As
filed with the Securities and Exchange Commission on December 12, 2007
1933 Act File No. 333-
1940 Act File No. 811-22123
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box)
þ
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
o
Pre-Effective Amendment No. ___
o
Post-Effective Amendment No. ___
and
þ
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
þ
Amendment No. 4
Nuveen Municipal High Income Opportunity Fund 2
Exact Name of Registrant as Specified in Declaration of Trust
333 West Wacker Drive, Chicago, Illinois 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 257-8787
Registrants Telephone Number, including Area Code
Kevin J. McCarthy
Vice President and Secretary
333 West Wacker Drive
Chicago, Illinois 60606
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
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John T. Blatchford, Esq.
Vedder, Price, Kaufman & Kammholz, P.C.
222 North LaSalle Street
Chicago, IL 60601
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Eric F. Fess
Chapman and Cutler LLP
111 W. Monroe
Chicago, IL 60603
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Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
If any of the securities being registered on this form are offered on a delayed or continuous basis
in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in
connection with a dividend reinvestment plan, check the following
box.
o
It is proposed that this filing will become effective (check appropriate box)
o
when declared effective pursuant to section 8(c).
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed Maximum
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Proposed Maximum
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Title of Securities
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Amount Being
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Offering Price Per
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Aggregate Offering
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Amount of
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Being Registered
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Registered
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Unit
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Price
(1)
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Registration Fee
(2)
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MuniPreferred
Shares, $0.01 par
value
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40 Shares
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$25,000
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$1,000,000
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$30.70
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(1)
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Estimated solely for the purpose of calculating the registration fee.
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(2)
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Submitted prior to filing.
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary
to delay its effective date until the Registrant shall file a further amendment, which specifically
states this Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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Subject to Completion
Preliminary Prospectus
dated ,
2008
PROSPECTUS
$
Nuveen Municipal High Income
Opportunity Fund 2
Municipal Auction Rate
Cumulative Preferred Shares
(MuniPreferred
®
)
Shares, Series
Shares, Series
Liquidation Preference $25,000
per Share
Nuveen Municipal High Income Opportunity Fund 2 is a
recently organized, diversified, closed-end management
investment company. The Funds primary investment objective
is to provide attractive income exempt from regular federal
income tax. The Funds secondary investment objective is to
seek additional total return. Under normal circumstances, the
Fund will invest at least 80% of its Managed Assets (as defined
on page 4 of the prospectus) in municipal securities and
other related investments, the income of which is exempt from
regular federal income tax. Under normal circumstances, the Fund
expects to be fully invested in such tax-exempt municipal
securities. Generally, the Fund expects to be fully invested (at
least 95% of its Managed Assets) in such tax-exempt municipal
securities and other related investments. Up to 30% of the
Funds Managed Assets may be invested in municipal
securities that pay interest that is taxable under the federal
alternative minimum tax applicable to individuals. The Fund will
invest at least 50% of its Managed Assets in municipal
securities that are investment grade quality. A security is
considered investment grade quality if it is rated within the
four highest grades by at least one of the nationally recognized
statistical rating organizations that rate such security, or if
it is unrated but judged to be of comparable quality by the
Funds investment adviser. The Fund may invest up to 50% of
its Managed Assets in municipal securities that at the time of
investment are rated below investment grade quality or that are
unrated but judged to be of comparable quality by the
Funds investment adviser. No more than 10% of the
Funds Managed Assets may be invested in municipal
securities rated below B3/B- or that are unrated but judged to
be of comparable quality by the Funds investment adviser.
Municipal securities of below investment grade quality are
regarded as having predominately speculative characteristics
with respect to capacity to pay interest and repay principal,
and are commonly referred to as junk bonds. The Fund cannot
assure you that it will achieve its investment objectives.
(Continued on following page)
The Funds principal office is located at 333 West
Wacker Drive, Chicago, Illinois 60606, and its telephone number
is
(800) 257-8787.
You should read this prospectus, which contains important
information about the Fund, before deciding whether to invest
and retain it for future reference. A Statement of Additional
Information,
dated ,
2008 and as it may be supplemented, containing additional
information about the Fund, has been filed with the Securities
and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of
the Statement of Additional Information, the table of contents
of which is on page of this prospectus, annual
and semi-annual reports to shareholders, when available, and
other information about the Fund, and make shareholder inquiries
by calling
(800) 257-8787
or by writing to the Fund, or from the Funds website
(http://www.nuveen.com).
The information contained in, or that can be accessed through,
the Funds website is not part of this prospectus. You may
also obtain a copy of the Statement of Additional Information
(and other information regarding the Fund) from the Securities
and Exchange Commission web site
(http://www.sec.gov).
Investing in MuniPreferred shares involves certain risks. See
Risk Factors beginning on page 20. The minimum
purchase amount of the MuniPreferred shares is $25,000.
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Per Share
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Total
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Public offering price
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$
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25,000
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$
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Sales Load
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$
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250
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$
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Proceeds to the Fund(1)
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$
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24,750
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$
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(1)
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Not including offering expenses payable by the Fund estimated to
be $ . The public offering price
per MuniPreferred share will be increased by the amount of
dividends, if any, that have accumulated from the date the
MuniPreferred shares are first issued.
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters are offering the MuniPreferred shares subject
to various conditions. The MuniPreferred shares will be ready
for delivery in book-entry form, through the facilities of The
Depository Trust Company, to purchasers on or
about ,
2008.
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[Underwriter]
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[Underwriter]
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The date of this prospectus
is ,
2008.
®
Registered trademark of Nuveen Investments.
The Fund is
offering
and shares
of MuniPreferred
Series
and
Series ,
respectively. The shares are referred to in this prospectus as
MuniPreferred shares. The MuniPreferred shares have
a liquidation preference of $25,000 per share, plus any
accumulated, unpaid dividends. The MuniPreferred shares have
priority over the Funds common shares as to distribution
of assets as described in this prospectus. The dividend rate for
the initial dividend rate period will
be %
and % for MuniPreferred shares
Series
and
Series ,
respectively. The initial rate period is from the date of
issuance
through ,
2008
and ,
2008 for MuniPreferred Series and
Series , respectively. For subsequent rate periods,
MuniPreferred shares pay dividends based on a rate set at
auction, usually held weekly (unless a special rate period is
designated). Subsequent rate periods of longer than 7 days
are referred to in this prospectus as special rate
periods. Prospective purchasers should carefully review
the auction procedures described in the prospectus and attached
hereto as Appendix B and should note: (1) a buy order
(called a bid order) or sell order is a commitment
to buy or sell MuniPreferred shares based on the results of an
auction; (2) auctions will be conducted by telephone; and
(3) purchases and sales will be settled on the next
business day after the auction. MuniPreferred shares are not
listed on an exchange. You may only buy or sell MuniPreferred
shares through an order placed at an auction with or through a
broker-dealer that has entered into an agreement with the
auction agent and the Fund, or in a secondary market maintained
by certain broker-dealers. These broker-dealers are not required
to maintain this market, and it may not provide you with
liquidity.
It is a condition of the underwriters obligation to
purchase the MuniPreferred shares that shares of each Series of
MuniPreferred receive a rating
of from and from .
The MuniPreferred shares do not represent a deposit or
obligation of, and are not guaranteed or endorsed by, any bank
or other insured depository institution, and are not federally
insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
TABLE OF
CONTENTS
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Page
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1
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9
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10
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10
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11
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12
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12
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21
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27
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29
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32
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46
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51
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52
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53
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53
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55
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56
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57
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57
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58
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A-1
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Appendix B Auction Procedures
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B-1
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You should rely only on the information contained or
incorporated by reference in this prospectus. The Fund has not
authorized anyone to provide you with different information. The
Fund is not making an offer of these securities in any state
where the offer is not permitted. You should not assume that the
information contained in this prospectus is accurate as of any
date other than the date on the front of this prospectus.
i
This is only a summary. You should review the more detailed
information contained elsewhere in this prospectus and in the
Statement of Additional Information, including the Funds
Statement Establishing and Fixing the Rights and Preferences of
MuniPreferred Shares (the Statement) attached as
Appendix A to the Statement of Additional Information.
Capitalized terms used but not defined in this prospectus shall
have the meanings given to such terms in the Statement.
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The Fund
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Nuveen Municipal High Income Opportunity Fund 2 (the
Fund) is a recently organized, diversified,
closed-end management investment company. See The
Fund. The Funds common shares of beneficial
interest, $.01 par value (common shares), are
traded on the New York Stock Exchange (the Exchange)
under the symbol NMD. See Description of
Common Shares. As
of ,
200 , the Fund
had
common shares outstanding and net assets of
$ .
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The Offering
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The Fund is
offering
and shares
of MuniPreferred shares Series and
Series
, respectively, at a purchase price of $25,000 per share. Shares
of MuniPreferred are being offered by the underwriters listed
under Underwriting.
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Ratings
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It is a condition of the underwriters obligation to
purchase the MuniPreferred shares that shares of each Series of
MuniPreferred receive a rating
of
from
and
from .
Because the Fund is required to maintain at least one of these
ratings, it must own portfolio securities of a sufficient value
and with adequate credit quality to meet the rating
agencies guidelines. See Description of
MuniPreferred Shares Asset Maintenance.
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Investment Objectives
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The Funds primary investment objective is to provide
attractive income exempt from regular federal income tax. The
Funds secondary investment objective is to seek additional
total return. The Fund seeks to achieve its investment
objectives by investing in municipal securities that Nuveen
Asset Management (NAM), the Funds investment
adviser, believes are underrated and undervalued, based upon its
bottom-up,
research-driven investment strategy. The Fund cannot assure you
that it will achieve its investment objectives. See The
Funds Investments and Risk Factors.
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Under normal circumstances, the Fund will invest at least 80% of
its Managed Assets (as defined on page of this
prospectus) in municipal securities and other related
investments, the income from which is exempt from regular
federal income tax. See The Funds
Investments Municipal Securities and The
Funds Investments Derivatives for
additional information on the types of securities in which the
Fund may invest. Generally, the Fund expects to be fully
invested (at least 95% of its Managed Assets) in such tax-exempt
municipal securities and other related investments. Up to 30% of
the Funds Managed Assets may be invested in municipal
securities that pay interest that is taxable under the federal
alternative minimum tax applicable to individuals. For a
discussion of how the federal alternative minimum tax may affect
shareholders, see Federal Income Tax Matters.
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The Fund may invest in various municipal securities, including
municipal bonds and notes, other securities issued to finance
and refinance public projects, and other related securities and
derivative instruments that create exposure to municipal bonds,
notes and securities and that provide for the payment of
interest income that is exempt from regular federal income tax.
See The Funds Investments Municipal
Securities for additional information on the types of
municipal securities in which the Fund may invest. Municipal
securities are debt obligations generally issued by state and
local governmental entities to finance or refinance public
purpose projects such as roads, schools, and water supply
systems. Municipal securities may also be issued to finance and
refinance privately owned facilities, such as housing, medical
and educational construction, or for privately owned
transportation, electric utility and pollution control projects
deemed to serve a public purpose. Municipal securities may be
issued on a long term basis to provide permanent financing. The
repayment of such debt may be secured variously by a pledge of
the full faith and credit taxing power of the issuer, a limited
or special tax, or any other revenue source including project
revenues, which may include tolls, fees and other users charges,
lease payments, and mortgage payments. Municipal securities may
also be issued to finance projects on a short term interim
basis, anticipating repayment with the proceeds on long term
debt. Municipal securities may be issued and purchased in the
form of bonds, notes, leases or certificates of participation;
structured as callable or non-callable; with payment forms
including fixed coupon, variable rate, zero coupon, capital
appreciation bonds, tender-option bonds, and residual interest
bonds or inverse floating rate securities; or acquired through
investments in pooled vehicles, partnerships, or other
investment companies. Inverse floating rate securities are
securities that pay interest at rates that vary inversely with
changes in prevailing short-term tax-exempt interest rates and
represent a leveraged investment in an underlying municipal
security, which may increase the effective leverage of the Fund.
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The market value of a municipal security will generally depend
upon its form, maturity, call features, interest rate, as well
as the credit quality or credit rating of the issuer, all such
factors examined in the context of the municipal securities
market and interest rate levels and trends. To implement its
strategy, the Fund expects that it will invest primarily in long
term municipal securities with maturities ranging from 10 to
30 years, and in some cases longer intervals. The average
maturity of the bonds and securities in the portfolio may vary
from between 10 and 15 years to between 20 and
25 years, depending upon market conditions and an
assessment by the portfolio manager of which segments of the
municipal market offer the most favorable relative investment
values and opportunities for tax-exempt income and total return.
While the Funds investment strategy will seek to maximize
the potential income from the portfolio that is exempt from
federal income tax, the long dated maturity exposure may
increase the volatility of the Funds investment portfolio
over time in relation to changes in long term rates in the
municipal marketplace.
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Under normal circumstances:
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The Fund will invest at
least 50% of its Managed Assets in investment grade quality
municipal securities. Investment grade quality securities are
those that are (i) rated within the four highest letter
grades (including BBB- or Baa3 or better) by at least one of the
nationally recognized statistical rating organizations
(NRSRO) that rate such security, or
(ii) unrated but judged to be of comparable quality by NAM.
In the event that the percentage of Managed Assets rated
investment grade quality declines below 50%, the Fund will seek
to purchase investment grade quality securities and restore the
target minimum in a timely manner.
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The Fund may invest up to
50% of its Managed Assets in municipal securities that at the
time of investment are rated below investment grade or are
unrated but judged to be of comparable quality by NAM. In an
effort to pursue greater returns, the Fund may invest in
municipal securities that are rated below investment grade. No
more than 10% of the Funds Managed Assets may be invested
in municipal securities rated below B3/B- or that are unrated
but judged to be of comparable quality by NAM. This means that
the Fund may invest in municipal securities, the issuer of which
is in default on its obligations to pay principal or interest
thereon when due or that is involved in bankruptcy or insolvency
proceedings or is otherwise experiencing other financial
difficulties at the time of acquisition (such securities are
commonly referred to as distressed securities). Municipal
securities of below investment grade quality are regarded as
having predominately speculative characteristics with respect to
capacity to pay interest and repay principal, and are commonly
referred to as junk bonds.
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The Fund anticipates that,
upon the full investment of the net proceeds from this offering
[(which is expected to occur within three to four months
following the closing of this offering)], it will have invested
approximately 55% to 65% of its Managed Assets in investment
grade quality municipal securities and approximately 35% to 45%
of its Managed Assets in below investment grade quality
municipal securities.
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During temporary defensive periods or in order to keep the
Funds cash fully invested, the Fund may deviate from its
investment objectives. During such periods, the Fund may invest
up to 100% of its net assets in short-term investments,
including high quality, short-term securities that may be either
tax-exempt or taxable. The Fund intends to invest in taxable
short-term investments only in the event that suitable
tax-exempt short-term investments are not available at
reasonable prices and yields, as determined by NAM, and in
amounts limited to ensure that the Fund is eligible to pay
exempt-interest dividends (as described in Federal Income
Tax Matters below). Investment in taxable short-term
investments would result in a portion of your dividends being
subject to regular
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federal income tax. For a more complete discussion of the
Funds portfolio composition, see The Funds
Investments.
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The Funds assets, including assets attributable to any
offering of MuniPreferred shares that may be outstanding, are
called Managed Assets.
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Investment Adviser
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NAM is the Funds investment adviser. NAM, a registered
investment adviser, is a wholly owned subsidiary of Nuveen
Investments, Inc. (Nuveen Investments). Founded in
1898, Nuveen Investments and its affiliates had approximately
$ billion of assets under
management as
of ,
200 , of which over
$ billion was in municipal
securities. Regarding this
$ billion of tax-exempt
municipal securities, approximately
$ billion,
$ billion,
$ billion and
$ billion represent assets
relating to closed-end municipal bond funds, open-end municipal
bond funds, retail municipal managed accounts and institutional
municipal managed accounts, respectively. According to Thomson
Wealth Management, Nuveen is the leading sponsor of closed-end
funds as measured by the number of funds
( )
and the amount of fund assets under management (approximately
$ billion) as
of ,
200 . NAM had approximately
$ billion in assets under
management as
of ,
200 .
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On November 13, 2007, Nuveen Investments consummated the
transaction whereby it was acquired by investors led by Madison
Dearborn Partners, LLC. As a result, an underwriter may be an
indirect affiliated person (as that term is defined
in the Investment Company Act of 1940 (the 1940
Act)) of NAM (and the Fund). Certain conflicts of interest
may arise as a result of such indirect affiliation. For example,
the Fund is generally prohibited from entering into principal
transactions with an underwriter and certain of its affiliates.
NAM has or will adopt policies and procedures that address
investment activities of, and other arrangements involving, NAM
that may give rise to certain conflicts of interest. For
additional information regarding the transaction, see
Management of the Fund Nuveen
Investments.
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The Fund pays NAM an annual management fee, payable monthly, in
a maximum amount equal to .75% of the Funds average daily
Managed Assets (as previously defined, Managed Assets include
assets attributable to the principal amount of any MuniPreferred
Shares that may be outstanding). This maximum fee is equal to
the sum of a fund-level fee and a
complex-level fee. The
fund-level
fee is a maximum of .55% of the Funds average total daily
Managed Assets, with lower fee levels for assets that exceed
$125 million. The complex-level fee is a maximum of .20% of
the Funds daily Managed Assets based on the daily Managed
Assets of all Nuveen-branded closed-end and open-end registered
investment companies organized in the U.S., with lower fee
levels for complex-level assets that exceed $55 billion.
Based on complex-level assets of approximately
$ billion as
of ,
200 , the complex-level fee would
be % of Managed Assets and the
total fee to NAM would be % of
Managed Assets (assuming Managed Assets of $125 million).
NAM has contractually agreed
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to waive all or a portion of the Funds fund-level and
complex-level fees, in declining amounts for the first partial
month of the Funds operations through the next full
9 months of its operations (through August 31, 2008).
For more information on fees and expenses, see Management
of the Fund.
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Risk Factors Summary
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Risk is inherent in all investing. Therefore, before investing
in the Fund you should consider certain risks carefully. The
primary risks of investing in MuniPreferred shares are:
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if an auction fails you may
not be able to sell some or all of your shares;
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because of the nature of the
market for MuniPreferred shares, you may not be able to sell
your shares outside of the auction, or if you do sell your
shares outside of the auction, you may receive less than the
price you paid for your shares, especially when market interest
rates are rising;
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if you place a bid order to
retain MuniPreferred shares at an auction only at a specified
rate, and that rate exceeds the rate set at the auction, you
will not retain your MuniPreferred shares. If you submit a hold
order for MuniPreferred shares and the auction sets a
below-market rate, you may receive a lower rate of return on
your MuniPreferred shares than the market rate;
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a rating agency could
downgrade the rating assigned to MuniPreferred shares, which
could affect liquidity;
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if the Fund designates a
special rate period, changes in interest rates could affect the
price you would receive if you sold your MuniPreferred shares in
the secondary market;
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you may transfer your
MuniPreferred shares outside of auctions only to or through a
broker-dealer that has entered into an agreement with the
auction agent [and the Fund];
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the Fund may be forced to
redeem your shares to meet regulatory or rating agency
requirements or may voluntarily redeem your shares in certain
circumstances;
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in extraordinary
circumstances the Fund may not earn sufficient income from its
investments to pay dividends;
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if long-term interest rates
rise, the value of the Funds investment portfolio will
decline, reducing the asset coverage for the MuniPreferred
shares; and
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if an issuer of a municipal
bond in which the Fund invests is downgraded or defaults, there
may be a negative impact on the income and/or asset value of the
Funds portfolio.
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In addition to risks associated with investing in MuniPreferred
shares, an investor in the MuniPreferred shares will also be
subject to the general risks associated with the Funds
investment policies.
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For additional general risks of investing in MuniPreferred
shares and general risks of the Fund, see Risk
Factors.
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Trading Market
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MuniPreferred shares are not listed on an exchange. Instead, you
may buy or sell MuniPreferred shares at an auction by submitting
orders to a broker-dealer that has entered into an agreement
with the auction agent and the Fund (a
Broker-Dealer), or to a broker-dealer that has
entered into a separate agreement with a Broker-Dealer. After
the initial rate period, auctions for subsequent rate periods
are normally held weekly, unless they are designated in advance
as a special rate period, as described in detail below.
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In addition to the auctions, Broker-Dealers and other
broker-dealers may maintain a secondary trading market in
MuniPreferred shares outside of auctions, but may discontinue
this activity at any time. There is no assurance that a
secondary market will provide shareholders with liquidity. You
may transfer shares outside of auctions only to or through a
Broker-Dealer, or a broker-dealer that has entered into a
separate agreement with a Broker-Dealer.
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The table below shows the first auction date for each Series of
MuniPreferred shares and the day on which each subsequent
auction will normally be held for each Series of MuniPreferred
shares. The first auction date for the Series of MuniPreferred
shares will be the business day before the final dividend
payment date for the initial rate period for each Series of
MuniPreferred shares.
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Subsequent
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Series
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First Auction Date
|
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Auction Day
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|
|
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|
The start date for subsequent rate periods normally will be the
business day following the auction date unless the then-current
rate period is a special rate period, or the day that normally
would be the auction date or the first day of the subsequent
rate period is not a business day.
|
|
Dividends and Rate Periods
|
|
The table below shows the dividend rate for the initial rate
period of the MuniPreferred offered in this prospectus. For
subsequent rate periods, MuniPreferred shares will pay dividends
based on a rate set at auctions, normally held weekly. The rate
set at auction will not exceed the Maximum Rate. See
Description of MuniPreferred Shares Dividends
and Dividend Periods General.
|
|
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|
The table below also shows the date from which dividends on the
MuniPreferred shares will accumulate at the initial rate, the
dividend payment date for the initial rate period and the number
of days of the initial rate period for each Series of
MuniPreferred.
|
|
|
|
For subsequent rate periods, other than special rate periods
that may be specifically designated in advance, dividends will
normally be paid weekly, on the day following the end of the
subsequent rate period. The table below also shows the day on
which dividends for subsequent rate periods will normally be
paid. If such dividends are payable on a Monday or Tuesday and
that day is not a business day, then your dividends will
generally be paid on the first business day that falls after
that day. If dividends are payable on a Wednesday, Thursday or
Friday and that day is not a business day,
|
6
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|
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|
|
then your dividends generally will be paid on the first business
day prior to that day. See Description of MuniPreferred
Shares Dividends and Dividend Periods
General. The dividend payment date for any subsequent rate
period that is a special rate period of more than
seven days will be set out in the notice designating a
special rate period. See Description of MuniPreferred
Shares Dividends and Dividend Periods
Designation of Special Rate Periods.
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Dividend
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|
Number
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|
|
|
|
|
|
|
|
Payment
|
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|
Payment
|
|
|
of Days
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|
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|
Initial
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|
|
Date of
|
|
|
Date for
|
|
|
Day After
|
|
|
of Initial
|
|
|
|
Dividend
|
|
|
Accumulation
|
|
|
Initial Rate
|
|
|
Initial Rate
|
|
|
Rate
|
|
Series
|
|
Rate
|
|
|
at Initial Rate
|
|
|
Period
|
|
|
Period
|
|
|
Period
|
|
|
|
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|
Asset Maintenance
|
|
Under the terms of the MuniPreferred shares, if the Fund fails
to maintain the required asset coverage on the MuniPreferred
shares and any other shares of preferred stock or fails to
comply with other covenants of certain derivatives transactions,
the Fund may be required to redeem some or all of the
MuniPreferred shares.
|
|
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|
Under the Statement, which establishes and fixes the rights and
preferences of the MuniPreferred shares, the Fund must maintain
asset coverage of the MuniPreferred shares as required by the
rating agency or agencies rating the MuniPreferred shares; and
asset coverage of at least 200% with respect to senior
securities that are stock, including the MuniPreferred shares.
In the event that the Fund does not maintain or cure these
coverage tests, some or all of the MuniPreferred shares will be
subject to mandatory redemption. See Description of
MuniPreferred Shares Redemption.
|
|
|
|
Based on the composition of the Funds portfolio as
of ,
2007, the asset coverage of the MuniPreferred shares as measured
pursuant to the 1940 Act would be
approximately % if the Fund were to
issue all of the MuniPreferred shares offered in this
prospectus, representing
approximately % of the Funds
assets.
|
|
Redemption
|
|
Although the Fund does not expect to and will not ordinarily
redeem MuniPreferred shares, it may be required to redeem shares
if, for example, the Fund does not meet an asset coverage ratio
required by law or in order to correct a failure to meet rating
agency guidelines in a timely manner. The Fund may voluntarily
redeem MuniPreferred shares,without the consent of holders of
the MuniPreferred shares, in certain circumstances. See
Description of MuniPreferred Shares
Redemption, and Asset Maintenance.
|
|
Liquidation Preference
|
|
The liquidation preference (that is, the amount the Fund must
pay to holders of the MuniPreferred shares if the Fund is
liquidated) of the shares of MuniPreferred will be $25,000 per
share plus accumulated but unpaid dividends, if any, thereon.
See Description of MuniPreferred Shares
Liquidation Rights.
|
|
Federal Income Taxation
|
|
Because under normal circumstances the Fund will invest
substantially all of its assets in municipal securities that pay
interest
|
7
|
|
|
|
|
exempt from regular federal income tax, the income you receive
will ordinarily be similarly exempt. A portion of the income
from the Fund may also be subject to the federal alternative
minimum tax. Therefore, MuniPreferred shares may not be a
suitable investment if you are subject to this tax or would
become subject to such tax by investing in MuniPreferred shares.
Taxable income and gain earned by the Fund will be allocated
proportionately to holders of MuniPreferred shares and common
shares, based on the percentage of total dividends paid to each
class for that year. Accordingly, certain specified
MuniPreferred dividends may be subject to regular federal income
tax on income or gains attributed to the Fund. See Federal
Income Tax Matters. The Fund intends to notify
shareholders, before any applicable auction for a rate period of
28 days or less, of the amount of any taxable income and
gain for regular federal income tax purposes only, to be paid
for the period relating to that auction. For longer periods, the
Fund may notify shareholders of the foregoing information. In
certain limited circumstances, the Fund will make payments to
MuniPreferred shareholders to offset the federal income tax
effects of the taxable distribution. See Description of
MuniPreferred Shares Dividend and Dividend
Periods
Gross-Up
Payments.
|
|
Voting Rights
|
|
The holders of the Funds preferred shares, $.01 par
value (Preferred Shares), including MuniPreferred
shares, voting as a separate class, have the right to elect at
least two trustees at all times and to elect a majority of the
trustees in the event two full years dividends on the
Preferred Shares are unpaid. In each case, the remaining
trustees will be elected by holders of common shares and
Preferred Shares, including MuniPreferred shares, voting
together as a single class. The holders of shares of Preferred
Shares, including MuniPreferred shares, will vote as a separate
class or classes on certain other matters as required under the
Declaration of Trust, the Investment Company Act of 1940, as
amended (the 1940 Act), and Massachusetts law. See
Description of MuniPreferred Shares Voting
Rights and Certain Provisions in the Declaration of
Trust.
|
8
Information contained in the table below under the headings
Per Share Operating Performance and
Ratios/Supplemental Data shows the unaudited
operating performance of the Fund from the commencement of the
Funds investment operations on November ,
2007 until December , 2007. Since the Fund
commenced operations on November , 2007, the
table covers less
than
weeks of operations, during which a substantial portion of the
Funds assets were held in cash pending investment in
municipal bonds that meet the Funds investment objectives
and policies. Accordingly, the information presented may not
provide a meaningful picture of the Funds operating
performance.
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|
|
|
|
|
|
November , 2007-
|
|
|
|
December , 2007
|
|
|
|
(Unaudited)
|
|
|
Per Share Operating Performance:
|
|
|
|
|
Common share net asset value, beginning of period
|
|
$
|
|
|
Net investment income
|
|
|
|
|
Net realized/unrealized gain from investments
|
|
|
|
|
Total from investment operations
|
|
|
|
|
Offering costs
|
|
|
|
|
Common share net asset value, end of period
|
|
$
|
|
|
Per share market value, end of period
|
|
$
|
|
|
Total return on common share net asset value(a)
|
|
|
|
|
Total investment return on market value(a)
|
|
|
|
|
Ratios/Supplemental Data:
|
|
|
|
|
Net assets applicable to common shares, end of period (in
thousands)
|
|
$
|
|
|
Ratio of expenses to average net assets applicable to common
shares before reimbursement
|
|
|
|
|
Ratio of net investment income to average net assets applicable
to common shares before reimbursement
|
|
|
|
|
Ratio of expenses to average net assets applicable to common
shares after reimbursement
|
|
|
|
|
Ratio of net investment income to average net assets applicable
to common shares after reimbursement
|
|
|
|
|
Portfolio turnover rate
|
|
|
|
|
|
|
|
*
|
|
Annualized.
|
|
(a)
|
|
Total investment return on market value is the combination of
reinvested dividend income, reinvested capital gains
distributions, if any, and changes in stock price per share.
Total return on common share net asset value is the combination
of reinvested dividend income at net asset value, reinvested
capital gains distributions at net asset value, if any, and
changes in common share net asset value per share. Total returns
are not annualized.
|
9
The Fund is a recently organized, diversified, closed-end
management investment company registered under the 1940 Act. The
Fund was organized as a Massachusetts business trust on
September 13, 2007, pursuant to a Declaration of Trust (the
Declaration) governed by the laws of the
Commonwealth of Massachusetts. On November 15, 2007, the
Fund issued an aggregate of 13,750,000 common shares, pursuant
to the initial public offering thereof.
[On ,
2007,
and ,
2007, the Fund issued an
additional
and shares,
respectively, in connection with partial exercises by the
underwriters of their over-allotment option.] The Funds
common shares are listed on the Exchange under the symbol
NMD. The Funds principal office is located at
333 West Wacker Drive, Chicago, Illinois 60606, and its
telephone number is
(800) 257-8787.
The following provides information about the Funds
outstanding shares as
of ,
200 :
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|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amount Held by the
|
|
|
Amount
|
|
Title of Class
|
|
Authorized
|
|
|
Fund or for its Account
|
|
|
Outstanding
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
MuniPreferred Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
|
|
|
|
|
|
|
|
|
|
|
The net proceeds of the offering of MuniPreferred shares will be
approximately $ after payment of
the sales load and estimated offering costs. The Fund will
invest the net proceeds of the offering in accordance with the
Funds investment objectives and policies as stated below.
It is presently anticipated that the Fund will be able to invest
substantially all of the net proceeds in municipal securities
that meet those investment objectives and policies within three
months after the completion of the offering. Pending such
investment, it is anticipated that the proceeds will be invested
in short-term, tax-exempt securities in accordance with the
Funds investment policies.
10
The following table sets forth the capitalization of the Fund as
of ,
200 , and as adjusted to give effect to the issuance
of the shares of MuniPreferred offered hereby.
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
MuniPreferred Shares:
|
|
|
|
|
|
|
|
|
MuniPreferred shares, $25,000 stated value per share, at
liquidation value; unlimited shares authorized (no shares issued
and shares
issued, as adjusted), respectively
|
|
|
|
|
|
|
|
|
Common Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common shares, $.01 par value per share; unlimited shares
authorized, shares
outstanding*
|
|
|
|
|
|
|
|
|
Paid-in surplus**
|
|
|
|
|
|
|
|
|
Undistributed net investment income
|
|
|
|
|
|
|
|
|
Accumulated net realized gain from investments:
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) of investments
|
|
|
|
|
|
|
|
|
Net assets applicable to common shares
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
None of these outstanding shares are held by or for the account
of the Fund.
|
|
**
|
|
As adjusted, paid-in surplus reflects the reduction for the
sales load and estimated offering costs of the MuniPreferred
shares issuance ($ ).
|
11
As
of ,
200 , % of the market
value of the Funds portfolio was invested in long-term
municipal bonds. The following table sets forth certain
information with respect to the composition of the Funds
investment portfolio as
of ,
200 .
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Rating*
|
|
Value
|
|
|
Percent
|
|
|
|
|
|
Aaa/U.S. guaranteed
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
AA
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB
|
|
|
|
|
|
|
|
|
|
|
|
|
N/R
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
*
|
|
Using the higher of S&Ps or Moodys rating.
|
Investment
Objectives and Policies
The Funds primary investment objective is to provide
attractive income exempt from regular federal income tax. The
Funds secondary investment objective is to seek additional
total return.
The Fund seeks to achieve its investment objectives by investing
in municipal securities that NAM believes are underrated and
undervalued, based upon its
bottom-up,
research-driven investment strategy. Under normal circumstances,
the Fund will invest at least 80% of its Managed Assets (as
defined on page of this prospectus) in
municipal securities and other related investments, the income
from which is exempt from regular federal income tax. Generally,
the Fund expects to be fully invested (at least 95% of its
Managed Assets) in such tax-exempt municipal securities and
other related investments. Up to 30% of the Funds Managed
Assets may be invested in municipal securities that pay interest
that is taxable under the federal alternative minimum tax
applicable to individuals. For a discussion of how the federal
alternative minimum tax may affect shareholders, see
Federal Income Tax Matters.
The Fund may invest in various municipal securities, including
municipal bonds and notes, other securities issued to finance
and refinance public projects, and other related securities and
derivative instruments creating exposure to municipal bonds,
notes and securities that provide for the payment of interest
income that is exempt from federal income tax. Municipal
securities are debt obligations generally issued by state and
local governmental entities to finance or refinance public
projects such as roads, schools, and water supply systems.
Municipal securities may also be issued for private activities,
such as housing, medical and educational facility construction,
or for privately owned transportation, electric utility and
pollution control projects. Municipal securities may be issued
on a long term basis to provide permanent financing. The
repayment of such debt may be secured generally by a pledge of
the full faith and credit taxing power of the issuer, a limited
or special tax, or any other revenue source including project
revenues, which may include tolls, fees and other users charges,
lease payments, and mortgage payments. Municipal securities may
also be issued to finance projects on a short term interim
basis, anticipating repayment with the proceeds on long term
debt. Municipal securities may be issued and purchased in the
form of bonds, notes, leases or certificates of participation;
structured as callable or non-callable; with payment forms
including fixed coupon, variable rate, zero coupon, capital
appreciation bonds, tender-option bonds, and residual interest
bonds or inverse floating rate securities; or acquired through
investments in pooled vehicles, partnerships, or other
investment companies.
The market value of a municipal security will generally depend
upon its form, maturity, call features, interest rate, as well
as the credit quality or credit rating of the issuer, all such
factors examined in the context of the municipal securities
market and interest rate levels and trends. To implement its
strategy, the Fund
12
expects that it will invest primarily in long term municipal
securities with maturities ranging from 10 to 30 years, and
in some cases longer intervals. The average maturity of the
bonds and securities in the portfolio may vary from between 10
and 15 years to between 20 and 25 years, depending
upon market conditions and an assessment by the portfolio
manager of which segments of the municipal market offer the most
favorable relative investment values and opportunities for
tax-exempt income and total return. While the Funds
investment strategy will seek to maximize the potential income
from the portfolio that is exempt from federal income taxes, the
long dated maturity exposure may increase the volatility of the
Funds investment portfolio over time in relation to
changes in long term rates in the municipal marketplace.
Under normal circumstances:
|
|
|
|
|
The Fund will invest at least 50% of its Managed Assets in
investment grade quality municipal securities. Investment grade
quality securities are those that are (i) rated within the
four highest letter grades (including BBB- or Baa3 or better) by
at least one of the NRSROs that rate such security, or
(ii) unrated but judged to be of comparable quality by NAM.
|
|
|
|
The Fund may invest up to 50% of its Managed Assets in municipal
securities that at the time of investment are rated below
investment grade. No more than 10% of the Funds Managed
Assets may be invested in municipal securities rated below B3/B-
or that are unrated but judged to be of comparable quality by
NAM. In an effort to pursue greater returns, the Fund may invest
in municipal securities that are rated below investment grade.
This means that the Fund may invest in municipal securities, the
issuer of which is in default on its obligations to pay
principal or interest thereon when due or that is involved in
bankruptcy or insolvency proceedings or is otherwise
experiencing other financial difficulties at the time of
acquisition (such securities are commonly referred to as
distressed securities). Municipal securities of below investment
grade quality are regarded as having predominately speculative
characteristics with respect to capacity to pay interest and
repay principal, and are commonly referred to as junk bonds.
|
|
|
|
[The Fund anticipates that, upon the full investment of the net
proceeds from this offering (which is expected to occur within
three to four months following the closing of this offering), it
will have invested approximately 55% to 65% of its Managed
Assets in investment grade quality municipal securities and
approximately 35% to 45% of its Managed Assets in below
investment grade quality municipal securities.]
|
The credit quality policies noted above apply only at the time a
security is purchased, and the Fund is not required to dispose
of a security in the event that a rating agency downgrades its
assessment of the credit characteristics of a particular issue.
In determining whether to retain or sell such a security, NAM
may consider such factors as NAMs assessment of the credit
quality of the issuer of such security, the price at which such
security could be sold and the rating, if any, assigned to such
security by other rating agencies. A general description of the
ratings of Standard & Poors Corporation Ratings
Group, a division of The McGraw-Hill Companies, Inc.
(S&P), Moodys Investors Service, Inc.
(Moodys) and Fitch Ratings, Inc.
(Fitch) of municipal securities is set forth in
Appendix B to the Statement of Additional Information.
The Fund may purchase municipal securities that are additionally
secured by insurance, bank credit agreements or escrow accounts.
The credit quality of companies which provide such credit
enhancements will affect the value of those securities. Although
the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for
insured obligations may reduce the Funds income. The Fund
may use any insurer, regardless of its rating. A municipal
security will be deemed to have the rating of its insurer. The
insurance feature does not guarantee the market value of the
insured obligations or the net asset value of the Funds
common shares.
The Fund presently intends to limit its investment in tobacco
settlement bonds to no more than 10% of its Managed Assets. In
addition, the Fund may invest up to 10% of its Managed Assets
[(up to 15% during its initial
invest-up
period)] in inverse floating rate securities, which are
securities that pay interest at rates that vary inversely with
changes in prevailing short-term tax-exempt interest rates and
which represent a leveraged investment in an underlying
municipal security, which may increase the effective leverage of
the Fund. The
13
Fund will invest in inverse floating rate securities as part of
its regular investment program in order to enhance its ability
to achieve the Funds investment objectives.
During temporary defensive periods or in order to keep the
Funds cash fully invested, the Fund may deviate from its
investment objectives. During such periods, the Fund may invest
up to 100% of its net assets in short-term investments,
including high quality, short-term securities that may be either
tax-exempt or taxable. The Fund intends to invest in taxable
short-term investments only in the event that suitable
tax-exempt short-term investments are not available at
reasonable prices and yields, as determined by NAM, and in
amounts limited to ensure that the Fund is eligible to pay
exempt-interest dividends (as described in Federal Income
Tax Matters below). Investment in taxable short-term
investments would result in a portion of your dividends being
subject to regular federal income tax. For more information, see
the Statement of Additional Information under Federal
Income Tax Matters.
The Funds policies noted above are not considered to be
fundamental by the Fund and can be changed without a vote of
shareholders. However, the Funds policy that it will
invest at least 80% of its Managed Assets in investments, the
income from which is exempt from regular federal income tax may
only be changed by the Funds Board of Trustees following
the provision of 60 days prior written notice to
shareholders.
The Fund cannot change its investment objectives without the
approval of the holders of a majority of the
outstanding common shares and MuniPreferred Shares voting
together as a single class, and of the holders of a
majority of the outstanding MuniPreferred Shares
voting as a separate class. When used with respect to particular
shares of the Fund, a majority of the outstanding
shares means (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the shares are
present or represented by proxy or (ii) more than 50% of
the shares, whichever is less. See Description of
Shares MuniPreferred Shares Voting
Rights and the Statement of Additional Information under
Description of Shares MuniPreferred
Shares Voting Rights for additional
information with respect to the voting rights of holders of
MuniPreferred Shares.
If you are, or as a result of investment in the Fund would
become, subject to the federal alternative minimum tax, the Fund
may not be a suitable investment for you because the Fund
expects that a significant portion of its investments will pay
interest that is taxable under the federal alternative minimum
tax. Special rules apply to corporate holders. In addition,
distributions of net capital gain will be subject to capital
gains taxes. See Federal Income Tax Matters.
NAM
Investment Philosophy and Process
NAM is the Funds investment adviser, responsible for
investing the Funds Managed Assets. NAM, a registered
investment adviser, is a wholly-owned subsidiary of Nuveen
Investments. Founded in 1898, Nuveen Investments and its
affiliates had approximately
$ billion of assets under
management as
of ,
200 , of which
$ billion was in municipal
securities. Regarding this
$ billion of tax-exempt
municipal securities, approximately
$ billion,
$ billion,
$ billion and
$ billion represent assets
relating to closed-end municipal bond funds, open-end municipal
bond funds, retail municipal managed accounts and institutional
municipal managed accounts, respectively. See Management
of the Fund.
Investment Philosophy
.
NAM believes that the
unique tax treatment of municipal securities and the structural
characteristics in the municipal securities market create
attractive opportunities to enhance the
after-tax
total return and diversification of the investment portfolios of
taxable investors. NAM believes that these unique
characteristics also present unique risks that may be managed to
realize the benefits of the asset class. NAM considers the
following factors:
After-Tax Income Potential.
The primary source of total
return from municipal securities comes from the tax-exempt
income derived therefrom. NAM believes that, at acceptable
levels of credit risk and maturity principal risk, the municipal
securities market offers the potential for higher after-tax
income when compared with other fixed income markets.
14
Managing Multi-Faceted Risks.
Risk in the municipal
securities market is derived from multiple sources, including
credit risk at the issuer and sector levels, structural risks
such as call risk, yield curve risk, and legislative and
tax-related risks. NAM believes that managing these risks at
both the individual security and Fund portfolio levels is an
important element of realizing the after-tax income and total
return potential of the asset class.
Opportunities for Diversification.
As
of ,
200 , the municipal securities market aggregated
approximately $ trillion, with
issuers with a wide array of financing purposes, security terms,
offering structures and credit quality. NAM believes that the
size and depth of the municipal securities market may facilitate
the creation of a diversified portfolio that reduces exposure to
the risks of individual issuers and may lower correlations to
other credit and market risks within an investors overall
portfolio.
Market Inefficiencies.
NAM believes that the scale and
intricacy of the municipal securities market often results in
pricing anomalies and other inefficiencies that can be
identified and capitalized on through trading strategies.
Investment Process
.
NAM employs a
bottom-up,
research-driven investment strategy that seeks to identify
underrated and undervalued municipal securities and sectors to
potentially outperform the general municipal securities market
over time. The primary elements of NAMs investment process
are:
Credit Analysis and Surveillance.
NAM focuses on
bottom-up,
fundamental analysis of municipal securities issuers. Analysts
screen each sector for issuers that meet the fundamental tests
of creditworthiness and favor those securities with demonstrable
growth potential, solid coverage of debt service and a priority
lien on hard assets, dedicated revenue streams or tax resources.
As part of NAMs overall risk management process, analysts
actively monitor the credit quality of portfolio holdings.
Sector Analysis.
Organized by sector, analysts
continually assess the key issues and trends affecting each
sector in order to maintain a sector outlook. Evaluating such
factors as historical default rates and average credit spreads
within each sector, analysts provide top-down analysis that
supports decisions to overweight or underweight a given sector
in a portfolio.
Diversification.
NAM seeks to invest in a large number of
sectors, states and specific issuers in order to help insulate a
portfolio from events that affect any individual industry,
geographic location or credit.
Portfolio managers normally seek to limit exposure to individual
credits over the long-term. Portfolio managers also seek to
diversify other portfolio level risks, including exposure to
calls, and to manage a portfolios interest rate
sensitivity within tolerance bands relative to the relevant
benchmark.
Trading Strategies.
Through its trading strategies, NAM
seeks to enhance portfolio value by trading to take advantage of
inefficiencies found in the municipal market. This may entail
selling issues NAM deems to be overvalued and purchasing issues
NAM considers to be undervalued.
Sell Discipline.
NAM generally sells securities when it
(i) determines a security has become overvalued or
over-rated, (ii) identifies credit deterioration, or
(iii) modifies a portfolio strategy, such as sector
allocation. NAM may also sell securities when such securities
exceed the portfolios diversification targets.
Portfolio
Composition and Other Information
The Funds portfolio will be composed principally of the
following investments. More detailed information about the
Funds portfolio investments are contained in the Statement
of Additional Information under Portfolio
Composition.
15
Municipal
Securities
Municipal securities are either general obligation or revenue
bonds and typically are issued to finance public projects (such
as roads or public buildings), to pay general operating expenses
or to refinance outstanding debt.
Municipal securities may also be issued for private activities,
such as housing, medical and educational facility construction,
or for privately owned industrial development and pollution
control projects. General obligation bonds are backed by the
full faith and credit, or taxing authority, of the issuer and
may be repaid from any revenue source; revenue bonds may be
repaid only from the revenues of a specific facility or source.
The Fund may also purchase municipal securities that represent
lease obligations, municipal notes,
pre-refunded
municipal bonds, private activity bonds, tender option bonds and
other forms of municipal bonds and securities.
The municipal securities in which the Fund will invest are
generally issued by states, cities and local authorities and
certain possessions and territories of the United States (such
as Puerto Rico and Guam), and pay interest that, in the opinion
of bond counsel to the issuer (or on the basis of other
authority believed by NAM to be reliable), is exempt from
regular federal income tax, although the interest may be subject
to the federal alternative minimum tax.
The yields on municipal securities depend on a variety of
factors, including prevailing interest rates and the condition
of the general money market and the municipal bond market, the
size of a particular offering, the maturity of the obligation
and the rating of the issue. The market value of municipal
securities will vary with changes in interest rate levels and as
a result of changing evaluations of the ability of their issuers
to meet interest and principal payments.
The market value of a municipal security will generally depend
upon its form, maturity, call features, interest rate, as well
as the credit quality of the issuer, all such factors examined
in the context of the municipal securities market and interest
rate levels and trends. To implement its strategy, the Fund
expects that it will invest primarily in long term municipal
securities with maturities ranging from 10 to 30 years, and
in some cases longer intervals. The average maturity of the
bonds and securities in the portfolio may vary from between 10
and 15 years to between 20 and 25 years, depending
upon market conditions and an assessment by the portfolio
manager of which segments of the municipal market offer the most
favorable investment values and opportunities for income and
total return. While the Funds investment strategy will
seek to maximize the potential income from the portfolio that is
exempt from federal income taxes, the long dated maturity
exposure may increase the volatility of the Funds
investment portfolio over time in relation to changes in long
term rates in the municipal marketplace.
Municipal Leases and Certificates of Participation.
The
Fund also may purchase municipal securities that represent lease
obligations and certificates of participation in such leases.
These carry special risks because the issuer of the securities
may not be obligated to appropriate money annually to make
payments under the lease. A municipal lease is an obligation in
the form of a lease or installment purchase which is issued by a
state or local government to acquire equipment and facilities.
Income from such obligations is generally exempt from state and
local taxes in the state of issuance. Leases and installment
purchase or conditional sale contracts (which normally provide
for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of
debt. The debt issuance limitations are deemed to be
inapplicable because of the inclusion in many leases or
contracts of
non-appropriation
clauses that relieve the governmental issuer of any obligation
to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. In addition, such
leases or contracts may be subject to the temporary abatement of
payments in the event the issuer is prevented from maintaining
occupancy of the leased premises or utilizing the leased
equipment or facilities. Although the obligations may be secured
by the leased equipment or facilities, the disposition of the
property in the event of non-appropriation or foreclosure might
prove difficult, time consuming and costly, and result in a
delay in recovering, or the failure to recover fully, the
Funds original investment. To the extent that the Fund
invests in unrated municipal leases or participates
16
in such leases, the credit quality rating and risk of
cancellation of such unrated leases will be monitored on an
ongoing basis. In order to reduce this risk, the Fund will only
purchase municipal securities representing lease obligations
where NAM believes the issuer has a strong incentive to continue
making appropriations until maturity.
A certificate of participation represents an undivided interest
in an unmanaged pool of municipal leases, an installment
purchase agreement or other instruments. The certificates are
typically issued by a municipal agency, a trust or other entity
that has received an assignment of the payments to be made by
the state or political subdivision under such leases or
installment purchase agreements. Such certificates provide the
Fund with the right to a pro rata undivided interest in the
underlying municipal securities. In addition, such
participations generally provide the Fund with the right to
demand payment, on not more than seven days notice, of all
or any part of the Funds participation interest in the
underlying municipal securities, plus accrued interest.
Municipal Notes.
Municipal securities in the form of
notes generally are used to provide for
short-term
capital needs, in anticipation of an issuers receipt of
other revenues or financing, and typically have maturities of up
to three years. Such instruments may include tax anticipation
notes, revenue anticipation notes, bond anticipation notes, tax
and revenue anticipation notes and construction loan notes. Tax
anticipation notes are issued to finance the working capital
needs of governments. Generally, they are issued in anticipation
of various tax revenues, such as income, sales, property, use
and business taxes, and are payable from these specific future
taxes. Revenue anticipation notes are issued in expectation of
receipt of other kinds of revenue, such as federal revenues
available under federal revenue sharing programs. Bond
anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the
long-term bonds then provide the funds needed for repayment of
the bond anticipation notes. Tax and revenue anticipation notes
combine the funding sources of both tax anticipation notes and
revenue anticipation notes. Construction loan notes are sold to
provide construction financing. Mortgage notes insured by the
Federal Housing Authority secure these notes; however, the
proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the
mortgage note if there has been a default. The anticipated
revenues from taxes, grants or bond financing generally secure
the obligations of an issuer of municipal notes. An investment
in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues
will be insufficient to satisfy the issuers payment
obligations under the notes or that refinancing will be
otherwise unavailable.
Pre-Refunded Municipal Securities.
The principal of, and
interest on, pre-refunded municipal securities are no longer
paid from the original revenue source for the securities.
Instead, the source of such payments is typically an escrow fund
consisting of U.S. government securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds
issued by the same issuer as the pre-refunded municipal
securities. Issuers of municipal securities use this advance
refunding technique to obtain more favorable terms with respect
to securities that are not yet subject to call or redemption by
the issuer. For example, advance refunding enables an issuer to
refinance debt at lower market interest rates, restructure debt
to improve cash flow or eliminate restrictive covenants in the
indenture or other governing instrument for the pre-refunded
municipal securities. However, except for a change in the
revenue source from which principal and interest payments are
made, the pre-refunded municipal securities remain outstanding
on their original terms until they mature or are redeemed by the
issuer.
Private Activity Bonds.
Private activity bonds, formerly
referred to as industrial development bonds, are issued by or on
behalf of public authorities to obtain funds to provide
privately operated housing facilities, airport, mass transit or
port facilities, sewage disposal, solid waste disposal or
hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other
types of private activity bonds, the proceeds of which are used
for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may
constitute municipal securities, although the current federal
tax laws place substantial limitations on the size of such
issues. The Funds distributions of its interest income
from private activity bonds may subject certain investors to the
federal alternative minimum tax.
17
Inverse Floating Rate Securities.
Inverse floating rate
securities (sometimes referred to as inverse
floaters) are securities whose interest rates bear an
inverse relationship to the interest rate on another security or
the value of an index. Inverse floating rate securities
represent beneficial interests in a special purpose trust formed
by a third party sponsor for the purpose of holding municipal
bonds. The special purpose trust typically sells two classes of
beneficial interests or securities: short-term floating rate
municipal securities, which are sold to third party investors,
and residual inverse floating rate municipal securities, which
the Fund would purchase. The short-term floating rate securities
have first priority on the cash flow from the municipal bonds
held by the special purpose trust. For its investment, the Fund
is paid the residual cash flow from the special purpose trust.
In addition, all voting rights and decisions to be made with
respect to any other rights relating to the municipal bonds held
in the special purpose trust are passed through to the Fund, as
the holder of the residual inverse floating rate securities. An
inverse floating rate municipal security generally is considered
highly leveraged if the principal amount of the short-term
floating rate interests issued by the related special purpose
trust exceeds 50% of the principal amount of the municipal bonds
owned by the special purpose trust.
Because increases in either the interest rate on the securities
or the value of indexes (with which inverse floaters maintain
their inverse relationship) reduce the residual interest paid on
inverse floaters, inverse floaters value is generally more
volatile than that of fixed rate bonds. Inverse floaters have
varying degrees of liquidity that approximate the liquidity of
the underlying bond(s), and the market price for these
securities is volatile. These securities generally will
underperform the market of fixed rate bonds in a rising interest
rate environment, but tend to outperform the market of fixed
rate bonds when interest rates decline or remain relatively
stable. 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.
The Fund intends to invest in inverse floating rate securities
the interest on which will, in the opinion of bond counsel,
counsel for the issuer of interests therein or counsel selected
by NAM, be exempt from regular federal income tax. However,
because there can be no assurance that the Internal Revenue
Service (the IRS) will agree with such
counsels opinion in any particular case, there is a risk
that the Fund will not be considered the owner of such tender
option bonds and thus will not be entitled to treat such
interest as exempt from such tax. Additionally, the federal
income tax treatment of certain other aspects of these
investments, including the proper tax treatment of tender option
bonds and the associated fees in relation to various regulated
investment company tax provisions, is unclear. The Fund intends
to manage its portfolio in a manner designed to eliminate or
minimize any adverse impact from the tax rules applicable to
these investments.
Special Taxing Districts.
Special taxing districts are
organized to plan and finance infrastructure developments to
induce residential, commercial and industrial growth and
redevelopment. The bond financing methods such as tax increment
finance, tax assessment, special services district and
Mello-Roos bonds, are generally payable solely from taxes or
other revenues attributable to the specific projects financed by
the bonds without recourse to the credit or taxing power of
related or overlapping municipalities. They often are exposed to
real estate development-related risks and can have more taxpayer
concentration risk than general tax-supported bonds, such as
general obligation bonds. Further, the fees, special taxes, or
tax allocations and other revenues that are established to
secure such financings are generally limited as to the rate or
amount that may be levied or assessed and are not subject to
increase pursuant to rate covenants or municipal or corporate
guarantees. The bonds could default if development failed to
progress as anticipated or if larger taxpayers failed to pay the
assessments, fees and taxes as provided in the financing plans
of the districts.
When-Issued
and Delayed Delivery Transactions
The Fund may buy and sell municipal securities on a when-issued
or delayed delivery basis, making payment or taking delivery at
a later date, normally within 15 to 45 days of the trade
date. This type of transaction may involve an element of risk
because no interest accrues on the bonds prior to settlement
and, because bonds are subject to market fluctuations, the value
of the bonds at time of delivery may be less (or more) than
cost. A separate account of the Fund will be established with
its custodian consisting of cash, cash equivalents, or liquid
securities having a market value at all times at least equal to
the amount of the commitment.
18
Zero
Coupon Bonds
A zero coupon bond is a bond that does not pay interest either
for the entire life of the obligation or for an initial period
after the issuance of the obligation. When held to its maturity,
its return comes from the difference between the purchase price
and its maturity value. A zero coupon bond is normally issued
and traded at a deep discount from face value. Zero coupon bonds
allow an issuer to avoid or delay the need to generate cash to
meet current interest payments and, as a result, may involve
greater credit risk than bonds that pay interest currently or in
cash. The Fund would be required to distribute the income on any
of these instruments as it accrues, even though the Fund will
not receive all of the income on a current basis or in cash.
Thus, the Fund may have to sell other investments, including
when it may not be advisable to do so, to make income
distributions to its shareholders.
Structured
Notes
The Fund may utilize structured notes and similar instruments
for investment purposes and also for hedging purposes.
Structured notes are privately negotiated debt obligations where
the principal
and/or
interest is determined by reference to the performance of a
benchmark asset, market or interest rate (an embedded
index), such as selected securities, an index of
securities or specified interest rates, or the differential
performance of two assets or markets. The terms of such
structured instruments normally provide that their principal
and/or
interest payments are to be adjusted upwards or downwards (but
not ordinarily below zero) to reflect changes in the embedded
index while the structured instruments are outstanding. As a
result, the interest
and/or
principal payments that may be made on a structured product may
vary widely, depending upon a variety of factors, including the
volatility of the embedded index and the effect of changes in
the embedded index on principal
and/or
interest payments. The rate of return on structured notes may be
determined by applying a multiplier to the performance or
differential performance of the referenced index or indices or
other assets. Application of a multiplier involves leverage that
will serve to magnify the potential for gain and the risk of
loss.
Derivatives
The Fund may invest in certain derivative instruments in pursuit
of its investment objectives. Such instruments include financial
futures contracts, swap contracts, options on financial futures,
options on swap contracts or other derivative securities whose
prices, in NAMs opinion, correlate with the prices of the
Funds investments. NAM uses derivatives to shorten or
lengthen the effective duration of its portfolio securities, and
therefore the interest rate risk, of the Funds portfolio,
and to adjust other aspects of the portfolios risk/return
profile. The Fund may use these instruments if the Fund deems it
more efficient from a transaction cost, total return or income
standpoint than investing in cash securities.
Other
Investment Companies
The Fund may invest up to 10% of its Managed Assets in
securities of other open- or closed-end investment companies
(including exchange-traded funds (often referred to as
ETFs)) that invest primarily in municipal securities
of the types in which the Fund may invest directly. In addition,
the Fund may invest a portion of its Managed Assets in pooled
investment vehicles (other than investment companies) that
invest primarily in municipal securities of the types in which
the Fund may invest directly. The Fund generally expects that it
may invest in other investment companies
and/or
other
pooled investment vehicles either during periods when it has
large amounts of uninvested cash, such as the period shortly
after the Fund receives the proceeds of the offering of its
common shares or MuniPreferred Shares, or during periods when
there is a shortage of attractive, high-yielding municipal
securities available in the market. As an investor in an
investment company, the Fund will bear its ratable share of that
investment companys expenses, and would remain subject to
payment of the Funds advisory and administrative fees with
respect to assets so invested. Common shareholders would
therefore be subject to duplicative expenses to the extent the
Fund invests in other investment companies. NAM will take
expenses into account when evaluating the investment merits of
an investment in the investment company relative to available
municipal security investments. In addition, the securities of
other investment companies also may be leveraged and therefore
will be subject to the same
19
leverage risks described herein. The net asset value and market
value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield
generated by unleveraged shares.
Portfolio
Turnover
The Fund may engage in portfolio trading when considered
appropriate, but short-term trading will not be used as the
primary means of achieving the Funds investment
objectives. Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is generally not expected to
exceed 25% under normal circumstances. However, there are no
limits on the Funds rate of portfolio turnover, and
investments may be sold without regard to length of time held
when, in NAMs opinion, investment considerations warrant
such action. A higher portfolio turnover rate would result in
correspondingly greater brokerage commissions and other
transactional expenses that are borne by the Fund. These
commissions and expenses will be reflected in the Funds
total return. In addition, high portfolio turnover may result in
the realization of net short-term capital gains by the Fund
which, when distributed to shareholders, will be taxable as
ordinary income. See Federal Income Tax Matters.
20
Risk is inherent in all investing. Investing in any investment
company security involves risk, including the risk that you may
receive little or no return on your investment or even that you
may lose part or all of your investment. Therefore, before
investing you should consider carefully the following risks that
you assume when you invest in MuniPreferred shares.
Risks of Investing in MuniPreferred Shares
Interest Rate Risk (and its impact on the value of the
Funds investments)
. The Fund issues MuniPreferred
shares, which pay dividends based on short- and
intermediate-term interest rates, and uses the proceeds to buy
municipal bonds, which pay interest based on long-term yields.
Long-term municipal bond yields are typically, although not
always, higher than short- and intermediate-term interest rates.
Long-term, intermediate-term and short-term interest rates may
fluctuate. If short- or intermediate-term interest rates rise,
MuniPreferred rates may rise so that the amount of dividends
paid to MuniPreferred shareholders exceeds the income from the
portfolio securities purchased with the proceeds from the sale
of MuniPreferred shares. Because income from the Funds
entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the MuniPreferred share
offering) is available to pay MuniPreferred dividends, however,
MuniPreferred dividend rates would need to greatly exceed the
Funds net portfolio income before the Funds ability
to pay MuniPreferred dividends would be jeopardized. If
long-term rates rise, the value of the Funds investment
portfolio will decline, reducing the amount of assets serving as
asset coverage for the MuniPreferred shares.
Auction Risk.
You may not be able to sell your
MuniPreferred shares at an auction if the auction fails; that
is, if there are more MuniPreferred shares offered for sale than
there are buyers for those shares. Also, if you place hold
orders (orders to retain MuniPreferred shares) at an auction
only at a specified rate, and that bid rate exceeds the rate set
at the auction, you will not retain your MuniPreferred shares.
Finally, if you buy shares or elect to retain shares without
specifying a rate below which you would not wish to continue to
hold those shares, and the auction sets a below-market rate, you
may receive a lower rate of return on your shares than the
market rate. See Description of MuniPreferred Shares
and The Auction Auction Procedures.
Secondary Market Risk
If you try to sell your
MuniPreferred shares between auctions, you may not be able to
sell any or all of your shares, or you may not be able to sell
them for $25,000 per share or $25,000 per share plus accumulated
dividends. If the Fund has designated a subsequent rate period
for a Series as a special rate period (a rate period of more
than seven days), changes in market interest rates could
adversely affect the price you would receive if you sold your
shares in the secondary market. If market interest rates for
tax-exempt
securities having similar credit quality to the MuniPreferred
shares, and maturities equivalent to the period remaining until
the end of the subsequent special rate period, increase so as to
exceed the dividend rate for that rate period, the amount for
which the MuniPreferred shares could be sold in the secondary
market (assuming there is a market for the shares) will tend to
fall, and will likely be less than $25,000 per share.
Broker-dealers that maintain a secondary trading market for
MuniPreferred shares, if any, are not required to maintain this
market, and the Fund is not required to redeem shares either if
an auction or an attempted secondary market sale fails because
of a lack of buyers. MuniPreferred shares are not registered on
a stock exchange or the NASDAQ stock market. If you sell your
MuniPreferred shares to a broker-dealer between auctions, you
may receive less than the price you paid for them, especially
when market interest rates have risen since the last auction or
risen higher than the dividend rate on a Series within a rate
period longer than seven days.
Ratings and Asset Coverage Risk.
While
and
assign ratings
of
and ,
respectively, to MuniPreferred shares, the ratings do not
eliminate or necessarily mitigate the risks of investing in
MuniPreferred shares. A rating agency could downgrade
MuniPreferred shares, which may make your shares less liquid at
an auction or in the secondary market. If a rating agency
downgrades MuniPreferred shares, the Fund may alter its
portfolio or redeem MuniPreferred shares. The Fund may
voluntarily redeem MuniPreferred shares under certain
circumstances. See Description of MuniPreferred
Shares Rating Agency Guidelines and Asset
Coverage for a description of the asset maintenance tests
the Fund must meet.
21
Inflation Risk.
Inflation is the reduction in the
purchasing power of money resulting from the increase in the
price of goods and services. Inflation risk is the risk that the
inflation-adjusted (or real) value of your
MuniPreferred shares investment or the income from that
investment will be worth less in the future. As inflation
occurs, the real value of the MuniPreferred shares and
distributions declines. In an inflationary period, however, it
is expected that, through the auction process, the MuniPreferred
shares dividend rates would increase, tending to offset
this risk. For additional general risks that inflation may pose
to investors in the Fund see Risk Factors
General Risks of Investing in the Fund Inflation
Risk.
Decline in Net Asset Value Risk.
A material decline in
the Funds net asset value may impair the Funds
ability to maintain required levels of asset coverage. For a
description of risks affecting the Fund, please see
General Risks of Investing in the Fund
below.
Payment Restrictions.
The Fund is prohibited from
declaring, paying or making any dividends or distributions on
MuniPreferred shares unless it satisfies certain conditions. See
Description of MuniPreferred Shares
Restrictions on Dividend, Redemption and Other Payments.
The Fund is also prohibited from declaring, paying or making any
dividends or distributions on common shares unless it satisfies
certain conditions. These prohibitions on the payment of
dividends or distributions might impair the Funds ability
to maintain its qualification as a regulated investment company
for federal income tax purposes. While the Fund intends to
redeem MuniPreferred shares if necessary to comply with the
asset coverage requirements, there can be no assurance that such
redemptions can be effected in time to permit the Fund to
distribute its income as required to maintain its qualification
as a regulated investment company under the Code. See
Federal Income Tax Matters.
Conflicts of Broker-Dealers Participating in Auctions.
A
Broker-Dealer may submit orders in auctions for its own account.
Any Broker-Dealer submitting an order for its own account in any
auction will have an advantage over other bidders in that it
would have knowledge of other orders placed through it in that
auction (but it would not have knowledge of orders submitted by
other Broker-Dealers). As a result of the Broker-Dealer bidding,
the auction clearing rate may be higher or lower than the rate
that would have prevailed if the Broker-Dealer had not bid. A
Broker-Dealer may also bid in order to prevent what would
otherwise be a failed action, or an auction clearing at a rate
that the Broker-Dealer believes does not reflect the market for
such securities at the time of the action. Broker-Dealers may,
but are not obligated to, advise holders of the MuniPreferred
shares that the rate that will apply in an all hold
auction is often a lower rate than would apply if holders submit
bids, and such advice, if given, may facilitate the submission
of bids by existing holders that would avoid the occurrence of
an all hold auction. A Broker-Dealer may, but is not
obligated to, encourage additional or revised investor bidding
in order to prevent an all-hold auction.
General
Risks of Investing in the Fund
Limited Operating History.
The Fund is a recently
organized, diversified, closed-end management investment company
and has a limited operating history.
Credit and Below Investment Grade Risk.
Credit risk is
the risk that one or more municipal securities in the
Funds portfolio will decline in price, or the issuer
thereof will fail to pay interest or principal when due, because
the issuer of the security experiences a decline in its
financial status. In general, lower-rated municipal securities
carry a greater degree of risk that the issuer will lose its
ability to make interest and principal payments, which could
have a negative impact on the Funds net asset value or
dividends. The Fund may invest up to 50% of its Managed Assets
in municipal securities that are rated below investment grade at
the time of investment or that are unrated but judged to be of
comparable quality by NAM. No more than 10% of the Funds
Managed Assets may be invested in municipal securities rated
below B3/B- or that are unrated but judged to be of comparable
quality by NAM. This means that the Fund may invest in municipal
securities that are involved in bankruptcy or insolvency
proceedings or are experiencing other financial difficulties at
the time of acquisition (such securities are commonly referred
to as distressed securities). Municipal securities of below
investment grade quality, commonly referred to as junk bonds,
are regarded as having predominately speculative characteristics
with respect to capacity to pay interest and repay principal
when due, and are susceptible to default or decline in market
value due to adverse economic and business
22
developments. The market values for municipal securities of
below investment grade quality tend to be volatile, and these
securities are less liquid than investment grade municipal
securities. For these reasons, an investment in the Fund is
subject to the following specific risks:
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increased price sensitivity resulting from changing interest
rates
and/or
a deteriorating economic environment;
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greater risk of loss due to default or declining credit quality;
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adverse issuer specific events that are more likely to render
the issuer unable to make interest
and/or
principal payments; and
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the possibility that a negative perception of the below
investment grade market develops, resulting in the price and
liquidity of below investment grade securities becoming
depressed, and this negative perception could last for a
significant period of time.
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Adverse changes in economic conditions are more likely to lead
to a weakened capacity of a below investment grade issuer to
make principal payments and interest payments compared to an
investment grade issuer. The principal amount of below
investment grade securities outstanding has proliferated in the
past decade as an increasing number of issuers have used below
investment grade securities for financing. An economic downturn
could severely affect the ability of highly leveraged issuers to
service their debt obligations or to repay their obligations
upon maturity. If the national economy enters into a
recessionary phase, potentially decreasing the tax and other
revenue of municipal issuers, or interest rates rise sharply,
increasing the interest cost on variable rate instruments and
negatively impacting economic activity, the number of defaults
by below investment grade municipal issuers is likely to
increase. Similarly, down-turns in profitability in specific
industries could adversely affect private activity bonds. The
market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than
do higher quality securities, which react primarily to
fluctuations in the general level of interest rates. Factors
having an adverse impact on the market value of lower quality
securities may have an adverse impact on the Funds net
asset value and the market value of its common shares. In
addition, the Fund may incur additional expenses to the extent
it is required to seek recovery upon a default in payment of
principal or interest on its portfolio holdings. In certain
circumstances, the Fund may be required to foreclose on an
issuers assets and take possession of its property or
operations. In such circumstances, the Fund would incur
additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
The secondary market for below investment grade securities may
not be as liquid as the secondary market for more highly rated
securities, a factor that may have an adverse effect on the
Funds ability to dispose of a particular security. There
are fewer dealers in the market for below investment grade
municipal securities than the market for investment grade
municipal securities. The prices quoted by different dealers for
below investment grade municipal securities may vary
significantly, and the spread between the bid and ask price is
generally much larger for below investment grade municipal
securities than for higher quality instruments. Under adverse
market or economic conditions, the secondary market for below
investment grade securities could contract further, independent
of any specific adverse changes in the condition of a particular
issuer, and these instruments may become illiquid. As a result,
the Fund could find it more difficult to sell these securities
or may be able to sell the securities only at prices lower than
if such securities were widely traded. Prices realized upon the
sale of such lower rated or unrated securities, under these
circumstances, may be less than the prices used in calculating
the Funds net asset value.
Issuers of such below investment grade securities are highly
leveraged and may not have available to them more traditional
methods of financing. Therefore, the risk associated with
acquiring the securities of such issuers generally is greater
than is the case with higher rated securities. For example,
during an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of below investment
grade securities may experience financial stress. During such
periods, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuers ability to
service its debt obligations also may be adversely affected by
specific developments, the issuers inability to meet
specific projected forecasts or the unavailability of additional
financing. The risk of loss from default by the issuer is
significantly greater for the
23
holders of below investment grade securities because such
securities are generally unsecured and are often subordinated to
other creditors of the issuer. Prices and yields of below
investment grade securities will fluctuate over time and, during
periods of economic uncertainty, volatility of below investment
grade securities may adversely affect the Funds net asset
value. In addition, investments in below investment grade zero
coupon bonds rather than income-bearing below investment grade
securities, may be more speculative and may be subject to
greater fluctuations in value due to changes in interest rates.
The Fund may invest in distressed securities, which are
securities issued by companies that are involved in bankruptcy
or insolvency proceedings or are experiencing other financial
difficulties at the time of acquisition by the Fund. The issuers
of such securities may be in transition, out of favor,
financially leveraged or troubled, or potentially troubled, and
may be or have recently been involved in major strategic
actions, restructurings, bankruptcy, reorganization or
liquidation. These characteristics of these companies can cause
their securities to be particularly risky, although they also
may offer the potential for high returns. These companies
securities may be considered speculative, and the ability of the
companies to pay their debts on schedule could be affected by
adverse interest rate movements, changes in the general economic
climate, economic factors affecting a particular industry or
specific developments within the companies. Distressed
securities frequently do not produce income while they are
outstanding and may require the Fund to bear certain
extraordinary expenses in order to protect and recover its
investment.
Investments in lower rated or unrated securities may present
special tax issues for the Fund to the extent that the issuers
of these securities default on their obligations pertaining
thereto, and the federal income tax consequences to the Fund as
a holder of such distressed securities may not be clear.
Interest Rate Risk.
Interest rate risk is the risk that
the debt securities in the Funds portfolio will decline in
value because of increases in market interest rates. In typical
market interest rate environments, the prices of longer-term
debt securities generally fluctuate more than the prices of
shorter-term debt securities as interest rates change. To the
extent the Fund invests in debt securities that may be prepaid
at the option of the obligor, the sensitivity of such securities
to changes in interest rates may increase (to the detriment of
the Fund) when interest rates rise. Moreover, because rates on
certain floating rate debt securities in which the Fund may
invest typically reset only periodically, changes in prevailing
interest rates (and particularly sudden and significant changes)
can be expected to cause some fluctuations in the Funds
net asset value. The Fund may utilize certain strategies,
including taking positions in futures or interest rate swaps,
for the purpose of reducing the interest rate sensitivity of the
Funds debt securities and decreasing the Funds
exposure to interest rate risk. The Fund is not required to
hedge its exposure to interest rate risk and may choose not to
do so. In addition, there is no assurance that any attempts by
the Fund to reduce interest rate risk will be successful.
Municipal Securities Market Risk.
Investing in the
municipal securities market involves certain risks. The amount
of public information available about the municipal securities
in the Funds portfolio is generally less than that for
corporate equities or bonds, and the investment performance of
the Fund may therefore be more dependent on the analytical
abilities of NAM than if the Fund were a stock fund or taxable
bond fund. The secondary market for municipal securities,
particularly the below investment grade bonds in which the Fund
may invest, also tends to be less well-developed or liquid than
many other securities markets, which may adversely affect the
Funds ability to sell its municipal securities at
attractive prices or at prices approximating those at which the
Fund currently values them.
The ability of municipal issuers to make timely payments of
interest and principal may be diminished during general economic
downturns and as governmental cost burdens are reallocated among
federal, state and local governments. In addition, laws enacted
in the future by Congress or state legislatures or referenda
could extend the time for payment of principal
and/or
interest, or impose other constraints on enforcement of such
obligations, or on the ability of municipalities to levy taxes.
Issuers of municipal securities might seek protection under the
bankruptcy laws. In the event of bankruptcy of such an issuer,
the Fund could experience delays in collecting principal and
interest and the Fund may not, in all circumstances, be able to
collect all principal and interest to which it is entitled. To
enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Fund may take
possession of and manage the assets securing
24
the issuers obligations on such securities, which may
increase the Funds operating expenses. Any income derived
from the Funds ownership or operation of such assets may
not be tax-exempt.
Reinvestment Risk.
Reinvestment risk is the risk that
income from the Funds portfolio will decline if and when
the Fund invests the proceeds from matured, traded or called
bonds at market interest rates that are below the
portfolios current earnings rate. A decline in income
could affect the common shares market price or their
overall returns.
Inverse Floating Rate Securities Risk.
The Fund may
invest in inverse floating rate securities. In general, income
on inverse floating rate securities will decrease when interest
rates increase and increase when interest rates decrease.
Investments in inverse floating rate securities may subject the
Fund to the risks of reduced or eliminated interest payments and
losses of principal. In addition, inverse floating rate
securities may increase or decrease in value at a greater rate
than the underlying interest rate, which effectively leverages
the Funds investment. As a result, the market value of
such securities will generally be more volatile than that of
fixed rate securities.
Tax Risk.
To qualify for the favorable U.S. federal
income tax treatment generally accorded to regulated investment
companies, among other things, the Fund must derive in each
taxable year at least 90% of its gross income from certain
prescribed sources. If for any taxable year the Fund does not
qualify as a regulated investment company, all of its taxable
income (including its net capital gain) would be subject to tax
at regular corporate rates without any deduction for
distributions to stockholders, and such distributions would be
taxable as ordinary dividends to the extent of the Funds
current and accumulated earnings and profits.
The value of the Funds investments and its net asset value
may be adversely affected by changes in tax rates and policies.
Because interest income from municipal securities is normally
not subject to regular federal income taxation, the
attractiveness of municipal securities in relation to other
investment alternatives is affected by changes in federal income
tax rates or changes in the tax-exempt status of interest income
from municipal securities. Any proposed or actual changes in
such rates or exempt status, therefore, can significantly affect
the demand for and supply, liquidity and marketability of
municipal securities. This could in turn affect the Funds
net asset value and ability to acquire and dispose of municipal
securities at desirable yield and price levels. Additionally,
the Fund is not a suitable investment for individual retirement
accounts, for other tax-exempt or tax-deferred accounts or for
investors who are not sensitive to the federal income tax
consequences of their investments.
Inflation Risk.
Inflation risk is the risk that the value
of assets or income from investment will be worth less in the
future as inflation decreases the value of money. As inflation
increases, the real value of the dividends paid to MuniPreferred
shareholders can decline.
Deflation risk.
Deflation risk is the risk that prices
throughout the economy decline over time, which may have an
adverse effect on the market valuation of companies, their
assets and revenues. In addition, deflation may have an adverse
effect on the creditworthiness of issuers and may make issuer
default more likely, which may result in a decline in the value
of the Funds portfolio.
Sector and Industry Risk.
The Fund may invest in
municipal securities that are collateralized by the proceeds
from class action or other litigation against the tobacco
industry. Payment by tobacco industry participants of such
proceeds is spread over several years, and the collection and
distribution of such proceeds to the issuers of municipal
securities is dependent upon the financial health of such
tobacco industry participants, which cannot be assured.
Additional litigation, government regulation or prohibition on
the sales of tobacco products, or the seeking of protection
under the bankruptcy laws by companies in the tobacco industry,
could adversely affect the tobacco industry which, in turn,
could have an adverse affect on
tobacco-related
municipal securities. The Fund presently intends to limit its
investment in tobacco settlement bonds to no more than 10% of
the Funds Managed Assets.
Subject to rating agency guidelines, the Fund may invest a
significant portion of its Managed Assets in broad segments of
the municipal securities market, such as revenue obligations of
hospitals and other health care facilities, special taxing
districts, securities issued to finance charter schools and
other private educational facilities, municipal utility
securities, industrial development bonds, and other private
activity bonds. Subject
25
to the availability of suitable investment opportunities, NAM
will attempt to minimize the sensitivity of the Funds
portfolio to credit and other risks associated with a particular
sector or industry. However, if the Fund invests a significant
portion of its Managed Assets in the segments noted above, the
Fund will be more susceptible to economic, business, political,
regulatory and other developments generally affecting issuers in
such segments of the municipal securities market. To the extent
that the Fund focuses its Managed Assets in the hospital and
healthcare facilities sector, the Fund will be subject to risks
associated with such sector, including adverse government
regulation and reduction in reimbursement rates, as well as
government approval of products and services and intense
competition. Securities issued with respect to special taxing
districts will be subject to various risks, including
real-estate development related risks and taxpayer concentration
risk. Further, the fees, special taxes or tax allocations and
other revenues established to secure the obligations of
securities issued with respect to special taxing districts are
generally limited as to the rate or amount that may be levied or
assessed and are not subject to increase pursuant to rate
covenants or municipal or corporate guarantees. Securities
issued to finance charter schools and other private educational
facilities will be subject to various risks, including the
reversal of legislation authorizing or funding charter schools,
the failure to renew or secure a charter, the failure of a
funding entity to appropriate necessary funds and competition
from alternatives such as voucher programs. Issuers of municipal
utility securities can be significantly affected by government
regulation, financing difficulties, supply and demand of
services or fuel and natural resource conservation. The
transportation sector, including airports, airlines, ports and
other transportation facilities, can be significantly affected
by changes in the economy, fuel prices, labor relations,
insurance costs and government regulation.
Special Risks Related to Certain Municipal Obligations.
The Fund may invest in municipal leases and certificates of
participation in such leases. Municipal leases and certificates
of participation involve special risks not normally associated
with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means
for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements
for the issuance of debt. The debt issuance limitations are
deemed to be inapplicable because of the inclusion in many
leases or contracts of
non-appropriation
clauses that relieve the governmental issuer of any obligation
to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. In addition, such
leases or contracts may be subject to the temporary abatement of
payments in the event the governmental issuer is prevented from
maintaining occupancy of the leased premises or utilizing the
leased equipment. Although the obligations may be secured by the
leased equipment or facilities, the disposition of the property
in the event of non-appropriation or foreclosure might prove
difficult, time consuming and costly, and may result in a delay
in recovering or the failure to fully recover the Funds
original investment. In the event of non-appropriation, the
issuer would be in default and taking ownership of the assets
may be a remedy available to the Fund, although the Fund does
not anticipate that such a remedy would normally be pursued. To
the extent that the Fund invests in unrated municipal leases or
participates in such leases, the credit quality rating and risk
of cancellation of such unrated leases will be monitored on an
ongoing basis. Certificates of participation, which represent
interests in unmanaged pools of municipal leases or installment
contracts, involve the same risks as the underlying municipal
leases. In addition, the Fund may be dependent upon the
municipal authority issuing the certificates of participation to
exercise remedies with respect to the underlying securities.
Certificates of participation also entail a risk of default or
bankruptcy, both of the issuer of the municipal lease and also
the municipal agency issuing the certificate of participation.
Derivatives Risk.
The Fund may use derivatives or other
transactions for investment purposes or for hedging the
portfolios exposure to high yield credit risk and the risk
of increases in interest rates, which could result in poorer
overall performance for the Fund. The Funds use of
derivatives or other transactions to reduce risk involves costs
and will be subject to NAMs ability to predict correctly
changes in the relationships of such hedge instruments to the
Funds portfolio holdings or other factors. No assurance
can be given that NAMs judgment in this respect will be
correct. In addition, no assurance can be given that the Fund
will enter into hedging or other transactions at times or under
circumstances in which it may be advisable to do so.
26
Market Disruption Risk.
Certain events have a disruptive
effect on the securities markets, such as terrorist attacks
(including the terrorist attacks in the U.S. on
September 11, 2001), war and other geopolitical events. The
Fund cannot predict the effects of similar events in the future
on the U.S. economy.
Illiquid Securities Risk.
The Fund may invest in
municipal securities and other instruments that, at the time of
investment, are illiquid. Illiquid securities are securities
that are not readily marketable and may include some restricted
securities, which are securities that may not be resold to the
public without an effective registration statement under the
Securities Act of 1933, as amended (the Securities
Act), if they are unregistered, may be sold only in a
privately negotiated transaction or pursuant to an exemption
from registration. Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by
the Fund or at prices approximating the value at which the Fund
is carrying the securities on its books.
Certain Affiliations.
In addition to the indirect
affiliation discussed on page of this
prospectus, certain broker-dealers may be considered to be
affiliated persons of the Fund, NAM
and/or
Nuveen. Absent an exemption from the U.S. Securities and
Exchange Commission (the SEC) or other regulatory
relief, the Fund is generally precluded from effecting certain
principal transactions with affiliated brokers, and its ability
to purchase securities being underwritten by an affiliated
broker or a syndicate including an affiliated broker, or to
utilize affiliated brokers for agency transactions, is subject
to restrictions. This could limit the Funds ability to
engage in securities transactions and take advantage of market
opportunities. See also Management of the Fund
Nuveen Investments and Investment
Adviser.
Anti-Takeover Provisions.
The Declaration and By-laws
include provisions that could limit the ability of other
entities or persons to acquire control of the Fund or convert
the Fund to open-end status. See Certain Provisions in the
Declaration of Trust and By-Laws.
HOW
THE FUND MANAGES RISK
Investment
Limitations
The Fund has adopted certain investment limitations designed to
limit investment risk and maintain portfolio diversification.
These limitations are fundamental and may not be changed without
the approval of the holders of a majority of the
outstanding common shares and MuniPreferred shares voting
together as a single class, and the approval of the holders of a
majority of the outstanding MuniPreferred shares
voting as a separate class. When used with respect to particular
shares of the Fund, a majority of the outstanding
shares means (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the shares are
present or represented by proxy, or (ii) more than 50% of
the shares, whichever is less.
The Fund is subject to guidelines which are more limiting than
the investment restrictions set forth above in order to obtain
and maintain ratings
from
and
on the MuniPreferred shares. See Investment
Objectives in the Statement of Additional Information for
a complete list of the fundamental and non-fundamental
investment policies of the Fund.
Management
of Investment Portfolio and Capital Structure to Limit Leverage
Risk
The Fund may take certain actions if short- or intermediate-term
interest rates increase or market conditions otherwise change
(or the Fund anticipates such an increase or change) and the
Funds leverage begins (or is expected) to adversely affect
common shareholders. In order to attempt to offset such a
negative impact of leverage on common shareholders, the Fund may
shorten the average maturity of its investment portfolio (by
investing in short-term, high quality securities) or may extend
the maturity of outstanding MuniPreferred shares. The Fund may
also attempt to reduce the leverage by redeeming or otherwise
purchasing MuniPreferred shares. The success of any such attempt
to limit leverage risk depends on NAMs ability to
accurately predict interest rate or other market changes.
Because of the difficulty of making such predictions, the Fund
may never attempt to manage its capital structure in the manner
described above.
If market conditions suggest that additional leverage would be
beneficial, the Fund may sell previously unissued MuniPreferred
shares or MuniPreferred shares that the Fund previously issued
but later repurchased.
27
No
Inverse Floating Rate Securities
The Fund may not invest in inverse floating rate securities,
which are securities that pay interest at rates that vary
inversely with changes in prevailing short-term tax-exempt
interest rates and which represent a leveraged investment in an
underlying municipal security. This restriction is a
non-fundamental policy of the Fund that may be changed by vote
of the Funds Board of Trustees.
Hedging
Strategies
The Fund may use various investment strategies designed to limit
the risk of bond price fluctuations and to preserve capital.
These hedging strategies include using credit default swaps,
interest-rate swaps on taxable tax-exempt indices, forward
starting rate swaps and options on interest rate swaps,
financial futures contracts, options on financial futures or
options based on either an index of long-term municipal
securities or on taxable debt securities whose prices, in the
opinion of NAM, correlate with the prices of the Funds
investments. These hedging strategies may generate taxable
income.
28
Trustees
and Officers
The Board of Trustees is responsible for the management of the
Fund, including supervision of the duties performed by NAM. The
names and business addresses of the trustees and officers of the
Fund and their principal occupations and other affiliations
during the past five years are set forth under Management
of the Fund in the Statement of Additional Information.
Investment
Adviser
NAM, 333 West Wacker Drive, Chicago, Illinois 60606, a
registered investment adviser, is a wholly owned subsidiary of
Nuveen Investments. Founded in 1898, Nuveen Investments and its
affiliates had approximately
$ billion of assets under
management as
of ,
200 , of which
$ billion was in municipal
securities. Regarding this
$ billion of tax-exempt
municipal securities, approximately
$ billion,
$ billion,
$ billion and
$ billion represent assets
relating to closed-end municipal bond funds, open-end municipal
bond funds, retail municipal managed accounts and institutional
municipal managed accounts, respectively. At such time as the
Fund receives an exemptive order permitting it to do so, or as
otherwise permitted by the 1940 Act or the rules thereunder, the
Fund may, without obtaining approval of the Funds
shareholders, retain an unaffiliated subadviser to perform some
or all of the portfolio management functions on the Funds
behalf.
NAM will be responsible for investing the Funds Managed
Assets. NAM also is responsible for managing the Funds
business affairs and providing certain clerical, bookkeeping and
other administrative services. John V. Miller and Johnathan N.
Wilhelm will both serve as the portfolio managers of the Fund.
John V. Miller, CFA, is a Managing Director and supervises the
portfolio management activities for NAMs open-end and
closed-end tax-exempt bond funds, which total
$ billion in assets under
management. He has direct responsibility as the manager of the
Nuveen High Yield Municipal Bond Fund and the Nuveen Municipal
High Income Opportunity Fund, as well as other high yield
municipal funds and institutional accounts. He joined
Nuveens investment management team in 1996 as a municipal
credit analyst, and moved into portfolio management in 2000.
Mr. Miller is a frequent commentator for financial news
media outlets such as Bloomberg, Dow Jones, and Reuters, and
often appears on Bloomberg TV and CNBC. He earned his B.A. in
Economics and Political Science from Duke University, an M.A. in
Economics from Northwestern University, and an M.B.A. with
Honors in Finance from the University of Chicago.
Johnathan N. Wilhelm is a Vice-President with portfolio
management responsibilities relating to NAMs open-end and
closed-end tax-exempt bond funds, which total
$ billion in assets under
management. He has direct responsibility as the manager of the
Nuveen High Yield Municipal Bond Fund and the Nuveen Municipal
High Income Opportunity Fund, since 2006. Mr. Wilhelm has
over eighteen years of industry experience. From 1999 to 2006,
Mr. Wilhelm headed the research activities for industrial
development bond, utilities and real
estate-backed
financings. Prior to joining NAM in 1999, Mr. Wilhelm was
Senior Credit Analyst in the Van Kampen Senior Loan Group,
covering portfolio exposure of approximately $6 billion.
Before joining the senior loan group, he was a Senior
Fixed-Income Analyst for the mutual funds and unit investment
trusts. Prior to joining Van Kampen, he was the Chief Utilities
Research Officer for a $3.2 billion portfolio of
investor-owned utilities at the Canadian Imperial Bank of
Commerce. He received his B.S. in Business from Miami University
of Ohio and his J.D. from DePaul University.
Additional information about the portfolio managers
compensation, other accounts managed by them and other
information is provided in the Statement of Additional
Information. The Statement of Additional Information is
available free of charge by calling
(800) 257-8787
or by visiting Nuveens website at www.nuveen.com.
29
Nuveen
Investments
On June 20, 2007, Nuveen Investments announced that it had
entered into a definitive Agreement and Plan of Merger to be
acquired by an investor group majority-led by Madison Dearborn
Partners, LLC. Madison Dearborn Partners, LLC is a private
equity investment firm based in Chicago, Illinois. The merger
was consummated on November 13, 2007.
The consummation of the merger was deemed to be an
assignment (as defined in the 1940 Act) of the
investment management agreement between the Fund and NAM, and
resulted in the automatic termination of the agreement. The
Board of Trustees of the Fund considered and approved a new
ongoing investment management agreement with NAM. The new
ongoing agreement was approved by the Funds initial sole
shareholder, NAM, and took effect on November 13, 2007.
The investor group led by Madison Dearborn Partners, LLC
includes affiliates of one of the underwriters. As a result, an
underwriter may be an indirect affiliated person (as
that term is defined in the 1940 Act) of the Fund. Certain
conflicts of interest may arise as a result of such indirect
affiliation. For example, the Fund is generally prohibited from
entering into principal transactions with one of the
underwriters and certain of its affiliates. NAM has or will
adopt policies and procedures that address investment activities
of, and other arrangements involving, NAM that may give rise to
certain conflicts of interest. NAM does not believe that any
such prohibition or limitation will have a materially adverse
effect on the Funds ability to pursue its investment
objectives and policies.
Investment
Management Agreement
Pursuant to an investment management agreement between NAM and
the Fund, the Fund has agreed to pay an annual management fee
for the services and facilities provided by NAM, payable on a
monthly basis, based on the sum of a fund-level fee and a
complex-level fee, as described below, according to the
following schedule. Managed Assets include assets attributable
to MuniPreferred Shares.
Fund-Level Fee.
The fund-level fee shall be applied
according to the following schedule:
|
|
|
|
|
Fund-Level Average Daily Managed Assets
|
|
Fund-Level Fee Rate
|
|
|
Up to $125 million
|
|
|
.5500
|
%
|
$125 million to $250 million
|
|
|
.5375
|
%
|
$250 million to $500 million
|
|
|
.5250
|
%
|
$500 million to $1 billion
|
|
|
.5125
|
%
|
$1 billion to $2 billion
|
|
|
.5000
|
%
|
$2 billion and over
|
|
|
.4750
|
%
|
30
Complex-Level Fee.
The effective rates of the
complex-level fee at various specified complex-wide asset levels
are as indicated in the following table:
|
|
|
|
|
|
|
Effective Rate at
|
|
Complex-Level Asset Breakpoint Level(1)
|
|
Breakpoint Level
|
|
|
$55 billion
|
|
|
.2000
|
%
|
$56 billion
|
|
|
.1996
|
%
|
$57 billion
|
|
|
.1989
|
%
|
$60 billion
|
|
|
.1961
|
%
|
$63 billion
|
|
|
.1931
|
%
|
$66 billion
|
|
|
.1900
|
%
|
$71 billion
|
|
|
.1851
|
%
|
$76 billion
|
|
|
.1806
|
%
|
$80 billion
|
|
|
.1773
|
%
|
$91 billion
|
|
|
.1691
|
%
|
$125 billion
|
|
|
.1599
|
%
|
$200 billion
|
|
|
.1505
|
%
|
$250 billion
|
|
|
.1469
|
%
|
$300 billion
|
|
|
.1445
|
%
|
|
|
|
(1)
|
|
Complex Managed Assets are the aggregate Managed Assets of all
Nuveen-branded closed-end and
open-end
registered investment companies organized in the U.S. Complex
Managed Assets were approximately
$ billion as
of ,
2007.
|
In addition to NAMs management fee, the Fund pays all
other costs and expenses of its operations, including
compensation of its trustees (other than those affiliated with
NAM), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent registered
accounting firm, expenses of repurchasing shares, expenses of
issuing any MuniPreferred Shares, expenses of preparing,
printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, listing fees
and taxes, if any. All fees and expenses are accrued daily and
deducted before payment distributions to shareholders.
For the initial partial month and next full nine months of the
Funds operations, NAM has contractually agreed to waive
all or a portion of the Funds fund-level and complex level
fees in the amounts, and for the time periods set forth below:
|
|
|
|
|
|
|
Percentage
|
|
Month
|
|
Waived
|
|
|
Initial Partial Month
|
|
|
100
|
%
|
1st Full Month
|
|
|
100
|
%
|
2nd Full Month
|
|
|
100
|
%
|
3rd Full Month
|
|
|
100
|
%
|
4th Full Month
|
|
|
50
|
%
|
5th Full Month
|
|
|
50
|
%
|
6th Full Month
|
|
|
50
|
%
|
7th Full Month
|
|
|
25
|
%
|
8th Full Month
|
|
|
25
|
%
|
9th Full Month
|
|
|
25
|
%
|
NAM has not agreed to waive any portion of the Funds
fund-level and complex-level fees beyond the ninth full month of
the Funds operations (August 31, 2008).
31
The basis for the Board of Trustees initial approval of
the Funds investment management agreement will be provided
in the Funds initial shareholder report for the period
ended .
The basis for subsequent continuations of the Funds
investment management agreement will be provided in annual or
semi-annual reports to shareholders for the periods during which
such continuations occur.
DESCRIPTION
OF MUNIPREFERRED SHARES
The following is a brief description of the terms of the
MuniPreferred shares. This description does not purport to be
complete and is subject to and qualified in its entirety by
reference to the more detailed description of the MuniPreferred
shares in the Funds Statement attached as Appendix A
to the Statement of Additional Information. Capitalized terms
not otherwise defined in the prospectus shall have the same
meaning as defined in the Statement.
General
The Funds Declaration of Trust authorizes the issuance of
an unlimited number of preferred shares, par value $.01 per
share, in one or more classes or series, with rights as
determined by the Board of Trustees without the approval of
holders of common shares. The Statement currently authorizes the
issuance
of
and shares
of MuniPreferred Series and Series ,
respectively. All MuniPreferred shares will have a liquidation
preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or
declared to the date of final distribution. The MuniPreferred
shares when issued and sold through this offering (i) will
be fully paid and, subject to matters discussed in Certain
Provisions in the Declaration of Trust and By-Laws,
non-assessable, (ii) will not be convertible into common
shares or other capital stock of the Fund, (iii) will have
no preemptive rights, and (iv) will not be subject to any
sinking fund. The MuniPreferred shares will be subject to
optional and mandatory redemption as described below under
Redemption).
Holders of MuniPreferred shares will not receive certificates
representing their ownership interest in such shares. The
Depository Trust Company will initially act as Securities
Depository for the Agent Members with respect to the
MuniPreferred shares.
In addition to serving as the Auction Agent in connection with
the Auction Procedures described below, the Auction Agent will
act as the transfer agent, registrar, and paying agent for the
MuniPreferred shares. Furthermore, the Auction Agent will send
notices to holders of MuniPreferred shares of any meeting at
which holders of MuniPreferred shares have the right to vote.
See Voting Rights below. However, the
Auction Agent generally will serve merely as the agent of the
Fund, acting in accordance with the Funds instructions.
Except in an Auction, the Fund will have the right (to the
extent permitted by applicable law) to purchase or otherwise
acquire any share of MuniPreferred shares, so long as the Fund
is current in the payment of dividends on the MuniPreferred
shares and on any other capital shares of the Fund ranking on a
parity with the MuniPreferred shares with respect to the payment
of dividends or upon liquidation.
Any MuniPreferred shares repurchased or redeemed by the Fund
will be classified as authorized and unissued MuniPreferred
shares. The Board of Trustees may by resolution classify or
reclassify any authorized and unissued MuniPreferred shares from
time to time by setting or changing the preferences, rights,
voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such
shares.
Dividends
and Dividend Periods
General.
Holders of MuniPreferred shares will be entitled
to receive, when, as and if declared by the Board of Trustees,
out of funds legally available therefor, cumulative cash
dividends on their shares, at the Applicable Rate determined as
set forth below under Determination of
Dividend Rate, payable on the respective dates set forth
below. Dividends so declared and payable shall be paid to the
extent permitted under
32
Massachusetts law and the Declaration of Trust, and to the
extent available and in preference to and priority over any
dividend declared and payable on the common shares.
On the Business Day next preceding each Dividend Payment Date,
the Fund is required to deposit with the Paying Agent sufficient
funds for the payment of dividends. The Fund does not intend to
establish any reserves for the payment of dividends.
All moneys paid to the Paying Agent for the payment of dividends
shall be held in trust for the payment of such dividends to the
Holders. Each dividend will be paid by the Paying Agent to the
Holders as their names appear on the share ledger or share
records of the Fund, which Holder is expected to be the nominee
of the Securities Depository. The Securities Depository will
credit the accounts of the Agent Members of the beneficial
owners in accordance with the Securities Depositorys
normal procedures. The Securities Depositorys current
procedures provide for it to distribute dividends in
same-day
funds to Agent Members who are in turn expected to distribute
such dividends to the persons for whom they are acting as
agents. The Agent Member of a beneficial owner will be
responsible for holding or disbursing such payments on the
applicable Dividend Payment Date to such beneficial owner in
accordance with the instructions of such beneficial owner.
Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as their names appear on
the share ledger or share records of the Fund on such date, not
exceeding 15 days preceding the payment date thereof, as
may be fixed by the Board of Trustees. Any dividend payment
shall first be credited against the earliest accumulated but
unpaid dividends. No interest will be payable in respect of any
dividend payment or payments which may be in arrears. See
Default Period below.
The amount of dividends per share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one
year (or in respect of dividends on another date in connection
with a redemption during such Dividend Period) shall be computed
by multiplying the Applicable Rate (or the Default Rate) for
such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend
Period (or portion thereof) that such share was outstanding and
for which the Applicable Rate or the Default Rate was applicable
and the denominator of which will be 365, multiplying the amount
so obtained by $25,000, and rounding the amount so obtained to
the nearest cent. During any Dividend Period of one year or
more, the amount of dividends per share payable on any Dividend
Payment Date (or in respect of dividends on another date in
connection with a redemption during such Dividend Period) shall
be computed as described in the preceding sentence, except that
it will be determined on the basis of a year consisting of
twelve 30 day months.
Determination of Dividend Rate.
The dividend rate for the
initial Dividend Period (i.e., the period from and including the
Date of Original Issue to and including the initial Auction
Date) and the initial Auction Date are set forth on the inside
cover page of the Prospectus. For each subsequent Dividend
Period, subject to certain exceptions, the dividend rate will be
the Applicable Rate that the Auction Agent advises the Fund has
resulted from an Auction.
The initial Dividend Period for the MuniPreferred shares shall
be 7 days. Dividend Periods after the initial Dividend
Period shall either be Standard Dividend Periods or, subject to
certain conditions and with notice to Holders, Special Dividend
Periods.
A Special Dividend Period will not be effective unless
Sufficient Clearing Bids exist at the Auction in respect of such
Special Dividend Period (that is, in general, the number of
shares subject to Buy Orders by Potential Holders is at least
equal to the number of shares subject to Sell Orders by Existing
Holders).
Dividends will accumulate at the Applicable Rate from the Date
of Original Issue and shall be payable on each Dividend Payment
Date thereafter. For Dividend Periods of less than 30 days,
Dividend Payment Dates shall occur on the first Business Day
following such Dividend Period and, if greater than
30 days, then on a monthly basis on the first Business Day
of each month within such Dividend Period and on the Business
Day following the last day of such Dividend Period. Dividends
will be paid through the Securities Depository on each Dividend
Payment Date.
33
Except during a Default Period as described below, the
Applicable Rate resulting from an Auction will not be greater
than the Maximum Rate. The Maximum Rate will be the higher of
the Applicable Percentage of the Reference Rate, or the
Applicable Spread plus the Reference Rate. The Reference Rate
will be the applicable LIBOR Rate (as defined below) (for a
Dividend Period of fewer than 365 days) or the Treasury
Index Rate (as defined below) (for a Dividend Period of
365 days or more). The Applicable Percentage and Applicable
Spread for any Standard Dividend Period will generally be
determined based on the credit ratings assigned to the
MuniPreferred shares
by
and
on the Auction Date for such period.
If
and/or
shall not make such rating available, the rate shall be
determined by reference to equivalent ratings issued by any
Other Rating Agency.
|
|
|
|
|
|
|
|
|
Credit Ratings for the MuniPreferred Shares
|
|
|
|
|
|
[ ]
|
|
[ ]
|
|
Applicable Percentage
|
|
|
Applicable Spread
|
|
Aaa
|
|
AAA
|
|
|
125
|
%
|
|
125 bps
|
Aa3 to Aa1
|
|
AA- to AA+
|
|
|
150
|
%
|
|
150 bps
|
A3 to A1
|
|
A- to A+
|
|
|
200
|
%
|
|
200 bps
|
Baa3 to Baa1
|
|
BBB- to BBB+
|
|
|
250
|
%
|
|
250 bps
|
Ba1 and below
|
|
BB+ and below
|
|
|
300
|
%
|
|
300 bps
|
The LIBOR Rate is the applicable London Inter-Bank
Offered Rate for deposits in U.S. dollars for the period
most closely approximating the applicable Dividend Period for a
Series of MuniPreferred shares.
The Treasury Index Rate is the average yield to
maturity for certain U.S. Treasury securities having
substantially the same length to maturity as the applicable
dividend period for a Series of MuniPreferred shares.
Assuming the Fund maintains an AAA/Aaa rating on the
MuniPreferred shares, the practical effect of the different
methods used to calculate the Maximum Rate is shown in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Maximum
|
|
|
Method Used to
|
|
|
Rate Using the
|
|
|
Rate Using the
|
|
|
Determine the
|
Index
|
|
Applicable Percentage
|
|
|
Applicable Spread
|
|
|
Maximum Rate
|
|
1%
|
|
|
1.25
|
%
|
|
|
2.25
|
%
|
|
Spread
|
2%
|
|
|
2.50
|
%
|
|
|
3.25
|
%
|
|
Spread
|
3%
|
|
|
3.75
|
%
|
|
|
4.25
|
%
|
|
Spread
|
4%
|
|
|
5.00
|
%
|
|
|
5.25
|
%
|
|
Spread
|
5%
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
Either
|
6%
|
|
|
7.50
|
%
|
|
|
7.25
|
%
|
|
Percentage
|
The Board of Trustees may amend the Maximum Rate to increase the
percentage amount by which the Reference Rate described above is
multiplied, or to increase the spread added to the Reference
Rate, to determine the Maximum Rate shown without the consent of
the holders of MuniPreferred shares, including each Series, or
any shareholder of the Fund, but only with confirmation from
each Rating Agency then rating the MuniPreferred shares that
such action will not impair such agencys then-current
rating of the MuniPreferred shares, and after consultation with
the Broker-Dealers, provided that immediately following any such
increase the Fund could meet the MuniPreferred Shares Basic
Maintenance Amount test discussed below under Asset
Maintenance.
The Maximum Rate for the MuniPreferred shares will apply
automatically following an Auction for such shares in which
Sufficient Clearing Bids have not been made (other than because
all shares of MuniPreferred shares were subject to Submitted
Hold Orders) or following the failure to hold an Auction for any
reason on the Auction Date scheduled to occur (except for
circumstances in which the Dividend Rate is the Default Rate, as
described below).
The All Hold Rate will apply automatically following an Auction
in which all of the outstanding shares are subject to (or are
deemed to be subject to) Submitted Hold Orders. The All Hold
Rate is 80% of the applicable Reference Rate.
34
Prior to each Auction, Broker-Dealers will notify Holders of the
term of the next succeeding Dividend Period as soon as
practicable after the Broker-Dealers have been so advised by the
Fund. After each Auction, Broker-Dealers will advise Holders of
the Applicable Rate for the next succeeding Dividend Period and
of the Auction Date of the next succeeding Auction.
Notification of Dividend Period.
The Fund will designate
the duration of Dividend Periods of the MuniPreferred shares;
provided, however, that no such designation is necessary for a
Standard Dividend Period and that any designation of a Special
Dividend Period shall be effective only if (i) notice
thereof shall have been given as provided herein, (ii) any
failure to pay in the timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, the
MuniPreferred shares shall have been cured as set forth under
Default Period, (iii) Sufficient
Clearing Bids shall have existed in an Auction held on the
Auction Date immediately preceding the first day of such
proposed Special Dividend Period, (iv) if the Fund shall
have mailed a notice of redemption with respect to any shares,
as described under Redemption below, the
Redemption Price with respect to such shares shall have
been deposited with the Paying Agent, and (v) the Fund has
confirmed that, as of the Auction Date next preceding the first
day of such Special Dividend Period, it satisfies the
MuniPreferred Shares Basic Maintenance Amount (as defined below)
and has consulted with the Broker-Dealers and has provided
notice and otherwise complied with any Rating Agency Guidelines.
If the Fund proposes to designate any Special Dividend Period,
not fewer than seven (7) (or two (2) Business Days in the
event the duration of the Dividend Period prior to such Special
Dividend Period is fewer than eight (8) days) nor more than
30 days prior to the first day of such Special Dividend
Period, notice shall be (i) made by press release and
(ii) communicated by the Fund by telephonic or other means
to the Auction Agent and confirmed in writing promptly
thereafter. Each such notice shall state (A) that the Fund
proposes to exercise its option to designate a succeeding
Special Dividend Period, specifying the first and last days
thereof and (B) that the Fund will, by
3:00 p.m. New York City time, on the second Business
Day next preceding the first day of such Special Dividend
Period, notify the Auction Agent, who will promptly notify the
Broker-Dealers, of either (x) its determination, subject to
certain conditions, to proceed with such Special Dividend
Period, subject to the terms of any Specific
Redemption Provisions, or (y) its determination not to
proceed with such Special Dividend Period in which latter event
the succeeding Dividend Period shall be a Standard Dividend
Period.
No later than 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of any proposed
Special Dividend Period, the Fund shall deliver to the Auction
Agent, who will promptly deliver to the Broker- Dealers and
Existing Holders, either:
(i) a notice stating (A) that the Fund has determined
to designate the next succeeding Dividend Period as a Special
Dividend Period, specifying the first and last days thereof and
(B) the terms of any Specific
Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to
exercise its option to designate a Special Dividend Period.
If the Fund fails to deliver either such notice with respect to
any designation of any proposed Special Dividend Period to the
Auction Agent or is unable to make the required confirmation
described above by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such
proposed Special Dividend Period, the Fund shall be deemed to
have delivered a notice to the Auction Agent with respect to
such Dividend Period to the effect set forth in clause (ii)
above, thereby resulting in a Standard Dividend Period.
Default Period.
Subject to cure provisions, a
Default Period with respect to a particular Series
will commence on any date the Fund fails to deposit irrevocably
in trust in
same-day
funds, with the Paying Agent by 12:00 noon, New York City time,
(A) the full amount of any declared dividend on that Series
payable on the Dividend Payment Date (a Dividend
Default) or (B) the full amount of any redemption
price (the Redemption Price) payable on the
date fixed for redemption (the Redemption Date)
(a Redemption Default) and together with a
Dividend Default, hereinafter referred to as
Default). Subject to cure provisions, a Default
Period with respect to a Dividend Default or a
Redemption Default shall end on the
35
Business Day on which, by 12:00 noon, New York City time, all
unpaid dividends and any unpaid Redemption Price shall have
been deposited irrevocably in trust in
same-day
funds with the Paying Agent. In the case of a Dividend Default,
the Applicable Rate for each Dividend Period commencing during a
Default Period will be equal to the Default Rate, and each
subsequent Dividend Period commencing after the beginning of a
Default Period shall be a Standard Dividend Period; provided,
however, that the commencement of a Default Period will not by
itself cause the commencement of a new Dividend Period. No
Auction shall be held during a Default Period with respect to a
Dividend Default applicable to that Series of MuniPreferred
shares. No Default Period with respect to a Dividend Default or
Redemption Default shall be deemed to commence if the
amount of any dividend or any Redemption Price due (if such
default is not solely due to the willful failure of the Fund) is
deposited irrevocably in trust, in
same-day
funds with the Paying Agent by 12:00 noon, New York City time
within three Business Days after the applicable Dividend Payment
Date or Redemption Date, together with an amount equal to
the Default Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by
365 for each series. The Default Rate shall be equal to the
Reference Rate multiplied by three (3).
Subject to the foregoing, and any requirements of Massachusetts
law, to the extent that the Funds investment company
taxable income for any taxable year (determined without regard
to the deduction for dividends paid by the Fund) exceeds any
current or accumulated dividends on the MuniPreferred shares,
the Fund intends to distribute such excess investment company
taxable income to the holders of the common shares. The term
investment company taxable income, as it is defined
in the Code, includes interest, dividends, net short-term
capital gains and other income received or accrued less the
advisory fee, bank custodian charges, taxes (except capital
gains taxes) and other expenses properly chargeable against
income, but generally does not include net capital gain (defined
as the excess of net long-term capital gains over net short-term
capital losses and capital loss carryovers from prior periods),
dividends paid in shares of stock, transfer taxes, brokerage or
other capital charges or distributions designated as a return of
capital. The Fund also intends to distribute any realized net
capital gain annually to the holders of the common shares
(subject to the prior rights of the holders of the MuniPreferred
shares) subject to the foregoing and any requirements of
Massachusetts law. Each year, the Fund will allocate ordinary
income dividends, capital gain distributions, dividends
qualifying for the corporate dividends received
deduction and qualified dividend income,
between its common shares and MuniPreferred shares in proportion
to the total dividends paid to each class during or with respect
to such year. See Federal Income Tax Matters
Federal Income Tax Treatment of Holders of MuniPreferred
Shares.
Gross-up
Payments.
Holders of shares of MuniPreferred are entitled to
receive, when, as and if declared by the Board, out of funds
legally available therefor in accordance with the Declaration of
Trust, including the Statement, and applicable law, dividends in
an amount equal to the aggregate
Gross-up
Payments in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate
Period of 28 Rate Period Days or fewer, the Fund allocates any
net capital gain or other income taxable for regular federal
income tax purposes to a dividend paid on shares of
MuniPreferred without having given advance notice thereof to the
Auction Agent as described below under The
Auction Auction Procedures (a Taxable
Allocation) solely by reason of the fact that such
allocation is made retroactively as a result of the redemption
of all or a portion of the outstanding shares of MuniPreferred
or the liquidation of the Fund, the Fund will, prior to the end
of the calendar year in which such dividend was paid, provide
notice thereof to the Auction Agent and direct the Funds
dividend disbursing agent to send such notice with a
Gross-up
Payment to each holder of shares (initially Cede &
Co., as nominee of the Securities Depository) that was entitled
to such dividend payment during such calendar year at such
holders address as the same appears or last appeared on
the stock books of the Fund.
If, in the case of any Special Rate Period or initial Rate
Period of more than 28 Rate Period Days, the Fund makes a
Taxable Allocation to a dividend paid on shares of MuniPreferred
without having given prior to the auction with respect to that
Rate Period to the Auction Agent advance notice thereof, the
Fund shall, prior to the end of the calendar year in which such
dividend was paid, provide notice thereof to the Auction Agent
and direct the Funds dividend disbursing agent to send
such notice with a
Gross-up
Payment
36
to each holder of shares that was entitled to such dividend
payment during such calendar year at such holders address
as the same appears or last appeared on the stock books of the
Fund.
A
Gross-up
Payment means payment to a holder of shares of
MuniPreferred of an amount which, when taken together with the
aggregate amount of Taxable Allocations made to such holder to
which such
Gross-up
Payment relates, would cause such holders dividends in
dollars (after federal income tax consequences) from the
aggregate of such Taxable Allocations and the related
Gross-up
Payment to be equal to the dollar amount of the dividends which
would have been received by such holder if the amount of the
aggregate Taxable Allocations would have been excludable from
the gross income of such holder. Such
Gross-up
Payment shall be calculated: (a) without consideration
being given to the time value of money; (b) assuming that
no holder of shares of MuniPreferred is subject to the federal
alternative minimum tax with respect to dividends received from
the Fund; and (c) assuming that each Taxable Allocation and
each
Gross-up
Payment (except to the extent such
Gross-up
Payment is designated as an exempt-interest dividend under
Section 852(b)(5) of the Internal Revenue Code of 1986, as
amended, or successor provisions) would be taxable in the hands
of each holder of shares of MuniPreferred at the maximum
marginal regular federal individual income tax rate applicable
to ordinary income or net capital gain, as applicable, or the
maximum marginal regular federal corporate income tax rate
applicable to ordinary income or net capital gain, as
applicable, whichever is greater, in effect at the time such
Gross-up
Payment is made.
Restrictions
on Dividend, Redemption and Other Payments
Under the 1940 Act, the Fund may not (i) declare any
dividend with respect to the MuniPreferred shares if, at the
time of such declaration (and after giving effect thereto),
asset coverage with respect to any Borrowings of the Fund that
are senior securities representing indebtedness (as defined in
the 1940 Act), would be less than 200% (or such other percentage
as may in the future be specified in or under the 1940 Act as
the minimum asset coverage for senior securities representing
indebtedness of a closed-end investment company as a condition
of declaring dividends on its preferred shares) or
(ii) declare any other distribution on the MuniPreferred
shares or purchase or redeem MuniPreferred shares if at the time
of the declaration (and after giving effect thereto), asset
coverage with respect to such Borrowings that are senior
securities representing indebtedness would be less than 300% (or
such higher percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior
securities representing indebtedness of a closed-end investment
company as a condition of declaring distributions, purchases or
redemptions of its shares of beneficial interest). Senior
securities representing indebtedness generally means any
bond, debenture, note or similar obligation or instrument
constituting a security (other than shares of beneficial
interest) and evidencing indebtedness and could include the
Funds obligations under any Borrowings. For purposes of
determining asset coverage for senior securities representing
indebtedness in connection with the payment of dividends or
other distributions on or purchases or redemptions of stock, the
term senior security does not include any promissory
note or other evidence of indebtedness issued in consideration
of any loan, extension or renewal thereof, made by a bank or
other person and privately arranged, and not intended to be
publicly distributed. The term senior security also
does not include any such promissory note or other evidence of
indebtedness in any case where such a loan is for temporary
purposes only and in an amount not exceeding 5% of the value of
the total assets of the Fund at the time when the loan is made;
a loan is presumed under the 1940 Act to be for temporary
purposes if it is repaid within 60 days and is not extended
or renewed; otherwise it is presumed not to be for temporary
purposes. For purposes of determining whether the 200% and 300%
asset coverage requirements described above apply in connection
with dividends or distributions on or purchases or redemptions
of MuniPreferred shares, such asset coverages may be calculated
on the basis of values calculated as of a time within
48 hours (not including Sundays or holidays) next preceding
the time of the applicable determination.
In addition, a declaration of a dividend or other distribution
on or purchase or redemption of MuniPreferred shares may be
prohibited (i) at any time that an event of default under
any Borrowings has occurred and is continuing; or
(ii) after giving effect to such declaration, the Fund
would not have eligible portfolio holdings with an aggregated
Discounted Value at least equal to any asset coverage
requirements
37
associated with such Borrowings; or (iii) the Fund has not
redeemed the full amount of Borrowings, if any, required to be
redeemed by any provision for mandatory redemption.
Upon failure to pay dividends for two years or more, the holders
of MuniPreferred shares will acquire certain additional voting
rights. See Voting Rights below. Such rights
shall be the exclusive remedy of the holders of MuniPreferred
shares upon any failure to pay dividends on the MuniPreferred
shares.
For so long as any MuniPreferred shares are outstanding, except
in connection with the liquidation of the Fund, or a refinancing
of the MuniPreferred shares as provided in the Statement, the
Fund will not declare, pay or set apart for payment any dividend
or other distribution (other than a dividend or distribution
paid in shares of, or options, warrants or rights to subscribe
for or purchase, common shares or other shares of beneficial
interest, if any, ranking junior to the MuniPreferred shares as
to dividends or upon liquidation) in respect to common shares or
any other shares of the Fund ranking junior to or on parity with
the MuniPreferred shares as to dividends or upon liquidation, or
call for redemption, redeem, purchase or otherwise acquire for
consideration any common shares or any other such junior shares
(except by conversion into or exchange for shares of the Fund
ranking junior to the MuniPreferred shares as to dividends and
upon liquidation) or any such parity shares (except by
conversion into or exchange for shares of the Fund ranking
junior to or on parity with the MuniPreferred shares as to
dividends and upon liquidation), unless (i) there is no
event of default under any Borrowings that is continuing;
(ii) immediately after such transaction, the Fund would
satisfy the MuniPreferred Shares Basic Maintenance Amount (as
defined below) and the Fund would maintain the 1940 Act
MuniPreferred Shares Asset Coverage (as defined below) (see
Asset Maintenance);
(iii) immediately after such transaction, the Fund
satisfies the asset coverage requirements, if any, under any
Borrowings; (iv) full cumulative dividends on the
MuniPreferred shares due on or prior to the date of the
transaction have been declared and paid; (v) the Fund has
redeemed the full number of MuniPreferred shares required to be
redeemed by any provision for mandatory redemption contained in
the Statement (see Redemption); and
(vi) the Fund has redeemed the full amount of any
Borrowings required to be redeemed by any provision for
mandatory redemption.
Redemption
Optional Redemption.
To the extent permitted under the
1940 Act and Massachusetts law, the Fund at its option may
redeem MuniPreferred shares having a Dividend Period of one year
or less, in whole or in part, out of funds legally available
therefor, on the Dividend Payment Date upon not less than
15 days and not more than 40 days prior notice. The
optional redemption price per share shall be $25,000 per share,
plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to the date fixed for
redemption. MuniPreferred shares having a Dividend Period of
more than one year are redeemable at the option of the Fund, in
whole or in part, out of funds legally available therefor, prior
to the end of the relevant Dividend Period, subject to any
Specific Redemption Provisions, which may include the
payment of redemption premiums to the extent required under any
applicable Specific Redemption Provisions. The Fund shall
not effect any optional redemption unless after giving effect
thereto (i) the Fund has available certain Deposit
Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to
Holders of MuniPreferred shares by reason of the redemption of
MuniPreferred shares on such date fixed for the redemption and
(ii) the Fund would satisfy the MuniPreferred Shares Basic
Maintenance Amount.
The Fund also reserves the right to repurchase MuniPreferred
shares in market or other transactions from time to time in
accordance with applicable law and at a price that may be more
or less than the liquidation preference of the MuniPreferred
shares, but is under no obligation to do so.
Mandatory Redemption.
If the Fund fails to maintain, as
of any Valuation Date, Eligible Assets with an aggregate
Discounted Value at least equal to the MuniPreferred Shares
Basic Maintenance Amount or, as of the last Business Day of any
month, the 1940 Act MuniPreferred Shares Asset Coverage, and
such failure is not cured within ten Business Days following
such Valuation Date in the case of a failure to maintain the
MuniPreferred Shares Basic Maintenance Amount or on the last
Business Day of the following month in the case of a failure to
maintain the 1940 Act MuniPreferred Shares Asset Coverage as of
such last Business Day
38
(each an Asset Coverage Cure Date), the
MuniPreferred shares will be subject to mandatory redemption out
of funds legally available therefor. See Asset
Maintenance. The number of MuniPreferred shares to be
redeemed in such circumstances will be equal to the lesser of
(i) the minimum number of MuniPreferred shares the
redemption of which, if deemed to have occurred immediately
prior to the opening of business on the relevant Asset Coverage
Cure Date, would result in the Fund satisfying the MuniPreferred
Shares Basic Maintenance Amount or 1940 Act MuniPreferred Shares
Asset Coverage, as the case may be, in either case as of the
relevant Asset Coverage Cure Date (provided that, if there is no
such minimum number of shares the redemption of which would have
such result, all MuniPreferred shares then outstanding will be
redeemed), and (ii) the maximum number of MuniPreferred
shares that can be redeemed out of funds expected to be
available therefor on the Mandatory Redemption Date (as
defined below) at the Mandatory Redemption Price (as
defined below).
The Fund shall allocate the number of shares required to be
redeemed to satisfy the MuniPreferred Shares Basic Maintenance
Amount or the 1940 Act MuniPreferred Shares Asset Coverage, as
the case may be, pro rata among the Holders of MuniPreferred
shares in proportion to the number of shares they hold, by lot
or by such other method as the Fund shall deem fair and
equitable, subject to mandatory redemption provisions, if any.
The Fund is required to effect such a mandatory redemption not
later than 40 days after the Asset Coverage Cure Date, as
the case may be (the Mandatory
Redemption Date), except that if the Fund does not
have funds legally available for the redemption of, or is not
otherwise legally permitted to redeem, all of the required
number of MuniPreferred shares which are subject to mandatory
redemption, or the Fund otherwise is unable to effect such
redemption on or prior to such Mandatory Redemption Date,
the Fund will redeem those MuniPreferred shares on the earliest
practicable date on which the Fund will have such funds
available, upon notice to record owners of shares of
MuniPreferred shares and the Paying Agent. The Funds
ability to make a mandatory redemption may be limited by the
provisions of the 1940 Act or Massachusetts law.
The redemption price per share in the event of any mandatory
redemption will be $25,000 per share, plus an amount equal to
accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption, plus (in the case of
a Dividend Period of more than one year) a redemption premium,
if any, determined by the Board of Trustees, in its discretion,
after consultation with the Broker-Dealers and set forth in any
applicable Specific Redemption Provisions (the
Mandatory Redemption Price).
Redemption Procedure.
Pursuant to
Rule 23c-2
under the 1940 Act, the Fund will file a notice of its intention
to redeem with the SEC so as to provide at least the minimum
notice required by such Rule or any successor provision (notice
currently must be filed with the SEC generally at least
30 days prior to the redemption date). The Fund shall
deliver a notice of redemption to the Auction Agent containing
the information described below one Business Day prior to the
giving of notice to Holders in the case of optional redemptions
as described above and on or prior to the 30th day
preceding the Mandatory Redemption Date in the case of a
mandatory redemption as described above. The Auction Agent will
use its reasonable efforts to provide notice to each holder of
MuniPreferred shares called for redemption by electronic means
not later than the close of business on the Business Day
immediately following the Business Day on which the Auction
Agent determines the shares to be redeemed (or, during a Default
Period with respect to such shares, not later than the close of
business on the Business Day immediately following the day on
which the Auction Agent receives notice of redemption from the
Fund). Such notice will be confirmed promptly in writing not
later than the close of business on the third Business Day
preceding the redemption date by providing the notice to each
holder of record of MuniPreferred shares called for redemption,
the Paying Agent (if different from the Auction Agent) and the
Securities Depository (Notice of Redemption). Notice
of Redemption will be addressed to the registered owners of the
MuniPreferred shares at their addresses appearing on the share
records of the Fund. Such notice will set forth (i) the
redemption date, (ii) the number and identity of
MuniPreferred shares to be redeemed, (iii) the redemption
price (specifying the amount of accumulated dividends to be
included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such redemption date, and
(v) the provision under which redemption shall be made. No
defect in the Notice of Redemption or in the transmittal or
mailing thereof will affect the validity of the redemption
proceedings, except as required by applicable law.
39
If fewer than all of the shares of a Series of MuniPreferred
shares are redeemed on any date, the shares to be redeemed on
such date will be selected by the Fund on a pro rata basis in
proportion to the number of shares held by such holders, by lot
or by such other method as is determined by the Fund to be fair
and equitable, subject to the terms of any Specific
Redemption Provisions.
MuniPreferred shares may be subject to mandatory redemption as
described herein notwithstanding the terms of any Specific
Redemption Provisions. The Auction Agent will give notice
to the Securities Depository, whose nominee will be the record
holder of all of the MuniPreferred shares, and the Securities
Depository will determine the number of shares to be redeemed
from the account of the Agent Member of each beneficial owner.
Each Agent Member will determine the number of shares to be
redeemed from the account of each beneficial owner for which it
acts as agent. An Agent Member may select for redemption shares
from the accounts of some beneficial owners without selecting
for redemption any shares from the accounts of other beneficial
owners. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the
shares, the particular shares to be redeemed shall be selected
by the Fund by lot, on a pro rata basis between each Series or
by such other method as the Fund shall deem fair and equitable,
as contemplated above.
If Notice of Redemption has been given, then upon the deposit of
funds sufficient to effect such redemption, dividends on such
shares should cease to accumulate and such shares should be no
longer deemed to be outstanding for any purpose and all rights
of the owners of the shares so called for redemption will cease
and terminate, except the right of the owners of such shares to
receive the redemption price, but without any interest or
additional amount. The Fund shall be entitled to receive from
the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of
(i) the aggregate redemption price of the MuniPreferred
shares called for redemption on such date and (ii) such
other amounts, if any, to which holders of MuniPreferred shares
called for redemption may be entitled. The Fund will be entitled
to receive, from time to time, from the Paying Agent the
interest, if any, earned on such funds deposited with the Paying
Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed
two years after such redemption date will be paid, to the extent
permitted by law, by the Paying Agent to the Fund upon its
request. Thereupon, Holders of MuniPreferred shares called for
redemption may look only to the Fund for payment.
So long as any MuniPreferred shares are held of record by the
nominee of the Securities Depository, the redemption price for
such shares will be paid on the redemption date to the nominee
of the Securities Depository. The Securities Depositorys
normal procedures provide for it to distribute the amount of the
redemption price to Agent Members who, in turn, are expected to
distribute such funds to the persons for whom they are acting as
agent.
Notwithstanding the provisions for redemption described above,
no MuniPreferred shares may be redeemed unless all dividends in
arrears on the outstanding MuniPreferred shares, and all shares
of beneficial interest of the Fund ranking on parity with the
MuniPreferred shares with respect to the payment of dividends or
upon liquidation, have been or are being contemporaneously paid
or set aside for payment, except in connection with the
liquidation of the Fund in which case all MuniPreferred shares
and all shares ranking in a parity with the MuniPreferred shares
must receive proportionate amounts and that the foregoing shall
not prevent the purchase or acquisition of all the outstanding
MuniPreferred shares pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same
terms to, and accepted by, Holders of all outstanding
MuniPreferred shares.
Except for the provisions described above, nothing contained in
the Statement limits any legal right of the Fund to purchase or
otherwise acquire any shares of MuniPreferred shares outside of
an Auction at any price, whether higher or lower than the price
that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there
is no arrearage in the payment of dividends on or the mandatory
or optional redemption price with respect to, any shares of
MuniPreferred shares for which Notice of Redemption has been
given and the Fund is in compliance with the 1940 Act
MuniPreferred Shares Asset Coverage and satisfies the
MuniPreferred Shares Basic Maintenance Amount after giving
effect to such purchase or acquisition on the date thereof. Any
shares which are purchased, redeemed or otherwise acquired
40
by the Fund shall have no voting rights. If fewer than all the
outstanding shares of MuniPreferred shares are redeemed or
otherwise acquired by the Fund, the Fund shall give notice of
such transaction to the Auction Agent, in accordance with the
procedures agreed upon by the Board of Trustees.
Asset
Maintenance
The Fund is required to satisfy two separate asset maintenance
requirements in respect of the MuniPreferred shares:
(i) the Fund must maintain assets in its portfolio that
have a value, discounted in accordance with guidelines set forth
by a Rating Agency, at least equal to the aggregate liquidation
preference of the MuniPreferred shares plus specified
liabilities, payment obligations and other amounts; and
(ii) the Fund must maintain asset coverage for
MuniPreferred shares of at least 200%.
MuniPreferred Shares Basic Maintenance Amount.
The Fund
must maintain, as of each Valuation Date on which any share of
MuniPreferred shares is outstanding, Eligible Assets having an
aggregate Discounted Value at least equal to the MuniPreferred
Shares Basic Maintenance Amount, which is calculated separately
for each Rating Agency which is then rating the MuniPreferred
shares and so requires. If the Fund fails to maintain Eligible
Assets having an aggregated Discounted Value at least equal to
the MuniPreferred Shares Basic Maintenance Amount as of any
Valuation Date and such failure is not cured on or before the
related Asset Coverage Cure Date, the Fund will be required in
certain circumstances to redeem certain of the shares of
MuniPreferred shares. See
Redemption Mandatory
Redemption.
The MuniPreferred Shares Basic Maintenance Amount as
of any Valuation Date is currently defined in Rating Agency
Guidelines as Eligible Assets having an aggregate Discounted
Value equal to or greater than the dollar amount equal to the
sum of:
(A) the product of the number of MuniPreferred outstanding
on such date multiplied by $25,000, plus any redemption premium
applicable to the MuniPreferred then subject to redemption;
(B) the aggregate amount of dividends that will have
accumulated at the respective Applicable Rates to (but not
including) the first respective Dividend Payment Dates for
MuniPreferred outstanding that follow such Valuation Date;
(C) the aggregate amount of dividends that would accumulate
on shares of each Series of MuniPreferred outstanding from such
first respective Dividend Payment Date therefor through the
45th day after such Valuation Date, at the Maximum Rate
(calculated as if such Valuation Date were the Auction Date for
the Dividend Period commencing on such Dividend Payment Date)
for a Standard Dividend Period of shares of such Series to
commence on such Dividend Payment Date, assuming, solely for
purposes of the foregoing, that if on such Valuation Date the
Fund shall have delivered a notice of Special Dividend Period to
the Auction Agent pursuant to Section 4(b) of Part I
of the Statement with respect to shares of such Series, such
Maximum Rate shall be the Maximum Rate for the Special Dividend
Period of shares of such Series to commence on such Dividend
Payment Date (except that (1) if such Valuation Date occurs
at a time when a Failure to Deposit (or, in the case of
preferred shares other than MuniPreferred, a failure similar to
a Failure to Deposit) has occurred that has not been cured, the
dividend for purposes of calculation would accumulate at the
current dividend rate then applicable to the shares in respect
of which such failure has occurred and (2) for those days
during the period described in this subparagraph (C) in
respect of which the Applicable Rate in effect immediately prior
to such Dividend Payment Date will remain in effect (or, in the
case of preferred shares other than MuniPreferred, in respect of
which the dividend rate or rates in effect immediately prior to
such respective dividend payment dates will remain in effect),
the dividend for purposes of calculation would accumulate at
such Applicable Rate (or other rate or rates, as the case may be
in respect of those days); (D) the amount of anticipated
expenses of the Fund for the 90 days subsequent to such
Valuation Date; (E) the amount of any indebtedness or
obligations of the Fund senior in right of payments to the
MuniPreferred; and (F) any current liabilities to the
extent not reflected in any of (A) through (E) (including,
without limitation, any payables for portfolio securities
purchased as of such Valuation Date and any liabilities incurred
for the purpose of clearing securities transactions); less the
value (i.e., the face value of cash, short-term municipal
obligations and short-term securities that are the direct
obligation of the U.S. government, provided in each case
that such securities mature on or prior to the date upon which
any of (A) though
41
(F) became payable, otherwise the Discounted Value) of any
of the Funds assets irrevocably deposited by the Fund for
the payment of any of (A) through (F).
If the average Discount Factor of the Funds
aggregate
Eligible Assets is less than 200%, the MuniPreferred Shares
Basic Maintenance amount
for
means the asset coverage, as determined in accordance with
Section 18(h) of the 1940 Act, with respect to all
outstanding senior securities of the Fund which are stock,
including all outstanding MuniPreferred shares (or such other
asset coverage as may in the future be specified in or under the
1940 Act as the minimum asset coverage for senior securities
which are stock of a closed-end investment company as a
condition of declaring dividends on its common shares). See
1940 Act MuniPreferred Shares Asset
Coverage below.
Each Rating Agency may amend the definition of
MuniPreferred Shares Basic Maintenance Amount.
The Market Value of the Funds portfolio securities (used
in calculating the Discounted Value of Eligible Assets) is
calculated in the same manner as the Fund calculates its net
asset value. See Net Asset Value in the Statement of
Additional Information.
Each Rating Agencys Discount Factors, the criteria used to
determine whether the assets held in the Funds portfolio
are Eligible Assets, and the guidelines for determining the
Discounted Value of the Funds portfolio holdings for
purposes of determining compliance with the MuniPreferred Shares
Basic Maintenance Amount are based on Rating Agency Guidelines
established by each Rating Agency in connection with its rating
of the MuniPreferred shares. The Discount Factor relating to any
asset of the Fund, the MuniPreferred Shares Basic Maintenance
Amount, the assets eligible for inclusion in the calculation of
the Discounted Value of the Funds portfolio and certain
definitions and methods of calculation relating thereto may be
changed from time to time by the applicable Rating Agency,
without the approval of the Fund, the Board of Trustees or the
shareholders.
A Rating Agencys guidelines will apply to MuniPreferred
shares only so long as such Rating Agency is rating such shares.
The Fund will pay certain fees to S&P, Moodys and any
Other Rating Agency which may provide a rating for the
MuniPreferred shares for rating MuniPreferred shares. The
ratings assigned to MuniPreferred shares are not recommendations
to buy, sell or hold MuniPreferred shares. Such ratings may be
subject to revision or withdrawal by the assigning rating agent
at any time. Any rating of MuniPreferred shares should be
evaluated independently of any other rating.
1940 Act MuniPreferred Shares Asset Coverage.
The Fund is
also required to maintain, with respect to MuniPreferred shares,
as of the last Business Day on any month in which any
MuniPreferred shares is outstanding, asset coverage of at least
200% (or such other percentage as may in the future be specified
in or under the 1940 Act as the minimum asset coverage for
senior securities representing shares of a closed-end investment
company as a condition of declaring dividends on its common
shares) (1940 Act MuniPreferred Shares Asset
Coverage). If the Fund fails to maintain the 1940 Act
MuniPreferred Shares Asset Coverage as of the last Business Day
of any month and such failure is not cured as of the related
Asset Coverage Cure Date, the Fund will be required to redeem
certain shares of MuniPreferred shares. See
Redemption Mandatory Redemption.
The Fund estimates that based on the composition of its
portfolio as
of ,
200 , assuming the issuance of all MuniPreferred shares
offered hereby and giving effect to the deduction of sales load
and estimated offering costs related thereto estimated at
$ , the 1940 Act MuniPreferred
Shares Asset Coverage would be:
|
|
|
|
|
|
|
|
|
Value of Fund assets less liabilities not
representing senior securities
Senior
securities representing indebtedness plus
aggregate liquidation preference of MuniPreferred
shares
|
|
=
|
|
$
$
|
|
=
|
|
%
|
Notices.
Under the current Rating Agency Guidelines,
after the Date of Original Issue and in certain other
circumstances, the Fund is required to deliver to any Rating
Agency which is then rating the MuniPreferred shares (i) a
certificate with respect to the calculation of the MuniPreferred
Shares Basic
42
Maintenance Amount; (ii) a certificate with respect to the
calculation of the 1940 Act MuniPreferred Shares Asset Coverage
and the value of the portfolio holdings of the Fund; and
(iii) a letter proposed by the Funds independent
registered public accounting firm regarding the accuracy of such
calculations.
Liquidation
Rights
In the event of a liquidation, dissolution or winding up of the
affairs of the Fund, whether voluntary or involuntary, the
holders of each Series of MuniPreferred shares then outstanding
and any other shares ranking on a parity with the MuniPreferred
shares then outstanding, in preference to the holders of common
shares, will be entitled to payment out of the assets of the
Fund, or the proceeds thereof, available for distribution to
shareholders after satisfaction of claims of creditors of the
Fund, of a liquidation preference in the amount equal to $25,000
per share of the MuniPreferred shares, plus an amount equal to
accumulated dividends (whether or not earned or declared but
without interest) to the date of payment of such preference is
made in full or a sum sufficient for the payment thereof is set
apart with the Paying Agent, together with any applicable
Gross-up Payments. However, holders of MuniPreferred shares will
not be entitled to a premium, if any, to which such holder would
be entitled to receive upon redemption of such MuniPreferred
shares. After payment of the full amount of such liquidation
distribution, the owners of the MuniPreferred shares will not be
entitled to any further participation in any distribution of
assets of the Fund.
If, upon any such liquidation, dissolution or winding up of the
affairs of the Fund, whether voluntary or involuntary, the
assets of the Fund available for distribution among the holders
of all outstanding Preferred Shares, including the MuniPreferred
shares, shall be insufficient to permit the payment in full to
such holders of the amounts to which they are entitled, then
such available assets shall be distributed among the holders of
all outstanding Preferred Shares, including the MuniPreferred
shares, ratably in any such distribution of assets according to
the respective amounts which would be payable on all such shares
if all amounts thereon were paid in full. Upon the dissolution,
liquidation or winding up of the affairs of the Fund, whether
voluntary or involuntary, until payment in full is made to the
holders of MuniPreferred shares of the liquidation distribution
to which they are entitled, no dividend or other distribution
shall be made to the holders of shares of common shares or any
other class of shares of beneficial interest of the Fund ranking
junior to MuniPreferred shares upon dissolution, liquidation or
winding up and no purchase, redemption or other acquisition for
any consideration by the Fund shall be made in respect of the
shares of common shares or any other class of shares of
beneficial interest of the Fund ranking junior to MuniPreferred
shares upon dissolution, liquidation or winding up.
A consolidation, reorganization or merger of the Fund with or
into any other trust or company, or a sale, lease or exchange of
all or substantially all of the assets of the Fund in
consideration for the issuance of equity securities of another
trust or company, shall not be deemed to be a liquidation,
dissolution or winding up of the Fund.
Voting
Rights
Except as otherwise indicated in the Declaration, Statement or
as otherwise required by applicable law, holders of
MuniPreferred shares have one vote per share and vote together
with holders of shares of common shares as a single class. Under
applicable rules of the Exchange, the Fund is currently required
to hold annual meetings of shareholders.
In connection with the election of the Board of Trustees, the
holders of outstanding preferred shares, including each Series
of the MuniPreferred shares, represented in person or by proxy
at said meeting, shall be entitled, as a class, to the exclusion
of the holders of all other securities and classes of beneficial
interest of the Fund, to elect two Trustees of the Fund. The
holders of outstanding common shares and preferred shares,
including each Series of the MuniPreferred shares, voting
together as a single class, shall elect the balance of the
Trustees. Notwithstanding the foregoing, if (a) at the
close of business on any Dividend Payment Date accumulated
dividends (whether or not earned or declared) on the preferred
shares, including MuniPreferred shares, equal to at least two
full years dividends shall be due and unpaid; or
(b) any time holders of any preferred shares are entitled
under the 1940 Act to elect a majority of the Trustees of the
Fund, then the
43
number of members constituting the Board shall automatically be
increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of preferred shares,
including the MuniPreferred shares, as described above, would
constitute a majority of the Board as so increased by such
smallest number; and at a special meeting of shareholders which
will be called and held as soon as practicable, and at all
subsequent meetings at which Trustees are to be elected, the
holders of preferred shares, including the MuniPreferred shares,
voting as a separate class, will be entitled to elect the
smallest number of additional Trustees that, together with the
two Trustees which such holders will be in any event entitled to
elect, constitutes a majority of the total number of Trustees of
the Fund as so increased. The terms of office of the persons who
are Trustees at the time of that election will continue. If the
Fund thereafter shall pay, or declare and set apart for payment,
in full all dividends payable on all outstanding preferred
shares, including the MuniPreferred shares, for all past
Dividend Periods, or the Voting Period is otherwise terminated,
the voting rights stated in the above sentence shall cease, and
the terms of office of all of the additional Trustees elected by
the holders of preferred shares, including the MuniPreferred
shares (but not of the Trustees with respect to whose election
the holders of common shares were entitled to vote or the two
Trustees the holders of preferred shares, including the
MuniPreferred shares, have the right to elect in any event),
will terminate automatically. Any shares of MuniPreferred shares
issued after the date hereof shall vote with the MuniPreferred
shares as a single class on the matters described above, and the
issuance of any other MuniPreferred shares by the Fund may
reduce the voting power of the MuniPreferred shares.
The affirmative vote of the holders of a majority of the
outstanding preferred shares, including each Series of the
MuniPreferred shares, determined with reference to a
majority of outstanding voting securities as the
term is defined in Section 2(a)(42) of the 1940 Act, voting
as a separate class, is required to (i) amend, alter or
repeal any of the preferences, rights or powers of such class so
as to affect materially and adversely such preferences, rights
or powers; (ii) increase the authorized number of shares of
preferred shares; (iii) create, authorize or issue shares
of any class of shares ranking senior to or on a parity with the
preferred shares with respect to the payment of dividends or the
distribution of assets, or any securities convertible into, or
warrants, options or similar rights to purchase, acquire or
receive, such shares of beneficial interest ranking senior to or
on parity with the preferred shares or reclassify any authorized
shares of beneficial interest of the Fund into any shares
ranking senior to or on parity with the preferred shares (except
that the Board of Trustees, without the vote or consent of the
holders of preferred shares, may from time to time authorize,
create and classify, and the Fund may from time to time issue
shares or Series of preferred shares, including other Series of
MuniPreferred shares, ranking on parity with the MuniPreferred
shares with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding
up to the affairs of the Fund, and may authorize, reclassify
and/or
issue
any additional shares of each Series of MuniPreferred shares,
including shares previously purchased or redeemed by the Fund,
subject to continuing compliance by the Fund with 1940 Act
MuniPreferred Shares Asset Coverage and MuniPreferred Shares
Basic Maintenance Amount requirements); (iv) institute any
proceedings to be adjudicated bankrupt or insolvent, or consent
to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to
reorganization or relief under any applicable federal or state
law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, Trustee,
sequestrator (or other similar official) of the Fund or a
substantial part of its property, or make any assignment for the
benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in
furtherance of any such action; (v) create, incur or suffer
to exist, or agree to create, incur or suffer to exist, or
consent to cause or permit in the future (upon the happening of
a contingency or otherwise) the creation, incurrence or
existence of any material lien, mortgage, pledge, charge,
security interest, security agreement, conditional sale or trust
receipt or other material encumbrance of any kind upon any of
the Funds assets as a whole, except (A) liens the
validity of which are being contested in good faith by
appropriate proceedings, (B) liens for taxes that are not
then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests,
security agreements or other encumbrances arising in connection
with any indebtedness senior to the MuniPreferred shares, or
arising in connection with any futures contracts or options
thereon, interest rate swap or cap transactions, forward rate
transactions, put or call options, or other similar
transactions, (D) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in
connection with any indebtedness permitted under
44
clause (vi) below and (E) liens to secure payment for
services rendered including, without limitation, services
rendered by the Funds custodian and the Auction Agent; or
(vi) create, authorize, issue, incur or suffer to exist any
indebtedness for borrowed money o r any direct or indirect
guarantee of such indebtedness for borrowed money or any direct
or indirect guarantee of such indebtedness, except the Fund may
borrow as may be permitted by the Funds investment
restrictions; provided, however, that transfers of assets by the
Fund subject to an obligation to repurchase shall not be deemed
to be indebtedness for purposes of this provision to the extent
that after any such transaction the Fund satisfies the
MuniPreferred Shares Basic Maintenance Amount as of the
immediately preceding Valuation Date.
In addition, the affirmative vote of the holders of a majority
of the outstanding preferred shares, including any Series of
MuniPreferred shares, voting separately from any other series,
determined with reference to a majority of outstanding
voting securities as that term is defined in
Section 2(a)(42) of the 1940 Act, shall be required with
respect to any matter that materially and adversely affects the
rights, preferences, or powers of such Series in a manner
different from that of other Series of classes of the
Funds shares of beneficial interest. For purposes of the
foregoing, no matter shall be deemed to adversely affect any
right, preference or power unless such matter (i) alters or
abolishes any preferential right of such series;
(ii) creates, alters or abolishes any right in respect of
redemption of such series; or (iii) creates or alters
(other than to abolish) any restriction on transfer applicable
to such series.
The foregoing voting provisions will not apply with respect to
the MuniPreferred shares if, at or prior to the time when a vote
is required, such shares have been (i) redeemed or
(ii) called for redemption, and sufficient funds shall have
been deposited in trust to effect such redemption.
The Board of Trustees, without the vote or consent of any holder
of preferred shares, including MuniPreferred shares, or any
other shareholder of the Fund, may from time to time adopt,
amend, alter or repeal any or all of any definitions set forth
in the Statement or add covenants and other obligations of the
Fund or confirm the applicability of covenants and other
obligations set forth in the Statement in connection with
obtaining or maintaining the rating of any Rating Agency which
is then rating the MuniPreferred shares and any such adoption,
amendment, alteration or repeal will not be deemed to affect the
preferences, rights or powers of MuniPreferred shares or the
holders thereof, provided the Board of Trustees receives written
confirmation from such Rating Agency (such confirmation in no
event being required to be obtained from a particular Rating
Agency with respect to definitions or other provisions relevant
only to another Rating Agencys rating) that any such
amendment, alteration or repeal would not adversely affect the
rating then assigned by such Rating Agency.
Notwithstanding anything herein to the contrary, the Rating
Agency Guidelines, as they may be amended from time to time by
the respective Rating Agency will be reflected in a written
document and may be amended by the respective Rating Agency
without the vote, consent or approval of the Fund, the Board of
Trustees and any holder of shares of preferred shares, including
any Series of MuniPreferred shares, or any other shareholder of
the Fund.
A copy of the current Rating Agency Guidelines will be provided
to any holder of MuniPreferred shares promptly upon request
therefor made by such holder to the Fund by writing the Fund at
333 West Wacker Dr., Chicago, Illinois 60606.
Also, subject to compliance with applicable law, the Board of
Trustees may amend the definition of Maximum Rate to increase
the percentage amount by which the Reference Rate is multiplied
to determine the Maximum Rate shown therein without the vote or
consent of the holders of the preferred shares, including
MuniPreferred shares, or any other shareholder of the Fund, and
without receiving any confirmation from any rating agency after
consultation with the Broker-Dealers, provided that immediately
following any such increase the Fund would be in compliance with
the MuniPreferred Shares Basic Maintenance Amount.
Unless otherwise required by law, holders of MuniPreferred
shares shall not have any relative rights or preferences or
other special rights other than those specifically set forth in
the Statement. The holders of MuniPreferred shares shall have no
rights to cumulative voting. In the event that the Fund fails to
pay any
45
dividends on the MuniPreferred shares, the exclusive remedy of
the holders shall be the right to vote for Trustees as discussed
above.
General
The Statement provides that, except as otherwise described
herein, the Applicable Rate for the shares of each Series of
MuniPreferred, including the shares of MuniPreferred to be
issued in this offering, for each Rate Period of shares of such
Series after the initial Rate Period thereof shall be equal to
the rate per annum that the Auction Agent advises has resulted
on the Business Day preceding the first day of such Subsequent
Rate Period (an Auction Date) from implementation of
the auction procedures (the Auction Procedures) set
forth in the Statement and summarized below, in which persons
determine to hold or offer to sell or, based on dividend rates
bid by them, offer to purchase or sell shares of such series.
Each periodic implementation of the Auction Procedures is
referred to herein as an Auction. See the Statement
for a more complete description of the Auction process.
Auction Agency Agreement.
The Fund has entered into an
Auction Agency Agreement (the Auction Agency
Agreement) with the Auction Agent (currently, Deutsche
Bank Trust Company Americas) which provides, among other
things, that the Auction Agent will follow the Auction
Procedures for purposes of determining the Applicable Rate for
shares of each Series of MuniPreferred so long as the Applicable
Rate for shares of such Series is to be based on the results of
an Auction.
The Auction Agent may terminate the Auction Agency Agreement
upon notice to the Fund on a date no earlier than 45 days
after such notice. If the Auction Agent should resign, the Fund
will use its best efforts to enter into an agreement with a
successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may
remove the Auction Agent provided that prior to such removal the
Fund shall have entered into such an agreement with a successor
Auction Agent.
Broker-Dealer Agreements.
Each Auction requires the
participation of one or more Broker-Dealers. The Auction Agent
has entered into agreements (collectively, the
Broker-Dealer Agreements) with several
Broker-Dealers selected by the Fund, which provide for the
participation of those Broker-Dealers in Auctions for shares of
MuniPreferred.
The Auction Agent after each Auction for shares of MuniPreferred
will pay to each Broker-Dealer, from funds provided by the Fund,
a service charge at the annual rate of
1
/
4
of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the
Fund and the Broker-Dealers in the case of any Auction
immediately preceding a Rate Period of one year or longer, of
the purchase price of shares of MuniPreferred placed by such
Broker-Dealer at such Auction. For the purposes of the preceding
sentence, shares of MuniPreferred will be placed by a
Broker-Dealer if such shares were (a) the subject of Hold
Orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its
own account or were acquired by such Broker-Dealer for its
customers who are Beneficial Owners or (b) the subject of
an Order submitted by such Broker-Dealer that is (i) a
Submitted Bid of an Existing Holder that resulted in such
Existing Holder continuing to hold such shares as a result of
the Auction or (ii) a Submitted Bid of a Potential Holder
that resulted in such Potential Holder purchasing such shares as
a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one
Broker-Dealer Agreement is in effect after such termination.
Auction
Procedures
Unless otherwise permitted by the Fund, investors may only
participate in Auctions through their Broker-Dealers. The
process for determining the dividend rate on the MuniPreferred
shares is summarized below and more fully set forth in the
Auction Procedures attached hereto as
Appendix B.
46
Prior to the Submission Deadline on each Auction Date for shares
of a Series of MuniPreferred, each customer of a Broker-Dealer
who is listed on the records of that Broker-Dealer (or, if
applicable, the Auction Agent) as a holder of shares of such
Series (a Beneficial Owner) may submit orders
(Orders) with respect to shares of such Series to
that Broker-Dealer as follows:
|
|
|
|
|
Hold Order indicating its desire to hold shares of
such Series without regard to the Applicable Rate for shares of
such Series for the next Rate Period thereof.
|
|
|
|
Bid indicating its desire to sell shares of such
Series at $25,000 per share if the Applicable Rate for shares of
such Series for the next Rate Period thereof is less than the
rate specified in such Bid (also known as a
hold-at-a-rate
order).
|
|
|
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Sell Order indicating its desire to sell shares of
such Series at $25,000 per share without regard to the
Applicable Rate for shares of such Series for the next Rate
Period thereof.
|
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a Series of
MuniPreferred then held by such Beneficial Owner. A Beneficial
Owner of shares of such Series that submits a Bid with respect
to shares of such Series to its Broker-Dealer having a rate
higher than the Maximum Rate for shares of such Series on the
Auction Date therefor will be treated as having submitted a Sell
Order with respect to such shares to its Broker-Dealer. A
Beneficial Owner of shares of such Series that fails to submit
an Order with respect to such shares to its Broker-Dealer will
be deemed to have submitted a Hold Order with respect to such
shares of such Series to its Broker-Dealer; provided, however,
that if a Beneficial Owner of shares of such Series fails to
submit an Order with respect to shares of such Series to its
Broker-Dealer for an Auction relating to a Rate Period of more
than 28 Rate Period Days, such Beneficial Owner will be deemed
to have submitted a Sell Order with respect to such shares to
its Broker-Dealer. A Sell Order shall constitute an irrevocable
offer to sell the shares of MuniPreferred subject thereto. A
Beneficial Owner that offers to become the Beneficial Owner of
additional shares of MuniPreferred is, for purposes of such
offer, a Potential Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of
shares of a Series of MuniPreferred but that wishes to purchase
shares of such series, or that is a Beneficial Owner of shares
of such Series that wishes to purchase additional shares of such
Series (in each case, a Potential Beneficial Owner),
may submit Bids to its Broker-Dealer in which it offers to
purchase shares of such Series at $25,000 per share if the
Applicable Rate for shares of such Series for the next Rate
Period thereof is not less than the rate specified in such Bid.
A Bid placed by a Potential Beneficial Owner of shares of such
Series specifying a rate higher than the Maximum Rate for shares
of such Series on the Auction Date therefor will not be accepted.
The Broker-Dealers in turn will submit the Orders of their
respective customers who are Beneficial Owners and Potential
Beneficial Owners to the Auction Agent, designating themselves
(unless otherwise permitted by the Fund) as Existing Holders in
respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders
in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. However, neither the Fund nor the
Auction Agent will be responsible for a Broker-Dealers
failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing
Holder or a Potential Holder will be treated in the same manner
as an Order placed with a Broker-Dealer by a Beneficial Owner or
Potential Beneficial Owner. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect
of any shares of MuniPreferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a
Beneficial Owners failure to submit to its Broker-Dealer
an Order in respect of shares of MuniPreferred held by it. A
Broker-Dealer may also submit Orders to the Auction Agent for
its own account as an Existing Holder or Potential Holder,
provided it is not an affiliate of the Fund.
If Sufficient Clearing Bids for shares of a Series of
MuniPreferred exist (that is, the number of shares of such
Series subject to Bids submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Potential
Holders with rates equal to or lower than the Maximum Rate for
shares of such Series is at least equal to the number of shares
of such Series subject to Sell Orders submitted or deemed
submitted to the Auction Agent by Broker-Dealers as or on behalf
of Existing Holders), the Applicable Rate for shares
47
of such Series for the next succeeding Rate Period thereof will
be the lowest rate specified in the Submitted Bids which, taking
into account such rate and all lower rates bid by Broker-Dealers
as or on behalf of Existing Holders and Potential Holders, would
result in Existing Holders and Potential Holders owning the
shares of such Series available for purchase in the Auction. If
Sufficient Clearing Bids for shares of a Series of MuniPreferred
do not exist, the Applicable Rate for shares of such Series for
the next succeeding Rate Period thereof will be the Maximum Rate
for shares of such Series on the Auction Date therefor. In such
event, Beneficial Owners of shares of such Series that have
submitted or are deemed to have submitted Sell Orders may not be
able to sell in such Auction all shares of such Series subject
to such Sell Orders. If Broker-Dealers submit or are deemed to
have submitted to the Auction Agent Hold Orders with respect to
all Existing Holders of shares of a Series of MuniPreferred, the
Applicable Rate for shares of such Series for the next
succeeding Rate Period thereof will be the All Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares
for purchase and sale, which may result in an Existing Holder
continuing to hold or selling, or a Potential Holder purchasing,
a number of shares of a Series of MuniPreferred that is fewer
than the number of shares of such Series specified in its Order.
To the extent the allocation procedures have that result,
Broker-Dealers that have designated themselves as Existing
Holders or Potential Holders in respect of customer Orders will
be required to make appropriate pro rata allocations among their
respective customers.
Settlement of purchases and sales will be made on the next
Business Day (also a Dividend Payment Date) after the Auction
Date through the Securities Depository. Purchasers will make
payment through their Agent Members in
same-day
funds to the Securities Depository against delivery to their
respective Agent Members. The Securities Depository will make
payment to the sellers Agent Members in accordance with
the Securities Depositorys normal procedures, which now
provide for payment against delivery by their Agent Members in
same-day
funds.
The Auctions for shares of MuniPreferred Series will
normally be held
every
and each Subsequent Rate Period of shares of such Series will
normally begin on the
following ,
assuming they are not Special Rate Periods. The Auctions for
shares of MuniPreferred Series will normally be held
every
and each Subsequent Rate Period of shares of such Series will
normally begin on the
following ,
assuming they are not Special Rate Periods. If an Auction Date
is not a business day because the Exchange is closed for
business due to an act of God, natural disaster, act of war,
civil or military disturbance, act of terrorism, sabotage, riots
or a loss or malfunction of utilities or communications
services, or the Auction Agent is not able to conduct an Auction
in accordance with the auction procedures for any such reason,
then the Applicable Rate for the next Auction Period will be the
Applicable Rate determined on the previous Auction Date.
Whenever the Fund intends to include any net capital gain or
other income taxable for regular federal income tax purposes in
any dividend on shares of MuniPreferred, the Fund shall, in the
case of Minimum Rate Periods or Special Rate Periods of 28 Rate
Period Days or fewer, and may, in the case of any other Special
Rate Period, notify the Auction Agent of the amount to be so
included not later than the Dividend Payment Date next preceding
the Auction Date on which the Applicable Rate for such dividend
is to be established. Whenever the Auction Agent receives such
notice from the Fund, it will be required in turn to notify each
Broker-Dealer, who, on or prior to such Auction Date, in
accordance with its Broker-Dealer Agreement, will be required to
notify its customers who are Beneficial Owners and Potential
Beneficial Owners believed by it to be interested in submitting
an Order in the Auction to be held on such Auction Date.
Certain
Considerations Affecting MuniPreferred Auctions
Bidding by Broker-Dealers.
Each Broker-Dealer is
permitted, but not obligated, to submit Orders in Auctions for
the MuniPreferred shares for their own account either as a
bidder or seller and routinely does so in the auction rate
securities market in its sole discretion. If a Broker-Dealer
submits an Order for its own account, it would have an advantage
over other Bidders because such Broker-Dealer would have
knowledge of other Orders placed through such Broker-Dealer in
that Auction and, thus, could determine the rate and size of its
Order so as to increase the likelihood that (i) its Order
will be accepted in the Auction and (ii) the Auction
48
will clear at a particular rate. For this reason, and because
each Broker-Dealer is appointed and paid by the Fund if they own
MuniPreferred shares on behalf of Beneficial Owners (including
themselves), a Broker-Dealers interests in serving as a
Broker-Dealer in an Auction may differ from those of Beneficial
Owners and Potential Beneficial Owners who participate in
Auctions. A Broker-Dealer would normally not have knowledge of
Orders submitted to the Auction Agent by any other Broker-Dealer.
Each Broker-Dealer may place bids in auctions for its own
account to acquire securities for its inventory, to prevent an
auction failure (which occurs if there is a lack of
sufficient clearing bids and results in the dividend rate being
set at the maximum dividend rate) or to prevent an auction from
clearing at a rate that such Broker-Dealer believes does not
reflect the market for MuniPreferred shares. Each Broker-Dealer
may place one or more Bids even after obtaining knowledge of
some or all of the other Orders submitted through it. When
bidding in an Auction for its own account, each Broker-Dealer
also may Bid inside or outside the range of rates that it posts
in its Price Talk. See price talk below.
Each Broker-Dealer routinely encourages bidding by others in
auctions for which it serves as a broker-dealer. Each
Broker-Dealer also may encourage bidding by others in Auctions,
including to prevent auction failure or to prevent an Auction
from clearing at a rate that the Broker-Dealer believes does not
reflect the market for the MuniPreferred shares. A Broker-Dealer
may encourage such Bids even after obtaining knowledge of some
or all of the other Orders submitted through it.
Bids by any Broker-Dealer or by those it may encourage to place
Bids are likely to affect (i) the Applicable
Rate including preventing the Applicable Rate from
being set at the Maximum Rate or otherwise causing Bidders to
receive a lower rate than they might have received had the
Broker-Dealer not Bid or not encouraged others to Bid and
(ii) the allocation of the MuniPreferred shares being
auctioned including displacing some Bidders who may have their
Bids rejected or receive fewer MuniPreferred shares than they
would have received if the Broker-Dealer had not Bid or
encouraged others to Bid. Because of these practices, the fact
that an Auction clears successfully does not mean that an
investment in the MuniPreferred shares involves no significant
liquidity or credit risk. A Broker-Dealer is not obligated to
continue to place such Bids or to continue to encourage other
Bidders to do so in any particular Auction to prevent an auction
failure or an Auction for the MuniPreferred shares from clearing
at a dividend rate such Broker-Dealer believes does not reflect
the market for the MuniPreferred shares. Investors should not
assume that any Broker-Dealer will place Bids or encourage
others to do so or that auction failures will not occur.
Investors should also be aware that Bids by a Broker-Dealer or
by those it may encourage to place Bids may cause lower
Applicable Rates to occur.
The statements herein regarding bidding by a Broker-Dealer apply
only to a Broker-Dealers auction desk and any other
business units of the Broker-Dealer that are not separated from
the auction desk by an information barrier designed to limit
inappropriate dissemination of bidding information.
In any particular Auction, if all outstanding MuniPreferred
shares are the subject to Submitted Hold Orders, the Applicable
Rate for the next succeeding Auction period will be the All Hold
Rate (such a situation is called an all hold
auction). If a Broker-Dealer holds any MuniPreferred
shares for its own account on an Auction Date, it may be a
Broker Dealers practice to submit a Sell Order into the
Auction with respect to such MuniPreferred shares, which could
prevent that Auction from being an all hold auction. Such a
Broker-Dealer
may, but is not obligated to, submit Bids for its own account in
that same Auction, as set forth above.
Price Talk.
Before the start of an Auction,
each Broker-Dealer, in its discretion, may make available to its
customers who are Beneficial Owners and Potential Beneficial
Owners the Broker-Dealers good faith judgment of the range
of likely clearing dividend rates for the Auction based on
market and other information. This is known as price
talk. Price talk is not a guarantee that the Applicable
Rate established through the Auction will be within the price
talk, and Beneficial Owners and Potential Beneficial Owners are
free to use it or ignore it. A Broker-Dealer occasionally may
update and change the price talk based on changes in the
Funds credit quality or macroeconomic factors that are
likely to result in a change in interest rate levels, such as an
announcement by the Federal Reserve Board of a change in the
Federal Funds rate or an announcement by the Bureau of Labor
Statistics of unemployment numbers. Potential Beneficial Owners
49
should confirm with the Broker-Dealer the manner by which the
Broker-Dealer will communicate price talk and any changes to
price talk.
All-or-Nothing Bids.
Broker-Dealers do not
accept all-or-nothing Bids (i.e., Bids whereby the
Bidder proposes to reject an allocation smaller than the entire
quantity Bid) or any other type of Bid that allows the Bidder to
avoid auction procedures that require the pro rata allocation of
MuniPreferred shares where there are not sufficient Sell Orders
to fill all Bids at the Winning Bid Rate.
No Assurances Regarding Auction Outcomes.
Broker-Dealers
provide no assurances as to the outcome of any Auction.
Broker-Dealers also do not provide any assurance that any Bid
will be successful, in whole or in part, or that the Auction
will clear at a dividend rate that a Bidder considers
acceptable. Bids may be only partially filled, or not filled at
all, and the Applicable Rate on any MuniPreferred shares
purchased or retained in the Auction for the MuniPreferred
shares may be lower than the market rate for similar investments.
A Broker-Dealer will generally not agree before an Auction to
buy MuniPreferred shares from or sell MuniPreferred shares to a
customer after the Auction.
Deadlines.
Each particular Auction has a formal deadline
by which all Bids must be submitted by a Broker-Dealer to the
Auction Agent. This deadline is called the Submission
Deadline. To provide sufficient time to process and submit
customer Bids to the Auction Agent before the Submission
Deadline, each Broker-Dealer imposes an earlier deadline called
the broker-dealer deadline by which Bidders must
submit Bids to such Broker-Dealer. The broker-dealer deadline is
subject to change by such Broker-Dealer. Potential Beneficial
Owners should consult with a Broker-Dealer as to its
broker-dealer deadline. A Broker-Dealer may allow for correction
of clerical errors after the broker-dealer deadline and prior to
the Submission Deadline. A Broker-Dealer may submit Bids for its
own account at any time until the Submission Deadline. After the
Submission Deadline has passed, any Bid that has been submitted
by a Broker-Dealer to the Auction Agent, either on behalf of a
Beneficial Owner or Potential Beneficial Owner or for the
Broker-Dealers own account, shall become irrevocable,
except that the Auction Agent may allow for the correction of
clerical errors after the Submission Deadline but prior to the
announcement of the auction results.
Beneficial Owners Ability to Resell MuniPreferred
Shares May Be Limited.
A Beneficial Owner may sell, transfer
or dispose of MuniPreferred shares only in an auction, pursuant
to a bid or sell order in accordance with the auction
procedures, or outside an auction, to or through a
Broker-Dealer. Beneficial Owners will be able to sell all of the
MuniPreferred shares that are the subject of their Submitted
Sell Orders only if there are Bidders willing to purchase all of
those MuniPreferred shares in the Auction. If Sufficient
Clearing Bids have not been made, Beneficial Owners that have
submitted Sell Orders will not be able to sell in the Auction
all, and may not be able to sell any, of the MuniPreferred
shares subject to such Submitted Sell Orders. As discussed above
(see Bidding by Broker-Dealers), a Broker-Dealer may
submit a Bid in an Auction to avoid an auction failure, but it
is not obligated to do so. There may not always be enough
Bidders to prevent an auction failure in the absence of a
Broker-Dealer bidding in the Auction for its own account or
encouraging others to Bid. Therefore, auction failures are
possible, especially if the credit quality of the MuniPreferred
shares were to deteriorate, if a market disruption were to occur
or if, for any reason, each Broker-Dealer were unable or
unwilling to Bid.
Between Auctions, there can be no assurance that a secondary
market for the MuniPreferred shares will develop or, if it does
develop, that it will provide Beneficial Owners the ability to
resell the MuniPreferred shares in the secondary market on the
terms or at the times desired by a Beneficial Owner. Each
Broker-Dealer may, in its own discretion, decide to buy or sell
the MuniPreferred shares in the secondary market for its own
account to or from investors at any time and at any price,
including at prices equivalent to, below, or above the
liquidation preference for the MuniPreferred shares. However, a
Broker-Dealer is not obligated to make a market in the
MuniPreferred shares and may discontinue trading in the
MuniPreferred shares without notice for any reason at any time.
Beneficial Owners who resell between Auctions for the
MuniPreferred shares may receive an amount less than liquidation
preference, depending on market conditions.
50
If a Beneficial Owner purchased a MuniPreferred share through a
dealer which is not a Broker-Dealer for the MuniPreferred
shares, such Beneficial Owners ability to sell its
MuniPreferred shares may be affected by the continued ability of
its dealer to transact trades for the MuniPreferred shares
through a Broker-Dealer.
The ability to resell the MuniPreferred shares (whether during
or between auctions) will depend on various factors affecting
the market for the MuniPreferred shares, including news relating
to the Fund or NAM, the attractiveness of alternative
investments, investor demand for short term securities, the
perceived risk of owning the MuniPreferred shares (whether
related to credit, liquidity or any other risk), the tax or
accounting treatment accorded the MuniPreferred shares
(including U.S. generally accepted accounting principles as
they apply to the accounting treatment of auction rate
securities), reactions of market participants to regulatory
actions (such as those described in Securities and
Exchange Commission Settlements below) or press reports,
financial reporting cycles and market conditions generally.
Demand for the MuniPreferred shares may change without warning,
and declines in demand may be short-lived or continue for longer
periods.
Resignation of the Auction Agent or Broker-Dealers Could
Impact the Ability to Hold Auctions
. The Auction Agent
Agreement provides that the Auction Agent may resign from its
duties as Auction Agent by giving at least 45 days notice
to the Fund and does not require, as a condition to the
effectiveness of such resignation, that a replacement Auction
Agent be in place if its fee has not been paid. Each
Broker-Dealer Agreement provides that a Broker-Dealer thereunder
may resign upon 5 days notice, and does not require, as a
condition to the effectiveness of such resignation, that a
replacement Broker-Dealer be in place. For any Auction period
during which there is no Auction Agent or Broker-Dealer, it will
not be possible to hold Auctions for the MuniPreferred shares,
with the result that the dividend rate on the MuniPreferred
shares will be determined as described in the Statement.
Securities and Exchange Commission Settlements.
On
May 31, 2006, the SEC announced that it had settled its
investigation of fifteen firms, including
[ ] (the
Settling Broker-Dealers), that participate in the
auction rate securities market, regarding their respective
practices and procedures in this market. The SEC alleged in the
settlement that the firms had managed auctions for auction rate
securities in which they participated in ways that were not
adequately disclosed or that did not conform to disclosed
auction procedures. As part of the settlement, the Settling
Broker-Dealers agreed to pay civil penalties. In addition, each
Settling Broker-Dealer, without admitting or denying the
SECs allegations, agreed to provide to customers written
descriptions of its material auction practices and procedures
and to implement procedures reasonably designed to detect and
prevent any failures by that Settling Broker-Dealer to conduct
the auction process in accordance with disclosed procedures. No
assurance can be offered as to how the settlement may affect the
market for auction rate securities or the MuniPreferred shares.
In addition on January 9, 2007, the SEC announced that it
had settled its investigation of three banks, including
[ ] (the
Settling Auction Agents), that participate as
auction agents in the auction rate securities market, regarding
their respective practices and procedures in this market. The
SEC alleged in the settlement that the Settling Auction Agents
allowed broker-dealers in auctions to submit bids or revise bids
after the submission deadlines and allowed broker-dealers to
intervene in auctions in ways that affected the rates paid on
the auction rate securities. As part of the settlement, the
Settling Auction Agents agreed to pay civil penalties. In
addition, each Settling Auction Agent, without admitting or
denying the SECs allegations, agreed to provide to
broker-dealers and issuers written descriptions of its material
auction practices and procedures and to implement procedures
reasonably designed to detect and prevent any failures by that
Settling Auction Agent to conduct the auction process in
accordance with disclosed procedures. No assurance can be
offered as to how the settlement may affect the market for
auction rate securities or the MuniPreferred shares.
DESCRIPTION
OF COMMON SHARES
In addition to the MuniPreferred shares, the Declaration
authorizes the issuance of an unlimited number of common shares,
par value of $.01 per share. All outstanding common shares have
equal rights to the payment of dividends and the distribution of
assets upon liquidation, are fully paid and, subject to matters
discussed in Certain Provisions in the Declaration of
Trust, non-assessable, and have no pre-emptive or
51
conversion rights or rights to cumulative voting. Whenever
MuniPreferred shares are outstanding, holders of the Funds
common shares will not be entitled to receive any cash
distributions from the Fund unless all accrued dividends on
MuniPreferred shares have been paid, and unless asset coverage
(as defined in the 1940 Act) with respect to MuniPreferred
shares would be at least 200% after giving effect to the
distributions.
CERTAIN
PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Fund. However, the Declaration contains an express
disclaimer of shareholder liability for debts or obligations of
the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into
or executed by the Fund or the trustees. The Declaration further
provides for indemnification out of the assets and property of
the Fund for all loss and expense of any shareholder held
personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the
Fund would be unable to meet its obligations. The Fund believes
that the likelihood of such circumstances is remote.
The Declaration includes provisions that could limit the ability
of other entities or persons to acquire control of the Fund or
to convert the Fund to open-end status. Specifically, the
Declaration requires a vote by holders of at least two-thirds of
the common shares and MuniPreferred shares, voting together as a
single class, except as described below, to authorize (1) a
conversion of the Fund from a closed-end to an open-end
investment company, (2) a merger or consolidation of the
Fund, or a Series or class of the Fund, with any corporation,
association, trust or other organization or a reorganization of
the Fund, or a Series or class of the Fund, (3) a sale,
lease or transfer of all or substantially all of the Funds
assets (other than in the regular course of the Funds
investment activities), (4) in certain circumstances, a
termination of the Fund, or a Series or class of the Fund, or
(5) a removal of trustees by shareholders, and then only
for cause, unless, with respect to (1) through (4), such
transaction has already been authorized by the affirmative vote
of two-thirds of the total number of trustees fixed in
accordance with the Declaration or the By-laws, in which case
the affirmative vote of the holders of at least a majority of
the Funds common shares and MuniPreferred shares
outstanding at the time, voting together as a single class, is
required; provided, however, that where only a particular class
or Series is affected (or, in the case of removing a trustee,
when the trustee has been elected by only one class), only the
required vote by the applicable class or Series will be
required. Approval of shareholders is not required, however, for
any transaction, whether deemed a merger, consolidation,
reorganization or otherwise whereby the Fund issues shares in
connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or
similar entity. In the case of the conversion of the Fund to an
open-end investment company, or in the case of any of the
foregoing transactions constituting a plan of reorganization
which adversely affects the holders of MuniPreferred shares, the
action in question will also require the affirmative vote of the
holders of at least two-thirds of the Funds MuniPreferred
shares outstanding at the time, voting as a separate class, or,
if such action has been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance
with the Declaration or the By-laws, the affirmative vote of the
holders of at least a majority of the Funds MuniPreferred
shares outstanding at the time, voting as a separate class. None
of the foregoing provisions may be amended except by the vote of
at least two-thirds of the common shares and MuniPreferred
shares, voting together as a single class. The votes required to
approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects
the holders of MuniPreferred shares are higher than those
required by the 1940 Act. The Board of Trustees believes that
the provisions of the Declaration relating to such higher votes
are in the best interest of the Fund and its shareholders. See
the Statement of Additional Information under Certain
Provisions in the Declaration of Trust.
Reference should be made to the Declaration on file with the SEC
for the full text of these provisions.
52
REPURCHASE
OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem
their shares. Instead, the common shares will trade in the open
market at a price that will be a function of several factors,
including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability,
portfolio credit quality, relative demand for and supply of such
shares in the market, general market and economic conditions and
other factors. Because shares of closed-end investment companies
may frequently trade at prices lower than net asset value, the
Funds Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to
reduce or eliminate any material discount from net asset value
in respect of common shares, which may include the repurchase of
such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or
the conversion of the Fund to an open-end investment company.
The Fund cannot assure you that its Board of Trustees will
decide to take any of these actions, or that share repurchases
or tender offers will actually reduce market discount.
If the Fund converted to an open-end investment company, it
would be required to redeem all MuniPreferred shares then
outstanding (requiring in turn that it liquidate a portion of
its investment portfolio), and the common shares would no longer
be listed on the Exchange. In contrast to a closed-end
investment company, shareholders of an open-end investment
company may require the company to redeem their shares at any
time (except in certain circumstances as authorized by or under
the 1940 Act) at their net asset value, less any redemption
charge that is in effect at the time of redemption. See the
Statement of Additional Information under Certain
Provisions in the Declaration of Trust for a discussion of
the voting requirements applicable to the conversion of the Fund
to an open-end investment company.
Before deciding whether to take any action if the common shares
trade below net asset value, the Board would consider all
relevant factors, including the extent and duration of the
discount, the liquidity of the Funds portfolio, the impact
of any action that might be taken on the Fund or its
shareholders, and market considerations. Based on these
considerations, even if the Funds shares should trade at a
discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be
taken. See the Statement of Additional Information under
Repurchase of Fund Shares; Conversion to Open-End
Fund for a further discussion of possible action to reduce
or eliminate such discount to net asset value.
FEDERAL
INCOME TAX MATTERS
The discussions below and in the Statement of Additional
Information provide general tax information. Because tax laws
are complex and often change, you should consult your tax
advisor about the tax consequences of an investment in the
MuniPreferred shares before making such an investment.
The Fund intends to elect to be treated, and to qualify each
year, as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the
Code), and intends to distribute substantially all
of its net income and gains to its shareholders. Therefore, it
is not expected that the Fund will be subject to any federal
income tax. The Fund primarily invests in municipal securities
issued by states, cities and local authorities and certain
possessions and territories of the United States (such as Puerto
Rico or Guam) or in municipal securities whose income is
otherwise exempt from regular federal income taxes. Thus,
substantially all of the Funds dividends to you should
qualify as exempt-interest dividends. A shareholder
treats an exempt-interest dividend as interest on state and
local bonds exempt from regular federal income tax. Federal
income tax law imposes an alternative minimum tax with respect
to corporations, individuals, trusts and estates.
Interest on certain municipal obligations, such as certain
private activity bonds is included as an item of tax preference
in determining the amount of a taxpayers alternative
minimum taxable income. To the extent that the Fund receives
income from such municipal obligations, a portion of the
dividends paid by the Fund, although exempt from regular federal
income tax, will be taxable to shareholders to the extent that
their tax liability is determined under the federal alternative
minimum tax. The Fund will annually provide a report indicating
the percentage of the Funds income attributable to
municipal obligations subject to the federal
53
alternative minimum tax. In addition, for certain corporations,
federal alternative minimum taxable income is increased by 75%
of the difference between an alternative measure of income
(adjusted current earnings) and the amount otherwise
determined to be the alternative minimum taxable income.
Interest on all municipal obligations, and therefore all
distributions by the Fund that would otherwise be tax-exempt, is
included in calculating a corporations adjusted current
earnings. Certain small corporations are not subject to the
alternative minimum tax.
In addition to exempt-interest dividends, the Fund also may
distribute to its shareholders amounts that are treated as
long-term capital gain or ordinary income. These distributions
will generally be taxable to holders of MuniPreferred. The Fund
will allocate distributions to shareholders that are treated as
tax-exempt interest and as long-term capital gain and ordinary
income, if any, among the common shares and MuniPreferred shares
in proportion to total dividends paid to each class for the
year. The Fund intends to notify MuniPreferred shareholders in
advance if it will allocate to them income that is not exempt
from regular federal income tax. In certain circumstances, the
Fund will make payments to MuniPreferred shareholders to offset
the federal income tax effects of the taxable distribution. See
Description of MuniPreferred Shares Dividends
and Dividend Periods
Gross-up
Payments. As long as the Fund qualifies as a regulated
investment company, distributions paid by the Fund generally
will not be eligible for the dividends-received deduction
available to corporations. Although dividends generally will be
treated as distributed when paid, dividends declared in October,
November or December, payable to shareholders of record on a
specified date in one of those months and paid during the
following January, will be treated as having been distributed by
the Fund (and received by the shareholders) on December 31 of
the year declared.
The sale or other disposition of common shares or shares of
MuniPreferred of the Fund will normally result in capital gain
or loss to shareholders if such shares are held as a capital
asset. Present law taxes both long-term and short-term capital
gains of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, long-term capital gains are
generally subject to reduced rates of taxation. Losses realized
by a shareholder on the sale or exchange of shares of the Fund
held for six months or less are disallowed to the extent of any
distribution of exempt-interest dividends received with respect
to such shares, and, if not disallowed, such losses are treated
as long-term capital losses to the extent of any distribution of
long-term capital gain received (or designated amounts of
undistributed capital gain that are treated as received) with
respect to such shares. Under certain circumstances, a
shareholders holding period may have to restart after, or
may be suspended for, any periods during which the
shareholders risk of loss is diminished as a result of
holding one or more other positions in substantially similar or
related property, or through certain options or short sales. Any
loss realized on a sale or exchange of shares of the Fund will
be disallowed to the extent those shares of the Fund are
replaced by other substantially identical shares of the Fund
within a period of 61 days beginning 30 days before
and ending 30 days after the date of disposition of the
original shares. In that event, the basis of the replacement
shares of the Fund will be adjusted to reflect the disallowed
loss.
The Code provides that interest on indebtedness incurred or
continued to purchase or carry the Funds shares to which
exempt-interest dividends are allocated is not deductible. Under
rules used by the Internal Revenue Service for determining when
borrowed funds are considered used for the purpose of purchasing
or carrying particular assets, the purchase or ownership of
shares may be considered to have been made with borrowed funds
even though such funds are not directly used for the purchase or
ownership of such shares.
The Fund is required in certain circumstances to withhold a
portion of dividends and certain other payments paid to certain
holders of the Funds shares who do not furnish to the Fund
their correct taxpayer identification number (in the case of
individuals, their social security number) and certain
certifications, or who are otherwise subject to backup
withholding.
[The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the
Act) reduced the maximum rate of tax on long-term
capital gains of noncorporate investors from 20% to 15%. The Act
also reduced to 15% the maximum rate of tax on qualified
dividend income received by noncorporate shareholders who
satisfy certain holding period and other requirements. None of
the Funds distributions are expected to be eligible for
treatment as qualified dividend income. Without further
legislative change, the rate reductions enacted by the
54
Act will lapse, and the previous rates will be reinstated, for
taxable years beginning on or after January 1, 2009.]
The Statement of Additional Information contains a more detailed
summary of the federal income tax rules that apply to the Fund
and its shareholders. Legislative, judicial or administrative
action may change the tax rules that apply to the Fund or its
shareholders and any such change may be retroactive. You should
consult with your tax advisor about the federal, foreign, state
and local tax consequences of an investment in the Fund before
making such investment.
CUSTODIAN,
TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REDEMPTION AGENT
The custodian of the assets of and transfer, shareholder
services and dividend paying agent for the Fund is State Street
Bank and Trust Company, One Federal Street, Boston,
Massachusetts 02110. The Custodian performs custodial, fund
accounting and portfolio accounting services. Deutsche Bank
Trust Company Americas, 100 Plaza One, 6th Floor,
Jersey City, New Jersey 07311, a banking corporation organized
under the laws of New York, is the Auction Agent with respect to
shares of MuniPreferred and acts as transfer agent, registrar,
dividend disbursing agent and redemption agent with respect to
such shares.
55
The underwriters named below have severally agreed, subject to
the terms and conditions of the Underwriting Agreement with the
Fund and NAM, to purchase from the Fund the number of
MuniPreferred shares set forth below opposite their respective
names.
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Number of Shares
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Underwriters
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Series
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|
Series
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|
[Underwriter]
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[Underwriter]
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[Underwriter]
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|
[Underwriter]
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Total
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|
The Underwriting Agreement provides that the obligations of the
underwriters are subject to certain conditions, including the
absence of any materially adverse change in the Funds
business and the receipt of certain certificates, opinions and
letters from the Fund and the Funds attorneys and
independent accountants. The nature of the underwriters
obligation is such that they are committed to purchase all
MuniPreferred shares offered hereby if any of the MuniPreferred
shares are purchased.
The underwriters have advised the Fund that the underwriters
propose to offer some of the MuniPreferred shares directly to
investors at the offering price of $25,000 per MuniPreferred
share, and may offer some of the MuniPreferred shares to certain
dealers at the offering price less a concession not in excess of
$ per MuniPreferred share, and
such dealers may reallow a concession not in excess of
$ per MuniPreferred share on sales
to certain other dealers. The sales load of
$ per share is equal
to % of the offering price. The
MuniPreferred shares are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to reject orders in
whole or in part.
The Fund anticipates that the underwriters may from time to time
act as brokers or dealers in executing the Funds portfolio
transactions after they have ceased to be underwriters and,
subject to certain restrictions, may act as brokers while they
are underwriters. The underwriters are active underwriters of,
and dealers in, securities and act as market makers in a number
of such securities, and therefore can be expected to engage in
portfolio transactions with, and perform services for, the
Fund.
may engage in these transactions only in compliance with the
1940 Act.
The Fund anticipates that the underwriters or their respective
affiliates may, from time to time, act in auctions as
Broker-Dealers and receive fees as set forth under The
Auction and in the Statement of Additional Information.
The Fund and NAM have agreed to indemnify the underwriters
against certain liabilities, including liabilities arising under
the Securities Act, or to contribute payments the underwriters
may be required to make for any of those liabilities. Insofar as
indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons
of the Fund pursuant to the foregoing provisions, or otherwise,
the Fund has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Fund of expenses incurred or paid by a
director, officer or controlling person of the Fund in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will,
unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
[Underwriter principal business addresses.]
56
Certain legal matters in connection with the MuniPreferred will
be passed upon for the Fund by Vedder, Price,
Kaufman & Kammholz, P.C., Chicago, Illinois, and
for the underwriters
by .
Vedder, Price, Kaufman & Kammholz, P.C.
and
may rely as to certain matters of Massachusetts law on the
opinion of Bingham McCutchen LLP, Boston, Massachusetts.
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act and is required
to file reports, proxy statements and other information with the
SEC. These documents can be inspected and copied for a fee at
the SECs public reference room, 100 F Street, N.E.,
Washington, D.C. 20549, and Northeast Regional Office,
Woolworth Building, 233 Broadway, New York, NY
10013-2409.
Reports, proxy statements, and other information about the Fund
can be inspected at the offices of the Exchange.
This prospectus does not contain all of the information in the
Funds Registration Statement, including amendments,
exhibits, and schedules.
Statements in this prospectus about the contents of any contract
or other document are not necessarily complete and in each
instance reference is made to the copy of the contract or other
document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by this reference.
Additional information about the Fund and MuniPreferred shares
can be found in the Funds Registration Statement
(including amendments, exhibits, and schedules) on
Form N-2
filed with the SEC. The SEC maintains a web site
(http://www.sec.gov)
that contains each Funds Registration Statement, other
documents incorporated by reference, and other information the
Fund has filed electronically with the SEC, including proxy
statements and reports file under the Securities Exchange Act of
1934. Additional information may be found on the internet at
http://www.nuveen.com.
57
TABLE
OF CONTENTS FOR THE STATEMENT OF ADDITIONAL
INFORMATION
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Investment Objectives
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S-1
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Investment Policies and Techniques
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S-3
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Other Investment Policies and Techniques
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S-13
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Management of the Fund
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S-15
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Investment Adviser
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S-18
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Portfolio Transactions
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S-21
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Net Asset Value
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S-22
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Additional Information Concerning the Auctions For MuniPreferred
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S-22
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Description of Common Shares
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S-24
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Certain Provisions in the Declaration of Trust
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S-24
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Repurchase of Fund Shares; Conversion to Open-End Fund
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S-25
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Federal Income Tax Matters
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S-27
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Experts
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S-31
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Custodian, Transfer Agent, Dividend Disbursing Agent and
Redemption Agent
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S-32
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Additional Information
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S-32
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Report of Independent Auditors
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F-1
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Financial Statements
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F-3
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58
TAXABLE
EQUIVALENT YIELD TABLES
The taxable equivalent yield is the current yield you would need
to earn on a taxable investment in order to equal a stated
tax-free yield on a municipal investment. To assist you to more
easily compare municipal investments like the Fund with taxable
alternative investments, the table below presents the
approximate taxable equivalent yields for individuals for a
range of hypothetical tax-free yields assuming the stated
marginal federal tax rates for
200
listed below:
Taxable
Equivalent of Tax Free Yields*
Tax-Free
Yields
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Joint Return
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Federal
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Single Return Bracket
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Bracket
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Tax Rate
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4.00%
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4.25%
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4.50%
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4.75%
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5.00%
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5.25%
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5.50%
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Joint Return
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Federal
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Single Return Bracket
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Bracket
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Tax Rate
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5.75%
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6.00%
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6.25%
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6.50%
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6.75%
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7.00%
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7.25%
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7.50%
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*
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Please note that the table does not reflect (i) any federal
limitations on the amounts of allowable itemized deductions,
phase-outs of personal or dependent exemption credits or other
allowable credits, (ii) any state or local taxes imposed,
or (iii) any alternative minimum taxes or any taxes other
than federal personal income taxes.
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A-1
AUCTION
PROCEDURES
APPENDIX B
TO
PROSPECTUS
1.
Definitions.
As used in this
Appendix B, the following terms shall have the following
meanings (with terms defined in the singular having comparable
meanings when used in the plural and vice versa), unless the
context otherwise requires:
(a) Affiliate means any person controlled by,
in control of or under common control with the Fund; provided
that no Broker-Dealer controlled by, in control of or under
common control with the Fund shall be deemed to be an Affiliate
nor shall any corporation or any person controlled by, in
control of or under common control with such corporation one of
the trustees, directors or executive officers of which is also a
Trustee of the Fund be deemed to be an Affiliate solely because
such Trustee, director or executive officer is also a Trustee of
the Fund.
(b) Agent Member means a member of or
participant in the Securities Depository that will act on behalf
of a Bidder.
(c) All Hold Rate means 80% of the Reference
Rate.
(d) Applicable Percentage means the percentage
determined based on the higher of the credit ratings assigned to
the series of MuniPreferred on such date
by
and
or equivalent credit rating by any Other Rating Agency as
follows:
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Credit Ratings
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Applicable
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[ ]
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[ ]
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Percentage
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Aaa
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AAA
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125
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%
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Aa3 to Aa1
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AA− to AA+
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150
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%
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A3 to A1
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A− to A+
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200
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%
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Baa3 to Baa1
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BBB− to BBB+
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250
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%
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Ba1 and lower
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BB+ and lower
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300
|
%
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The Applicable Percentage as so determined shall be further
subject to upward but not downward adjustment in the discretion
of the Board of Trustees of the Fund after consultation with the
Broker-Dealers, provided that immediately following any such
increase the Fund would be in compliance with the MuniPreferred
Basic Maintenance Amount.
(e) Applicable Rate means, with respect to each
Series of MuniPreferred shares for each Dividend Period
(i) if Sufficient Clearing Orders exist for the Auction in
respect thereof, the Winning Bid Rate, (ii) if Sufficient
Clearing Orders do not exist for the Auction in respect thereof,
the Maximum Applicable Rate and (iii) in the case where all
the shares of MuniPreferred shares are the subject of Hold
Orders for the Auction in respect thereof, the All Hold Rate.
(f) Applicable Spread means the spread
determined based on the higher of the credit rating assigned to
the series of MuniPreferred on such date
by
and
(or equivalent credit rating by any Other Rating Agency) as
follows:
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Credit Ratings
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[ ]
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[ ]
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Spread
|
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Aaa
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AAA
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125 bps
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Aa3 to Aa1
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AA− to AA+
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150 bps
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A3 to A1
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A− to A+
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200 bps
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Baa3 to Baa1
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BBB− to BBB+
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250 bps
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Ba1 and lower
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BB+ and lower
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300 bps
|
|
The Applicable Spread as so determined shall be further subject
to upward but not downward adjustment in the discretion of the
Board of Trustees after consultation with the Broker-Dealers,
provided that immediately following any such increase the Fund
would be in compliance with the MuniPreferred Basic Maintenance
Amount.
(g) Auction means each periodic operation of
the procedures set forth in this Appendix B.
B-2
(h) Auction Agent means
[ ] unless and until another
commercial bank, trust company, or other financial institution
appointed by a resolution of the Board of Trustees enters into
an agreement with the Fund to follow the Auction Procedures for
the purpose of determining the Applicable Rate.
(i) Auction Date means the first Business Day
next preceding the first day of a Dividend Period for each
Series of MuniPreferred shares.
(j) Auction Procedures means the procedures for
conducting Auctions set forth in this Appendix B.
(k) Available MuniPreferred shares shall have
the meaning specified in paragraph (a) of Section 4 of
this Appendix B.
(l) Beneficial Owner, with respect to shares of
each Series of MuniPreferred shares, means a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of shares of
such Series.
(m) Bid shall have the meaning specified in
paragraph (a) of Section 2 of this Appendix B.
(n) Bidder shall have the meaning specified in
paragraph (a) of Section 2 of this Appendix B;
provided
,
however
, that neither the Fund nor any
affiliate thereof shall be permitted to be a Bidder in an
Auction, except that any Broker-Dealer that is an affiliate of
the Fund may be a Bidder in an Auction, but only if the Orders
placed by such Broker-Dealer are not for its own account.
(o) Broker-Dealer means any broker-dealer or
broker-dealers, or other entity permitted by law to perform the
functions required of a Broker-Dealer by the Auction Procedures,
that has been selected by the Fund and has entered into a
Broker-Dealer Agreement that remains effective.
(p) Broker-Dealer Agreement means an agreement
among the Auction Agent and a Broker-Dealer, pursuant to which
such Broker-Dealer agrees to follow the Auction Procedures.
(q) Business Day means a day on which the New
York Stock Exchange is open for trading and which is not a
Saturday, Sunday or other day on which banks in the City of New
York, New York are authorized or obligated by law to close.
(r) Date of Original Issue means, with respect
to
Series MuniPreferred
shares, ,
200 and, with respect to
Series MuniPreferred
shares, ,
200 .
(s) Default Rate means the Reference Rate
multiplied by three (3).
(t) Dividend Period means, with respect to a
Series of MuniPreferred shares, the period commencing on the
Date of Original Issue thereof and ending on the date specified
for such series on the Date of Original Issue thereof and
thereafter, as to such series, the period commencing on the day
following each Dividend Period for such series and ending on the
day established for such series by the Fund.
(u) Existing Holder, with respect to shares of
a series of MuniPreferred shares, shall mean a Broker-Dealer (or
any such other Person as may be permitted by the Fund) that is
listed on the records of the Auction Agent as a holder of shares
of such series.
(v) Fund means Nuveen Municipal High Income
Opportunity Fund 2, a Massachusetts business trust.
(w) Holder means, with respect to MuniPreferred
shares, the registered holder of shares of each Series of
MuniPreferred shares as the same appears on the share ledger or
share records of the Fund.
(x) Hold Order shall have the meaning specified
in paragraph (a) of Section 2 of this Appendix B.
(y) LIBOR Rate on any Auction Date, means
(i) the rate for deposits in U.S. dollars for the
designated Rate Period, which appears on display page 3750
of Moneylines Telerate Service (Telerate
Page 3750) (or such other page as may replace that
page on that service, or such other service as may be selected
by the Fund in consultation with Broker-Dealers) as of
11:00 a.m., London time, on the day that is the London
Business Day on the Auction Date or, if the Auction Date is not
a London Business Day, the
B-3
London Business Day preceding the Auction Date (the LIBOR
Determination Date), or (ii) if such rate does not
appear on Telerate Page 3750 or such other page as may
replace such Telerate Page 3750, (A) the Fund in
consultation with Broker-Dealers shall determine the arithmetic
mean of the offered quotations of the reference banks to leading
banks in the London interbank market for deposits in
U.S. dollars for the designated Rate Period in an amount
determined by the Fund in consultation with Broker-Dealers by
reference to requests for quotations as of approximately
11:00 a.m. (London time) on such date made by the Fund in
consultation with Broker-Dealers to the reference banks,
(B) if at least two of the reference banks provide such
quotations, LIBOR Rate shall equal such arithmetic mean of such
quotations, (C) if only one or none of the reference banks
provide such quotations, LIBOR Rate shall be deemed to be the
arithmetic mean of the offered quotations that leading banks in
The City of New York selected by the Fund in consultation with
Broker-Dealers are quoting on the relevant LIBOR Determination
Date for deposits in U.S. dollars for the designated Rate
Period in an amount determined by the Fund in consultation with
Broker-Dealers that is representative of a single transaction in
such market at such time by reference to the principal London
offices of leading banks in the London interbank market. If the
number of Rate Period days shall be (i) 7 or more but fewer
than 21 days, such rate shall be the
seven-day
LIBOR rate; (ii) more than 21 but fewer than 49 days,
such rate shall be one-month LIBOR rate; (iii) 49 or more
but fewer than 77 days, such rate shall be the two-month
LIBOR rate; (iv) 77 or more but fewer than 112 days,
such rate shall be the three-month LIBOR rate; (v) 112 or
more but fewer than 140 days, such rate shall be the
four-month LIBOR rate; (vi) 140 or more but fewer than
168 days, such rate shall be the five-month LIBOR rate;
(vii) 168 or more but fewer 189 days, such rate shall
be the six-month LIBOR rate; (viii) 189 or more but fewer
than 217 days, such rate shall be the seven-month LIBOR
rate; (ix) 217 or more but fewer than 252 days, such
rate shall be the eight-month LIBOR rate; (x) 252 or more
but fewer than 287 days, such rate shall be the nine-month
LIBOR rate; (xi) 287 or more but fewer than 315 days,
such rate shall be the ten-month LIBOR rate; (xii) 315 or
more but fewer than 343 days, such rate shall be the
eleven-month LIBOR rate; and (xiii) 343 or more days but
fewer than 365 days, such rate shall be the twelve-month
LIBOR rate.
(z) London Business Day means any day on which
commercial banks are generally open for business in London.
(aa) Maximum Rate means the greater of the
Applicable Percentage of the Reference Rate or the Applicable
Spread plus the Reference Rate. The Auction Agent will round
each applicable Maximum Rate to the nearest one-thousandth
(0.001) of one percent per annum, with any such number ending in
five ten-thousandths of one percent being rounded upwards to the
nearest one-thousandth (0.001) of one percent.
(bb) MuniPreferred shares means the shares of
Series
and
Series
of the MuniPreferred shares or any other shares of Preferred
Shares hereinafter designated as shares of
Series
or
Series
of the MuniPreferred shares.
(cc) MuniPreferred Shares Basic Maintenance
Amount as of any Valuation Date has the meaning set forth
in the Rating Agency Guidelines.
(dd) Order shall have the meaning specified in
paragraph (a) of Section 2 of this Appendix B.
(ee) Other Rating Agency means each rating
agency, if any, other
than
or
then providing a rating for the MuniPreferred shares pursuant to
the request of the Fund.
(ff) Outstanding or outstanding
means, as of any date, MuniPreferred shares theretofore issued
by the Fund except, without duplication, (i) any shares of
MuniPreferred shares theretofore canceled, redeemed or
repurchased by the Fund, or delivered to the Auction Agent for
cancellation or with respect to which the Fund has given notice
of redemption and irrevocably deposited with the Paying Agent
sufficient funds to redeem such MuniPreferred shares and
(ii) any MuniPreferred shares represented by any
certificate in lieu of which a new certificate has been executed
and delivered by the Fund. Notwithstanding the foregoing,
(A) for purposes of voting rights (including the
determination of the number of shares required to constitute a
quorum), any of the MuniPreferred shares to which the Fund or
any Affiliate of the Fund shall be the Existing Holder shall be
disregarded and not deemed Outstanding; (B) in connection
with any Auction, any Series of MuniPreferred shares as to which
the Fund or any person known to the Auction Agent to be an
Affiliate of the Fund shall be
B-4
the Existing Holder thereof shall be disregarded and deemed not
to be Outstanding; and (C) for purposes of determining the
MuniPreferred Shares Basic Maintenance Amount, MuniPreferred
shares held by the Fund shall be disregarded and not deemed
Outstanding but shares held by any Affiliate of the Fund shall
be deemed Outstanding.
(gg) Paying Agent means
[ ] unless and until another
entity appointed by a resolution of the Board of Trustees enters
into an agreement with the Fund to serve as paying agent, which
paying agent may be the same as the Auction Agent.
(hh) Person or person means and
includes an individual, a partnership, a trust, a Fund, an
unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
(ii) Potential Beneficial Owner, with respect
to shares of a series of MuniPreferred shares, shall mean a
customer of a Broker-Dealer that is not a Beneficial Owner of
shares of such series but that wishes to purchase shares of such
series, or that is a Beneficial Owner of shares of such series
that wishes to purchase additional shares of such series.
(jj) Potential Holder means any Person,
including any Existing Holder, who may be interested in
acquiring a beneficial interest in the MuniPreferred shares in
addition to the MuniPreferred shares currently owned by such
Person, if any;
provided
,
however
, that for
purposes of conducting an Auction, the Auction Agent may
consider a Broker-Dealer acting on behalf of its customer as a
Potential Holder.
(kk) Preferred Shares means the preferred
shares of beneficial interest, par value $.01 per share,
including the MuniPreferred shares, of the Fund from time to
time.
(ll) Rating Agency Guidelines
mean
Guidelines
(if
is then rating MuniPreferred
shares),
Guidelines
(if
is then rating MuniPreferred shares) and any Other Rating Agency
Guidelines.
(mm) Reference Rate means, with respect to the
determination of the Maximum Rate and Default Rate, the
applicable LIBOR Rate (for a Dividend Period of fewer than
365 days) or the applicable Treasury Index Rate (for a
Dividend Period of 365 days or more).
(nn) Securities Depository means The Depository
Trust Company and its successors and assigns or any
successor securities depository selected by the Fund that agrees
to follow the procedures required to be followed by such
securities depository in connection with the shares of
MuniPreferred shares
Series
and MuniPreferred shares
Series .
(oo) Sell Order shall have the meaning
specified in paragraph (a) of Section 2 of this
Appendix B.
(pp) Series means
Series
and
Series
MuniPreferred shares, together with additional series of
MuniPreferred shares that may be authorized and issued.
(qq) Special Dividend Period means a Dividend
Period that is not a Standard Dividend Period.
(rr) Standard Dividend Period means a Dividend
Period of 7 days.
(ss) Statement means the Statement Establishing
and Fixing the Rights and Preferences of MuniPreferred Shares
attached as Appendix B to the Funds statement of
additional information.
(tt) Submission Deadline means 1:00 P.M.,
Eastern Standard time, on any Auction Date or such other time on
any Auction Date by which Broker-Dealers are required to submit
Orders to the Auction Agent as specified by the Auction Agent
from time to time.
(uu) Submitted Bid shall have the meaning
specified in paragraph (a) of Section 4 of this
Appendix B.
(vv) Submitted Hold Order shall have the
meaning specified in paragraph (a) of Section 4 of
this Appendix B.
B-5
(ww) Submitted Order shall have the meaning
specified in paragraph (a) of Section 4 of this
Appendix B.
(xx) Submitted Sell Order shall have the
meaning specified in paragraph (a) of Section 4 of
this Appendix B.
(yy) Sufficient Clearing Bids shall have the
meaning specified in paragraph (a) of Section 4 of
this Appendix B.
(zz) Treasury Index Rate means the average
yield to maturity for actively traded marketable
U.S. Treasury fixed interest rate securities having the
same number of
30-day
periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear
interpolation based upon the yield for such securities having
the next shorter and next longer number of
30-day
periods to maturity treating all Dividend Periods with a length
greater than the longest maturity for such securities as having
a length equal to such longest maturity, in all cases based upon
data set forth in the most recent weekly statistical release
published by the Board of Governors of the Federal Reserve
System (currently in H.15(519)); provided, however, if the most
recent such statistical release shall not have been published
during the 15 days preceding the date of computation, the
foregoing computations shall be based upon the average of
comparable data as quoted to the Fund by at least three
recognized dealers in U.S. Government securities selected
by the Fund.
(aaa) Valuation Date means every Friday, or, if such
day is not a Business Day, the next preceding Business Day;
provided, however, that the first Valuation Date may occur on
any other date established by the Fund; provided, further,
however, that such first Valuation Date shall be not more than
one week from the date on which MuniPreferred shares
Series
or MuniPreferred shares
Series ,
as the case may be, initially are issued.
(bbb) Winning Bid Rate has the meaning set forth in
Section 4(a)(iii) of this Appendix B.
2.
Orders.
(a) Prior to the Submission Deadline on each Auction Date
for shares of a series of MuniPreferred shares:
(i) each Beneficial Owner of shares of such series may
submit to its Broker-Dealer by telephone or otherwise
information as to:
(A) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial Owner
desires to continue to hold without regard to the Applicable
Rate for shares of such Series for the next succeeding Dividend
Period of such shares;
(B) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial Owner
offers to sell if the Applicable Rate for shares of such Series
for the next succeeding Dividend Period of shares of such series
shall be less than the rate per annum specified by such
Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial Owner
offers to sell without regard to the Applicable Rate for shares
of such Series for the next succeeding Dividend Period of shares
of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the purpose of
conducting a competitive Auction in a commercially reasonable
manner, contact Potential Beneficial Owners (by telephone or
otherwise), including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any, of such
series which each such Potential Beneficial Owner offers to
purchase if the Applicable Rate for shares of such Series for
the next succeeding Dividend Period of shares of such series
shall not be less than the rate per annum specified by such
Potential Beneficial Owner.
B-6
For the purposes hereof, the communication by a Beneficial Owner
or Potential Beneficial Owner to a Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, of information referred to
in clause (i) (A), (i) (B), (i) (C) or (ii) of this
paragraph (a) is hereinafter referred to as an
Order and collectively as Orders and
each Beneficial Owner and each Potential Beneficial Owner
placing an Order with a Broker-Dealer, and such Broker-Dealer
placing an Order with the Auction Agent, is hereinafter referred
to as a Bidder and collectively as
Bidders; an Order containing the information
referred to in clause (i)(A) of this paragraph (a) is
hereinafter referred to as a Hold Order and
collectively as Hold Orders; an Order containing the
information referred to in clause (i)(B) or (ii) of this
paragraph (a) is hereinafter referred to as a
Bid and collectively as Bids; and an
Order containing the information referred to in clause (i)(C) of
this paragraph (a) is hereinafter referred to as a
Sell Order and collectively as Sell
Orders.
(b) (i) A Bid by a Beneficial Owner or an Existing
Holder of shares of a series of MuniPreferred shares subject to
an Auction on any Auction Date shall constitute an irrevocable
offer to sell:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such
series determined on such Auction Date shall be less than the
rate specified therein;
(B) such number or a lesser number of Outstanding shares of
such series to be determined as set forth in clause (iv) of
paragraph (a) of Section 5 of this Appendix B if
the Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified
therein; or
(C) the number of Outstanding shares of such series
specified in such Bid if the rate specified therein shall be
higher than the Maximum Rate for shares of such series, or such
number or a lesser number of Outstanding shares of such series
to be determined as set forth in clause (iii) of paragraph
(b) of Section 5 of this Appendix B if the rate
specified therein shall be higher than the Maximum Rate for
shares of such series and Sufficient Clearing Bids for shares of
such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing
Holder of shares of a series of MuniPreferred shares subject to
an Auction on any Auction Date shall constitute an irrevocable
offer to sell:
(A) the number of Outstanding shares of such series
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding shares of
such series as set forth in clause (iii) of paragraph
(b) of Section 5 of this Appendix B if Sufficient
Clearing Bids for shares of such series do not exist;
provided, however
,
that a Broker-Dealer that is an
Existing Holder with respect to shares of a series of
MuniPreferred shares shall not be liable to any Person for
failing to sell such shares pursuant to a Sell Order described
in the proviso to paragraph (c) of Section 3 of this
Appendix B if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial
Owner or its transferee Broker-Dealer (or other transferee
person, if permitted by the Fund) with the provisions of
Section 5 of Part I of the Statement or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the
terms of its Broker-Dealer Agreement that, according to such
Broker-Dealers records, such Broker-Dealer believes it is
not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential
Holder of shares of a series of MuniPreferred shares subject to
an Auction on any Auction Date shall constitute an irrevocable
offer to purchase:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such
series determined on such Auction Date shall be higher than the
rate specified therein; or
B-7
(B) such number or a lesser number of Outstanding shares of
such series as set forth in clause (v) of paragraph
(a) of Section 5 of this Appendix B if the Applicable
Rate for shares of such series determined on such Auction Date
shall be equal to the rate specified therein.
(c) No Order for any number of MuniPreferred shares other
than whole shares shall be valid.
3.
Submission of Orders by Broker-Dealers to Auction
Agent.
(a) Each Broker-Dealer shall submit in writing to the
Auction Agent prior to the Submission Deadline on each Auction
Date all Orders for MuniPreferred shares of a series subject to
an Auction on such Auction Date obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Fund) as
an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as
a Potential Holder in respect of shares subject to Orders
submitted to it by Potential Beneficial Owners, and shall
specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall
be the Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series that are
the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder
of shares of such series:
(A) the number of shares, if any, of such series subject to
any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to
any Bid of such Existing Holder and the rate specified in such
Bid; and
(C) the number of shares, if any, of such series subject to
any Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of
shares of such series, the rate and number of shares of such
series specified in such Potential Holders Bid.
(b) If any rate specified in any Bid contains more than
three figures to the right of the decimal point, the Auction
Agent shall round such rate up to the next highest one
thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding
shares of MuniPreferred shares of a series held by any Existing
Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order
to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by
such Existing Holder and not subject to Orders submitted to the
Auction Agent; provided, however, that if an Order or Orders
covering all of the Outstanding shares of such series held by
any Existing Holder is not submitted to the Auction Agent prior
to the Submission Deadline for an Auction relating to a Special
Dividend Period consisting of more than 28 Dividend Period Days,
the Auction Agent shall deem a Sell Order to have been submitted
by or on behalf of such Existing Holder covering the number of
outstanding shares of such series held by such Existing Holder
and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is
submitted to the Auction Agent covering in the aggregate more
than the number of Outstanding MuniPreferred shares of a series
subject to an Auction held by such Existing Holder, such Orders
shall be considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall be
considered valid, but only up to and including in the aggregate
the number of Outstanding shares of such series held by such
Existing Holder, and if the number of shares of such series
subject to such Hold Orders exceeds the number of Outstanding
shares of such series held by such Existing Holder, the number
of shares subject to each such Hold Order shall be reduced pro
rata to cover the number of Outstanding shares of such series
held by such Existing Holder;
B-8
(ii) (A) any Bid for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder
over the number of shares of such series subject to any Hold
Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an
Existing Holder for shares of such series is submitted to the
Auction Agent with the same rate and the number of Outstanding
shares of such series subject to such Bids is greater than such
excess, such Bids shall be considered valid up to and including
the amount of such excess, and the number of shares of such
series subject to each Bid with the same rate shall be reduced
pro rata to cover the number of shares of such series equal to
such excess;
(C) subject to subclauses (A) and (B), if more than
one Bid of an Existing Holder for shares of such series is
submitted to the Auction Agent with different rates, such Bids
shall be considered valid in the ascending order of their
respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if any, of such
Outstanding shares of such series subject to any portion of Bids
considered not valid in whole or in part under this
clause (ii) shall be treated as the subject of a Bid for
shares of such series by or on behalf of a Potential Holder at
the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder
over the sum of shares of such series subject to valid Hold
Orders referred to in clause (i) above and valid Bids
referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series
of MuniPreferred shares is submitted to the Auction Agent by or
on behalf of any Potential Holder, each such Bid submitted shall
be a separate Bid with the rate and number of shares therein
specified.
(f) Any Order submitted by a Beneficial Owner or a
Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission
Deadline on any Auction Date, shall be irrevocable.
4.
Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate.
(a) Not earlier than the Submission Deadline on each
Auction Date for shares of a series of MuniPreferred shares, the
Auction Agent shall assemble all valid Orders submitted or
deemed submitted to it by the Broker-Dealers in respect of
shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to
individually as a Submitted Hold Order, a
Submitted Bid or a Submitted Sell Order,
as the case may be, or as a Submitted Order and
collectively as Submitted Hold Orders,
Submitted Bids or Submitted Sell Orders,
as the case may be, or as Submitted Orders) and
shall determine for such series:
(i) the excess of the number of Outstanding shares of such
series over the number of Outstanding shares of such series
subject to Submitted Hold Orders (such excess being hereinafter
referred to as the Available MuniPreferred shares of
such series);
(ii) from the Submitted Orders for shares of such series
whether:
(A) the number of Outstanding shares of such series subject
to Submitted Bids of Potential Holders specifying one or more
rates equal to or lower than the Maximum Rate for shares of such
series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject
to Submitted Bids of Existing Holders specifying one or more
rates equal to or lower than the Maximum Rate for shares of such
series; and
B-9
(C) the number of Outstanding shares of such series subject
to Submitted Sell Orders
(in the event such excess or such equality exists (other than
because the number of shares of such series in
subclauses (B) and (C) above is zero because all of
the Outstanding shares of such series are subject to Submitted
Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as Sufficient
Clearing Bids for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series
exist, the lowest rate specified in such Submitted Bids (the
Winning Bid Rate for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders
specifying such lowest rate and (II) all other such
Submitted Bids of Existing Holders specifying lower rates were
rejected, thus entitling such Existing Holders to continue to
hold the shares of such series that are subject to such
Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders
specifying such lowest rate and (II) all other such
Submitted Bids of Potential Holders specifying lower rates were
accepted;
would result in such Existing Holders described in
subclause (A) above continuing to hold an aggregate number
of Outstanding shares of such series which, when added to the
number of Outstanding shares of such series to be purchased by
such Potential Holders described in subclause (B) above,
would equal not less than the Available MuniPreferred shares of
such series.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this
Section 4, the Auction Agent shall advise the Fund of the
Maximum Rate for shares of the series of MuniPreferred shares
for which an Auction is being held on the Auction Date and,
based on such determination, the Applicable Rate for shares of
such series for the next succeeding Dividend Period thereof as
follows:
(i) if Sufficient Clearing Bids for shares of such series
exist, that the Applicable Rate for all shares of such series
for the next succeeding Dividend Period thereof shall be equal
to the Winning Bid Rate for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such series
do not exist (other than because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), that the
Applicable Rate for all shares of such series for the next
succeeding Dividend Period thereof shall be equal to the Maximum
Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are
subject to Submitted Hold Orders, that the Applicable Rate for
all shares of such series for the next succeeding Dividend
Period thereof shall be All Hold Rate.
5.
Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of
Shares.
Existing Holders shall continue to hold
the MuniPreferred shares that are subject to Submitted Hold
Orders, and, based on the determinations made pursuant to
paragraph (a) of Section 4 of this Appendix B,
the Submitted Bids and Submitted Sell Orders shall be accepted
or rejected by the Auction Agent and the Auction Agent shall
take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of
MuniPreferred shares have been made, all Submitted Sell Orders
with respect to shares of such series shall be accepted and,
subject to the provisions of paragraphs (d) and (e) of
this Section 5, Submitted Bids with respect to shares of
such series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids with
respect to shares of such series shall be rejected:
(i) Existing Holders Submitted Bids for shares of
such series specifying any rate that is higher than the Winning
Bid Rate for shares of such series shall be accepted, thus
requiring each such Existing Holder to sell the MuniPreferred
shares subject to such Submitted Bids;
B-10
(ii) Existing Holders Submitted Bids for shares of
such series specifying any rate that is lower than the Winning
Bid Rate for shares of such series shall be rejected, thus
entitling each such Existing Holder to continue to hold the
MuniPreferred shares subject to such Submitted Bids;
(iii) Potential Holders Submitted Bids for shares of
such series specifying any rate that is lower than the Winning
Bid Rate for shares of such series shall be accepted;
(iv) each Existing Holders Submitted Bid for shares
of such series specifying a rate that is equal to the Winning
Bid Rate for shares of such series shall be rejected, thus
entitling such Existing Holder to continue to hold the
MuniPreferred shares subject to such Submitted Bid, unless the
number of Outstanding MuniPreferred shares subject to all such
Submitted Bids shall be greater than the number of MuniPreferred
shares (remaining shares) in the excess of the
Available MuniPreferred shares of such series over the number of
MuniPreferred shares subject to Submitted Bids described in
clauses (ii) and (iii) of this paragraph (a), in which
event such Submitted Bid of such Existing Holder shall be
rejected in part, and such Existing Holder shall be entitled to
continue to hold MuniPreferred shares subject to such Submitted
Bid, but only in an amount equal to the number of MuniPreferred
shares of such series obtained by multiplying the number of
remaining shares by a fraction, the numerator of which shall be
the number of Outstanding MuniPreferred shares held by such
Existing Holder subject to such Submitted Bid and the
denominator of which shall be the aggregate number of
Outstanding MuniPreferred shares subject to such Submitted Bids
made by all such Existing Holders that specified a rate equal to
the Winning Bid Rate for shares of such series; and
(v) each Potential Holders Submitted Bid for shares
of such series specifying a rate that is equal to the Winning
Bid Rate for shares of such series shall be accepted but only in
an amount equal to the number of shares of such series obtained
by multiplying the number of shares in the excess of the
Available MuniPreferred shares of such series over the number of
MuniPreferred shares subject to Submitted Bids described in
clauses (ii) through (iv) of this paragraph
(a) by a fraction, the numerator of which shall be the
number of Outstanding MuniPreferred shares subject to such
Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding MuniPreferred shares subject to
such Submitted Bids made by all such Potential Holders that
specified a rate equal to the Winning Bid Rate for shares of
such series.
(b) If Sufficient Clearing Bids for shares of a series of
MuniPreferred shares have not been made (other than because all
of the Outstanding shares of such series are subject to
Submitted Hold Orders), subject to the provisions of paragraph
(d) of this Section 5, Submitted Orders for shares of
such series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids for
shares of such series shall be rejected:
(i) Existing Holders Submitted Bids for shares of
such series specifying any rate that is equal to or lower than
the Maximum Rate for shares of such series shall be rejected,
thus entitling such Existing Holders to continue to hold the
MuniPreferred shares subject to such Submitted Bids;
(ii) Potential Holders Submitted Bids for shares of
such series specifying any rate that is equal to or lower than
the Maximum Rate for shares of such series shall be
accepted; and
(iii) Each Existing Holders Submitted Bid for shares
of such series specifying any rate that is higher than the
Maximum Rate for shares of such series and the Submitted Sell
Orders for shares of such series of each Existing Holder shall
be accepted, thus entitling each Existing Holder that submitted
or on whose behalf was submitted any such Submitted Bid or
Submitted Sell Order to sell the shares of such series subject
to such Submitted Bid or Submitted Sell Order, but in both cases
only in an amount equal to the number of shares of such series
obtained by multiplying the number of shares of such series
subject to Submitted Bids described in clause (ii) of this
paragraph (b) by a fraction, the numerator of which shall
be the number of Outstanding shares of such series held by such
Existing Holder subject to such Submitted Bid or Submitted Sell
Order and the denominator of
B-11
which shall be the aggregate number of Outstanding shares of
such series subject to all such Submitted Bids and Submitted
Sell Orders.
(c) If all of the Outstanding shares of a series of
MuniPreferred shares are subject to Submitted Hold Orders, all
Submitted Bids for shares of such series shall be rejected.
(d) If, as a result of the procedures described in
clause (iv) or (v) of paragraph (a) or
clause (iii) of paragraph (b) of this Section 5,
any Existing Holder would be entitled or required to sell, or
any Potential Holder would be entitled or required to purchase,
a fraction of a share of a series of MuniPreferred shares on any
Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, round up or down the
number of MuniPreferred shares of such series to be purchased or
sold by any Existing Holder or Potential Holder on such Auction
Date as a result of such procedures so that the number of shares
so purchased or sold by each Existing Holder or Potential Holder
on such Auction Date shall be whole shares of MuniPreferred
shares.
(e) If, as a result of the procedures described in
clause (v) of paragraph (a) of this Section 5,
any Potential Holder would be entitled or required to purchase
less than a whole share of a series of MuniPreferred shares on
any Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, allocate MuniPreferred
shares of such series or purchase among Potential Holders so
that only whole shares of MuniPreferred shares of such series
are purchased on such Auction Date as a result of such
procedures by any Potential Holder, even if such allocation
results in one or more Potential Holders not purchasing
MuniPreferred shares of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a
series of MuniPreferred shares, the Auction Agent shall
determine the aggregate number of shares of such series to be
purchased and the aggregate number of shares of such series to
be sold by Potential Holders and Existing Holders and, with
respect to each Potential Holder and Existing Holder, to the
extent that such aggregate number of shares to be purchased and
such aggregate number of shares to be sold differ, determine to
which other Potential Holder(s) or Existing Holder(s) they shall
deliver, or from which other Potential Holder(s) or Existing
Holder(s) they shall receive, as the case may be, MuniPreferred
shares of such series. Notwithstanding any provision of the
Auction Procedures or the Settlement Procedures to the contrary,
in the event an Existing Holder or Beneficial Owner of shares of
a series of MuniPreferred shares with respect to whom a
Broker-Dealer submitted a Bid to the Auction Agent for such
shares that was accepted in whole or in part, or submitted or is
deemed to have submitted a Sell Order for such shares that was
accepted in whole or in part, fails to instruct its Agent Member
to deliver such shares against payment therefor, partial
deliveries of shares of MuniPreferred shares that have been made
in respect of Potential Holders or Potential Beneficial
Owners Submitted Bids for shares of such series that have
been accepted in whole or in part shall constitute good delivery
to such Potential Holders and Potential Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any
affiliate of either shall have any responsibility or liability
with respect to the failure of an Existing Holder, a Potential
Holder, a Beneficial Owner, a Potential Beneficial Owner or its
respective Agent Member to deliver MuniPreferred shares of any
series or to pay for MuniPreferred shares of any series sold or
purchased pursuant to the Auction Procedures or otherwise.
$
Nuveen Municipal High
Income
Opportunity
Fund 2
Municipal Auction Rate
Cumulative
Preferred Shares
MuniPreferred
®
Shares,
Series
Shares,
Series
PROSPECTUS
[UNDERWRITER]
[UNDERWRITER]
,
200
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND 2
STATEMENT OF ADDITIONAL INFORMATION
Nuveen Municipal High Income Opportunity Fund 2 (the Fund) is a recently organized,
diversified closed-end management investment company. Prior to October 4, 2007, the Fund was named
Nuveen Municipal High Income Strategy Fund.
This Statement of Additional Information relating to Municipal Auction Rate Cumulative
Preferred Shares of the Fund (MuniPreferred shares) does not constitute a prospectus, but should
be read in conjunction with the Funds prospectus relating
thereto dated
, 200
(the
Prospectus). This Statement of Additional Information does not include all information that a
prospective investor should consider before purchasing MuniPreferred shares. Investors should
obtain and read the Funds prospectus prior to purchasing such shares. A copy of the Funds
prospectus, annual and semi-annual reports to shareholders when available and other information
about the Fund may be obtained without charge by calling (800) 257-8787, by writing to the Fund or
from the Funds website
(http://www.nuveen.com)
. The information contained on, or that can be
accessed through, the Funds website is not part of the Funds prospectus or this Statement of
Additional Information. You may also obtain a copy of the Funds prospectus on the Securities and
Exchange Commissions web site (http://www.sec.gov). Capitalized terms used but not defined in
this Statement of Additional Information have the meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
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S-2
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S-31
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S-31
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S-33
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S-36
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A-1
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B-1
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This Statement of Additional Information is dated
, 200
.
INVESTMENT OBJECTIVES AND POLICIES
The Funds primary investment objective is to provide attractive income exempt from regular
federal income tax. The Funds secondary investment objective is to seek additional total return.
The Fund seeks to achieve its investment objectives by investing in municipal securities that
Nuveen Asset Management (NAM), the Funds investment adviser, believes are underrated and
undervalued, based upon its bottom-up, research-driven investment strategy. Under normal
circumstances, the Fund will invest at least 80% of its assets, including assets attributable to
any offering of preferred shares of beneficial interest (MuniPreferred
®
Shares) that may be
outstanding (Managed Assets), in municipal securities and other related investments, the income
from which is exempt from regular federal income tax. Generally, the Fund expects to be fully
invested (at least 95% of its Managed Assets) in such tax-exempt municipal securities and other
related investments. Up to 30% of the Funds Managed Assets may be invested in municipal
securities that pay interest that is taxable under the federal alternative minimum tax applicable
to individuals. For a discussion of how the federal alternative minimum tax may affect
shareholders, see Federal Income Tax Matters.
Under normal circumstances:
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The Fund will invest at least 50% of its Managed Assets in investment grade
quality municipal securities. Investment grade quality securities are those
that are (i) rated within the four highest letter grades (including BBB- or
Baa3 or better) by at least one of the nationally recognized statistical rating
organizations (NRSROs) that rate such security, or (ii) unrated but judged to
be of comparable quality by NAM. In the event that the percentage of Managed
Assets rated investment grade quality declines below 50%, the Fund will seek to
purchase investment grade quality securities and restore the target minimum in
a timely manner.
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The Fund may invest up to 50% of its Managed Assets in municipal securities
that at the time of investment are rated below investment grade. In an effort
to pursue greater returns, the Fund may invest in municipal securities that are
rated below investment grade. No more than 10% of the Funds Managed Assets
may be invested in municipal securities rated below B3/B- or that are unrated
but judged to be of comparable quality by NAM. This means that the Fund may
invest in municipal securities, the issuer of which is in default on its
obligations to pay principal or interest thereon when due or that is involved
in bankruptcy or insolvency proceedings or is otherwise experiencing other
financial difficulties at the time of acquisition (such securities are commonly
referred to as distressed securities). Municipal securities of below
investment grade quality are regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal,
and are commonly referred to as junk bonds.
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[The Fund anticipates that, upon the full investment of the net proceeds
from this offering (which is expected to occur within three to four months
following the closing of this offering), it will have invested approximately
55% to 65% of its Managed Assets in investment grade quality municipal
securities and approximately 35% to 45% of its Managed Assets in below
investment grade quality municipal securities.]
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The credit quality policies noted above apply only at the time a security is purchased, and
the Fund is not required to dispose of a security in the event that a rating agency downgrades its
assessment
S-1
of the credit characteristics of a particular issue. In determining whether to retain or sell
such a security, NAM may consider such factors as NAMs assessment of the credit quality of the
issuer of such security, the price at which such security could be sold and the rating, if any,
assigned to such security by other rating agencies. A general description of the ratings of
Moodys Investors Service, Inc. (Moodys), Standard & Poors Ratings Group, a division of The
McGraw Hill Companies, Inc. (S&P) and Fitch Ratings, Inc. (Fitch) of municipal securities is set forth
in Appendix B to this Statement of Additional Information.
A more complete description of the Funds investment objectives and policies is set forth in
the Funds Prospectus.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not, without the approval of
the holders of a majority of the outstanding common shares and, if applicable, MuniPreferred shares
voting together as a single class, and of the holders of a majority of the outstanding
MuniPreferred shares voting as a separate class, if applicable:
(1) Issue senior securities, as defined in the Investment Company Act of 1940, as
amended (the 1940 Act), other than MuniPreferred shares except to the extent permitted
under the 1940 Act and except as otherwise described in the Prospectus;
(2) Borrow money, except as permitted by the 1940 Act and exemptive orders granted
under the 1940 Act;
(3) Act as underwriter of another issuers securities, except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933, as
amended (the Securities Act), in connection with the purchase and sale of portfolio
securities;
(4) Invest more than 25% of its total assets in securities of issuers in any one
industry, provided, however, that such limitation shall not apply to municipal securities
other than those municipal securities backed only by the assets and revenues of
non-governmental users;
(5) Purchase or sell real estate, but this shall not prevent the Fund from investing in
municipal securities secured by real estate or interests therein or foreclosing upon and
selling such real estate;
(6) Purchase or sell physical commodities unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from purchasing or
selling options, futures contracts or derivative instruments or from investing in securities
or other instruments backed by physical commodities);
(7) Make loans, except as permitted by the 1940 Act and exemptive orders granted under
the 1940 Act; and
(8) With respect to 75% of the value of the Funds total assets, purchase any
securities (other than obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities), if as a result more than 5% of the Funds total assets would
then be invested in securities of a single issuer or if as a result the Fund would hold more
than 10% of the outstanding voting securities of any single issuer.
S-2
For the purpose of applying the limitation set forth in subparagraph (8) above, an issuer
shall be deemed the single issuer of a security when its assets and revenues are separate from
other governmental entities and its securities are backed only by its assets and revenues.
Similarly, in the case of a non-governmental issuer, if the security is backed only by the assets
and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to
be the single issuer. Where a security is also backed by the enforceable obligation of a superior
or unrelated governmental or other entity (other than a bond insurer), it shall also be included in
the computation of securities owned that are issued by such governmental or other entity. Where a
security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or
letter of credit, such a guarantee or letter of credit would be considered a separate security and
would be treated as an issue of such government, other entity or bank. When a municipal security
is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal security will be determined in accordance with
the principles set forth above. The foregoing restrictions do not limit the percentage of the
Funds assets that may be invested in municipal securities insured by any given insurer.
Under the 1940 Act, the Fund may invest only up to 10% of its total assets in the aggregate in
shares of other investment companies and only up to 5% of its total assets in any one investment
company, provided the investment does not represent more than 3% of the voting stock of the
acquired investment company at the time such shares are purchased. As an investor in any
investment company, the Fund will bear its ratable share of that investment companys expenses, and
will remain subject to payment of the Funds management, advisory and administrative fees with
respect to assets so invested. Holders of common shares (Common Shareholders) would therefore be
subject to duplicative expenses to the extent the Fund invests in other investment companies. In
addition, the securities of other investment companies may be leveraged and therefore will be
subject to the same leverage risks described herein.
In addition to the foregoing fundamental investment policies, the Fund is also subject to the
following non-fundamental restrictions and policies, which may be changed by the Board of Trustees.
The Fund may not:
(1) sell securities short, unless the Fund owns or has the right to obtain securities
equivalent in kind and amount to the securities sold at no added cost, and provided that
transactions in options, futures contracts, options on futures contracts, or other
derivative instruments are not deemed to constitute selling securities short;
(2) purchase securities of open-end or closed-end investment companies except in
compliance with the 1940 Act or any exemptive relief obtained thereunder;
(3) enter into futures contracts or related options or forward contracts, if more than
30% of the Funds net assets would be represented by futures contracts or more than 5% of
the Funds net assets would be committed to initial margin deposits and premiums on futures
contracts and related options;
(4) purchase securities when borrowings exceed 5% of its total assets if and so long as
MuniPreferred Shares are outstanding; and
(5) purchase securities of companies for the purpose of exercising control, except as
otherwise permitted in the Funds Prospectus and Statement of Additional Information.
The restrictions and other limitations set forth above will apply only at the time of purchase
of securities and will not be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of an acquisition of securities. In addition, the Funds policy,
as noted in the
S-3
Prospectus, that it will invest at least 80% of its Managed Assets in investments, the income
from which is exempt from regular federal income tax may only be changed by the Funds Board of
Trustees following the provision of 60 days prior written notice to Common Shareholders.
The Fund may be subject to certain restrictions imposed by either guidelines of one or more
NRSROs that may issue ratings for MuniPreferred shares, if any, commercial paper or notes, or, if
the Fund borrows from a lender, by the lender. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed on the Fund by the
1940 Act. If these restrictions were to apply, it is not anticipated that these covenants or
guidelines would impede NAM from managing the Funds portfolio in accordance with the Funds
investment objectives and policies.
PORTFOLIO COMPOSITION
In addition to and supplementing the Prospectus section The Funds InvestmentsPortfolio
Composition and Other Information, the Funds portfolio will be composed principally of the
investments described below.
Municipal Securities
Municipal securities are either general obligation or revenue bonds and typically are issued
to finance public projects (such as roads or public buildings), to pay general operating expenses
or to refinance outstanding debt.
Municipal securities may also be issued for private activities, such as housing, medical and
educational facility construction, or for privately owned industrial development and pollution
control projects. General obligation bonds are backed by the full faith and credit, or taxing
authority, of the issuer and may be repaid from any revenue source; revenue bonds may be repaid
only from the revenues of a specific facility or source. The Fund may also purchase municipal
securities that represent lease obligations, municipal notes, pre-refunded municipal bonds, private
activity bonds, tender option bonds and other forms of municipal bonds and securities.
Municipal securities of below investment grade quality (Ba/BB or below) are commonly referred
to as junk bonds. Issuers of securities rated Ba/BB or B are regarded as having current capacity
to make principal and interest payments but are subject to business, financial or economic
conditions which could adversely affect such payment capacity. Municipal securities rated Baa or
BBB are considered investment grade securities; municipal securities rated Baa are considered
medium grade obligations which lack outstanding investment characteristics and have speculative
characteristics, while municipal securities rated BBB are regarded as having adequate capacity to
pay principal and interest. Municipal securities rated Aaa or AAA in which the Fund may invest may
have been so rated on the basis of the existence of insurance guaranteeing the timely payment, when
due, of all principal and interest. Municipal securities rated below investment grade quality are
obligations of issuers that are considered predominately speculative with respect to the issuers
capacity to pay interest and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the possibility of issuer default and
bankruptcy and increased market price volatility. Municipal securities rated below investment
grade tend to be less marketable than higher-quality securities because the market for them is less
broad. The market for unrated municipal securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to increase
significantly and the Fund may have greater difficulty selling its portfolio securities. The Fund
will be more dependent on NAMs research and analysis when investing in these securities.
S-4
The Fund may invest in distressed securities, which are securities issued by companies in
default on their obligations to pay principal or interest thereon when due or that are involved in
bankruptcy or insolvency proceedings or are otherwise experiencing other financial difficulties at
the time of acquisition by the Fund. The issuers of such securities may be in transition, out of
favor, financially leveraged or troubled, or potentially troubled, and may be or have recently been
involved in major strategic actions, restructurings, bankruptcy, reorganization or liquidation.
These characteristics of these companies can cause their securities to be particularly risky,
although they also may offer the potential for high returns. These companies securities may be
considered speculative, and the ability of the companies to pay their debts on schedule could be
affected by adverse interest rate movements, changes in the general economic climate, economic
factors affecting a particular industry or specific developments within the companies. Distressed
securities frequently do not produce income while they are outstanding and may require the Fund to
bear certain extraordinary expenses in order to protect and recover its investment.
Investments in lower rated or unrated securities may present special tax issues for the Fund
to the extent that the issuers of these securities default on their obligations pertaining thereto,
and the federal income tax consequences to the Fund as a holder of such distressed securities may
not be clear.
A general description of Moodys, S&Ps and Fitchs ratings of municipal securities is set
forth in Appendix B hereto. The ratings of Moodys, S&P and Fitch represent their opinions as to
the quality of the municipal securities they rate. It should be emphasized, however, that ratings
are general and are not absolute standards of quality. Consequently, municipal securities with the
same maturity, coupon and rating may have different yields while obligations of the same maturity
and coupon with different ratings may have the same yield.
The Fund will primarily invest in municipal securities with long-term maturities in order to
maintain a weighted average maturity of 15 to 30 years, but the weighted average maturity of
obligations held by the Fund may be shorter, depending on market conditions. As a result, the
Funds portfolio at any given time may include both long-term and intermediate-term municipal
securities. Moreover, during temporary defensive periods (e.g., times when, in NAMs opinion,
temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt
securities market adversely affect the price at which long-term or intermediate-term municipal
securities are available), and in order to keep the Funds cash fully invested, including the
period during which the net proceeds of an offering are being invested, the Fund may invest any
percentage of its net assets in short-term investments including high quality, short-term
securities that may be either tax-exempt or taxable and up to 10% of its Managed Assets in
securities of other open or closed-end investment companies that invest primarily in municipal
securities of the type in which the Fund may invest directly. The Fund intends to invest in
taxable short-term investments only in the event that suitable tax-exempt short-term investments
are not available at reasonable prices and yields, as determined by NAM, and in amounts limited to
ensure that the Fund is eligible to pay exempt-interest dividends (as described in Federal Income
Tax Matters below). Tax-exempt short-term investments include various obligations issued by state
and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation
notes and revenue anticipation notes or other such municipal bonds maturing in three years or less
from the date of issuance) and municipal commercial paper. The Fund will invest only in taxable
short-term investments which are U.S. government securities or securities rated within the highest
grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry
a variable or floating rate of interest. See Appendix B for a general description of Moodys,
S&Ps and Fitchs ratings of securities in such categories. Taxable short-term investments of the
Fund may include certificates of deposit issued by U.S. banks with assets of at least $1 billion,
or commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year
or less, or repurchase agreements. To the extent the Fund invests in taxable investments, the Fund
will not at such times be in a position to achieve its investment objective of tax-exempt income.
S-5
The foregoing policies as to ratings of portfolio investments will apply only at the time of
the purchase of a security, and the Fund will not be required to dispose of securities in the event
Moodys, S&P or Fitch downgrades its assessment of the credit characteristics of a particular
issuer.
Obligations of issuers of municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors. In addition, the
obligations of such issuers may become subject to the laws enacted in the future by Congress, state
legislatures or referenda extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations or upon municipalities to levy
taxes. There is also the possibility that, as a result of legislation or other conditions, the
power or ability of any issuer to pay, when due, the principal of, and interest on, its municipal
securities may be materially affected.
The Fund presently intends to limit its investment in tobacco settlement bonds to no more than
10% of its Managed Assets.
Subject to guidelines which are imposed in connection with the Funds investment grade rating
on the MuniPreferred Shares, the Fund may invest a significant portion of its Managed Assets in
broad segments of the municipal securities market, such as revenue obligations of hospitals and
other health care facilities, special taxing districts, securities issued to finance charter
schools and other private educational facilities, municipal utility securities, industrial
development bonds and other private activity bonds. Subject to the availability of suitable
investment opportunities, NAM will attempt to minimize the sensitivity of the Funds portfolio to
credit and other risks associated with a particular sector or industry. However, if the Fund
invests a significant portion of its Managed Assets in the segments noted above, the Fund will be
more susceptible to economic, business, political, regulatory and other developments generally
affecting issuers in such segments of the municipal securities market. To the extent that the Fund
focuses its Managed Assets in the hospital and healthcare facilities sector, the Fund will be
subject to risks associated with such sector, including adverse government regulation and reduction
in reimbursement rates, as well as government approval of products and services and intense
competition. Securities issued to finance charter schools and other private educational facilities
will be subject to various risks, including the reversal of legislation authorizing or funding
charter schools, the failure to renew or secure a charter, the failure of a funding entity to
appropriate necessary funds and competition from alternatives such as voucher programs. Issuers of
municipal utility securities can be significantly affected by government regulation, financing
difficulties, supply and demand of services or fuel and natural resource conservation.
Up to 30% of the Funds Managed Assets may be invested in municipal securities subject to the
federal alternative minimum tax applicable to individuals. Special federal alternative minimum tax
rules apply to corporate investors. For a discussion of how the federal alternative minimum tax
may affect shareholders, see Tax Matters.
Upon NAMs recommendation, during temporary defensive periods and in order to keep the Funds
cash fully invested, including the period during which the net proceeds of an offering of common
shares or MuniPreferred Shares are being invested, the Fund may deviate from its investment
objectives and invest up to 100% of its Managed Assets in short-term investments including high
quality, short-term securities that may be either tax-exempt or taxable. To the extent the Fund
invests in taxable short-term investments, the Fund will not at such times be in a position to
achieve that portion of its investment objective of seeking current income exempt from regular
federal income tax. For further information, see Short-Term Investments below.
Municipal Leases and Certificates of Participation. Also included within the general category
of municipal securities described in the Funds Prospectus are municipal leases, certificates of
participation in such lease obligations or installment purchase contract obligations (hereinafter
collectively called
S-6
Municipal Lease Obligations) of municipal authorities or entities. Although a Municipal
Lease Obligation does not constitute a general obligation of the municipality for which the
municipalitys taxing power is pledged, a Municipal Lease Obligation is ordinarily backed by the
municipalitys covenant to budget for, appropriate and make the payments due under the Municipal
Lease Obligation. However, certain Municipal Lease Obligations contain nonappropriation clauses
which provide that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a yearly basis. In the
case of a non-appropriation lease, the Funds ability to recover under the lease in the event of
non-appropriation or default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and disposition or releasing of the property
might prove difficult. In order to reduce this risk, the Fund will only purchase Municipal Lease
Obligations where NAM believes the issuer has a strong incentive to continue making appropriations
until maturity.
Hedging Strategies and Other Uses of Derivatives
The Fund may periodically engage in hedging transactions, and otherwise use various types of
derivative instruments, described below, to reduce risk, to effectively gain particular market
exposures, to seek to enhance returns, and to reduce transaction costs, among other reasons.
Hedging is a term used for various methods of seeking to preserve portfolio capital value by
offsetting price changes in one investment through making another investment whose price should
tend to move in the opposite direction.
A derivative is a financial contract whose value is based on (or derived from) a
traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a
market index (such as the Lehman Municipal Bond Index). Some forms of derivatives may trade on
exchanges, while non-standardized derivatives, which tend to be more specialized and complex, trade
in over-the-counter or a one-on-one basis. It may be desirable and possible in various market
environments to partially hedge the portfolio against fluctuations in market value due to market
interest rate or credit quality fluctuations, or instead to gain a desired investment exposure, by
entering into various types of derivative transactions, including financial futures and index
futures as well as related put and call options on such instruments, structured notes, or interest
rate swaps on taxable or tax-exempt securities or indexes (which may be forward-starting), credit
default swaps, and options on interest rate swaps, among others.
These transactions present certain risks. In particular, the imperfect correlation between
price movements in the futures contract and price movements in the securities being hedged creates
the possibility that losses on the hedge by a Fund may be greater than gains in the value of the
securities in the Funds portfolio. In addition, futures and options markets may not be liquid in
all circumstances. As a result, in volatile markets, the Fund may not be able to close out the
transaction without incurring losses substantially greater than the initial deposit. Losses due to
hedging transactions will reduce the Funds net asset value which in turn could reduce yield. Net
gains, if any, from hedging and other portfolio transactions will be distributed as taxable
distributions to shareholders. The Fund will not make any investment (whether an initial premium
or deposit or a subsequent deposit) other than as necessary to close a prior investment if,
immediately after such investment, the sum of the amount of its premiums and deposits would exceed
15% of the Funds net assets. The Fund will invest in these instruments only in markets believed
by NAM to be active and sufficiently liquid. Successful implementation of most hedging strategies
would generate taxable income.
Both parties entering into an index or financial futures contract are required to post an
initial deposit, typically equal to from 1% to 5% of the total contract price. Typically, option
holders enter into offsetting closing transactions to enable settlement in cash rather than take
delivery of the position in the future of the underlying security. Interest rate swap and credit
default swap transactions are typically
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entered on a net basis, meaning that the two payment streams are netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two payments. The Fund will
only sell covered futures contracts, which means that the Fund segregates assets equal to the
amount of the obligations.
Interest Rate and Total Return Swaps
. The Fund may invest in interest rate swaps, total
return swaps and other debt-related derivative instruments. The Fund will enter into swap
agreements only with counterparties that meet certain standards of creditworthiness. In an
interest rate swap, the Fund and another party exchange their respective commitments to pay each
other floating for fixed rates of interest at a floating rate referenced to local short-term
interest rates and a fixed rate referenced to the interest rate in the international (non-U.S.)
local government securities market denominated in that non-U.S. market currency. In a total return
swap, the Fund exchanges with another party their respective commitments to pay or receive the
total return of an underlying asset and a floating local short-term interest rate.
The Fund usually will enter into interest rate swaps and total return swaps on a net basis
(i.e., the two payment streams are netted out with the Fund receiving or paying, as the case may
be, only the net amount of the two payments). The net amount of the excess, if any, of the Funds
obligations over its entitlements with respect to each interest rate swap will be accrued on a
daily basis, and an amount of cash or liquid securities having an aggregate net asset value at
least equal to the accrued excess will be segregated by the Fund. If the interest rate swap
transaction is entered into on other than a net basis, the full amount of the Funds obligations
will be accrued on a daily basis, and the full amount of the Funds obligations will be segregated
by the Fund.
The use of swaps is a highly specialized activity that involves investment techniques and
risks different from those associated with ordinary portfolio securities transactions, including
the risk that the counterparty may be unable to fulfill the transaction. If there is a default by
the other party to such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. If NAM is incorrect in its forecasts of market values,
interest rates and other applicable factors, the investment performance of the Fund would be
unfavorably affected.
Bond Futures and Forward Contracts
. Bond futures contracts are agreements in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar amount times the
difference between the value of a specific bond at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of securities is made.
Forward contracts are agreements to purchase or sell a specified security or currency at a
specified future date (or within a specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks, foreign exchange dealers or
broker-dealers and are usually for less than one year, but may be renewed. Forward contracts are
generally purchased or sold in OTC transactions.
Under regulations of the Commodity Futures Trading Commission (CFTC) currently in effect,
which may change from time to time, with respect to futures contracts purchased by the Fund, the
Fund will set aside in a segregated account liquid securities with a value at least equal to the
value of instruments underlying such futures contracts less the amount of initial margin on deposit
for such contracts. The current view of the staff of the Securities and Exchange Commission is
that the Funds long and short positions in futures contracts must be collateralized with cash or
certain liquid assets held in a segregated account or covered in order to counter the impact of
any potential leveraging.
Parties to a futures contract must make initial margin deposits to secure performance of the
contract. There are also requirements to make variation margin deposits from time to time as the
value of the futures contract fluctuates.
Options on Currency Futures Contracts
. Currency futures contracts are standardized agreements
between two parties to buy and sell a specific amount of a currency at a set price on a future
date. While
S-8
similar to currency forward contracts, currency futures contracts are traded on commodities
exchanges and are standardized as to contract size and delivery date. An option on a currency
futures contract gives the holder of the option the right to buy or sell a position in a currency
futures contract, at a set price and on or before a specified expiration date. Trading options on
international (non-U.S.) currency futures contracts is relatively new. The ability to establish
and close out positions on such options is subject to the maintenance of a liquid secondary market.
The Fund and NAM have claimed, respectively, an exclusion from registration as a commodity
pool operator and as a commodity trading advisor under the Commodity Exchange Act (the CEA) and,
therefore, neither the Fund, NAM, nor their officers and directors, are subject to the registration
requirements of the CEA or regulation as a commodity pool operator or a commodity trading adviser
under the CEA. The Fund reserves the right to engage in transactions involving futures and options
thereon to the extent allowed by CFTC regulations in effect from time to time and in accordance
with the Funds policies. In addition, certain provisions of the Code (as defined under Federal
Income Tax Matters) may limit the extent to which the Fund may enter into futures contracts or
engage in options transactions. See Federal Income Tax Matters.
Index Futures
. A tax-exempt bond index which assigns relative values to the tax-exempt bonds
included in the index is traded on the Chicago Board of Trade. The index fluctuates with changes
in the market values of all tax-exempt bonds included rather than a single bond. An index future
is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount
of cash rather than any security equal to a specified dollar amount times the difference
between the index value at the close of the last trading day of the contract and the price at which
the index future was originally written. Thus, an index future is similar to traditional financial
futures except that settlement is made in cash.
Index Options
. The Fund may also purchase put or call options on U.S. Government or
tax-exempt bond index futures and enter into closing transactions with respect to such options to
terminate an existing position. Options on index futures are similar to options on debt
instruments except that an option on an index future gives the purchaser the right, in return for
the premium paid, to assume a position in an index contract rather than an underlying security at a
specified exercise price at any time during the period of the option. Upon exercise of the option,
the delivery of the futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance of the writers futures margin account which
represents the amount by which the market price of the index futures contract, at exercise, is less
than the exercise price of the option on the index future.
Bond index futures and options transactions would be subject to risks similar to transactions
in financial futures and options thereon as described above.
Interest Rate Transactions
. In order to seek to hedge the value of the Funds portfolio to
seek to increase the Funds return, the Fund may enter into various interest rate transactions such
as interest rate swaps and the purchase or sale of interest rate caps and floors. The Fund may
enter into these transactions to seek to increase its return, to preserve a return or spread on a
particular investment or portion of its portfolio, or to seek to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date.
Interest rate swaps involve the Funds agreement with the swap counterparty to pay a fixed
rate payment in exchange for the counterparty agreeing to pay the Fund a payment at a variable rate
that is expected to approximate the rate on the Funds variable rate payment obligations. The
payment obligations would be based on the notional amount of the swap. The Fund may use an
interest rate cap, which would require it to pay a premium to the cap counterparty and would
entitle it, to the extent that a specified variable rate index exceeds a predetermined fixed rate,
to receive from the counterparty payment of the difference based on the notional amount. The Fund
would use interest rate swaps or caps
S-9
only with the intent to reduce or eliminate the risk that an increase in short-term interest
rates could have on Common Share net earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is, the two payment
streams will be netted out in a cash settlement on the payment date or dates specified in the
instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two
payments. The Fund intends to maintain in a segregated account with its custodian cash or liquid
securities having a value at least equal to the Funds net payment obligations under any swap
transaction, marked-to-market daily.
The use of interest rate transactions, such as interest rate swaps and caps, is a highly
specialized activity that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of interest rates in
general, the Funds use of interest rate swaps or caps could enhance or harm the overall
performance on the Funds common shares. To the extent there is a decline in interest rates, the
value of the interest rate swap or cap could decline, and could result in a decline in the net
asset value of the common shares. In addition, if short-term interest rates are lower than the
Funds fixed rate of payment on the interest rate swap, the swap will reduce common share net
earnings. If, on the other hand, short-term interest rates are higher than the fixed rate of
payment on the interest rate swap, the swap will enhance common share net earnings. Buying
interest rate caps could enhance the performance of the common shares by providing a maximum
leverage expense. Buying interest rate caps could also decrease the net earnings of the common
shares in the event that the premium paid by the Fund to the counterparty exceeds the additional
amount the Fund would have been required to pay had it not entered into the cap agreement.
Interest rate swaps and caps do not involve the delivery of securities or other underlying
assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited
to the net amount of interest payments that the Fund is contractually obligated to make. If the
counterparty defaults, the Fund would not be able to use the anticipated net receipts under the
swap or cap to offset interest payments. Depending on whether the Fund would be entitled to
receive net payments from the counterparty on the swap or cap, which in turn would depend on the
general state of short-term interest rates at that point in time, such a default could negatively
impact the performance of the common shares.
Although this will not guarantee that the counterparty does not default, the Fund will not
enter into an interest rate swap or cap transaction with any counter-party that NAM believes does
not have the financial resources to honor its obligation under the interest rate swap or cap
transaction. Further, NAM will continually monitor the financial stability of a counterparty to an
interest rate swap or cap transaction in an effort to proactively protect the Funds investments.
In addition, at the time the interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund would not be able to obtain a replacement
transaction or that the terms of the replacement would not be as favorable as on the expiring
transaction. If this occurs, it could have a negative impact on the performance of the Funds
common shares.
Repurchase Agreements
. The Fund may enter into repurchase agreements (the purchase of a
security coupled with an agreement to resell that security at a higher price) with respect to its
permitted investments. The Funds repurchase agreements will provide that the value of the
collateral underlying the repurchase agreement will always be at least equal to the repurchase
price, including any accrued interest earned on the agreement, and will be marked-to-market daily.
The agreed-upon repurchase price determines the yield during the Funds holding period.
Repurchase agreements are considered to be loans collateralized by the underlying security
that is the subject of the repurchase contract. The Fund will only enter into repurchase
agreements with registered securities dealers or domestic banks that, in NAMs opinion, present
minimal credit risk. The
S-10
risk to the Fund is limited to the ability of the issuer to pay the agreed-upon repurchase
price on the delivery date; however, although the value of the underlying collateral at the time
the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the
value of the collateral declines there is a risk of loss of both principal and interest. In the
event of default, the collateral may be sold but the Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in connection with
liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization upon the collateral by the Fund may be delayed or limited.
NAM will monitor the value of the collateral at the time the transaction is entered into and at all
times subsequent during the term of the repurchase agreement in an effort to determine that such
value always equals or exceeds the agreed-upon repurchase price. In the event the value of the
collateral declines below the repurchase price, NAM will demand additional collateral from the
issuer to increase the value of the collateral to at least that of the repurchase price, including
interest.
Segregation of Assets
As a closed-end investment company registered with the U.S. Securities and Exchange Commission
(the SEC), the Fund is subject to the federal securities laws, including the 1940 Act, the rules
thereunder, and various SEC and SEC staff interpretive positions. In accordance with these laws,
rules and positions, the Fund must set aside (often referred to as asset segregation) liquid
assets, or engage in other SEC or staff-approved measures, to cover open positions with respect
to certain kinds of derivatives instruments. In the case of forward currency contracts that are
not contractually required to cash settle, for example, the Fund must set aside liquid assets equal
to such contracts full notional value while the positions are open. With respect to forward
currency contracts that are contractually required to cash settle, however, the Fund is permitted
to set aside liquid assets in an amount equal to the Funds daily marked-to-market net obligations
(i.e., the Funds daily net liability) under the contracts, if any, rather than such contracts
full notional value. The Fund reserves the right to modify its asset segregation policies in the
future to comply with any changes in the positions from time to time articulated by the SEC or its
staff regarding asset segregation.
The Fund generally will use its assets to cover its obligations as required by the 1940 Act,
the rules thereunder, and applicable SEC and SEC staff positions. As a result of their
segregation, such assets may not be used for other operational purposes. See the Funds Prospectus
under Description of MuniPreferred Shares Rating Agency Guidelines and Asset Coverage. NAM will
monitor the Funds use of derivatives and will take action as necessary for the purpose of
complying with the asset segregation policy stated above. Such actions may include the sale of the
Funds portfolio investments.
Short-Term Investments
Short-Term Taxable Fixed Income Securities. For temporary defensive purposes or to keep cash
on hand fully invested, the Fund may invest up to 100% of its net assets in cash equivalents and
short-term taxable fixed-income securities, although the Fund intends to invest in taxable
short-term investments only in the event that suitable tax-exempt short-term investments are not
available at reasonable prices and yields, as determined by NAM, and in amounts limited to ensure
that the Fund is eligible to pay exempt-interest dividends (as described in Federal Income Tax
Matters below). Short-term taxable fixed income investments are defined to include, without
limitation, the following:
(1) U.S. government securities, including bills, notes and bonds differing as to
maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or
by U.S. government agencies or instrumentalities. U.S. government agency securities include
securities issued by (a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and the Government
National Mortgage Association, whose securities are supported by the full faith and credit
of the United
S-11
States; (b) the Federal Home Loan Banks (whose securities are not backed by the full
faith and credit of the United States Government), Federal Intermediate Credit Banks, and
the Tennessee Valley Authority, whose securities are supported by the right of the agency to
borrow from the U.S. Treasury; (c) the Federal National Mortgage Association (whose
securities are not backed by the full faith and credit of the United States Government),
whose securities are supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it always will do so since it is not so
obligated by law. The U.S. government, its agencies, and instrumentalities do not guarantee
the market value of their securities. Consequently, the value of such securities may
fluctuate.
(2) Certificates of Deposit issued against funds deposited in a bank or a savings and
loan association. Such certificates are for a definite period of time, earn a specified
rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees
to pay the amount deposited plus interest to the bearer of the certificate on the date
specified thereon. Under current Federal Deposit Insurance Company regulations, the maximum
insurance payable as to any one certificate of deposit is $100,000; therefore, certificates
of deposit purchased by the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the
Fund purchases securities pursuant to a repurchase agreement, it simultaneously agrees to
resell and redeliver such securities to the seller, who also simultaneously agrees to buy
back the securities at a fixed price and time. This assures a predetermined yield for the
Fund during its holding period, since the resale price is always greater than the purchase
price and reflects an agreed-upon market rate. Such actions afford an opportunity for the
Fund to invest temporarily available cash. The Fund may enter into repurchase agreements
only with respect to obligations of the U.S. government, its agencies or instrumentalities;
certificates of deposit; or bankers acceptances in which the Fund may invest. Repurchase
agreements may be considered loans to the seller, collateralized by the underlying
securities. The risk to the Fund is limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement
provides that the Fund is entitled to sell the underlying collateral. If the seller
defaults under a repurchase agreement when the value of the underlying collateral is less
than the repurchase price, the Fund could incur a loss of both principal and interest. NAM
monitors the value of the collateral at the time the action is entered into and at all times
during the term of the repurchase agreement. NAM does so in an effort to determine that the
value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid
to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the
ability of the Fund to liquidate the collateral could be delayed or impaired because of
certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes,
including variable rate master demand notes issued by corporations to finance their current
operations. Master demand notes are direct lending arrangements between the Fund and a
corporation. There is no secondary market for such notes. However, they are redeemable by
the Fund at any time. NAM will consider the financial condition of the corporation (e.g.,
earning power, cash flow, and other liquidity measures) and will continuously monitor the
corporations ability to meet all of its financial obligations, because the Funds liquidity
might be impaired if the corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated in the highest
categories by a major rating agency
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and which mature within one year of the date of purchase or carry a variable or
floating rate of interest.
Short-Term Tax-Exempt Municipal Securities
. Short-term tax-exempt municipal securities are
securities that are exempt from regular federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt municipal income securities are defined to
include, without limitation, the following:
Bond Anticipation Notes (BANs) are usually general obligations of state and local
governmental issuers which are sold to obtain interim financing for projects that will eventually
be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to
meet its obligations on its BANs is primarily dependent on the issuers access to the long-term
municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay
the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to finance the
current operations of such governments. Repayment is generally to be derived from specific future
tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers
capacity to raise taxes due to, among other things, a decline in its tax base or a rise in
delinquencies, could adversely affect the issuers ability to meet its obligations on outstanding
TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the
expectation that future revenues from a designated source will be used to repay the notes. In
general, they also constitute general obligations of the issuer. A decline in the receipt of
projected revenues, such as anticipated revenues from another level of government, could adversely
affect an issuers ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other obligations could affect
the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects.
Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies, such as those described
above to commercial banks as evidence of borrowings. The purposes for which the notes are issued
are varied but they are frequently issued to meet short-term working capital or capital-project
needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (Municipal Paper) represent very short-term unsecured,
negotiable promissory notes issued by states, municipalities and their agencies. Payment of
principal and interest on issues of municipal paper may be made from various sources, to the extent
the funds are available therefrom. Maturities of municipal paper generally will be shorter than
the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of Municipal
Paper.
Certain municipal securities may carry variable or floating rates of interest whereby the rate
of interest is not fixed but varies with changes in specified market rates or indices, such as a
bank prime rate or a tax-exempt money market index.
While the various types of notes described above as a group represent the major portion of the
short-term tax-exempt note market, other types of notes are available in the marketplace and the
Fund may invest in such other types of notes to the extent permitted under its investment
objectives, policies and limitations. Such notes may be issued for different purposes and may be
secured differently from those mentioned above.
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Illiquid Securities
The Fund may invest in securities and other instruments that, at the time of investment, are
illiquid (i.e., securities that are not readily marketable). For this purpose, illiquid securities
may include, but are not limited to, restricted securities (securities the disposition of which is
restricted under the federal securities laws), securities that may only be resold pursuant to Rule
144A under the Securities Act, that are deemed to be illiquid, and certain repurchase agreements.
The Fund does not intend to invest more than 50% of its Managed Assets in illiquid securities. The
Board of Trustees or its delegate has the ultimate authority to determine which securities are
liquid or illiquid. The assets used to cover OTC derivatives used by the Fund will be considered
illiquid until the OTC derivatives are sold to qualified dealers who agree that the Fund may
repurchase them at a maximum price to be calculated by a formula set forth in an agreement. The
cover for an OTC derivative subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic value of the
derivative. The Board of Trustees has delegated to NAM the day-to-day determination of the
illiquidity of any security held by the Fund, although it has retained oversight and ultimate
responsibility for such determinations. No definitive liquidity criteria are used. The Board of
Trustees has directed NAM when making liquidity determinations to look for such factors as (i) the
nature of the market for a security (including the institutional private resale market; the
frequency of trades and quotes for the security; the number of dealers willing to purchase or sell
the security; the amount of time normally needed to dispose of the security; and the method of
soliciting offers and the mechanics of transfer), (ii) the terms of certain securities or other
instruments allowing for the disposition to a third party or the issuer thereof (e.g., certain
repurchase obligations and demand instruments), and (iii) other relevant factors.
Restricted securities may be sold only in privately negotiated transactions or in a public
offering with respect to which a registration statement is in effect under the Securities Act.
Where registration is required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision to sell and the time
the Fund may be permitted to sell a security under an effective registration statement. If, during
such a period, adverse market conditions were to develop, the Fund might obtain a less favorable
price than that which prevailed when it decided to sell. Illiquid securities will be priced at
fair value as determined in good faith by the Board of Trustees or its delegatee. If, through the
appreciation of illiquid securities or the depreciation of liquid securities, the Fund should be in
a position where more than 50% of the value of its net assets is invested in illiquid securities,
including restricted securities that are not readily marketable, the Fund will take such steps as
are deemed advisable by NAM, if any, to protect liquidity.
Inverse Floating Rate Securities
The Fund may invest up to 10% of its Managed Assets (up to 15% during its initial invest-up
period) in municipal securities whose coupons vary inversely with changes in short-term tax-exempt
interest rates and which economically represent a leveraged investment in an underlying municipal
bond, which may increase the effective leverage of the Fund. The Fund will invest in inverse
floating rate securities as part of its regular investment program in order to enhance its ability
to achieve the Funds investment objectives. These securities present special risks for two
reasons: (i) if short-term interest rates rise (fall), the income the Fund earns on the inverse
floating rate security will fall (rise); and (ii) if long-term interest rates rise (fall), the
value of the inverse floating rate security will fall (rise) more than the value of the underlying
bond because of the leveraged nature of the investment.
Inverse floating rate securities typically are created by depositing a fixed-rate municipal
bond in a special purpose trust created by a broker-dealer. The trust in turn issue
(a) floating-rate certificates to short-term investors, in an amount equal to a fraction of the par
amount or market value of the deposited
S-14
bonds, which certificates typically pay short-term tax-exempt interest rates and (b) inverse
floating-rate certificates (sometimes referred to as an inverse floaters or residual interest
bonds) to investors interested in gaining leveraged investment exposure to a long-term municipal
bond. The holder of the inverse floater in most circumstances bears substantially all of the price
risk associated with the underlying bond.
These securities generally are illiquid. The Fund will seek to buy these securities at
attractive values and yields that more than compensate the funds for their higher income and price
volatility and reduced liquidity.
When-Issued and Delayed Delivery Transactions
The Fund may purchase and sell securities on a when-issued or delayed delivery basis, making
payment or taking delivery at a later date, normally within 15 to 45 days of the trade date. On
such transactions, the payment obligation and the interest rate are fixed at the time the purchaser
enters into the commitment. Beginning on the date the Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund is required under the rules of the
SEC to maintain in a separate account liquid assets, consisting of cash, cash equivalents or liquid
securities having a market value at all times of at least equal to the amount of any delayed
payment commitment. Income generated by any such assets that provide taxable income for U.S.
federal income tax purposes is includable in the taxable income of the Fund. The Fund may enter
into contracts to purchase securities on a forward basis (i.e., where settlement will occur more
than 60 days from the date of the transaction) only to the extent that the Fund specifically
collateralizes such obligations with a security that is expected to be called or mature within 60
days before or after the settlement date of the forward transaction. The commitment to purchase
securities on a when-issued, delayed delivery or forward basis may involve an element of risk
because no interest accrues on the bonds prior to settlement and at the time of delivery the market
value may be less than their cost.
Other Investments
Zero Coupon and Payment-In-Kind Securities. The Funds investments in debt securities may be
in the form of a zero coupon bond. Zero coupon bonds are debt obligations that do not entitle the
holder to any periodic payments of interest for the entire life of the obligation. When held to
its maturity, its return comes from the difference between the purchase price and its maturity
value. Payment-in-kind securities (PIKs) pay dividends or interest in the form of additional
securities of the issuer, rather than in cash. Each of these instruments is typically issued and
traded at a deep discount from its face amount. The amount of the discount varies depending on
such factors as the time remaining until maturity of the securities, prevailing interest rates, the
liquidity of the security and the perceived credit quality of the issuer. The market prices of
zero coupon bonds and PIKs generally are more volatile than the market prices of debt instruments
that pay interest currently and in cash and are likely to respond to changes in interest rates to a
greater degree than do other types of securities having similar maturities and credit quality. In
order to satisfy a requirement for qualification to be taxed as a regulated investment company
under the Code (as defined under Federal Income Tax Matters), an investment company, such as the
Fund, must distribute each year at least 90% of its investment company taxable income (as described
under Federal Income Tax Matters), including the original issue discount accrued on zero coupon
bonds and PIKs. Because the Fund will not on a current basis receive cash payments from the issuer
of these securities in respect of any accrued original issue discount, in some years the Fund may
have to distribute cash obtained from selling other portfolio holdings of the Fund in order to
avoid unfavorable tax consequences. In some circumstances, such sales might be necessary in order
to satisfy cash distribution requirements to its Common Shareholders even though investment
considerations might otherwise make it undesirable for the Fund to sell securities at such time.
Under many market conditions,
S-15
investments in zero coupon bonds and PIKs may be illiquid, making it difficult for the Fund to
dispose of them or determine their current value.
Defensive Position; Invest-Up Period
During temporary defensive periods or in order to keep the Funds cash fully invested, the
Fund may deviate from its investment objectives and may not be able to achieve its investment
objectives. For a more complete discussion of the Funds portfolio composition, see the Funds
Prospectus under The Funds Investments.
Other Investment Companies
The Fund may invest up to 10% of its Managed Assets in securities of other open- or closed-end
investment companies (including exchange-traded funds (often referred to as ETFs)) that invest
primarily in municipal securities of the types in which the Fund may invest directly. In addition,
the Fund may invest a portion of its Managed Assets in pooled investment vehicles (other than
investment companies) that invest primarily in municipal securities of the types in which the Fund
may invest directly. The Fund generally expects that it may invest in other investment companies
and/or other pooled investment vehicles either during periods when it has large amounts of
uninvested cash, such as the period shortly after the Fund receives the proceeds of the offering of
its MuniPreferred shares, or during periods when there is a shortage of attractive, high-yielding
municipal securities available in the market. As an investor in an investment company, the Fund
will bear its ratable share of that investment companys expenses, and would remain subject to
payment of the Funds advisory and administrative fees with respect to assets so invested. Common
Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in
other investment companies. NAM will take expenses into account when evaluating the investment
merits of an investment in the investment company relative to available municipal security
instruments. In addition, the securities of other investment companies may be leveraged and
therefore will be subject to the same leverage risks described in the Funds Prospectus. As
described in the Funds Prospectus, the net asset value and market value of leveraged shares will
be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated
by unleveraged shares.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the Funds investment objectives. In
addition, a security may be sold and another of comparable quality purchased at approximately the
same time to take advantage of what NAM believes to be a temporary price disparity between the two
securities. Temporary price disparities between two comparable securities may result from supply
and demand imbalances where, for example, a temporary oversupply of certain securities may cause a
temporarily low price for such securities, as compared with other securities of like quality and
characteristics. A security may also be sold when NAM anticipates a change in the price of such
security, NAM believes the price of a security has reached or is near a realistic maximum, or there
are other securities that NAM believes are more attractive given the Funds investment objectives.
The Fund may engage in portfolio trading when considered appropriate, but short-term trading
will not be used as the primary means of achieving the Funds investment objectives. Although the
Fund cannot accurately predict its annual portfolio turnover rate, it is generally not expected to
exceed 25% under normal circumstances. However, there are no limits on the Funds rate of
portfolio turnover, and investments may be sold without regard to length of time held when, in
NAMs opinion, investment considerations warrant such action. A higher portfolio turnover rate
would result in correspondingly greater brokerage commissions and other transactional expenses that
are borne by the Fund. These commissions and expenses will be reflected in the Funds total
return. In addition, high portfolio turnover
S-16
may result in the realization of net short-term capital gains by the Fund which, when
distributed to shareholders, will be taxable as ordinary income. See Federal Income Tax Matters.
MANAGEMENT OF THE FUND
Trustees and Officers
The management of the Fund, including general supervision of the duties performed for the Fund
under the investment management agreement with NAM (the management agreement), is the
responsibility of the Board of Trustees of the Fund. The number of trustees of the Fund is
currently set at eight. None of the trustees who are not interested persons of the Fund has ever
been a director or employee of, or consultant to, Nuveen, NAM or their affiliates. The Board of
Trustees is divided into three classes, Class I, Class II and Class III, the Class II trustees
serving until the 2008 annual meeting, the Class III trustees serving until the 2009 annual meeting
and the Class I trustees serving until the 2010 annual meeting, in each case until their respective
successors are elected and qualified, as described below. Currently, Timothy R. Schwertfeger,
Judith M. Stockdale and Carole E. Stone are slated in Class I, William C. Hunter and David J.
Kundert are slated in Class II and Robert P. Bremner, Jack B. Evans, and William J. Schneider are
slated in Class III. The officers of the Fund serve annual terms and are elected on an annual
basis. The names and business addresses of the trustees and officers of the Fund, their principal
occupations and other affiliations during the past five years, the number of portfolios each
oversees and other directorships they hold are set forth below.
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Positions and Offices
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Number of
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with the Fund and
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Principal Occupations, Including
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Portfolios in Fund
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Year First Elected or
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Other Directorships Held, During
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Complex Overseen by
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Name and Address
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Birthdate
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Appointed
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Past Five Years
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Trustee
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Trustee who is an interested person of the Fund:
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Timothy R.
Schwertfeger*
333 West Wacker Drive
Chicago, IL 60606
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03/28/49
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Chairman of the Board
and Trustee, 2007
Class I
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Former Director
(1994-November 12, 2007),
Chairman (1996-November 12,
2007), Non-Executive
Chairman (July 1,
2007-November 12, 2007),
and Chief Executive Officer
(1996-June 30, 2007) of
Nuveen Investments, Inc.,
Nuveen Asset Management
(1997-2007) and certain
other subsidiaries of
Nuveen Investments, Inc.;
formerly, Director
(1996-2006) of
Institutional Capital
Corporation.
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177
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Robert P. Bremner
333 West Wacker Drive
Chicago, Il 60606
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8/22/40
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Lead Independent
Trustee, 2007
Class III
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Private Investor and
Management Consultant.
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177
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S-17
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Positions and Offices
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Number of
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with the Fund and
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Principal Occupations, Including
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Portfolios in Fund
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Year First Elected or
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Other Directorships Held, During
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Complex Overseen by
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Name and Address
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Birthdate
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Appointed
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Past Five Years
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Trustee
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Jack B. Evans**
333 West Wacker Drive
Chicago, IL 60606
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10/22/48
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Trustee, 2007
Class III
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President (since 1996), The
Hall-Perrine Foundation, a
private philanthropic
corporation; Director and
Vice Chairman, United Fire
Group, a publicly-held
company; Member of the
Board of Regents for the
State of Iowa University
System; Director, Gazette
Companies; Life Trustee,
Coe College and Iowa
College Foundation; Member
of the Advisory Council of
the Department of Finance
in the Tippie College of
Business, University of
Iowa; formerly, Director,
Alliant Energy; formerly,
Director, Federal Reserve
Bank of Chicago; formerly,
President and Chief
Operating Officer, SCI
Financial Group, Inc., a
regional financial services
firm.
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177
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William C. Hunter
333 West Wacker Drive
Chicago, IL 60606
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3/6/48
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Trustee, 2007 Class II
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Dean (since July 2006),
Tippie College of Business,
University of Iowa;
formerly, Dean and
Distinguished Professor of
Finance (2003-2006), School
of Business at the
University of Connecticut;
previously, Senior Vice
President and Director of
Research (1995-2003) at the
Federal Reserve Bank of
Chicago; Director (since
1997), Credit Research
Center at Georgetown
University; Director (since
2004) of Xerox Corporation,
a publicly-held company;
Director
(May 2005-October 2005) of
SS&C Technologies, Inc.
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177
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David J. Kundert
333 West Wacker Drive
Chicago, IL 60606
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10/28/42
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Trustee, 2007 Class II
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Director, Northwestern
Mutual Wealth Management
Company; retired (since
2004) as Chairman, JPMorgan
Fleming Asset Management;
President and CEO, Banc One
Investment Advisors
Corporation; President, One
Group Mutual Funds; prior
thereto, Executive Vice
President, Bank One
Corporation; Chairman and
CEO, Banc One Investment
Management Group; Board of
Regents, Luther College;
member of the Wisconsin Bar
Association; member of
Board of Directors, Friends
of Boerner Botanical
Gardens; member of Board of
Directors, Milwaukee
Repertory Theater.
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175
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S-18
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Positions and Offices
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Number of
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with the Fund and
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Principal Occupations, Including
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Portfolios in Fund
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Year First Elected or
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Other Directorships Held, During
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Complex Overseen by
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Name and Address
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Birthdate
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Appointed
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Past Five Years
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Trustee
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William J. Schneider
333 West Wacker Drive
Chicago, IL 60606
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9/24/44
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Trustee, 2007
Class III
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Chairman, formerly, Senior
Partner and Chief Operating
Officer (retired since
2004), Miller-Valentine
Partners Ltd., a real
estate investment company;
formerly, Vice President,
Miller-Valentine Realty;
Board Member, Chair of the
Finance Committee and
Member of the Audit
Committee, Premier Health
Partners, the
not-for-profit company of
Miami Valley Hospital;
Board Member, Director,
Dayton Development
Coalition; Vice President,
Dayton Philharmonic
Orchestra Association;
Board Member, Regional
Leaders Forum, which
promotes cooperation on
economic development
issues; formerly, Member,
Community Advisory Board,
National City Bank, Dayton,
Ohio and Business Advisory
Council, Cleveland Federal
Reserve Bank.
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177
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Judith M. Stockdale
333 West Wacker Drive
Chicago, IL 60606
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12/29/47
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Trustee, 2007 Class I
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Executive Director (since
1994), Gaylord and Dorothy
Donnelley Foundation; prior
thereto, Executive Director
(1990-1994), Great Lakes
Protection Fund.
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177
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Carole E. Stone
333 West Wacker Drive
Chicago, IL 60606
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6/28/47
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Trustee, 2007 Class I
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Director, Chicago Board
Options Exchange
(since 2006); Chair New
York Racing Association
Oversight Board (since
2005);
Commissioner, New York State
Commission on Public
Authority Reform
(since 2005); formerly
Director, New York
State Division of the
Budget (2000-2004),
Chair, Public Authorities
Control Board
(2000-2004) and Director,
Local Government Assistance
Corporation (2000-2004).
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177
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S-19
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Positions and Offices
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Number of
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with the Fund and
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Principal Occupations, Including
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Portfolios in Fund
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Year First Elected or
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Other Directorships Held, During
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Complex Overseen by
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Name and Address
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Birthdate
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Appointed
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Past Five Years
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Trustee
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Officers of the Fund:
Gifford R. Zimmerman
333 West Wacker Drive
Chicago, IL 60606
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9/9/56
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Chief Administrative
Officer, 2007
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Managing Director (since
2002), Assistant Secretary
and Associate General
Counsel, formerly, Vice
President and Assistant
General Counsel, of Nuveen
Investments, LLC; Managing
Director (since 2002),
Associate General Counsel
and Assistant Secretary, of
Nuveen Asset Management;
Vice President and
Assistant Secretary of NWQ
Investment Management
Company, LLC (since 2002),
Nuveen Investments Advisers
Inc. (since 2002), Symphony
Asset Management LLC, and
NWQ Investment Management
Company, LLC (since 2003),
Tradewinds Global
Investors, LLC, and Santa
Barbara Asset Management,
LLC (since 2006); Nuveen
HydePark Group, LLC and
Richards & Tierney, Inc.
(since 2007); Managing
Director, Associate General
Counsel and Assistant
Secretary of Rittenhouse
Asset Management, Inc.
(since 2003); Managing
Director (since 2004) and
Assistant Secretary (since
1994) of Nuveen
Investments, Inc.;
Assistant Secretary (since
2003) of Symphony Asset
Management LLC; formerly,
Managing Director
(2002-2004), General
Counsel (since 1998) and
Assistant Secretary,
formerly, Vice President of
Nuveen Advisory Corp. and
Nuveen Institutional
Advisory Corp.***;
Chartered Financial
Analyst.
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177
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Williams Adams IV
333 West Wacker Drive
Chicago, IL 60606
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6/9/55
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Vice President
(since 2007)
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Executive Vice President,
U.S. Structured Products of
Nuveen Investments, LLC,
(since 1999), prior
thereto, Managing Director
of Structured Investments.
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119
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Julia L. Antonatos
333 West Wacker Drive
Chicago, Il 60606
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9/22/63
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Vice President, 2007
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Managing Director (since
2005), formerly Vice
President (since 2002) of
Nuveen Investments, LLC;
CFA charterholder.
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177
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Cedric H. Antosiewicz
333 West Wacker Drive
Chicago, IL 60606
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1/11/62
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Vice President
(since 2007)
|
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Managing Director, (since
2004), previously, Vice
President (1993-2004) of
Nuveen Investments LLC.
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119
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Michael T. Atkinson
333 West Wacker Drive
Chicago, IL 60606
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2/3/66
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Vice President and
Assistant
Secretary, 2007
|
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Vice President (since 2002)
of Nuveen Investments, LLC.
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177
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S-20
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|
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|
|
Positions and Offices
|
|
|
|
Number of
|
|
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|
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with the Fund and
|
|
Principal Occupations, Including
|
|
Portfolios in Fund
|
|
|
|
|
Year First Elected or
|
|
Other Directorships Held, During
|
|
Complex Overseen by
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Name and Address
|
|
Birthdate
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|
Appointed
|
|
Past Five Years
|
|
Trustee
|
Peter H. DArrigo
333 West Wacker Drive
Chicago, IL 60606
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|
11/28/67
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|
Vice President and
Treasurer, 2007
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|
Vice President and
Treasurer of Nuveen
Investments, LLC and Nuveen
Investments, Inc.; Vice
President and Treasurer
(1999-2004) of Nuveen
Advisory Corp. and Nuveen
Institutional Advisory
Corp.***; Vice President
and Treasurer of Nuveen
Asset Management (since
2002), Nuveen Investments
Advisers Inc. (since 2002),
NWQ Investment Management
Company, LLC. (since 2002),
Rittenhouse Asset
Management, Inc. (since
2003), Tradewinds NWQ
Global Investors, LLC
(since 2006), Santa Barbara
Asset Management, LLC
(since 2006) and Nuveen
HydePark Group, LLC and
Richards & Tierney, Inc.
(since 2007); Treasurer of
Symphony Asset Management
LLC (since 2003); Chartered
Financial Analyst.
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177
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Lorna C. Ferguson
333 West Wacker Drive
Chicago, IL 60606
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10/24/45
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Vice President, 2007
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Managing Director (since
2004), formerly, Vice
President of Nuveen
Investments, LLC; Managing
Director (since 2004)
formerly, Vice President
(1998-2004) of Nuveen
Advisory Corp. and Nuveen
Institutional Advisory
Corp.***; Managing Director
(since 2005) of Nuveen
Asset Management.
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177
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William M. Fitzgerald
333 West Wacker Drive
Chicago, IL 60606
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3/2/64
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Vice President, 2007
|
|
Managing Director (since
2002), formerly, Vice
President of Nuveen
Investments, LLC; Managing
Director (since 2001) of
Nuveen Asset Management;
Vice President (since 2002)
of Nuveen Investments
Advisers Inc.; formerly,
Managing Director
(1997-2004) of Nuveen
Advisory Corp. and Nuveen
Institutional Advisory
Corp.***; CFA
charterholder.
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177
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Stephen D. Foy
333 West Wacker Drive
Chicago, IL 60606
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5/31/54
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Vice President and
Controller, 2007
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Vice President (since 1993)
and Funds Controller (since
1998) of Nuveen
Investments, LLC; formerly,
Vice President and Funds
Controller (1998-2004) of
Nuveen Investments, Inc.;
Certified Public
Accountant.
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177
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S-21
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|
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|
|
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|
|
Positions and Offices
|
|
|
|
Number of
|
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with the Fund and
|
|
Principal Occupations, Including
|
|
Portfolios in Fund
|
|
|
|
|
Year First Elected or
|
|
Other Directorships Held, During
|
|
Complex Overseen by
|
Name and Address
|
|
Birthdate
|
|
Appointed
|
|
Past Five Years
|
|
Trustee
|
Walter M. Kelly
333 West Wacker Drive
Chicago, IL 60606
|
|
2/24/70
|
|
Vice President and
Chief Compliance
Officer, 2007
|
|
Assistant Vice President
and Assistant Secretary of
the Nuveen Funds
(2003-2006); Vice
President, formerly,
Assistant Vice President
and Assistant General
Counsel (since 2003) of
Nuveen Investments, LLC;
Vice President (since 2006)
and Assistant Secretary
(since 2003), formerly,
Assistant Vice President of
Nuveen Asset Management;
previously, Associate
(2001-2003) at the law firm
of Vedder, Price Kaufman &
Kummholz.
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177
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David J. Lamb
333 West Wacker Drive
Chicago, IL 60606
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3/22/63
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Vice President, 2007
|
|
Vice President (since 2000)
of Nuveen Investments, LLC;
Certified Public
Accountant.
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177
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|
|
Tina M. Lazar
333 West Wacker Drive
Chicago, IL 60606
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8/27/61
|
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Vice President, 2007
|
|
Vice President (since 1999)
of Nuveen Investments, LLC.
|
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177
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|
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|
|
|
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Larry W. Martin
333 West Wacker Drive
Chicago, IL 60606
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7/27/51
|
|
Vice President and
Assistant
Secretary, 2007
|
|
Vice President, Assistant
Secretary and Assistant
General Counsel of Nuveen
Investments, LLC; formerly,
Vice President and
Assistant Secretary of
Nuveen Advisory Corp. and
Nuveen Institutional
Advisory Corp.***; Vice
President (since 2005) and
Assistant Secretary of
Nuveen Investments, Inc.;
Vice President (since 2005)
and Assistant Secretary
(since 1997) of Nuveen
Asset Management; Vice
President (since 2000),
Assistant Secretary and
Assistant General Counsel
(since 1998) of Rittenhouse
Asset Management, Inc.;
Vice President and
Assistant Secretary of
Nuveen Investments Advisers
Inc. (since 2002), NWQ
Investment Management
Company, LLC (since 2002),
Symphony Asset Management
LLC (since 2003),
Tradewinds NWQ Global
Investors, LLC, Santa
Barbara Asset Management
LLC (since 2006), and of
Nuveen HydePark Group, LLC
and Richards & Tierney,
Inc. (since 2007).
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177
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S-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Positions and Offices
|
|
|
|
Number of
|
|
|
|
|
with the Fund and
|
|
Principal Occupations, Including
|
|
Portfolios in Fund
|
|
|
|
|
Year First Elected or
|
|
Other Directorships Held, During
|
|
Complex Overseen by
|
Name and Address
|
|
Birthdate
|
|
Appointed
|
|
Past Five Years
|
|
Trustee
|
Kevin J. McCarthy
333 West Wacker Drive
Chicago, IL 60606
|
|
3/26/66
|
|
Vice President and
Secretary, 2007
|
|
Vice President, Nuveen
Investments, LLC (since
2007); Vice President and
Assistant Secretary, Nuveen
Asset Management,
Rittenhouse Asset
Management, Inc., Nuveen
Investment Advisers Inc.,
Nuveen Investment
Institutional Services
Group LLC, NWQ Investment
Management Company, LLC,
Tradewinds Global
Investors, LLC, NWQ
Holdings, LLC, Symphony
Asset Management LLC, Santa
Barbara Asset Management,
LLC, Nuveen HydePark Group,
LLC and Richards & Tierney,
Inc. (since 2007); Vice
President and Assistant
General Counsel, Nuveen
Investments, Inc. (since
2007); prior thereto,
Partner, Bell, Boyd & Lloyd
LLP (1997-2007).
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177
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|
|
John V. Miller
333 West Wacker Drive
Chicago, IL 60606
|
|
4/10/67
|
|
Vice President, 2007
|
|
Managing Director (since
2007), formerly, Vice
President (2002-2007), of
Nuveen Investments, LLC;
CFA charterholder.
|
|
|
177
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James F. Ruane
333 West Wacker Drive
Chicago, IL 60606
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7/3/62
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Vice President and
Assistant
Secretary, 2007
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Vice President, Nuveen
Investments since 2007;
prior thereto, Partner,
Deloitte & Touche USA LLP
(since 2005), formerly,
senior tax manager (since
2002); Certified Public
Accountant.
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177
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*
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Interested person as defined in the 1940 Act, by reason of being the former Chairman and
Chief Executive Officer of Nuveen Investments, Inc. and having previously served in various
other capacities with Nuveen Investments, Inc. and its subsidiaries. It is expected that
Mr. Schwertfeger will resign from the Board of Trustees by the end of the second quarter of
2008.
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**
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As a result of his ownership of securities issued by Wells Fargo & Co., the parent company of
Wells Fargo Securities, LLC, one of the principal underwriters of the Fund, the Fund believes
that Mr. Evans may be deemed to be an interested person for as long as Wells Fargo Securities,
LLC serves as principal underwriter to the Fund and, therefore, for purposes of this offering
he is being treated as an interested person. Mr. Evans owns less than 1% of such securities
outstanding and has abstained from voting on any items involving the appointment of Wells
Fargo Securities, LLC as principal underwriter to the Fund.
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***
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Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp. were reorganized into Nuveen
Asset Management, effective January 1, 2005.
|
The Board of Trustees has five standing committees: the executive committee, the audit
committee, the nominating and governance committee, the dividend committee and the compliance, risk
management and regulatory oversight committee. Because the Fund is newly organized, none of the
committees have met during the Funds last fiscal year. The executive committee will meet once
prior to the commencement of the Funds operations.
Robert P. Bremner, Judith M. Stockdale and Timothy R. Schwertfeger, Chair, serve as members of
the executive committee of the Board of Trustees of the Fund. The executive committee, which meets
S-23
between regular meetings of the Board of Trustees, is authorized to exercise all of the powers
of the Board of Trustees.
The audit committee monitors the accounting and reporting policies and practices of the Fund,
the quality and integrity of the financial statements of the Fund, compliance by the Fund with
legal and regulatory requirements and the independence and performance of the external and internal
auditors. The members of the audit committee are Robert P. Bremner, Jack B. Evans, David J.
Kundert, Chair, and William J. Schneider.
The nominating and governance committee is responsible for Board selection and tenure;
selection and review of committees; and Board education and operations. In addition, the committee
monitors performance of legal counsel and other service providers; periodically reviews and makes
recommendations about any appropriate changes to trustee compensation; and has the resources and
authority to discharge its responsibilitiesincluding retaining special counsel and other experts
or consultants at the expense of the Fund. In the event of a vacancy on the Board, the nominating
and governance committee receives suggestions from various sources (including shareholders) as to
suitable candidates. Suggestions should be sent in writing to Lorna Ferguson, Manager of Board
Relations, Nuveen Investments, LLC, 333 West Wacker Drive, Chicago, IL 60606. The nominating and
governance committee sets appropriate standards and requirements for nominations for new trustees
and reserves the right to interview all candidates and to make the final selection of any new
trustees. The members of the nominating and governance committee are Robert P. Bremner, Chair,
Jack B. Evans, William C. Hunter, David J. Kundert, William J. Schneider, Judith M. Stockdale and
Carole E. Stone.
The dividend committee is authorized to declare distributions on the Funds shares including,
but not limited to, regular and special dividends, capital gains and ordinary income distributions.
The members of the dividend committee are Timothy R. Schwertfeger, Chair, Jack B. Evans and
Judith M. Stockdale.
The compliance, risk management and regulatory oversight committee is responsible for the
oversight of compliance issues, risk management, and other regulatory matters affecting the Fund
that are not otherwise the jurisdiction of the other board committees. As part of its duties
regarding compliance matters the committee is responsible for the oversight of the Pricing
Procedures of the Fund and the Valuation Group. The members of the compliance, risk management and
regulatory oversight committee are William J. Schneider, Chair, William C. Hunter, Judith M.
Stockdale and Carole E. Stone.
The independent directors of the Nuveen Fund Board have appointed Robert P. Bremner as their
Lead Director. The role of the Lead Director is one of coordination and assuring the appropriate,
effective and efficient functioning of the Board and its processes. Specific responsibilities may
include organizing and leading independent director sessions, facilitating and ensuring an
appropriate level of communication among the independent directors, leading the assessment of the
Boards effectiveness, and working with NAMs staff and outside counsel on Board meeting agendas,
Board material and workshops for directors to ensure that the priorities of the independent
directors are addressed.
The trustees are trustees of 58 Nuveen open-end funds and 119 closed-end funds, except
David J. Kundert is trustee of 58 Nuveen open-end funds and 117 closed-end funds managed by NAM.
None of the independent trustees, nor any of their immediate family members, has ever been a
director, officer, or employee of, or a consultant to, NAM, Nuveen or their affiliates. In
addition, none of the independent trustees owns beneficially or of record, any security of NAM,
Nuveen, or any person (other than a registered investment company) directly or indirectly
controlling, controlled by or under common control with NAM or Nuveen.
S-24
`
Class I trustees will serve until the annual meeting of shareholders in 2010; Class II
trustees will serve until the annual meeting of shareholders in 2008; and Class III trustees will
serve until the annual meeting of shareholders in 2009. As each trustees term expires,
shareholders will be asked to elect trustees and such trustees shall be elected for a term expiring
at the time of the third succeeding annual meeting subsequent to their election or thereafter in
each case when their respective successors are duly elected and qualified. These provisions could
delay for up to two years the replacement of a majority of the Board of Trustees. See the Funds
Prospectus under Certain Provisions in the Declaration of Trust and By-Laws. If issued, holders
of MuniPreferred Shares, voting as a separate class, will be entitled to elect two of the Funds
trustees. Holders of MuniPreferred Shares, if issued, will also be entitled to elect a majority of
the Funds trustees under certain circumstances. See Description of SharesMuniPreferred
SharesVoting Rights.
The following table sets forth the dollar range of equity securities beneficially owned by
each trustee as of December 31, 2006:
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Aggregate Dollar Range of
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Equity Securities in All
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Registered Investment
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Dollar Range of
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Companies Overseen by
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Equity Securities in
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Trustee in Family of
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Name of Trustee
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the Fund
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Investment Companies
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Timothy R. Schwertfeger
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None
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Over $100,000
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Robert P. Bremner
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None
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Over $100,000
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Jack B. Evans
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None
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Over $100,000
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William C. Hunter
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None
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Over $100,000
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David J. Kundert
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None
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Over $100,000
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William S. Schneider
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None
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Over $100,000
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Judith M. Stockdale
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None
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Over $100,000
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Carole E. Stone
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None
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None
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No trustee who is not an interested person of the Fund owns beneficially or of record, any
security of NAM, Nuveen or any person (other than a registered investment company) directly or
indirectly controlling, controlled by or under common control with NAM or Nuveen.
The following table sets forth estimated compensation to be paid by the Fund projected during
the Funds first full fiscal year after commencement of operation. The Fund does not have a
retirement or pension plan. The officers and trustees affiliated with Nuveen serve without any
compensation from the Fund. The Fund has a deferred compensation plan (the Plan) that permits
any trustee who is not an interested person of the Fund to elect to defer receipt of all or a
portion of his or her compensation as a trustee. The deferred compensation of a participating
trustee is credited to a book reserve account of the Fund when the compensation would otherwise
have been paid to the trustee. The value of the trustees deferral account at any time is equal to
the value that the account would have had if contributions to the account had been invested and
reinvested in shares of one or more of the eligible Nuveen funds. At the time for commencing
distributions from a trustees deferral account, the trustee may elect to receive distributions in
a lump sum or over a period of five years. The Fund will not be liable for any other funds
obligations to make distributions under the Plan.
S-25
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Amount of Total
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Aggregate
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Total Compensation
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Compensation That
|
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Compensation from
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from Fund and Fund
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Has Been
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Trust
(1)
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Complex
(2)
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Deferred
(3)
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Timothy R. Schwertfeger
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$
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$
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Robert P. Bremner
(4)
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Jack B. Evans
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William C. Hunter
|
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|
|
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David J. Kundert
|
|
|
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William J. Schneider
|
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Judith M. Stockdale
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|
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Carole E. Stone
(5)
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(1)
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Based on the estimated compensation to be earned by the independent trustees for the 12-month
period ending 12/31/2007, representing the Funds first full fiscal year, for services to the
Fund.
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(2)
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Based on the compensation paid to the trustees for the one year period ending 12/31/2006 for
services to the Nuveen open-end and closed-end funds. Includes deferred fees. Pursuant to a
deferred compensation agreement with certain of the Nuveen funds, deferred amounts are treated
as though an equivalent dollar amount has been invested in shares of one or more eligible
Nuveen funds.
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(3)
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Total deferred fees for the Funds (including the return from the assumed investment in the
eligible Nuveen funds) payable are stated above.
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(4)
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Robert P. Bremner was appointed Lead Director of the Board of Trustees. The Lead Director
receives compensation of $25,000 annually, effective January 1, 2007.
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(5)
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Carole E. Stone was appointed to the Board of Trustees of the Nuveen funds, effective
January 1, 2007.
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The Fund has no employees. Its officers are compensated by Nuveen Investments, Inc. (Nuveen
Investments) or its affiliates.
INVESTMENT ADVISER
NAM, the Funds investment adviser, is responsible for determining the Funds overall
investment strategy and its implementation. NAM also is responsible for managing operations and
the Funds business affairs and providing certain clerical, bookkeeping and other administrative
services to the Fund. For additional information regarding the management services performed by
NAM, including biographies of each of the Funds portfolio managers and further information about
the investment management agreement between the Fund and NAM, see Management of the Fund in the
Funds Prospectus.
NAM, 333 West Wacker Drive, Chicago, Illinois 60606, a registered investment adviser, is a
wholly-owned subsidiary of Nuveen Investments. According to data from Thomson Wealth Management,
Nuveen Investments is the leading sponsor of closed-end exchange-traded funds as measured by number
of funds (
) and the amount of fund assets under management (approximately
$
billion) as of
,
200
. Founded in 1898, Nuveen Investments and its affiliates had approximately
$
billion of assets under management as of
, 200
, of which $
billion was in
municipal securities. Regarding this $
billion of tax-exempt municipal securities,
approximately $
billion, $
billion, $
billion and $
billion represent assets
relating to closed-end bond municipal funds, open-end municipal bond funds, retail municipal
managed accounts and institutional municipal managed accounts, respectively.
Nuveen Investments provides investment services to financial advisors serving high-net-worth
clients and institutional clients. Nuveen Investments markets its capabilitieswhich include
tax-free investing, separately-managed accounts and market-neutral alternative investment
portfoliosunder four distinct brands: Nuveen, NWQ, Rittenhouse and Symphony.
S-26
On June 20, 2007, Nuveen Investments announced that it had entered into a definitive Agreement
and Plan of Merger to be acquired by an investor group majority-led by Madison Dearborn Partners,
LLC. Madison Dearborn Partners, LLC is a private equity investment firm based in Chicago,
Illinois. The merger was consummated on November 13, 2007.
The consummation of the merger was deemed to be an assignment (as defined in the 1940 Act)
of the investment management agreement between the Fund and NAM, and resulted in the automatic
termination of the agreement. The Board of Trustees of the Fund considered and approved a new
ongoing investment management agreement with NAM. The new ongoing agreement was approved by the
Funds initial sole shareholder, NAM, and took effect November 13, 2007.
The
investor group led by Madison Dearborn Partners, LLC includes
affiliates of one of the underwriters.
As a result, one of the underwriters is an indirect affiliated person (as that term is defined in the 1940
Act) of the Fund. Certain conflicts of interest may arise as a result of such indirect
affiliation. For example, the Fund is generally prohibited from entering into principal
transactions with one of the underwriters and certain of its affiliates. NAM has or will adopt policies and
procedures that address investment activities of, and other arrangements involving, NAM that may
give rise to certain conflicts of interest. NAM does not believe that any such prohibition or
limitation will have a materially adverse effect on the Funds ability to pursue its investment
objectives and policies.
PORTFOLIO MANAGERS
Unless otherwise indicated, the information below is provided as of the date of this Statement
of Additional Information.
Portfolio Management Team
. John V. Miller and John Wilhelm are the Portfolio Managers of the
Fund at NAM and have primary responsibility for the day-to-day implementation of the Funds
investment strategy.
Other Accounts Managed
. In addition to managing the Fund, Mr. Miller is also primarily
responsible for the day-to-day portfolio management of the following accounts. Information is
provided as of ___, 200___ unless otherwise indicated:
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Type of Account Managed
|
|
Number of Accounts
|
|
Assets*
|
Registered Investment Company
|
|
|
|
|
|
$
|
|
|
Other Pooled Investment
|
|
|
|
|
|
|
|
|
Other Accounts
|
|
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|
|
|
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|
In addition to managing the Fund, Mr. Wilhelm is also primarily responsible for the day-to-day
portfolio management of the following accounts. Information is provided as of
, 200
unless otherwise indicated:
|
|
|
|
|
|
|
|
|
Type of Account Managed
|
|
Number of Accounts
|
|
Assets*
|
Registered Investment Company
|
|
|
|
|
|
$
|
|
|
Other Pooled Investment
|
|
|
|
|
|
|
|
|
Other Accounts
|
|
|
|
|
|
|
|
|
|
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|
*
|
|
None of the assets in these accounts are subject to an advisory fee based on performance.
|
S-27
Compensation
. The Funds Portfolio Managers participate in a highly competitive compensation
program that is designed to attract and retain outstanding people. The total compensation program
includes base salary and cash incentives. These elements reflect individual performance and the
performance of the business as a whole. Base salaries are fixed for each portfolio manager. Cash
bonuses are variable and focused extensively on the profitability of the business as a whole as
well as portfolio investment performance. Base salaries are not based on the performance of any
account. Cash bonuses are based on the profitability of the business as a whole as well as the
investment performance of all accounts managed by the portfolio manager. Portfolio Manager
compensation is not based on the value of assets held in the Funds portfolio.
Conflicts of Interest
. Actual or apparent conflicts of interest may arise when a portfolio
manager has day-to-day management responsibilities with respect to more than one account. More
specifically, a portfolio manager who manages multiple accounts is presented with the following
potential conflicts:
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|
|
The management of multiple accounts may result in a portfolio manager
devoting unequal time and attention to the management of each account. NAM
seeks to manage such competing interests for the time and attention of
portfolio managers by having portfolio managers focus on a particular
investment discipline. Most accounts managed by a portfolio manager in a
particular investment strategy are managed using the same investment models.
|
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|
If a portfolio manager identifies a limited investment opportunity that may
be suitable for more than one account, an account may not be able to take full
advantage of that opportunity due to an allocation of filled purchase or sale
orders across all eligible accounts. To deal with these situations, NAM has
adopted procedures for allocating portfolio transactions across multiple
accounts.
|
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|
|
With respect to many of its clients accounts, NAM determines which broker
to use to execute transaction orders, consistent with its duty to seek best
execution of the transaction. However, with respect to certain other accounts,
NAM may be limited by the client with respect to the selection of brokers or
may be instructed to direct trades through a particular broker. In these
cases, NAM may place separate, non-simultaneous, transactions for a Fund and
other accounts, which may temporarily affect the market price of the security
or the execution of the transaction, or both, to the detriment of the Fund or
the other accounts.
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The Fund is subject to different regulation than the other pooled investment
vehicles and other accounts managed by the portfolio manager. As a consequence
of this difference in regulatory requirements, the Fund may not be permitted to
engage in all the investment techniques or transactions or to engage in these
transactions to the same extent as the other accounts managed by the portfolio
manager. Finally, the appearance of a conflict of interest may arise where NAM
has an incentive, such as a performance-based management fee, which relates to
the management of some accounts, with respect to which a portfolio manager has
day-to-day management responsibilities.
|
NAM has adopted certain compliance procedures that are designed to address these types of conflicts
common among investment managers. However, there is no guarantee that such procedures will detect
each and every situation in which a conflict arises.
S-28
Beneficial Ownership of Securities
. [As of the date of this Statement of Additional
Information, neither Mr. Miller nor Mr. Wilhelm beneficially own any stock issued by the Fund.]
Unless earlier terminated as described below, the Funds management agreement with NAM will
remain in effect until August 1, 2009. The management agreement continues in effect from year to
year so long as such continuation is approved at least annually by (1) the Board of Trustees or the
vote of a majority of the outstanding voting securities of the Fund, and (2) a majority of the
trustees who are not interested persons of any party to the management agreement, cast in person at
a meeting called for the purpose of voting on such approval. The management agreement may be
terminated at any time, without penalty, by either the Fund or NAM upon 60 days written notice,
and is automatically terminated in the event of its assignment as defined in the 1940 Act. See
also Investment Adviser for a discussion of the merger which, if consummated, will result in the
automatic termination of the Funds management agreement. A new management agreement, if approved
as described, would remain in effect until.
The Fund, NAM, Nuveen and other related entities have adopted codes of ethics that essentially
prohibit certain of their personnel, including the Funds portfolio managers, from engaging in
personal investments that compete or interfere with, or attempt to take advantage of a clients,
including the Funds, anticipated or actual portfolio transactions, and are designed to assure that
the interests of clients, including Fund shareholders, are placed before the interests of personnel
in connection with personal investment transactions. Text-only versions of the codes of ethics of
the Fund, NAM and Nuveen can be viewed online or downloaded from the EDGAR Database on the SECs
internet web site at www.sec.gov. You may also review and copy those documents by visiting the
SECs Public Reference Room in Washington, DC. Information on the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission at 202-942-8090.
In addition, copies of those codes of ethics may be obtained, after mailing the appropriate
duplicating fee, by writing to the SECs Public Reference Section, 100 F Street, N.E., Washington,
DC 20549 or by e-mail request at publicinfo@sec.gov.
The Fund invests its assets primarily in municipal securities. On rare occasions a Fund may
acquire, directly or through a special purpose vehicle, equity securities of certain issuers whose
securities the Fund already owns when such securities have deteriorated or are expected shortly to
deteriorate significantly in credit quality. The purpose of acquiring equity securities generally
will be to acquire control of the issuer and to seek to prevent the credit deterioration or
facilitate the liquidation or other workout of the distressed issuers credit problem. In the
course of exercising control of a distressed issuer, NAM may pursue the Funds interests in a
variety of ways, which may entail negotiating and executing consents, agreements and other
arrangements, and otherwise influencing the management of the issuer. NAM does not consider such
activities proxy voting for purposes of Rule 206(4)-6 under the Investment Advisers Act of 1940,
but nevertheless provides reports to the Funds Board of Trustees on its control activities on a
quarterly basis.
In the rare event that an issuer were to issue a proxy or that the Fund were to receive a
proxy issued by a cash management security, NAM would either engage an independent third party to
determine how the proxy should be voted or vote the proxy with the consent, or based on the
instructions, of the Funds Board of Trustees or its representative. A member of NAMs legal
department would oversee the administration of the voting, and ensure that records were maintained
in accordance with Rule 206(4)-6 of the Investment Advisers Act of 1940, as amended, reports were
filed with the Securities and Exchange Commission on Form N-PX, and the results provided to the
Funds Board of Trustees and made available to shareholders as required by applicable rules.
In the event of a conflict of interest that might arise when voting proxies for the Fund, NAM will
defer to the recommendation of an independent third party engaged to determine how the proxy should
be voted, or, alternatively, members of NAMs legal and compliance departments, in consultation
with the
S-29
Board of Trustees, will examine the conflict of interest and seek to resolve such conflict in
the best interest of the Fund. If a member of NAMs legal or compliance department or the Board of
Trustees has a personal conflict of interest, that member will refrain from participating in the
consultation.
Information regarding how the Fund voted proxies relating to portfolio securities during the
most recent twelve-month period ended June 30 will be available without charge by calling
(800) 257-8787 or by accessing the Securities and Exchange Commissions website at
http://www.sec.gov.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, NAM is responsible for decisions to
purchase and sell securities for the Fund, the negotiation of the prices to be paid and the
allocation of transactions among various dealer firms. Transactions on stock exchanges involve the
payment by the Fund of brokerage commissions. There generally is no stated commission in the case
of securities traded in the over-the-counter market but the price paid by the Fund usually includes
an undisclosed dealer commission or mark-up. Transactions in the over-the-counter market can also
be placed with broker-dealers who act as agents and charge brokerage commissions for effecting
over-the-counter transactions. The Fund may place its over-the-counter transactions either
directly with principal market makers, or with broker-dealers if that is consistent with NAMs
obligation to obtain best qualitative execution. In certain instances, the Fund may make purchases
of underwritten issues at prices that include underwriting fees.
Portfolio securities may be purchased directly from an underwriter or in the over-the-counter
market from the principal dealers in such securities, unless it appears that a better price or
execution may be obtained through other means. Portfolio securities will not be purchased from
Nuveen or its affiliates or affiliates of NAM except in compliance with the 1940 Act.
It is NAMs policy to seek the best execution under the circumstances of each trade. NAM will
evaluate price as the primary consideration, with the financial condition, reputation and
responsiveness of the dealer considered secondary in determining best execution. Given the best
execution obtainable, it will be NAMs practice to select dealers that, in addition, furnish
research information (primarily credit analyses of issuers and general economic reports) and
statistical and other services to NAM. It is not possible to place a dollar value on information
and statistical and other services received from dealers. Since it is only supplementary to NAMs
own research efforts, the receipt of research information is not expected to reduce significantly
NAMs expenses. While NAM will be primarily responsible for the placement of the business of the
Fund, NAMs policies and practices in this regard must be consistent with the foregoing and will,
at all times, be subject to review by the Board of Trustees of the Fund.
NAM may manage other investment accounts and investment companies for other clients that may
invest in the same types of securities as the Fund and that may have investment objectives similar
to those of the Fund. NAM seeks to allocate portfolio transactions equitably whenever concurrent
decisions are made to purchase or sell assets or securities by the Fund and another advisory
account. If an aggregated order cannot be filled completely, allocations will generally be made on
a pro rata basis. An order may not be allocated on a pro rata basis where, for example
(i) consideration is given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account with specialized
investment policies that coincide with the particulars of a specific investment; (iii) pro rata
allocation would result in odd-lot or de minimis amounts being allocated to a portfolio or other
client; or (iv) where NAM reasonably determines that departure from a pro rata allocation is
advisable. There may also be instances where the Fund will not participate at all in a transaction
that is allocated among other accounts. While these allocation procedures could have a detrimental
effect on the price or amount of the securities available to the Fund from time to time, it is the
S-30
opinion of the Board of Trustees that the benefits available from NAMs management outweigh
any disadvantage that may arise from NAMs larger management activities and its need to allocate
securities.
NET ASSET VALUE
The Funds net asset value per share is determined as of the close of regular session trading
(normally 4:00 p.m. eastern time) on each day the New York Stock Exchange is open for business.
Net asset value is calculated by taking the fair value of the Funds total assets, including
interest or dividends accrued but not yet collected, less all liabilities, and dividing by the
total number of shares outstanding. The result, rounded to the nearest cent, is the net asset
value per share.
In determining net asset value, expenses are accrued and applied daily and securities and
other assets for which market quotations are available are valued at market value. The prices of
municipal bonds are provided by a pricing service and based on the mean between the bid and asked
price. When price quotes are not readily available (which is usually the case for municipal
bonds), the pricing service establishes a fair market value based on prices of comparable municipal
bonds. All valuations are subject to review by the Funds Board of Trustees or its delegate, NAM.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR MUNIPREFERRED
General
Auction Agency Agreement
. The Fund has entered into an Auction Agency Agreement (the Auction
Agency Agreement) with the Auction Agent (currently, Deutsche Bank Trust Company Americas) which
provides, among other things, that the Auction Agent will follow the Auction Procedures for
purposes of determining the Applicable Rate for shares of each Series of MuniPreferred so long as
the Applicable Rate for shares of such Series is to be based on the results of an Auction.
Broker-Dealer Agreements
. Each Auction requires the participation of one or more
Broker-Dealers. The Auction Agent has entered into agreements (collectively, the Broker-Dealer
Agreements) with several Broker-Dealers selected by the Fund, which provide for the participation
of those Broker-Dealers in Auctions for shares of MuniPreferred. See Broker-Dealers below.
Securities Depository
. The Depository Trust Company (DTC) will act as the Securities
Depository for the Agent Members (as defined below) with respect to shares of each Series of
MuniPreferred. One certificate for all of the shares of each Series of MuniPreferred will be
registered in the name of Cede & Co., as nominee of the Securities Depository. Such certificate
will bear a legend to the effect that such certificate is issued subject to the provisions
restricting transfers of shares of MuniPreferred contained in the Statement. The Fund will also
issue stop-transfer instructions to the transfer agent for shares of each Series of MuniPreferred.
Prior to the commencement of the right of holders of preferred shares to elect a majority of the
Funds trustees, as described under Description of MuniPreferred SharesVoting Rights in the
Prospectus, Cede & Co. will be the holder of record of all shares of each Series of MuniPreferred
and owners of such shares will not be entitled to receive certificates representing their ownership
interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services for its
participants (including the Agent Members), some of whom (and/or their representatives) own DTC.
DTC maintains lists of its participants and will maintain the positions (ownership interests) held
by each such participant (the Agent Member) in shares of MuniPreferred, whether for its own
account or as a nominee for another person.
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Concerning the Auction Agent
The Auction Agent is acting as agent for the Fund in connection with Auctions. In the absence
of bad faith or negligence on its part, the Auction Agent will not be liable for any action taken,
suffered, or omitted or for any error of judgment made by it in the performance of its duties under
the Auction Agency Agreement and will not be liable for any error of judgment made in good faith
unless the Auction Agent will have been negligent in ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the Existing Holders of
shares of MuniPreferred, the Auction Agents registry of Existing Holders, the results of Auctions
and notices from any Broker-Dealer (or other Person, if permitted by the Fund) with respect to
transfers described under The AuctionSecondary Market Trading and Transfer of MuniPreferred in
the Prospectus and notices from the Fund. The Auction Agent is not required to accept any such
notice for an Auction unless it is received by the Auction Agent by 3:00 p.m., New York City time,
on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to the Fund on a date
no earlier than 45 days after such notice. If the Auction Agent should resign, the Fund will use
its best efforts to enter into an agreement with a successor Auction Agent containing substantially
the same terms and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such an agreement with a
successor Auction Agent.
Broker-Dealers
The Auction Agent after each Auction for shares of MuniPreferred will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% in
the case of any Auction immediately preceding a Rate Period of less than 364 Rate Period Days, or a
percentage agreed to by the Fund and the Broker-Dealers in the case of any Auction immediately
preceding a Rate Period of 364 Rate Period Days or longer, of the purchase price of shares of
MuniPreferred placed by such Broker-Dealer at such Auction. For the purposes of the preceding
sentence, shares of MuniPreferred will be placed by a Broker-Dealer if such shares were (a) the
subject of Hold Orders deemed to have been submitted to the Auction Agent by the Broker-Dealer and
were acquired by such Broker-Dealer for its own account or were acquired by such Broker-Dealer for
its customers who are Beneficial Owners or (b) the subject of an Order submitted by such
Broker-Dealer that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a Submitted Bid of a
Potential Holder that resulted in such Potential Holder purchasing such shares as a result of the
Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more Broker-Dealer Agreements at
any time, provided that at least one Broker-Dealer Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than an affiliate of the
Fund) may submit Orders in Auctions for its own account, unless the Fund notifies all
Broker-Dealers that they may no longer do so, in which case Broker-Dealers may continue to submit
Hold Orders and Sell Orders for their own accounts. Any Broker-Dealer that is an affiliate of the
Fund may submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might have an
advantage over other Bidders because it would have knowledge of all Orders submitted by it in that
Auction; such Broker-Dealer, however, would not have knowledge of Orders submitted by other
Broker-Dealers in that Auction.
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DESCRIPTION OF COMMON SHARES
In addition to the MuniPreferred shares, the Declaration authorizes the issuance of an
unlimited number of common shares, par value of $0.01 per share. All outstanding common shares
have equal rights to the payment of dividends and the distribution of assets upon liquidation, are
fully paid and, subject to matters discussed in Certain Provisions in the Declaration of Trust,
non-assessable, and have no pre-emptive or conversion rights or rights to cumulative voting.
Whenever MuniPreferred shares are outstanding, holders of the Funds common shares will not be
entitled to receive any cash distributions from the Fund unless all accrued dividends on
MuniPreferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to MuniPreferred shares would be at least 200% after giving effect to the distributions.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances, be held personally
liable for the obligations of the Fund. However, the Declaration contains an express disclaimer of
shareholder liability for debts or obligations of the Fund and requires that notice of such limited
liability be given in each agreement, obligation or instrument entered into or executed by the Fund
or the trustees. The Declaration further provides for indemnification out of the assets and
property of the Fund for all loss and expense of any shareholder held personally liable for the
obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be unable to meet its
obligations. The Fund believes that the likelihood of such circumstances is remote.
The Declaration includes provisions that could limit the ability of other entities or persons
to acquire control of the Fund or to convert the Fund to open-end status. Specifically, the
Declaration requires a vote by holders of at least two-thirds of the common shares and
MuniPreferred shares, voting together as a single class, except as described below, to authorize
(1) a conversion of the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a Series or class of the Fund, with any corporation, association,
trust or other organization or a reorganization of the Fund, or a Series or class of the Fund,
(3) a sale, lease or transfer of all or substantially all of the Funds assets (other than in the
regular course of the Funds investment activities), (4) in certain circumstances, a termination of
the Fund, or a Series or class of the Fund or (5) removal of trustees by shareholders, and then
only for cause, unless, with respect to (1) through (4), such transaction has already been
authorized by the affirmative vote of two-thirds of the total number of trustees fixed in
accordance with the Declaration or the By-laws, in which case the affirmative vote of the holders
of at least a majority of the Funds common shares and MuniPreferred shares outstanding at the
time, voting together as a single class, is required, provided, however, that where only a
particular class or Series is affected (or, in the case of removing a trustee, when the trustee has
been elected by only one class), the required vote only by the applicable class or Series will be
required. Approval of shareholders is not required, however, for any transaction, whether deemed a
merger, consolidation, reorganization or otherwise whereby the Fund issues shares in connection
with the acquisition of assets (including those subject to liabilities) from any other investment
company or similar entity. In the case of the conversion of the Fund to an open-end investment
company, or in the case of any of the foregoing transactions constituting a plan of reorganization
which adversely affects the holders of MuniPreferred shares, the action in question will also
require the affirmative vote of the holders of at least two-thirds of the Funds MuniPreferred
shares outstanding at the time, voting as a separate class, or, if such action has been authorized
by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, the affirmative vote of the holders of at least a majority of the
Funds MuniPreferred shares outstanding at the time, voting as a separate class. None of the
foregoing provisions may be amended except by the vote
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of at least two-thirds of the common shares and MuniPreferred shares, voting together as a
single class. The votes required to approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions constituting a plan of reorganization which
adversely affects the holders of MuniPreferred shares are higher than those required by the 1940
Act. The Board of Trustees believes that the provisions of the Declaration relating to such higher
votes are in the best interest of the Fund and its shareholders.
Reference should be made to the Declaration on file with the SEC for the full text of these
provisions.
The Declaration provides that the obligations of the Fund are not binding upon the trustees of
the Fund individually, but only upon the assets and property of the Fund, and that the trustees
shall not be liable for errors of judgment or mistakes of fact or law. Nothing in the Declaration,
however, protects a trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of his office.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders will not have the
right to cause the Fund to redeem their shares. Instead, the Funds common shares will trade in
the open market at a price that will be a function of several factors, including dividend levels
(which are in turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general market and economic
conditions and other factors. Because shares of a closed-end investment company may frequently
trade at prices lower than net asset value, the Funds Board of Trustees has currently determined
that, at least annually, it will consider action that might be taken to reduce or eliminate any
material discount from net asset value in respect of common shares, which may include the
repurchase of such shares in the open market or in private transactions, the making of a tender
offer for such shares at net asset value, or the conversion of the Fund to an open-end investment
company. There can be no assurance, however, that the Board of Trustees will decide to take any of
these actions, or that share repurchases or tender offers, if undertaken, will reduce market
discount.
Notwithstanding the foregoing, at any time when the Funds MuniPreferred shares are
outstanding, the Fund may not purchase, redeem or otherwise acquire any of its common shares unless
(1) all accrued MuniPreferred shares dividends have been paid and (2) at the time of such purchase,
redemption or acquisition, the net asset value of the Funds portfolio (determined after deducting
the acquisition price of the common shares) is at least 200% of the liquidation value of the
outstanding MuniPreferred shares (expected to equal the original purchase price per share plus any
accrued and unpaid dividends thereon). The staff of the SEC currently requires that any tender
offer made by a closed-end investment company for its shares must be at a price equal to the net
asset value of such shares at the close of business on the last day of the tender offer. Any
service fees incurred in connection with any tender offer made by the Fund will be borne by the
Fund and will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the repurchase of shares
or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or
the accumulation of cash by the Fund in anticipation of share repurchases or tenders will reduce
the Funds net income. Any share repurchase, tender offer or borrowing that might be approved by
the Board of Trustees would have to comply with the Securities Exchange Act of 1934, as amended,
and the 1940 Act and the rules and regulations thereunder.
S-34
Although the decision to take action in response to a discount from net asset value will be
made by the Board of the Fund at the time it considers such issue, it is the Boards present
policy, which may be changed by the Board, not to authorize repurchases of common shares or a
tender offer for such shares if (1) such transactions, if consummated, would (a) result in the
delisting of the common shares from the New York Stock Exchange, or (b) impair the Funds status as
a regulated investment company under the Internal Revenue Code of 1986, as amended (which would
make the Fund a taxable entity, causing the Funds income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from the Fund) or as a registered
closed-end investment company under the 1940 Act; (2) the Fund would not be able to liquidate
portfolio securities in an orderly manner and consistent with the Funds investment objectives and
policies in order to repurchase shares; or (3) there is, in the Boards judgment, any (a) material
legal action or proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Fund, (b) general suspension of or limitation on prices for
trading securities on the New York Stock Exchange, (c) declaration of a banking moratorium by
Federal or state authorities or any suspension of payment by United States or state banks in which
the Fund invests, (d) material limitation affecting the Fund or the issuers of its portfolio
securities by federal or state authorities on the extension of credit by lending institutions or on
the exchange of foreign currency, (e) commencement of war, armed hostilities or other international
or national calamity directly or indirectly involving the United States, or (f) other event or
condition which would have a material adverse effect (including any adverse tax effect) on the Fund
or its shareholders if shares were repurchased. The Board of Trustees of the Fund may in the
future modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the holders of at least
two-thirds of the Funds common shares and MuniPreferred shares outstanding at the time, voting
together as a single class, and of the holders of at least two-thirds of the Funds MuniPreferred
shares outstanding at the time, voting as a separate class, provided however, that such separate
class vote shall be a majority vote if the action in question has previously been approved, adopted
or authorized by the affirmative vote of two-thirds of the total number of trustees fixed in
accordance with the Declaration or By-laws. See the prospectus under Certain Provisions in the
Declaration of Trust for a discussion of voting requirements applicable to conversion of the Fund
to an open-end company. If the Fund converted to an open-end company, it would be required to
redeem all MuniPreferred shares then outstanding, and the Funds common shares would no longer be
listed on the New York Stock Exchange. Shareholders of an open-end investment company may require
the company to redeem their shares on any business day (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such redemption charge, if any,
as might be in effect at the time of redemption. In order to avoid maintaining large cash
positions or liquidating favorable investments to meet redemptions, open-end companies typically
engage in a continuous offering of their shares. Open-end companies are thus subject to periodic
asset in-flows and out-flows that can complicate portfolio management. The Board of Trustees of
the Fund may at any time propose conversion of the Fund to an open-end company depending upon their
judgment as to the advisability of such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset value would result in an
increase in the net asset value of those shares that remain outstanding. However, there can be no
assurance that share repurchases or tenders at or below net asset value would result in the Funds
shares trading at a price equal to their net asset value. Nevertheless, the fact that the Funds
shares may be the subject of repurchase or tender offers at net asset value from time to time, or
that the Fund may be converted to an open-end company, may reduce any spread between market price
and net asset value that might otherwise exist.
In addition, a purchase by the Fund of its common shares would decrease the Funds total
assets which would likely have the effect of increasing the Funds expense ratio. Any purchase by
the Fund of
S-35
its common shares at a time when MuniPreferred shares are outstanding will increase the
leverage applicable to the outstanding common shares then remaining.
Before deciding whether to take any action if the Funds common shares trade below net asset
value, the Board of the Fund would consider all relevant factors, including the extent and duration
of the discount, the liquidity of the Funds portfolio, the impact of any action that might be
taken on the Fund or its shareholders and market considerations. Based on these considerations,
even if the Funds shares should trade at a discount, the Board of Trustees may determine that, in
the interest of the Fund and its shareholders, no action should be taken.
FEDERAL INCOME TAX MATTERS
The following is intended to be a general summary of certain U.S. federal income tax
consequences of investing in shares of MuniPreferred. It is not intended to be a complete
discussion of all such federal income tax consequences, nor does it purport to deal with all
categories of investors. Investors are advised to consult with their own tax advisors before
investing in the Fund.
The Fund intends to elect to be treated, and to qualify each year, as a regulated investment
company, under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code) and to
satisfy conditions which enable dividends on common shares and shares of MuniPreferred which are
attributable to interest on municipal obligations to be exempt from federal income tax in the hands
of owners of such stock, subject to the possible application of the federal alternative minimum
tax.
To qualify under Subchapter M of the Code as a regulated investment company, the Fund must,
among other things: (a) distribute to its shareholders each year at least 90% of the sum of
(i) its investment company taxable income (as that term is defined in the Code, determined without
regard to the deduction for dividends paid) and (ii) its net tax-exempt income (the excess of its
gross tax-exempt interest income over certain disallowed deductions) and (b) diversify its holdings
so that, at the end of each quarter of the Funds taxable year (i) at least 50% of the market value
of the Funds assets is represented by cash, cash items, U.S. government securities, securities of
other regulated investment companies, and other securities, with these other securities limited,
with respect to any one issuer, to an amount not greater in value than 5% of the Funds total
assets, and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the market value of the Funds assets is invested in the securities of any one
issuer (other than U.S. government securities or securities of other regulated investment
companies) or two or more issuers controlled by the Fund and engaged in the same, similar or
related trades or businesses. In meeting these requirements, the Fund may be restricted in the
utilization of certain of the investment techniques described under Investment Policies and
Techniques and Other Investment Policies and Techniques above. If for any taxable year the Fund
did not qualify as a regulated investment company for federal income tax purposes, it would be
treated as a corporation subject to federal income tax and distributions to its shareholders would
not be deducted by the Fund in computing its taxable income. In addition, in the event of a
failure to qualify as a regulated investment company, the Funds distributions, to the extent
derived from the Funds current or accumulated earnings and profits, would generally constitute
ordinary dividends, which generally would be eligible for the dividends received deduction
available to corporate shareholders and the reduced rate of taxation for qualified dividend
income available to noncorporate shareholders.
A regulated investment company that fails to distribute, by the close of each calendar year,
an amount equal to the sum of 98% of its ordinary taxable income for such year and 98% of its
capital gain net income for the one-year period ending October 31 in such year, plus any shortfalls
from the prior years required distribution, is liable for a nondeductible 4% federal excise tax on
the excess of the required distribution for such calendar year over the distributed amount for such
calendar year. To avoid
S-36
the imposition of this excise tax, the Fund generally intends to make the required
distributions of its ordinary taxable income, if any, and its capital gain net income, to the
extent possible, by the close of each calendar year.
The Fund intends to qualify to pay exempt-interest dividends, as defined in the Code, on its
common shares and shares of MuniPreferred by satisfying the requirement that, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets consist of tax-exempt
municipal bonds. Exempt-interest dividends are dividends or any part thereof (other than a capital
gain dividend) paid by the Fund which are attributable to interest on municipal bonds and are so
designated by the Fund. Exempt-interest dividends will be exempt from federal income tax, subject
to the possible application of the federal alternative minimum tax. Insurance proceeds received by
the Fund under any insurance policies in respect of scheduled interest payments on defaulted
municipal bonds, as described herein, will generally be excludable from federal gross income under
Section 103(a) of the Code. In the case of non-appropriation by a political subdivision, however,
there can be no assurance that payments made by the issuer representing interest on such
non-appropriation municipal lease obligations will be excludable from gross income for federal
income tax purposes. See Investment Policies and Techniques above. Gains of the Fund that are
attributable to market discount on certain municipal obligations are treated as ordinary income to
the extent of accrued market discount on the bond.
Distributions to shareholders of net investment income received by the Fund from taxable
temporary investments, if any, and of net short-term capital gains realized by the Fund, if any,
will be taxable to its shareholders as ordinary income. Distributions by the Fund of net capital
gain (i.e., the excess of net long-term capital gain over net short-term capital loss), if any, are
taxable as long-term capital gain, regardless of the length of time the shareholder has owned the
shares with respect to which such distributions are made. The amount of taxable income allocable
to the Funds shares will depend upon the amount of such income realized by the Fund, but is not
generally expected to be significant. Except for dividends paid on shares of MuniPreferred which
include an allocable portion of any net capital gain or other taxable income, the Fund anticipates
that all other dividends paid on shares of its MuniPreferred will constitute exempt-interest
dividends for federal income tax purposes. Distributions, if any, in excess of the Funds earnings
and profits will first reduce the adjusted tax basis of a shareholders shares and, after that
basis has been reduced to zero, will constitute capital gain to the shareholder (assuming the
shares are held as a capital asset). As long as the Fund qualifies as a regulated investment
company under the Code, no part of its distributions to shareholders will qualify for the
dividends-received deduction available to corporate shareholders or as qualified dividend income
available to noncorporate shareholders.
The Internal Revenue Service (the IRS) requires that a regulated investment company that has
two or more classes of shares must designate to each such class proportionate amounts of each type
of its income for each tax year based upon the percentage of total dividends distributed to each
class for such year. The Fund intends each year to allocate, to the fullest extent practicable,
net tax-exempt interest, net capital gain and other taxable income, if any, between its common
shares and shares of MuniPreferred in proportion to the total dividends paid to each class with
respect to such year. To the extent permitted under applicable law, the Fund reserves the right to
make special allocations of income within a class, consistent with the objectives of the Fund. The
Fund will, in the case of a Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or
fewer, and may, in the case of any other Special Rate Period, notify the Auction Agent of the
amount of any net capital gain or other income taxable for regular federal income tax purposes to
be included in any dividend on shares of its MuniPreferred prior to the Auction establishing the
Applicable Rate for such dividend. If (a) in the case of any Minimum Rate Period or any Special
Rate Period of 28 Rate Period Days or fewer, the Fund allocates any net capital gain or other
income taxable for regular federal income tax purposes to a dividend paid on shares of
MuniPreferred without having given advance notice thereof to the Auction Agent as required by the
S-37
Statement solely by reason of the fact that such allocation is made retroactively as a result
of the redemption of all or a portion of the outstanding shares of its MuniPreferred or the
liquidation of the Fund or (b) in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund allocates any net capital gain or other taxable income for regular federal income
tax purposes to shares of its MuniPreferred without having given advance notice thereof as
described above, the Fund will make certain payments to owners of shares of its MuniPreferred to
which such allocation was made to offset the federal income tax effect thereof as described under
Description of MuniPreferred SharesDividends and Dividend PeriodsGross-up Payments in the
Prospectus.
In order for any distributions to owners of the shares of MuniPreferred to be eligible to be
treated as exempt-interest dividends, such shares of MuniPreferred must be treated as stock for
federal income tax purposes. Nuveen Advisory believes the shares of MuniPreferred should be
treated as stock for federal income tax purposes.
If at any time when the Funds shares of MuniPreferred are outstanding the Fund fails to meet
the MuniPreferred Basic Maintenance Amount or the 1940 Act MuniPreferred Asset Coverage, the Fund
will be required to suspend distributions to holders of its common shares until such maintenance
amount or asset coverage, as the case may be, is restored. See Description of MuniPreferred
SharesDividends and Dividend PeriodsRestrictions on Dividends and Other Distributions in the
Prospectus. This may prevent the Fund from distributing at least 90% of the sum of its investment
company taxable income (as that term is defined in the Code, determined without regard to the
deduction for dividends paid) and its net tax-exempt income, and may therefore jeopardize the
Funds qualification for taxation as a regulated investment company or cause the Fund to incur an
income tax liability or a non-deductible 4% federal excise tax on the undistributed taxable income
(including gain), or both. Upon failure to meet the MuniPreferred Basic Maintenance Amount or the
1940 Act MuniPreferred Asset Coverage, the Fund will be required to redeem its shares of
MuniPreferred in order to maintain or restore such maintenance amount or asset coverage and avoid
the adverse consequences to the Fund and its shareholders of failing to qualify as a regulated
investment company. There can be no assurance, however, that any such redemption would achieve
such objectives.
The Code provides that interest on indebtedness incurred or continued to purchase or carry the
Funds shares to which exempt-interest dividends are allocated is not deductible. Under rules used
by the IRS for determining when borrowed funds are considered used for the purpose of purchasing or
carrying particular assets, the purchase or ownership of shares may be considered to have been made
with borrowed funds even though such funds are not directly used for the purchase or ownership of
such shares.
The interest on private activity bonds in most instances is not federally tax-exempt to a
person who is a substantial user of a facility financed by such bonds or a related person of
such substantial user. As a result, the Fund may not be an appropriate investment for a
shareholder who is considered either a substantial user or a related person within the meaning
of the Code. In general, a substantial user of a facility includes a nonexempt person who
regularly uses a part of such facility in his trade or business. Related persons are in general
defined to include persons among whom there exists a relationship, either by family or business,
which would result in a disallowance of losses in transactions among them under various provisions
of the Code (or if they are members of the same controlled group of corporations under the Code),
including a partnership and each of its partners (and certain members of their families), an S
corporation and each of its shareholders (and certain members of their families) and various
combinations of these and other relationships. The foregoing is not a complete description of all
of the provisions of the Code covering the definitions of substantial user and related person.
S-38
The Fund may, at its option, redeem shares of its MuniPreferred in whole or in part, and is
required to redeem shares of its MuniPreferred to the extent required to maintain the MuniPreferred
Basic Maintenance Amount and the 1940 Act MuniPreferred Asset Coverage. Gain or loss, if any,
resulting from a redemption of the shares of MuniPreferred will be taxed as gain or loss from the
sale or exchange of the shares of MuniPreferred under Section 302 of the Code rather than as a
dividend, but only if the redemption distribution (a) is deemed not to be essentially equivalent to
a dividend, (b) is in complete redemption of an owners interest in the Fund, (c) is substantially
disproportionate with respect to the owner, or (d) with respect to non-corporate owners, is in
partial liquidation of the Fund. In determining whether the above conditions are satisfied, shares
owned by certain persons related to the owner will be treated as held by such owner and, for
purposes of (a), (b) and (c) above, an owners ownership of common shares will be taken into
account.
Nonresident alien individuals and certain foreign corporations and other entities (foreign
investors) generally are subject to U.S. federal income tax withholding at the rate of 30% (or
possibly a lower rate provided by an applicable tax treaty) on distributions of taxable net
investment income and net short-term capital gain. To the extent received by foreign investors,
exempt-interest dividends, distributions of net long-term capital gain and gain from the sale or
other disposition of the shares of MuniPreferred generally are exempt from U.S. federal income
taxation. Different tax consequences may result if the owner is engaged in a trade or business in
the United States or, in the case of an individual, is present in the United States for more than
182 days during a taxable year and certain other conditions are met.
Although dividends generally will be treated as distributed when paid, dividends declared in
October, November or December, payable to shareholders of record on a specified date in one of
those months and paid during the following January, will be treated as having been distributed by
the Fund (and received by the shareholders) on December 31 of the year declared.
Certain of the Funds investment practices are subject to special provisions of the Code that,
among other things, may defer the use of certain deductions or losses of the Fund, affect the
holding period of securities held by the Fund, and alter the character of the gains or losses
realized by the Fund. These provisions may also require the Fund to recognize income or gain
without receiving cash with which to make distributions in the amounts necessary to satisfy the
requirements for maintaining regulated investment company status and for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections in order to
mitigate the effect of these rules and prevent disqualification of the Fund as a regulated
investment company.
The sale or other disposition of shares of MuniPreferred (other than redemptions, the rules
for which are described above) will normally result in capital gain or loss to shareholders who
hold their shares as capital assets. Present law taxes both long-term and short-term capital gains
of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, however,
long-term capital gains are generally subject to reduced rates of taxation. Losses realized by a
shareholder on the sale or exchange of shares of the Fund held for six months or less are
disallowed to the extent of any distribution of exempt-interest dividends received with respect to
such shares, and, if not disallowed, such losses are treated as long-term capital losses to the
extent of any distribution of long-term capital gain received (or designated amounts of
undistributed capital gain that are treated as received) with respect to such shares. Under
certain circumstances, a shareholders holding period may have to restart after, or may be
suspended for, any periods during which the shareholders risk of loss is diminished as a result of
holding one or more other positions in substantially similar or related property, or through
certain options or short sales. Any loss realized on a sale or exchange of shares of the Fund will
be disallowed to the extent those shares of the Fund are replaced by other substantially identical
shares of the Fund within a period of 61
S-39
days beginning 30 days before and ending 30 days after the date of disposition of the original
shares. In that event, the basis of the replacement shares of the Fund will be adjusted to reflect
the disallowed loss.
Federal income tax law imposes an alternative minimum tax with respect to corporations,
individuals, trusts and estates. Interest on certain municipal obligations, such as bonds issued
to make loans for housing purposes or to private entities (but not to certain tax-exempt
organizations such as universities and non-profit hospitals) is included as an item of tax
preference in determining the amount of a taxpayers alternative minimum taxable income. To the
extent that the Fund receives income from municipal obligations subject to the federal alternative
minimum tax, a portion of the dividends paid by the Fund, although otherwise exempt from federal
income tax, will be taxable to its shareholders to the extent that their tax liability is
determined under the federal alternative minimum tax. The Fund will annually provide a report
indicating the percentage of the Funds income attributable to municipal obligations subject to the
federal alternative minimum tax. In addition, for certain corporations, federal alternative
minimum taxable income is increased by 75% of the difference between an alternative measure of
income (adjusted current earnings) and the amount otherwise determined to be the alternative
minimum taxable income. Interest on all municipal obligations, and therefore all distributions by
the Fund that would otherwise be tax-exempt, is included in calculating a corporations adjusted
current earnings. Certain small corporations are not subject to the federal alternative minimum
tax.
Tax-exempt income, including exempt-interest dividends paid by the Fund, is taken into account
in calculating the amount of social security and railroad retirement benefits that may be subject
to federal income tax.
The Fund is required in certain circumstances to withhold a portion of taxable dividends and
certain other payments paid to certain holders of the Funds shares who do not furnish to the Fund
their correct taxpayer identification number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments made to a shareholder may
be refunded or credited against such shareholders federal income tax liability, provided the
required information is furnished to the IRS.
The Code provides that every shareholder required to file a tax return must include for
information purposes on such return the amount of tax-exempt interest received during the taxable
year, including any exempt-interest dividends received from the Fund.
The foregoing is a general summary of certain provisions of the Code and regulations
thereunder presently in effect as they directly govern the federal income taxation of the Fund and
its shareholders. These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive. Moreover, the foregoing does not address many of the
factors that may be determinative of whether an investor will be liable for the alternative minimum
tax. Shareholders are advised to consult their own tax advisors for more detailed information
concerning the federal, foreign, state and local tax consequences of purchasing, holding and
disposing of Fund shares.
EXPERTS
The Financial Statements of the Fund as of
,
200__, appearing in this Statement of
Additional Information have been audited by
, independent auditors, as set forth
in their report thereon appearing elsewhere herein, and is included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
provides accounting and auditing services to the Fund. The principal
business address of
is
.
S-40
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING
AGENT AND REDEMPTION AGENT
The custodian of the assets of and transfer, shareholder services and dividend paying agent
for the Fund is State Street Bank and Trust Company, One Federal Street, Boston, Massachusetts
02110. The Custodian performs custodial, fund accounting and portfolio accounting services.
Deutsche Bank Trust Company Americas, 100 Plaza One, 6th Floor, Jersey City, NJ 07311, a banking
corporation organized under the laws of New York, is the Auction Agent with respect to shares of
MuniPreferred and acts as transfer agent, registrar, dividend disbursing agent and redemption agent
with respect to such shares.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to the shares of
the Fund offered hereby, has been filed by the Fund with the SEC, Washington, D.C. The Funds
prospectus and this Statement of Additional Information do not contain all of the information set
forth in the Registration Statement, including any exhibits and schedules thereto. For further
information with respect to the Fund and the shares offered hereby, reference is made to the Funds
Registration Statement. Statements contained in the Funds prospectus and this Statement of
Additional Information as to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement may be inspected without
charge at the SECs principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the SEC upon the payment of certain fees prescribed by the SEC.
S-41
REPORT OF INDEPENDENT AUDITORS
F-1
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND 2
Statement of Assets and Liabilities
October 16, 2007
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
100,275
|
|
Offering costs
|
|
|
500,000
|
|
Receivable from Adviser
|
|
|
11,000
|
|
|
|
|
|
Total assets
|
|
|
611,275
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accrued offering costs
|
|
|
500,000
|
|
Payable for organization costs
|
|
|
11,000
|
|
|
|
|
|
Total liabilities
|
|
|
511,000
|
|
|
|
|
|
Net assets applicable to Common shares
|
|
$
|
100,275
|
|
|
|
|
|
Common shares outstanding
|
|
|
7,000
|
|
|
|
|
|
Net asset value per Common share outstanding ($100,275 divided by
7,000 Common shares outstanding)
|
|
$
|
14.325
|
|
|
|
|
|
Net Assets Represent:
|
|
|
|
|
Shares, $.01 par value; unlimited number of shares authorized,
7,000 Common shares outstanding
|
|
$
|
70
|
|
|
|
|
|
Paid-in surplus
|
|
|
100,205
|
|
|
|
|
|
Net assets applicable to Common shares
|
|
$
|
100,275
|
|
|
|
|
|
F-2
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND 2
Statement of Operations
Period from September 13, 2007 (date of organization) through October 16, 2007
|
|
|
|
|
Investment income
|
|
$
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Organization costs
|
|
|
11,000
|
|
Expense reimbursement
|
|
|
(11,000
|
)
|
Total expenses
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
|
|
|
|
|
|
(1) The Fund
The Nuveen Municipal High Income Opportunity Fund 2 (the Fund) was organized as a
Massachusetts business trust on September 13, 2007. The Fund has been inactive since that date
except for matters relating to its organization and registration as a diversified, closed-end
management investment company registered under the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended, and the sale of 7,000 Common shares to Nuveen Asset
Management, the Funds investment adviser (the Adviser), a wholly owned subsidiary of Nuveen
Investments, Inc. (Nuveen).
The Fund seeks to provide attractive income exempt from regular federal income tax and
secondarily to seek additional total return. The Fund seeks to achieve its investment objectives
by investing in a portfolio of municipal securities that the Adviser believes are underrated and
undervalued based on its bottom-up, research-driven investment strategy.
The Fund is authorized by its Declaration of Trust to utilize financial leverage by offering
Preferred shares (MuniPreferred shares). MuniPreferred shares may have a liquidation value of
$25,000 per share and may be issued in one or more classes or series, with dividend, liquidation
preference and other rights as determined by the Funds Board of Trustees without approval of the
Common shareholders.
(2) Significant Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts of
increases and decreases in net assets from operations during the reporting period. Actual results
may differ from those estimates.
(3) Organization and Offering Costs
Nuveen Investments, LLC (the Distributor), a wholly owned subsidiary of Nuveen, has agreed
to (i) reimburse all organizational costs of the Fund (approximately $11,000) and (ii) pay all
offering costs (other than sales load) that exceed $.03 per Common share. Based on an estimated
offering size of $250,000,000 (16,666,667 Common shares), the Fund would pay a maximum of $500,000
of offering costs and Nuveen would pay all offering costs in excess of $500,000, which is currently
estimated to be $215,000. The Funds share of Common share offering costs will be recorded as a
reduction of the proceeds from the sale of the shares upon commencement of Fund operations. If the
Fund offers MuniPreferred shares, the offering costs will also be borne by Common shareholders as a
direct reduction in paid-in-surplus.
F-3
(4) Investment Management Agreement
Pursuant to an investment management agreement between the Adviser and the Fund, the Fund has
agreed to pay an annual management fee for the services and facilities provided by the Adviser,
payable on a monthly basis, based on the sum of a fund-level fee and a complex-level fee, as
described below.
Fund-Level Fee
. The annual fund-level fee, payable monthly, shall be applied according to the
following schedule:
|
|
|
|
|
Fund-Level Average Daily Managed Assets
|
|
Fund-Level Fee Rate
|
First $125 million
|
|
|
0.5500
|
%
|
Next $125 million
|
|
|
0.5375
|
|
Next $250 million
|
|
|
0.5250
|
|
Next $500 million
|
|
|
0.5125
|
|
Next $1 billion
|
|
|
0.5000
|
|
$2 billion and over
|
|
|
0.4750
|
|
Complex-Level Fee
. The annual complex-level fee, payable monthly, shall be applied according
to the schedule below. Based on complex-level assets of $73.1 billion as of September 30, 2007,
the complex-level fee rate would be 0.1831%.
|
|
|
|
|
Complex-Level Asset
|
|
Effective Rate at
|
Breakpoint Level (1)
|
|
Breakpoint Level
|
$55 billion
|
|
|
0.2000
|
%
|
$56 billion
|
|
|
0.1996
|
|
$57 billion
|
|
|
0.1989
|
|
$60 billion
|
|
|
0.1961
|
|
$63 billion
|
|
|
0.1931
|
|
$66 billion
|
|
|
0.1900
|
|
$71 billion
|
|
|
0.1851
|
|
$76 billion
|
|
|
0.1806
|
|
$80 billion
|
|
|
0.1773
|
|
$91 billion
|
|
|
0.1691
|
|
$125 billion
|
|
|
0.1599
|
|
$200 billion
|
|
|
0.1502
|
|
$250 billion
|
|
|
0.1469
|
|
$300 billion
|
|
|
0.1445
|
|
|
|
|
(1)
|
|
The complex-level fee component of the management fee for the funds is calculated based upon
the aggregate Managed Assets (Managed Assets means the average daily net assets of each fund
including assets attributable to preferred stock issued by and borrowings by the Nuveen funds)
of Nuveen sponsored funds in the U.S.
|
The management fee compensates the Adviser for overall investment advisory and administrative
services and general office facilities. The Fund pays no compensation directly to those of its
Trustees who are affiliated with the Adviser or to its officers, all of whom receive remuneration
for their services to the Fund from the Adviser or its affiliates.
The Adviser has contractually agreed to waive 100% of the management fee from the commencement of
operations through February 29, 2008, 50% of the management fee for the period March 1, 2008
through May 31, 2008, and 25% of the management fee for the period June 1, 2008 through August 31,
2008.
F-4
(5) Income Taxes
The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code
applicable to regulated investment companies. The Fund intends to distribute substantially all of
its net investment income to shareholders. In any year when the Fund realizes net capital gains,
the Fund may choose to distribute all or a portion of it net capital gains to shareholders, or
alternatively, to retain all or a portion of its net capital gains and pay Federal corporate income
taxes on such retained gains.
[Unaudited interim financial statements to be inserted in a pre-effective amendment.]
F-5
APPENDIX A
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND 2
STATEMENT ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES
OF MUNIPREFERRED SHARES
Nuveen Municipal High Income Opportunity Fund 2 (the Fund), a Massachusetts business trust,
certifies that:
FIRST, pursuant to the authority expressly vested in the Board of the Fund by Articles IV and
VI of the Funds Declaration of Trust (which, as hereafter restated or amended from time to time,
are together with this Statement herein called the Declaration), the Board of Trustees has, by
resolution, authorized the issuance of
preferred shares of beneficial interest (Preferred
Shares), $.01 par value, classified as MuniPreferred shares (MuniPreferred shares), and further
classified as Series ___ and Series ___ MuniPreferred shares (each series, and together with
additional series of MuniPreferred shares that may be authorized and issued, a Series) each with
a liquidation preference of $25,000 per share;
SECOND, the preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of such series of MuniPreferred
shares are as follows:
DESIGNATION
Series ___: A series of ___Preferred Shares, liquidation preference $25,000 per share, is
designated Series ___ MuniPreferred shares (MuniPreferred shares Series ___). The initial
Dividend Period for MuniPreferred shares Series ___ shall be the period from and including the Date
of Original Issue thereof to but excluding
, 200_. Each share of MuniPreferred shares
Series ___ shall have an Applicable Rate for its initial Dividend Period equal to ___% per annum and
an initial Dividend Payment Date of
, 200___and each share of MuniPreferred shares Series ___
shall have such other preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, in addition to those required by
applicable law or set forth in the Declaration applicable to preferred shares of the Fund, as are
set forth in Part I and Part II of this Statement. The MuniPreferred shares Series ___ shall
constitute a separate series of Preferred Shares of the Fund.
Series ___: A series of ___ Preferred Shares, liquidation preference $25,000 per share, is
designated Series ___ MuniPreferred shares (MuniPreferred shares Series ___). The initial
Dividend Period for MuniPreferred shares Series ___ shall be the period from and including the Date
of Original Issue thereof to but excluding
, 200_. Each share of MuniPreferred shares
Series ___ shall have an Applicable Rate for its initial Dividend Period equal to ___% per annum and
an initial Dividend Payment Date of
, 200___and each share of MuniPreferred shares Series ___
shall have such other preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, in addition to those required by
applicable law or set forth in the Declaration applicable to preferred shares of the Fund, as are
set forth in Part I and Part II of this Statement. The MuniPreferred shares Series ___ shall
constitute a separate series of Preferred Shares of the Fund.
Subject to the provisions of Section 11 of Part I hereof, the Board of Trustees of the Fund
may, in the future, authorize the issuance of additional shares of the Funds Preferred Shares as
MuniPreferred shares Series ___ and MuniPreferred shares Series ___ with the same preferences,
rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption and other terms of the respective series herein described, except that the
Applicable Rate for its initial Dividend Period, its initial Dividend Payment Date and any other
changes in the terms herein set forth shall be as set forth in an amendment to this Statement.
As used in Part I and Part II of this Statement, capitalized terms shall have the meanings
provided in Section 17 of Part I.
PART I: MUNIPREFERRED SHARES TERMS
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting each of MuniPreferred shares Series
___ is ___ shares. No fractional shares of MuniPreferred shares Series ___ shall be issued.
(b) The initial number of authorized shares constituting each of MuniPreferred shares Series
___ is ___ shares. No fractional shares of MuniPreferred shares Series ___ shall be issued.
(c) Any shares of each Series of MuniPreferred shares which at any time have been redeemed or
purchased by the Fund shall, after such redemption or purchase, have the status of authorized but
unissued shares of Preferred Shares.
(d) The shares of each Series of MuniPreferred shares shall rank on a parity with shares of
any other series of Preferred Shares (including any other MuniPreferred shares) as to the payment
of dividends to which such shares are entitled and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund.
(e) No holder of shares of any Series of MuniPreferred shares shall have, solely by reason of
being such a holder, any preemptive right, or, unless otherwise determined by the Trustees other
right to acquire, purchase or subscribe for any shares of any Series of MuniPreferred shares,
shares of Common Shares of the Fund or other securities of the Fund which the Fund may hereafter
issue or sell.
2.
Dividends
.
(a) The Holders of shares of any Series of MuniPreferred shares shall be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally available therefor,
cumulative cash dividends on their shares at the Applicable Rate, determined as set forth in
paragraph (c) of this Section 2, and no more, payable on the respective dates determined as set
forth in paragraph (b) of this Section 2. Dividends on the Outstanding shares of any Series of
MuniPreferred shares issued on the Date of Original Issue shall accumulate from the Date of
Original Issue.
(b)(i) Dividends shall be payable when, as and if declared by the Board of
Trustees following the initial Dividend Payment Date, subject to subparagraph (b)(ii) of
this Section 2, on the shares of each Series of MuniPreferred shares, with respect to any
Dividend Period on the first Business Day following the last day of such Dividend Period;
provided, however, if the Dividend Period is greater than 30 days then on a monthly basis on
the first Business Day of each month within such Dividend Period and on the Business Day
following the last day of such Dividend Period.
(ii) If a day for payment of dividends resulting from the application of
subparagraph (b)(i) above is not a Business Day, (A) then the Dividend Payment Date shall be
the first Business Day following such day for payment of dividends in the case of a Series
of MuniPreferred shares designated as Series M or Series F or (B) then the Dividend
Payment Date shall be the first Business Day that falls prior to such day for payment of
dividends in the case of a Series of MuniPreferred shares designated as Series T,
Series W, or Series TH.
A-2
(iii) The Fund shall pay to the Paying Agent not later than 3:00 p.m., New York City
time, on the Business Day next preceding each Dividend Payment Date for the shares of each
Series of MuniPreferred shares, an aggregate amount of funds available on the next Business
Day in the City of New York, New York, equal to the dividends to be paid to all Holders of
such shares on such Dividend Payment Date. The Fund shall not be required to establish any
reserves for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the payment of dividends shall be held in
trust for the payment of such dividends by the Paying Agent for the benefit of the Holders
specified in subparagraph (b)(v) of this Section 2. Any moneys paid to the Paying Agent in
accordance with the foregoing but not applied by the Paying Agent to the payment of
dividends, including interest earned on such moneys, will, to the extent permitted by law,
be repaid to the Fund at the end of 90 days from the date on which such moneys were to have
been so applied.
(v) Each dividend on a Series of MuniPreferred shares shall be paid on the Dividend
Payment Date therefor to the Holders of that series as their names appear on the share
ledger or share records of the Fund on the Business Day next preceding such Dividend Payment
Date. Dividends in arrears for any past Dividend Period may be declared and paid at any
time, without reference to any regular Dividend Payment Date, to the Holders as their names
appear on the share ledger or share records of the Fund on such date, not exceeding 15 days
preceding the payment date thereof, as may be fixed by the Board of Trustees. No interest
will be payable in respect of any dividend payment or payments which may be in arrears.
(c) (i) The dividend rate on Outstanding shares of each Series of MuniPreferred
shares during the period from and after the Date of Original Issue to and including the last
day of the initial Dividend Period therefor shall be equal to the rate per annum set forth
under Designation above. For each subsequent Dividend Period with respect to the
MuniPreferred shares Outstanding thereafter, the dividend rate shall be equal to the rate
per annum that results from an Auction; provided, however, that if an Auction for any
subsequent Dividend Period of a Series of MuniPreferred shares is not held for any reason or
if Sufficient Clearing Bids have not been made in an Auction (other than as a result of all
shares of a Series of MuniPreferred shares being the subject of Submitted Hold Orders), then
the dividend rate on the shares of a Series of MuniPreferred shares for any such Dividend
Period shall be the Maximum Rate (except (i) during a Default Period when the dividend rate
shall be the Default Rate, as set forth in Section 2(c)(ii) below) or (ii) after a Default
Period and prior to the beginning of the next Dividend Period when the dividend rate shall
be the Maximum Rate at the close of business on the last day of such Default Period). The
All Hold Rate will apply automatically following an Auction in which all of the Outstanding
shares of a Series of MuniPreferred shares are subject (or are deemed to be subject) to Hold
Orders. The rate per annum at which dividends are payable on shares of a Series of
MuniPreferred shares as determined pursuant to this Section 2(c)(i) shall be the Applicable
Rate.
(ii) Subject to the cure provisions below, a Default Period with respect to a
particular Series will commence on any date the Fund fails to deposit irrevocably in trust
in same-day funds, with the Paying Agent by 12:00 noon, New York City time, (A) the full
amount of any declared dividend on that Series payable on the Dividend Payment Date (a
Dividend Default) or (B) the full amount of any redemption price (the Redemption Price)
payable on the date fixed for redemption (the Redemption Date) (a Redemption Default)
and together with a
Dividend Default, hereinafter referred to as Default). Subject to the cure
provisions of Section 2(c)(iii) below, a Default Period with respect to a Dividend Default
or a Redemption
A-3
Default shall end on the Business Day on which, by 12:00 noon, New York City
time, all unpaid dividends and any unpaid Redemption Price shall have been deposited
irrevocably in trust in same-day funds with the Paying Agent. In the case of a Dividend
Default, the Applicable Rate for each Dividend Period commencing during a Default Period
will be equal to the Default Rate, and each subsequent Dividend Period commencing after the
beginning of a Default Period shall be a Standard Dividend Period; provided, however, that
the commencement of a Default Period will not by itself cause the commencement of a new
Dividend Period. No Auction shall be held during a Default Period with respect to a
Dividend Default applicable to that Series of MuniPreferred shares.
(iii) No Default Period with respect to a Dividend Default or Redemption Default shall
be deemed to commence if the amount of any dividend or any Redemption Price due (if such
default is not solely due to the willful failure of the Fund) is deposited irrevocably in
trust, in same-day funds with the Paying Agent by 12:00 noon, New York City time within
three Business Days after the applicable Dividend Payment Date or Redemption Date, together
with an amount equal to the Default Rate applied to the amount of such non-payment based on
the actual number of days comprising such period divided by 365 for each Series. The
Default Rate shall be equal to the Reference Rate multiplied by three (3).
(iv) The amount of dividends per share payable (if declared) on each Dividend Payment
Date of each Dividend Period of less than one (1) year (or in respect of dividends on
another date in connection with a redemption during such Dividend Period) shall be computed
by multiplying the Applicable Rate (or the Default Rate) for such Dividend Period (or a
portion thereof) by a fraction, the numerator of which will be the number of days in such
Dividend Period (or portion thereof) that such share was Outstanding and for which the
Applicable Rate or the Default Rate was applicable and the denominator of which will be 365,
multiplying the amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent. During any Dividend Period of one (1) year or more, the amount of dividends
per share payable on any Dividend Payment Date (or in respect of dividends on another date
in connection with a redemption during such Dividend Period) shall be computed as described
in the preceding sentence, except that it will be determined on the basis of a year
consisting of twelve 30-day months.
(d) Any dividend payment made on shares of any Series of MuniPreferred shares shall first be
credited against the earliest accumulated but unpaid dividends due with respect to such Series.
(e) For so long as the MuniPreferred shares are Outstanding, except as contemplated by Part I
of this Statement, the Fund will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or other shares of beneficial interest, if any,
ranking junior to the MuniPreferred shares as to dividends or upon liquidation) in respect to
Common Shares or any other shares of the Fund ranking junior to or on a parity with the
MuniPreferred shares as to dividends or upon liquidation, or call for redemption, redeem, purchase
or otherwise acquire for consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to the MuniPreferred shares as to
dividends and upon liquidation) or any such parity shares (except by conversion into or exchange
for shares of the Fund ranking junior to or on a parity with the MuniPreferred shares as to
dividends and upon liquidation), unless (i) immediately after such transaction, the Fund would have
Eligible Assets with an aggregate Discounted Value at least
equal to the MuniPreferred Shares Basic Maintenance Amount and the 1940 Act MuniPreferred
Shares Asset Coverage would be achieved, (ii) full cumulative dividends on the MuniPreferred Shares
due on or
A-4
prior to the date of the transaction have been declared and paid and (iii) the Fund has
redeemed the full number of MuniPreferred shares required to be redeemed by any provision for
mandatory redemption contained in Section 3(a)(ii).
(f) The Fund will not declare, pay or set apart for payment any dividend or other distribution
in respect to the MuniPreferred shares unless (i) there is not an event of default under
indebtedness senior to the MuniPreferred shares, if any, or (ii) immediately after such
transaction, the Fund would have eligible portfolio holdings with an aggregate discounted value at
least equal to the asset coverage requirements under the indebtedness senior to the MuniPreferred
shares.
3.
Redemption
.
(a) (i) After the initial Dividend Period, subject to the provisions of this
Section 3 and to the extent permitted under the 1940 Act and Massachusetts law, the Fund
may, at its option, redeem in whole or in part out of funds legally available therefor
shares of a Series of MuniPreferred shares herein designated as (A) having a Dividend Period
of one year or less, on the Business Day after the last day of such Dividend Period by
delivering a notice of redemption not less than 15 days and not more than 40 days prior to
the date fixed for such redemption, at a redemption price per share equal to $25,000, plus
an amount equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to the date fixed for redemption (Redemption Price), or (B) having a Dividend
Period of more than one year, on any Business Day prior to the end of the relevant Dividend
Period by delivering a notice of redemption not less than 15 days and not more than 40 days
prior to the date fixed for such redemption, at the Redemption Price, plus a redemption
premium, if any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption Provisions at the time of
the designation of such Dividend Period as set forth in Section 4 of this Statement;
provided, however, that during a Dividend Period of more than one year no shares of a Series
of MuniPreferred shares will be subject to optional redemption except in accordance with any
Specific Redemption Provisions approved by the Board of Trustees after consultation with the
Broker-Dealers at the time of the designation of such Dividend Period. Notwithstanding the
foregoing, the Fund shall not give a notice of or effect any redemption pursuant to this
Section 3(a)(i) unless, on the date on which the Fund intends to give such notice and on the
date of redemption (a) the Fund has available certain Deposit Securities with maturity or
tender dates not later than the day preceding the applicable redemption date and having a
value not less than the amount (including any applicable premium) due to Holders of a Series
of MuniPreferred shares by reason of the redemption of such MuniPreferred shares on such
date fixed for the redemption and (b) the Fund would satisfy the MuniPreferred Shares Basic
Maintenance Amount immediately subsequent to such redemption, if such redemption were to
occur on such date, it being understood that the provisions of paragraph (d) of this
Section 3 shall be applicable in such circumstances in the event the Fund makes the deposit
and takes the other action required thereby.
(ii) If the Fund fails to maintain, as of any Valuation Date, the MuniPreferred Shares
Basic Maintenance Amount or, as of the last Business Day of any month, the 1940 Act
MuniPreferred Shares Asset Coverage, and such failure is not cured within ten Business Days
following such Valuation Date in the case of a failure to maintain the MuniPreferred Shares
Basic Maintenance Amount or on the last Business Day of the following
month in the case of a failure to maintain the 1940 Act MuniPreferred Shares Asset
Coverage as of such last Business Day (each an Asset Coverage Cure Date), the
MuniPreferred shares will be subject to mandatory redemption out of funds legally available
therefor. The number of MuniPreferred shares to be redeemed in such circumstances will be
equal to the lesser of (A) the
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minimum number of MuniPreferred shares the redemption of
which, if deemed to have occurred immediately prior to the opening of business on the
relevant Asset Coverage Cure Date, would result in the Fund satisfying the MuniPreferred
Shares Basic Maintenance Amount, or sufficient to satisfy 1940 Act MuniPreferred Shares
Asset Coverage, as the case may be, in either case as of the relevant Asset Coverage Cure
Date (provided that, if there is no such minimum number of shares the redemption of which
would have such result, all shares of MuniPreferred shares then Outstanding will be
redeemed), and (B) the maximum number of MuniPreferred shares that can be redeemed out of
funds expected to be available therefor on the Mandatory Redemption Date at the Mandatory
Redemption Price set forth in subparagraph (a)(iii) of this Section 3.
(iii) In determining the MuniPreferred shares required to be redeemed in accordance
with the foregoing Section 3(a)(ii), the Fund shall allocate the number of shares required
to be redeemed to satisfy the MuniPreferred Shares Basic Maintenance Amount or the 1940 Act
MuniPreferred Shares Asset Coverage, as the case may be, pro rata among the Holders of
MuniPreferred shares in proportion to the number of shares they hold and shares of other
Preferred Shares subject to mandatory redemption provisions similar to those contained in
this Section 3, subject to the further provisions of this subparagraph (iii). The Fund
shall effect any required mandatory redemption pursuant to subparagraph (a)(ii) of this
Section 3 no later than 40 days after the Asset Coverage Cure Date (the Mandatory
Redemption Date), except that if the Fund does not have funds legally available for the
redemption of, or is not otherwise legally permitted to redeem, the number of shares of the
MuniPreferred shares which would be required to be redeemed by the Fund under clause (A) of
subparagraph (a)(ii) of this Section 3 if sufficient funds were available, together with
shares of other Preferred Shares which are subject to mandatory redemption under provisions
similar to those contained in this Section 3, or the Fund otherwise is unable to effect such
redemption on or prior to such Mandatory Redemption Date, the Fund shall redeem those shares
of the MuniPreferred shares, and shares of other Preferred Shares which it was unable to
redeem, on the earliest practicable date on which the Fund will have such funds available,
upon notice pursuant to Section 3(b) to record owners of the MuniPreferred shares to be
redeemed and the Paying Agent. The Fund will deposit with the Paying Agent funds sufficient
to redeem the specified number of MuniPreferred shares with respect to a redemption required
under subparagraph (a)(ii) of this Section 3, by 1:00 p.m., New York City time, of the
Business Day immediately preceding the Mandatory Redemption Date. If fewer than all of the
Outstanding MuniPreferred shares are to be redeemed pursuant to this Section 3(a)(iii), the
number of shares to be redeemed shall be redeemed pro rata from the Holders of such shares
in proportion to the number of such shares held by such Holders, by lot or by such other
method as the Fund shall deem fair and equitable, subject, however, to the terms of any
applicable Specific Redemption Provisions. Mandatory Redemption Price means the
Redemption Price plus (in the case of a Dividend Period of one year or more only) a
redemption premium, if any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption Provisions.
(b) In the event of a redemption pursuant to Section 3(a), the Fund will file a notice of its
intention to redeem with the Securities and Exchange Commission so as to provide at least the
minimum notice required under Rule 23c-2 under the 1940 Act or any successor provision. In
addition, the Fund shall deliver a notice of redemption to the Auction Agent (the Notice of
Redemption) containing the information set forth below (i) in the case of an optional redemption
pursuant to subparagraph (a)(i) above, one Business Day prior to the giving of notice to the
Holders and
(ii) in the case of a mandatory redemption pursuant to subparagraph (a)(ii) above, on or prior
to the 30th day preceding the Mandatory Redemption Date. The Auction Agent will use its reasonable
efforts to provide notice to each Holder of shares of each Series of MuniPreferred shares called
for redemption by electronic or other reasonable means not later than the close of business on the
Business Day immediately
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following the day on which the Auction Agent determines the shares to be
redeemed (or, during a Default Period with respect to such shares, not later than the close of
business on the Business Day immediately
following the day on which the Auction Agent receives
Notice of Redemption from the Fund). The Auction Agent shall confirm such notice in writing not
later than the close of business on the third Business Day preceding the date fixed for redemption
by providing the Notice of Redemption to each Holder of shares called for redemption, the Paying
Agent (if different from the Auction Agent) and the Securities Depository. Notice of Redemption
will be addressed to the registered owners of each Series of MuniPreferred shares at their
addresses appearing on the share records of the Fund. Such Notice of Redemption will set forth
(i) the date fixed for redemption, (ii) the number and identity of MuniPreferred shares to be
redeemed, (iii) the redemption price (specifying the amount of accumulated dividends to be included
therein), (iv) that dividends on the shares to be redeemed will cease to accumulate on such date
fixed for redemption, and (v) the provision under which redemption shall be made. No defect in the
Notice of Redemption or in the transmittal or mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law. If fewer than all shares held by any
Holder are to be redeemed, the Notice of Redemption mailed to such Holder shall also specify the
number of shares to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this Section 3, but subject to
Section 7(e), no MuniPreferred shares may be redeemed unless all dividends in arrears on the
Outstanding MuniPreferred shares and all shares of beneficial interest of the Fund ranking on a
parity with the MuniPreferred shares with respect to payment of dividends or upon liquidation, have
been or are being contemporaneously paid or set aside for payment; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all Outstanding MuniPreferred shares
pursuant to the successful completion of an otherwise lawful purchase or exchange offer made on the
same terms to, and accepted by, Holders of all Outstanding MuniPreferred shares.
(d) Upon the deposit of funds sufficient to redeem shares of any Series of MuniPreferred
shares with the Paying Agent and the giving of the Notice of Redemption to the Auction Agent under
paragraph (b) of this Section 3, dividends on such shares shall cease to accumulate and such shares
shall no longer be deemed to be Outstanding for any purpose (including, without limitation, for
purposes of calculating whether the Fund has maintained the requisite MuniPreferred Shares Basic
Maintenance Amount or the 1940 Act MuniPreferred Shares Asset Coverage), and all rights of the
holder of the shares so called for redemption shall cease and terminate, except the right of such
holder to receive the redemption price specified herein, but without any interest or other
additional amount. Such redemption price shall be paid by the Paying Agent to the nominee of the
Securities Depository. The Fund shall be entitled to receive from the Paying Agent, promptly after
the date fixed for redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate redemption price of the MuniPreferred shares called for redemption on such date and
(ii) such other amounts, if any, to which Holders of shares of each Series of MuniPreferred shares
called for redemption may be entitled. Any funds so deposited that are unclaimed at the end of two
years from such redemption date shall, to the extent permitted by law, be paid to the Fund, after
which time the Holders of MuniPreferred shares so called for redemption may look only to the Fund
for payment of the redemption price and all other amounts, if any, to which they may be entitled.
The Fund shall be entitled to receive, from time to time after the date fixed for redemption, any
interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of Redemption has been given is not
made by reason of the absence of legally available funds therefor, or is otherwise prohibited,
such redemption shall be made as soon as practicable to the extent such funds become legally
available or such redemption is no longer otherwise prohibited. Failure to redeem shares of any
Series of MuniPreferred shares shall be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Fund shall have failed, for any reason whatsoever, to
deposit in trust with
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the Paying Agent the redemption price with respect to any shares for which
such Notice of Redemption has been given. Notwithstanding the fact that the Fund may not have
redeemed shares of any Series of MuniPreferred shares for which a Notice of Redemption has been
given, dividends may be declared and paid on MuniPreferred shares Series and shall include those
MuniPreferred shares for which Notice of Redemption has been given but for which deposit of funds
has not been made.
(f) All moneys paid to the Paying Agent for payment of the redemption price of shares of any
Series of MuniPreferred shares called for redemption shall be held in trust by the Paying Agent for
the benefit of holders of shares so to be redeemed.
(g) So long as any shares of any Series of MuniPreferred shares are held of record by the
nominee of the Securities Depository, the redemption price for such shares will be paid on the date
fixed for redemption to the nominee of the Securities Depository for distribution to Agent Members
for distribution to the persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing contained in this Statement limits any
right of the Fund to purchase or otherwise acquire any shares of each Series of MuniPreferred
shares outside of an Auction at any price, whether higher or lower than the price that would be
paid in connection with an optional or mandatory redemption, so long as, at the time of any such
purchase, there is no arrearage in the payment of dividends on, or the mandatory or optional
redemption price with respect to, any shares of any Series of MuniPreferred shares for which Notice
of Redemption has been given and the Fund is in compliance with the 1940 Act MuniPreferred Shares
Asset Coverage and the MuniPreferred Shares Basic Maintenance Amount after giving effect to such
purchase or acquisition on the date thereof. Any shares which are purchased, redeemed or otherwise
acquired by the Fund shall have no voting rights. If fewer than all the Outstanding shares of any
Series of MuniPreferred shares are redeemed or otherwise acquired by the Fund, the Fund shall give
notice of such transaction to the Auction Agent, in accordance with the procedures agreed upon by
the Board of Trustees.
(i) In the case of any redemption pursuant to this Section 3, only whole shares of
MuniPreferred shares shall be redeemed, and in the event that any provision of the Declaration
would require redemption of a fractional share, the Auction Agent shall be authorized to round up
so that only whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary, including, without limitation,
Sections 2(e), 6(f) and 11 of Part I hereof, the Board of Trustees may authorize, create or issue
any class or series of shares of beneficial interest, including other series of MuniPreferred
shares, ranking prior to or on a parity with the MuniPreferred shares with respect to the payment
of dividends or the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, to the extent permitted by the 1940 Act, as amended, if, upon issuance, either
(A) the net proceeds from the sale of such shares of beneficial interest (or such portion thereof
needed to redeem or repurchase the Outstanding MuniPreferred shares) are deposited with the Auction
Agent in accordance with Section 3(d) of Part I hereof, Notice of Redemption as contemplated by
Section 3(b) of Part I hereof has been delivered prior thereto or is sent promptly thereafter, and
such proceeds are used to redeem all Outstanding MuniPreferred shares or (B) the Fund would meet
the 1940 Act MuniPreferred Shares Asset Coverage, the MuniPreferred Shares Basic Maintenance Amount
and the requirements of Section 11 of Part I hereof.
4.
Designation of Dividend Period
.
(a) The initial Dividend Period for each Series of MuniPreferred shares is as set forth under
Designation above. The Fund will designate the duration of subsequent Dividend Periods of each
Series of MuniPreferred shares; provided, however, that no such designation is necessary for a
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Standard Dividend Period and, provided further, that any designation of a Special Dividend Period
shall be effective only if (i) notice thereof shall have been given as provided herein, (ii) any
failure to pay in a timely manner to the Auction Agent the full amount of any dividend on, or the
redemption price of, MuniPreferred shares shall have been cured as provided above, (iii) Sufficient
Clearing Bids shall have existed in an Auction held on the Auction Date immediately preceding the
first day of such proposed Special Dividend Period, (iv) if the Fund shall have mailed a Notice of
Redemption with respect to any shares, the redemption price with respect to such shares shall have
been deposited with the Paying Agent, and (v) in the case of the designation of a Special Dividend
Period, the Fund has confirmed that as of the Auction Date next preceding the first day of such
Special Dividend Period, it satisfies the MuniPreferred Shares Basic Maintenance Amount, and the
Fund has consulted with the Broker-Dealers and has provided notice of such designation and
otherwise complied with the Rating Agency Guidelines.
(b) If the Fund proposes to designate any Special Dividend Period, not fewer than 7 (or two
Business Days in the event the duration of the Dividend Period prior to such Special Dividend
Period is fewer than 8 days) nor more than 30 Business Days prior to the first day of such Special
Dividend Period, notice shall be (i) made by press release and (ii) communicated by the Fund by
telephonic or other means to the Auction Agent and confirmed in writing promptly thereafter. Each
such notice shall state (A) that the Fund proposes to exercise its option to designate a succeeding
Special Dividend Period, specifying the first and last days thereof and (B) that the Fund will by
3:00 p.m., New York City time, on the second Business Day next preceding the first day of such
Special Dividend Period, notify the Auction Agent, who will promptly notify the Broker-Dealers, of
either (x) its determination, subject to certain conditions, to proceed with such Special Dividend
Period, subject to the terms of any Specific Redemption Provisions, or (y) its determination not to
proceed with such Special Dividend Period, in which latter event the succeeding Dividend Period
shall be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day next preceding the
first day of any proposed Special Dividend Period, the Fund shall deliver to the Auction Agent, who
will promptly deliver to the Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the next succeeding
Dividend Period as a Special Dividend Period, specifying the first and last days thereof and
(B) the terms of any Specific Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to exercise its option to
designate a Special Dividend Period.
If the Fund fails to deliver either such notice with respect to any designation of any proposed
Special Dividend Period to the Auction Agent or is unable to make the confirmation provided in
clause (v) of Paragraph (a) of this Section 4 by 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of such proposed Special Dividend Period, the Fund shall
be deemed to have delivered a notice to the Auction Agent with respect to such Dividend Period to
the effect set forth in clause (ii) above, thereby resulting in a Standard Dividend Period.
5.
Restrictions on Transfer
. Shares of a Series of MuniPreferred shares may be
transferred only (a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer
or (c) to the Fund or any Affiliate. Notwithstanding the foregoing, a transfer other than pursuant
to an Auction will not be
effective unless the selling Existing Holder or the Agent Member of such Existing Holder, in
the case of an Existing Holder whose shares are listed in its own name on the books of the Auction
Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a transfer
between persons holding MuniPreferred shares through different Broker-Dealers, advises the Auction
Agent of such transfer. The certificates representing the shares of a Series of MuniPreferred
shares issued to the Securities Depository
A-9
will bear legends with respect to the restrictions
described above and stop-transfer instructions
will be issued to the Transfer Agent and/or
Registrar.
6.
Voting Rights
.
(a) Except as otherwise provided in the Declaration and the Funds By-laws, herein or as
otherwise required by applicable law, (i) each Holder of shares of any Series of MuniPreferred
shares shall be entitled to one vote for each share of any Series of MuniPreferred shares held on
each matter submitted to a vote of shareholders of the Fund, and (ii) the holders of Outstanding
shares of Preferred Shares, including each Series of MuniPreferred shares, and shares of Common
Shares shall vote together as a single class on all matters submitted to shareholders; provided,
however, that, at any meeting of the shareholders of the Fund held for the election of Trustees,
the holders of Outstanding shares of Preferred Shares, including each Series of MuniPreferred
shares, represented in person or by proxy at said meeting, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of shares of beneficial interest of
the Fund, to elect two Trustees of the Fund, each share of Preferred Shares, including each Series
of MuniPreferred shares, entitling the holder thereof to one vote; provided, further that if the
Board of Trustees shall be divided into classes, the Board of Trustees may determine to which class
or classes the Trustees elected by holders of Preferred Shares shall be assigned and the holders of
Preferred Shares shall only be entitled to elect the Trustees so designated as being elected by the
holders of Preferred Shares when their term shall have expired. The identity of the nominees of
such Trustees may be fixed by the Board of Trustees. Subject to paragraph (b) of this Section 6,
the holders of Outstanding shares of Common Shares and Preferred Shares, including each Series of
MuniPreferred shares, voting together as a single class, shall elect the balance of the Trustees.
(b) During any period in which any one or more of the conditions described below shall exist
(such period being referred to herein as a Voting Period), the number of Trustees constituting
the Board of Trustees shall be automatically increased by the smallest number that, when added to
the two Trustees elected exclusively by the holders of shares of Preferred Shares, including each
Series of MuniPreferred shares, would constitute a majority of the Board of Trustees as so
increased by such smallest number; and the holders of shares of Preferred Shares, including each
Series of MuniPreferred shares, shall be entitled, voting as a class on a one-vote-per-share basis
(to the exclusion of the holders of all other securities and classes of shares of the Fund), to
elect such smallest number of additional Trustees, together with the two Trustees that such holders
are in any event entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any Dividend Payment Date accumulated dividends
(whether or not earned or declared) on Preferred Shares equal to at least two full years
dividends shall be due and unpaid; or
(ii) if at any time holders of any Preferred Shares are entitled under the 1940 Act to
elect a majority of the Trustees of the Fund.
Upon the termination of a Voting Period, the voting rights described in this paragraph (b) of
Section 6 shall cease, subject always, however, to the revesting of such voting rights in the
Holders of shares of Preferred Shares, including each Series of MuniPreferred shares, upon the
further occurrence of any of the events described in this paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right of the Holders of shares of
Preferred Shares, including each Series of MuniPreferred shares, to elect additional Trustees as
described in paragraph (b) of this Section 6, the Fund shall notify the Auction Agent, and the
Auction Agent shall instruct the Trustees to call a special meeting of such holders and shall mail
a notice of such special meeting to such holders, such meeting to be held not less than 10 nor more
than 30 days after the
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date of mailing of such notice. If the Fund fails to send such notice to
the Auction Agent or if such special meeting is not called, it may be called by any such holder on
like notice. The record date for determining the holders entitled to notice of and to vote at such
special meeting shall be the close of business on the fifth Business Day preceding the day on which
such notice is mailed. At any such special meeting and at each meeting of holders of shares of
Preferred Shares, including each Series of MuniPreferred shares, held during a Voting Period at
which Trustees are to be elected, such holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of capital stock of the Fund), shall be entitled to
elect the number of Trustees prescribed in paragraph (b) of this Section 6 on a one-vote-per-share
basis.
(d) The terms of office of all persons who are Trustees of the Fund at the time of a special
meeting of holders of the MuniPreferred shares and holders of other Preferred Shares to elect
Trustees shall continue, notwithstanding the election at such meeting by the holders and such other
holders of the number of Trustees that they are entitled to elect, and the persons so elected by
such holders, together with the two incumbent Trustees elected by such holders and the remaining
incumbent Trustees, shall constitute the duly elected Trustees of the Fund.
(e) Simultaneously with the termination of a Voting Period, the terms of office of the
additional directors elected by the Holders of the MuniPreferred shares and holders of other
Preferred Shares pursuant to paragraph (b) of this Section 6 shall terminate, the remaining
Trustees shall constitute the Trustees of the Fund and the voting rights of such holders to elect
additional Trustees pursuant to paragraph (b) of this Section 6 shall cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.
(f) So long as any of the shares of Preferred Shares, including each Series of MuniPreferred
shares, are Outstanding, the Fund will not, without the affirmative vote of the holders of a
majority of the Outstanding shares of Preferred Shares determined with reference to a majority of
outstanding voting securities as that term is defined in Section 2(a)(42) of the 1940 Act, voting
as a separate class, (i) amend, alter or repeal any of the preferences, rights or powers of such
class so as to affect materially and adversely such preferences, rights or powers as defined in
Section 6(h) below; (ii) increase the authorized number of shares of Preferred Shares;
(iii) create, authorize or issue shares of any class of shares of beneficial interest ranking
senior to or on a parity with the Preferred Shares with respect to the payment of dividends or the
distribution of assets, or any securities convertible into, or warrants, options or similar rights
to purchase, acquire or receive, such shares of beneficial interest ranking senior to or on a
parity with the Preferred Shares or reclassify any authorized shares of beneficial interest of the
Fund into any shares ranking senior to or on a parity with the Preferred Shares (except that,
notwithstanding the foregoing, but subject to the provisions of either Section 3(j) or 11, as
applicable, the Board of Trustees, without the vote or consent of the holders of the Preferred
Shares, may from time to time authorize, create and classify, and the Fund may from time to time
issue, shares or series of Preferred Shares, including other series of MuniPreferred shares,
ranking on a parity with the MuniPreferred shares with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up to the affairs of the Fund, and
may authorize, reclassify and/or issue any additional shares of each Series of MuniPreferred
shares, including shares previously purchased or redeemed by the Fund, subject to continuing
compliance by the Fund with 1940 Act MuniPreferred Shares Asset Coverage and MuniPreferred Shares
Basic Maintenance Amount requirements); (iv) institute any proceedings to be adjudicated bankrupt
or insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief under any
applicable federal or state law relating to bankruptcy or insolvency, or consent to the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Fund
or a substantial part of its property, or make any assignment for the benefit of creditors, or,
except as may be required by applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in
A-11
furtherance of any such action;
(v) create, incur or suffer to exist, or agree to create, incur or suffer to exist, or consent to
cause or permit in the future (upon the happening of a contingency or otherwise) the creation,
incurrence or existence of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of any kind upon any of
the Funds assets as a whole, except (A) liens the validity of which are being contested in good
faith by appropriate proceedings, (B) liens for taxes that are not then due and payable or that can
be paid thereafter without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness senior to the
MuniPreferred shares or arising in connection with any futures contracts or options thereon,
interest rate swap or cap transactions, forward rate transactions, put or call options, short sales
of securities or other similar transactions; (D) liens, pledges, charges, security interests,
security agreements or other encumbrances arising in connection with any indebtedness permitted
under clause (vi) below and (E) liens to secure payment for services rendered including, without
limitation, services rendered by the Funds custodian and the Auction Agent; or (vi) create,
authorize, issue, incur or suffer to exist any indebtedness for borrowed money or any direct or
indirect guarantee of such indebtedness for borrowed money or any direct or indirect guarantee of
such indebtedness, except the Fund may borrow as may be permitted by the Funds investment
restrictions; provided, however, that transfers of assets by the Fund subject to an obligation to
repurchase shall not be deemed to be indebtedness for purposes of this provision to the extent that
after any such transaction the Fund satisfies the MuniPreferred Shares Basic Maintenance Amount as
of the immediately preceding Valuation Date.
(g) The affirmative vote of the holders of a majority of the Outstanding shares of Preferred
Shares, including each Series of MuniPreferred shares, voting as a separate class, determined with
reference to a majority of outstanding voting securities as that term is defined in Section
2(a)(42) of the 1940 Act, shall be required to approve any plan of reorganization (as such term is
used in the 1940 Act) adversely affecting such shares or any action requiring a vote of security
holders of the Fund under Section 13(a) of the 1940 Act. In the event a vote of holders of shares
of Preferred Shares is required pursuant to the provisions of Section 13(a) of the 1940 Act, the
Fund shall, not later than ten Business Days prior to the date on which such vote is to be taken,
notify any Rating Agency and which so requires that such vote is to be taken and the nature of the
action with respect to which such vote is to be taken and shall, not later than ten Business Days
after the date on which such vote is taken, notify such Rating Agency, as applicable, of the
results of such vote.
(h) The affirmative vote of the holders of a majority of the Outstanding shares of any series
of Preferred Shares, including any Series of MuniPreferred shares, voting separately from any other
series, determined with reference to a majority of outstanding voting securities as that term is
defined in Section 2(a)(42) of the 1980 Act, (shall be required with respect to any matter that
materially and adversely affects the rights, preferences, or powers of that series in a manner
different from that of other series of classes of the Funds shares of beneficial interest. For
purposes of the foregoing, no matter shall be deemed to adversely affect any right, preference or
power unless such matter (i) alters or abolishes any preferential right of such series;
(ii) creates, alters or abolishes any right in respect of redemption of such series; or
(iii) creates or alters (other than to abolish) any restriction on transfer applicable to such
series. The vote of holders of any shares described in this Section 6(h) will in each case be in
addition to a separate vote of the requisite percentage of Common Shares and/or Preferred Shares,
if any, necessary to authorize the action in question.
(i) The Board of Trustees, without the vote or consent of any holder of shares of Preferred
Shares, including any Series of MuniPreferred shares, or any other shareholder of the Fund, may
from time to time adopt, amend, alter or repeal any or all of the definitions contained herein, add
covenants and other obligations of the Fund, or confirm the applicability of covenants and other
obligations set forth herein, in connection with obtaining or maintaining the rating of any Rating
Agency
A-12
which is then rating the MuniPreferred shares, and any such adoption, amendment, alteration
or repeal will not be deemed to affect the preferences, rights or powers of Preferred Shares,
including MuniPreferred shares, or the Holders thereof, provided that the Board of Trustees
receives written confirmation from such Rating Agency, as applicable (with such confirmation in no
event being required to be obtained from a particular Rating Agency with respect to definitions or
other provisions relevant only to and adopted in connection with another Rating Agencys rating of
any Series of MuniPreferred shares) that any such amendment, alteration or repeal would not
adversely affect the rating then assigned by such Rating Agency.
Notwithstanding anything herein to the contrary, the Rating Agency Guidelines, as they may be
amended from time to time by the respective Rating Agency will be reflected in a written document
and may be amended by the respective Rating Agency without the vote, consent or approval of the
Fund, the Board of Trustees and any holder of shares of Preferred Shares, including any Series of
MuniPreferred shares, or any other shareholder of the Fund.
In addition, subject to compliance with applicable law, the Board of Trustees may amend the
definition of Maximum Rate to increase the percentage amount by which the Reference Rate is
multiplied to determine the Maximum Rate shown therein without the vote or consent of the holders
of the Preferred Shares, including any Series of MuniPreferred shares, or any other shareholder of
the Fund, and without receiving any confirmation from any Rating Agency after consultation with the
Broker-Dealers, provided that immediately following any such increase the Fund would be in
compliance with the MuniPreferred Shares Basic Maintenance Amount.
(j) Unless otherwise required by law, holders of shares of any Series of MuniPreferred shares
shall not have any relative rights or preferences or other special rights other than those
specifically set forth herein. The holders of shares of any Series of MuniPreferred shares shall
have no rights to cumulative voting. In the event that the Fund fails to pay any dividends on the
shares of any Series of MuniPreferred shares, the exclusive remedy of the holders shall be the
right to vote for Trustees pursuant to the provisions of this Section 6.
(k) The foregoing voting provisions will not apply with respect to any Series of MuniPreferred
shares if, at or prior to the time when a vote is required, such shares have been (i) redeemed or
(ii) called for redemption and sufficient funds shall have been deposited in trust to effect such
redemption.
7.
Liquidation Rights
.
(a) Upon the dissolution, liquidation or winding up of the affairs of the Fund, whether
voluntary or involuntary, the holders of each Series of MuniPreferred shares then Outstanding,
together with holders of shares of any class of shares ranking on a parity with each Series of
MuniPreferred shares upon dissolution, liquidation or winding up, shall be entitled to receive and
to be paid out of the assets of the Fund (or the proceeds thereof) available for distribution to
its shareholders after satisfaction of claims of creditors of the Fund an amount equal to the
liquidation preference with respect to such shares. The liquidation preference for shares of each
Series of MuniPreferred shares shall be $25,000 per share, plus an amount equal to all accumulated
dividends thereon (whether or not earned or declared but without interest) to the date payment of
such distribution is made in full or a sum
sufficient for the payment thereof is set apart with the Paying Agent. No redemption premium
shall be paid upon any liquidation even if such redemption premium would be paid upon optional or
mandatory redemption of the relevant shares.
A-13
(b) If, upon any such liquidation, dissolution or winding up of the affairs of the Fund,
whether voluntary or involuntary, the assets of the Fund available for distribution among the
holders of all outstanding Preferred Shares, including the MuniPreferred shares, shall be
insufficient to permit the payment in full to such holders of the amounts to which they are
entitled, then such available assets shall be distributed among the holders of all outstanding
Preferred Shares, including the MuniPreferred shares, ratably in any such distribution of assets
according to the respective amounts which would be payable on all such shares if all amounts
thereon were paid in full.
(c) Upon the dissolution, liquidation or winding up of the affairs of the Fund, whether
voluntary or involuntary, until payment in full is made to the holders of MuniPreferred shares of
the liquidation distribution to which they are entitled, no dividend or other distribution shall be
made to the holders of shares of Common Shares or any other class of shares of beneficial interest
of the Fund ranking junior to MuniPreferred shares upon dissolution, liquidation or winding up and
no purchase, redemption or other acquisition for any consideration by the Fund shall be made in
respect of the shares of Common Shares or any other class of shares of beneficial interest of the
Fund ranking junior to MuniPreferred shares upon dissolution, liquidation or winding up.
(d) A consolidation, reorganization or merger of the Fund with or into any other trust or
company, or a sale, lease or exchange of all or substantially all of the assets of the Fund in
consideration for the issuance of equity securities of another trust or company shall not be deemed
to be a liquidation, dissolution or winding up, whether voluntary or involuntary, for the purposes
of this Section 7.
(e) After the payment to the Holders of Preferred Shares, including MuniPreferred shares, of
the full preferential amounts provided for in this Section 7, the holders of Preferred Shares,
including MuniPreferred shares, as such shall have no right or claim to any of the remaining assets
of the Fund.
(f) In the event the assets of the Fund or proceeds thereof available for distribution to the
Holders of MuniPreferred shares, upon any dissolution, liquidation or winding up of the affairs of
the Fund, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution
shall be made on account of any shares of any other class or series of Preferred Shares ranking on
a parity with MuniPreferred shares unless proportionate distributive amounts shall be paid on
account of the MuniPreferred shares, ratably, in proportion to the full distributable amounts to
which holders of all such parity shares are entitled upon such dissolution, liquidation or winding
up.
(g) Subject to the rights of the holders of shares of any Series or class or classes of stock
ranking on a parity with MuniPreferred shares with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund, after payment shall have been
made in full to the holders of the MuniPreferred shares as provided in paragraph (a) of this
Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to
MuniPreferred shares with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund shall, subject to any respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the MuniPreferred shares shall not be entitled to share therein.
8.
Auction Agent
. For so long as any MuniPreferred shares are Outstanding, the
Auction Agent, duly appointed by the Fund to so act, shall be in each case a commercial bank, trust
company or other financial institution independent of the Fund and its Affiliates (which, however,
may engage or have engaged in business transactions with the Fund or its Affiliates) and at no time
shall the Fund or any of its Affiliates act as the Auction Agent in connection with the Auction
Procedures. If the Auction Agent
A-14
resigns or for any reason its appointment is terminated during
any period that any MuniPreferred shares are Outstanding, the Fund shall use its best efforts
promptly thereafter to appoint another qualified commercial bank, trust company or financial
institution to act as the Auction Agent.
9.
1940 Act MuniPreferred Shares Asset Coverage
. The Fund shall maintain, as of the
last Business Day of each month in which any shares of the MuniPreferred shares are Outstanding,
asset coverage with respect to the MuniPreferred shares which is equal to or greater than the 1940
Act MuniPreferred Shares Asset Coverage; provided, however, that Section 3(a)(ii) shall be the sole
remedy in the event the Fund fails to do so.
10.
MuniPreferred Shares Basic Maintenance Amount
. So long as the MuniPreferred
shares are Outstanding and any Rating Agency is then rating the MuniPreferred shares, the Fund
shall maintain, as of each Valuation Date, the MuniPreferred Shares Basic Maintenance Amount;
provided, however, that Section 3(a)(ii) shall be the sole remedy in the event the Fund fails to do
so.
11.
Certain Other Restrictions
. For so long as any shares of MuniPreferred shares are
Outstanding and any Rating Agency is then rating the shares of MuniPreferred shares, the Fund will
not engage in certain proscribed transactions set forth in the Rating Agency Guidelines, unless it
has received written confirmation from each such Rating Agency that proscribes the applicable
transaction in its Rating Agency Guidelines that any such action would not impair the rating then
assigned by such Rating Agency to a Series of MuniPreferred shares.
12.
Compliance Procedures for Asset Maintenance Tests
. For so long as any
MuniPreferred shares are Outstanding and any Rating Agency is then rating such shares:
(a) As of each Valuation Date, the Fund shall determine in accordance with the procedures
specified herein (i) whether the MuniPreferred Shares Basic Maintenance Amount is met as of that
date, and (ii) whether the 1940 Act MuniPreferred Shares Asset Coverage is met as of that date.
(b) Upon any failure to maintain the required MuniPreferred Shares Basic Maintenance Amount or
1940 Act MuniPreferred Shares Asset Coverage on any Valuation Date, the Fund may use reasonable
commercial efforts (including, without limitation, altering the composition of its portfolio,
purchasing MuniPreferred shares outside of an Auction or in the event of a failure to file a Rating
Agency Certificate (as defined below) on a timely basis, submitting the requisite Rating Agency
Certificate) to re-attain (or certify in the case of a failure to file on a timely basis, as the
case may be) the required MuniPreferred Shares Basic Maintenance Amount or 1940 Act MuniPreferred
Shares Asset Coverage on or prior to the Asset Coverage Cure Date.
(c) Compliance with the MuniPreferred Shares Basic Maintenance Amount and 1940 Act
MuniPreferred Shares Asset Coverage tests shall be determined with reference to those MuniPreferred
shares which are deemed to be Outstanding hereunder.
(d) The Fund shall deliver to each Rating Agency which is then rating MuniPreferred shares and
any other party specified in the Rating Agency Guidelines all certificates that are set forth in
the respective Rating Agency Guidelines regarding 1940 Act MuniPreferred Shares Asset Coverage,
MuniPreferred Shares Basic Maintenance Amount and/or related calculations at such times and
containing such information as set forth in the respective Rating Agency Guidelines (each, a
Rating Agency Certificate).
(e) In the event that any Rating Agency Certificate is not delivered within the time periods
set forth in the Rating Agency Guidelines, the Fund shall be deemed to have failed to maintain the
MuniPreferred Shares Basic Maintenance Amount or the 1940 Act MuniPreferred Shares
A-15
Asset Coverage,
as the case may be, on such Valuation Date for purposes of Section 12(b). In the event that any
Rating Agency Certificate with respect to an applicable Asset Coverage Cure Date is not delivered
within the time periods set forth in the Rating Agency Guidelines, the Fund shall be deemed to have
failed to satisfy the MuniPreferred Shares Basic Maintenance Amount or to meet the 1940
MuniPreferred Shares Asset Coverage, as the case may be, as of the related Valuation Date, and such
failure shall be deemed not to have been cured as of such Asset Coverage Cure Date for purposes of
the mandatory redemption provisions.
13.
Notice
. All notices or communications hereunder, unless otherwise specified in
this Statement, shall be sufficiently given if in writing and delivered in person, by telecopier,
by electronic means or mailed by first-class mail, postage prepaid. Notices delivered pursuant to
this Section 13 shall be deemed given on the earlier of the date received or the date five days
after which such notice is mailed.
14.
Waiver
. Holders of at least a majority of the Outstanding MuniPreferred shares,
acting collectively, or each Series of MuniPreferred shares acting as a separate series, determined
with reference to a majority of the outstanding voting securities as that term is defined in
Section 2(a)(42) of the 1940 Act, may waive any provision hereof intended for their respective
benefit in accordance with such procedures as may from time to time be established by the Board of
Trustees.
15.
Termination
. In the event that no MuniPreferred shares are Outstanding, all
rights and preferences of such shares established and designated hereunder shall cease and
terminate, and all obligations of the Fund under this Statement, shall terminate.
16.
Amendment
. Subject to the provisions of this Statement, the Board of Trustees
may, by resolution duly adopted, without shareholder approval (except as otherwise provided by this
Statement or required by applicable law), amend this Statement to (1) reflect any amendments hereto
which the Board of Trustees is entitled to adopt pursuant to the terms of this Statement without
shareholder approval or (2) add additional series of MuniPreferred shares or additional shares of a
series of MuniPreferred shares (and terms relating thereto) to the series and shares of
MuniPreferred shares theretofore described thereon. All such additional shares shall be governed
by the terms of this Statement, except as set forth in such amendment with respect to such
additional shares. To the extent permitted by applicable law, the Board of Trustees may interpret,
amend or adjust the provisions of this Statement to resolve any inconsistency or ambiguity or to
remedy any defect.
17.
Definitions
. As used in Part I and Part II of this Statement, the following terms
shall have the following meanings (with terms defined in the singular having comparable meanings
when used in the plural and vice versa), unless the context otherwise requires:
(a) Affiliate means any person controlled by, in control of or under common control with the
Fund; provided that no Broker-Dealer controlled by, in control of or under common control with the
Fund shall be deemed to be an Affiliate nor shall any corporation or any person controlled by, in
control of or under common control with such corporation one of the trustees, directors or
executive officers of which is also a Trustee of the Fund be deemed to be an Affiliate solely
because such Trustee, director or executive officer is also a Trustee of the Fund.
(b) Agent Member means a member of or participant in the Securities Depository that will act
on behalf of a Bidder.
(c) All Hold Rate means 80% of the Reference Rate.
(d) Applicable Rate means, with respect to each Series of MuniPreferred shares for each
Dividend Period (i) if Sufficient Clearing Orders exist for the Auction in respect thereof,
A-16
the
Winning Bid Rate, (ii) if Sufficient Clearing Orders do not exist for the Auction in respect
thereof, the Maximum Applicable Rate and (iii) in the case where all the shares of MuniPreferred
shares are the subject of Hold Orders for the Auction in respect thereof, the All Hold Rate.
(e) Applicable Percentage means the percentage determined based on the higher of the credit
ratings assigned to the series of MuniPreferred on such date by Moodys and S&P or equivalent
credit rating by any Other Rating Agency as follows:
|
|
|
|
|
|
|
Credit Ratings
|
|
|
Moodys
|
|
S&P
|
|
Applicable Percentage
|
Aaa
|
|
AAA
|
|
|
125
|
%
|
Aa3 to Aa1
|
|
AA- to AA+
|
|
|
150
|
%
|
A3 to A1
|
|
A- to A+
|
|
|
200
|
%
|
Baa3 to Baa1
|
|
BBB- to BBB+
|
|
|
250
|
%
|
Ba1 and lower
|
|
BB+ and lower
|
|
|
300
|
%
|
The Applicable Percentage as so determined shall be further subject to upward but not downward
adjustment in the discretion of the Board of Trustees of the Fund after consultation with the
Broker-Dealers, provided that immediately following any such increase the Fund would be in
compliance with the MuniPreferred Basic Maintenance Amount.
(f) Applicable Spread means the spread determined based on the higher of the credit rating
assigned to the series of MuniPreferred on such date by Moodys and S&P (or equivalent credit
rating by any Other Rating Agency) as follows:
|
|
|
|
|
|
|
Credit Ratings
|
|
|
Moodys
|
|
S&P
|
|
Spread
|
Aaa
|
|
AAA
|
|
125 bps
|
Aa3 to Aa1
|
|
AA- to AA+
|
|
150 bps
|
A3 to A1
|
|
A- to A+
|
|
200 bps
|
Baa3 to Baa1
|
|
BBB- to BBB+
|
|
250 bps
|
Ba1 and lower
|
|
BB+ and lower
|
|
300 bps
|
The Applicable Spread as so determined shall be further subject to upward but not downward
adjustment in the discretion of the Board of Trustees after consultation with the Broker-Dealers,
provided that immediately following any such increase the Fund would be in compliance with the
MuniPreferred Basic Maintenance Amount.
(g) Asset Coverage Cure Date has the meaning set forth in Section 3(a)(ii).
(h) Auction means each periodic operation of the procedures set forth under Auction
Procedures.
(i) Auction Agent means The Bank of New York unless and until another commercial bank, trust
company, or other financial institution appointed by a resolution of the Board of Trustees enters
into an agreement with the Fund to follow the Auction Procedures for the purpose of determining the
Applicable Rate.
A-17
(j) Auction Date means the first Business Day next preceding the first day of a Dividend
Period for each Series of MuniPreferred shares.
(k) Auction Procedures means the procedures for conducting Auctions set forth in Part II
hereof.
(l) Beneficial Owner, with respect to shares of each Series of MuniPreferred shares, means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer (or, if applicable,
the Auction Agent) as a holder of shares of such Series.
(m) Bid shall have the meaning specified in paragraph (a) of Section 1 of Part II of this
Statement.
(n) Bidder shall have the meaning specified in paragraph (a) of Section 1 of Part II of this
Statement;
provided
,
however
, that neither the Fund nor any affiliate thereof shall be permitted to
be a Bidder in an Auction, except that any Broker-Dealer that is an affiliate of the Fund may be a
Bidder in an Auction, but only if the Orders placed by such Broker-Dealer are not for its own
account.
(o) Board of Trustees or Board means the Board of Trustees of the Fund or any duly
authorized committee thereof as permitted by applicable law.
(p) Broker-Dealer means any broker-dealer or broker-dealers, or other entity permitted by
law to perform the functions required of a Broker-Dealer by the Auction Procedures, that has been
selected by the Fund and has entered into a Broker-Dealer Agreement that remains effective.
(q) Broker-Dealer Agreement means an agreement among the Auction Agent and a Broker-Dealer,
pursuant to which such Broker-Dealer agrees to follow the Auction Procedures.
(r) Business Day means a day on which the New York Stock Exchange is open for trading and
which is not a Saturday, Sunday or other day on which banks in the City of New York, New York are
authorized or obligated by law to close.
(s) Code means the Internal Revenue Code of 1986, as amended.
(t) Commission means the Securities and Exchange Commission.
(u) Common Share means the shares of beneficial interest, par value $.01 per share, of the
Fund.
(v) Date of Original Issue means, with respect to Series ___ MuniPreferred shares,
,
200___ and, with respect to
Series ___ MuniPreferred shares, ___, 200_.
(w) Default has the meaning set forth in Section 2(c)(ii) of this Part I.
(x) Default Period has the meaning set forth in Section 2(c)(ii) of this Part I.
(y) Default Rate means the Reference Rate multiplied by three (3).
(z) Deposit Securities means cash and any obligations or securities, including short term
money market instruments that are Eligible Assets, rated at least AAA, A-2 or SP-2 by S&P, except
that, for purposes of section 3(a)(i) of this Part I, such obligations or securities shall be
considered Deposit Securities only if they are also rated at least P-2 by Moodys.
A-18
(aa) Discount Factor means the Moodys Discount Factor (if Moodys is then rating the
MuniPreferred shares), S&P Discount Factor (if S&P is then rating the MuniPreferred shares) or an
Other Rating Agency Discount Factor, whichever is applicable.
(bb) Discounted Value means the quotient of the Market Value of an Eligible Asset divided by
the applicable Discount Factor.
(cc) Dividend Default has the meaning set forth in Section 2(c)(ii) of this Part I.
(dd) Dividend Payment Date with respect to a Series of MuniPreferred shares means any date
on which dividends are payable pursuant to Section 2(b) of this Part I.
(ee) Dividend Period means, with respect to a Series of MuniPreferred shares, the period
commencing on the Date of Original Issue thereof and ending on the date specified for such series
on the Date of Original Issue thereof and thereafter, as to such series, the period commencing on
the day following each Dividend Period for such series and ending on the day established for such
series by the Fund.
(ff) Eligible Assets means Moodys Eligible Assets or S&P Eligible Assets (if Moodys or S&P
are then rating the MuniPreferred shares) and/or Other Rating Agency Eligible Assets, whichever is
applicable.
(gg) Existing Holder, with respect to shares of a series of MuniPreferred shares, shall mean
a Broker-Dealer (or any such other Person as may be permitted by the Fund) that is listed on the
records of the Auction Agent as a holder of shares of such series.
(kk) Holder means, with respect to MuniPreferred shares, the registered holder of shares of
each Series of MuniPreferred shares as the same appears on the share ledger or share records of the
Fund.
(ll) Hold Order shall have the meaning specified in paragraph (a) of Section 1 of Part II of
this Statement.
(mm) LIBOR Rate on any Auction Date, means (i) the rate for deposits in U.S. dollars for the
designated Rate Period, which appears on display page 3750 of Moneylines Telerate Service
(Telerate Page 3750) (or such other page as may replace that page on that service, or such other
service as may be selected by the Fund in consultation with Broker-Dealers) as of 11:00 a.m.,
London time, on the day that is the London Business Day on the Auction Date or, if the Auction Date
is not a London Business Day, the London Business Day preceding the Auction Date (the LIBOR
Determination Date), or (ii) if such rate does not appear on Telerate Page 3750 or such other page
as may replace such Telerate Page 3750, (A) the Fund in consultation with Broker-Dealers shall
determine the arithmetic
A-19
mean of the offered quotations of the reference banks to leading banks in
the London interbank market for deposits in U.S. dollars for the designated Rate Period in an
amount determined by the Fund in consultation with Broker-Dealers by reference to requests for
quotations as of approximately 11:00 a.m. (London time) on such date made by the Fund in
consultation with Broker-Dealers to the reference banks, (B) if at least two of the reference banks
provide such quotations, LIBOR Rate shall equal such arithmetic mean of such quotations, (C) if
only one or none of the reference banks provide such quotations, LIBOR Rate shall be deemed to be
the arithmetic mean of the offered quotations that leading banks in The City of New York selected
by the Fund in consultation with Broker-Dealers are quoting on the relevant LIBOR Determination
Date for deposits in U.S. dollars for the designated Rate Period in an amount determined by the
Fund in consultation with Broker-Dealers that is representative of a single transaction in such
market at such time by reference to the principal London offices of leading banks in the London
interbank market. If the number of Rate Period days shall be (i) 7 or more but fewer than 21 days,
such rate shall be the seven-day LIBOR rate; (ii) more than 21 but fewer than 49 days, such rate
shall be one-month LIBOR rate; (iii) 49 or more but fewer than 77 days, such rate shall be the
two-month LIBOR rate; (iv) 77 or more but fewer than 112 days, such rate shall be the three-month
LIBOR rate; (v) 112 or more but fewer than 140 days, such rate shall be the four-month LIBOR rate;
(vi) 140 or more but fewer than 168 days, such rate shall be the five-month LIBOR rate; (vii) 168
or more but fewer 189 days, such rate shall be the six-month LIBOR rate; (viii) 189 or more but
fewer than 217 days, such rate shall be the seven-month LIBOR rate; (ix) 217 or more but fewer than
252 days, such rate shall be the eight-month LIBOR rate; (x) 252 or more but fewer than 287 days,
such rate shall be the nine-month LIBOR rate; (xi) 287 or more but fewer than 315 days, such rate
shall be the ten-month LIBOR rate; (xii) 315 or more but fewer than 343 days, such rate shall be
the eleven-month LIBOR rate; and (xiii) 343 or more days but fewer than 365 days, such rate shall
be the twelve-month LIBOR rate.
(nn) London Business Day means any day on which commercial banks are generally open for
business in London.
(oo) Mandatory Redemption Date has the meaning set forth in Section 3(a)(iii) of this
Part I.
(pp) Mandatory Redemption Price has the meaning set forth in Section 3(a)(iii) of this
Part I.
(qq) Market Value means the market value of the assets of the Fund as computed in accordance
with the Funds pricing procedures adopted by the Board of the Fund in connection with valuing the
Funds assets.
(rr) Maximum Rate means the greater of the Applicable Percentage of the Reference Rate or
the Applicable Spread plus the Reference Rate. The Auction Agent will round each applicable
Maximum Rate to the nearest one-thousandth (0.001) of one percent per annum, with any such number
ending in five ten-thousandths of one percent being rounded upwards to the nearest one-thousandth
(0.001) of one percent.
(ss) Moodys means Moodys Investor Services, Inc., a Delaware corporation, and its
successors at law.
(tt) Moodys Discount Factor means the discount factors set forth in the Moodys Guidelines
for use in calculating the Discounted Value of the Funds assets in connection with Moodys ratings
of MuniPreferred Shares.
A-20
(uu) Moodys Eligible Assets means assets of the Fund set forth in the Moodys Guidelines as
eligible for inclusion in calculating the Discounted Value of the Funds assets in connection with
Moodys ratings of MuniPreferred Shares.
(vv) Moodys Guidelines mean the guidelines provided by Moodys, as may be amended from time
to time, in connection with Moodys ratings of MuniPreferred shares.
(hh) MuniPreferred Shares Basic Maintenance Amount as of any Valuation Date has the meaning
set forth in the Rating Agency Guidelines.
(ii) MuniPreferred shares Series ___ means the shares of Series ___ of the MuniPreferred shares
or any other shares of Preferred Shares hereinafter designated as shares of Series ___ of the
MuniPreferred shares.
(jj) MuniPreferred shares Series ___ means the shares of Series ___ of the MuniPreferred shares
or any other shares of Preferred Shares hereinafter designated as shares of Series ___ of the
MuniPreferred shares.
(ww) 1940 Act means the Investment Company Act of 1940, as amended from time to time.
(xx) 1940 Act MuniPreferred Shares Asset Coverage means asset coverage, as determined in
accordance with Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding
senior securities of the Fund which are stock, including all Outstanding MuniPreferred shares (or
such other asset coverage as may in the future be specified in or under the 1940 Act as the minimum
asset coverage for senior securities which are stock of a closed-end investment company as a
condition of declaring dividends on its common shares), determined on the basis of values
calculated as of a time within 48 hours next preceding the time of such determination.
(yy) Notice of Redemption means any notice with respect to the redemption of shares of
MuniPreferred shares pursuant to Section 3.
(zz) Order shall have the meaning specified in paragraph (a) of Section 1 of Part II of this
Statement.
(aaa) Other Rating Agency means each rating agency, if any, other than Moodys or S&P then
providing a rating for the MuniPreferred shares pursuant to the request of the Fund.
(bbb) Other Rating Agency Discount Factor means the discount factors set forth in the Other
Rating Agency Guidelines of each Other Rating Agency for use in calculating the Discounted Value of
the Funds assets in connection with the Other Rating Agencys rating of MuniPreferred Shares.
(ccc) Other Rating Agency Eligible Assets means assets of the Fund set forth in the Other
Rating Agency Guidelines of each Other Rating Agency as eligible for inclusion in calculating the
Discounted Value of the Funds assets in connection with the Other Rating Agencys rating of
MuniPreferred shares.
(ddd) Other Rating Agency Guidelines mean the guidelines provided by each Other Rating
Agency, as may be amended from time to time, in connection with the Other Rating Agencys rating of
MuniPreferred shares.
(eee) Outstanding or outstanding means, as of any date, MuniPreferred shares theretofore
issued by the Fund except, without duplication, (i) any shares of MuniPreferred shares theretofore
canceled, redeemed or repurchased by the Fund, or delivered to the Auction Agent for cancellation
or with respect to which the Fund has given notice of redemption and irrevocably deposited with the
Paying Agent sufficient funds to redeem such MuniPreferred shares and (ii) any MuniPreferred shares
represented by any certificate in lieu of which a new certificate has been executed and delivered
by the Fund. Notwithstanding the foregoing, (A) for purposes of voting rights (including the
determination of the number of shares required to constitute a quorum), any of the MuniPreferred
shares to which the
Fund or any Affiliate of the Fund shall be the Existing Holder shall be disregarded and not
deemed Outstanding; (B) in connection with any Auction, any Series of MuniPreferred shares as to
which the Fund or any person known to the Auction Agent to be an Affiliate of the Fund shall be the
Existing Holder thereof shall be disregarded and deemed not to be Outstanding; and (C) for purposes
of
A-21
determining the MuniPreferred Shares Basic Maintenance Amount, MuniPreferred shares held by the
Fund shall be disregarded and not deemed Outstanding but shares held by any Affiliate of the Fund
shall be deemed Outstanding.
(fff) Paying Agent means The Bank of New York unless and until another entity appointed by a
resolution of the Board of Trustees enters into an agreement with the Fund to serve as paying
agent, which paying agent may be the same as the Auction Agent.
(ggg) Person or person means and includes an individual, a partnership, a trust, a Fund,
an unincorporated association, a joint venture or other entity or a government or any agency or
political subdivision thereof.
(hhh) Potential Beneficial Owner, with respect to shares of a series of MuniPreferred
shares, shall mean a customer of a Broker-Dealer that is not a Beneficial Owner of shares of such
series but that wishes to purchase shares of such series, or that is a Beneficial Owner of shares
of such series that wishes to purchase additional shares of such series.
(iii) Preferred Share means the preferred shares of beneficial interest, par value $.01 per
share, including the MuniPreferred shares, of the Fund from time to time.
(jjj) Rating Agency means each of Moodys (if Moodys is then rating MuniPreferred shares),
S&P (if S&P is then rating MuniPreferred shares) and any Other Rating Agency.
(kkk) Rating Agency Guidelines mean Moodys Guidelines (if Moodys is then rating
MuniPreferred shares), S&P Guidelines (if S&P is then rating MuniPreferred shares) and any Other
Rating Agency Guidelines.
(lll) Redemption Default has the meaning set forth in Section 2(c)(ii) of this Part I.
(mmm) Redemption Price has the meaning set forth in Section 3(a)(i) of this Part I.
(nnn) Reference Rate means, with respect to the determination of the Maximum Rate and
Default Rate, the applicable LIBOR Rate (for a Dividend Period of fewer than 365 days) or the
applicable Treasury Index Rate (for a Dividend Period of 365 days or more).
(ooo) Rule 144A Securities means securities which are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule 144A under the Securities Act as
determined by the Funds investment manager or portfolio manager acting pursuant to procedures
approved by the Board of Trustees of the Fund.
(ppp) S&P means Standard & Poors Ratings Services, a division of the McGraw-Hill Companies,
Inc., or its successors.
(qqq) S&P Discount Factor means the discount factors set forth in the S&P Guidelines for use
in calculating the Discounted Value of the Funds assets in connection with S&Ps ratings of
MuniPreferred Shares.
(rrr) S&P Eligible Asset means assets of the Fund set forth in the S&P Guidelines as
eligible for inclusion in calculating the Discounted Value of the Funds assets in connection S&Ps
ratings of MuniPreferred Shares.
A-22
(sss) S&P Guidelines mean the guidelines provided by S&P, as may be amended from time to
time, in connection with S&Ps ratings of MuniPreferred shares.
(ttt) Securities Act means the Securities Act of 1933, as amended from time to time.
(uuu) Securities Depository means The Depository Trust Company and its successors and
assigns or any successor securities depository selected by the Fund that agrees to follow the
procedures required to be followed by such securities depository in connection with the shares of
MuniPreferred shares Series ___ and MuniPreferred shares Series ___.
(vvv) Sell Order shall have the meaning specified in paragraph (a) of Section 1 of Part II
of this Statement.
(www) Special Dividend Period means a Dividend Period that is not a Standard Dividend
Period.
(xxx) Specific Redemption Provisions means, with respect to any Special Dividend Period of
more than one year, either, or any combination of (i) a period (a Non-Call Period) determined by
the Board of Trustees after consultation with the Broker-Dealers, during which the shares subject
to such Special Dividend Period are not subject to redemption at the option of the Fund pursuant to
Section 3(a)(i) and (ii) a period (a Premium Call Period), consisting of a number of whole years
as determined by the Board of Trustees after consultation with the Broker-Dealers, during each year
of which the shares subject to such Special Dividend Period shall be redeemable at the Funds
option pursuant to Section 3(a)(i) and/or in connection with any mandatory redemption pursuant to
Section 3(a)(i) at a price per share equal to $25,000 plus accumulated but unpaid dividends plus a
premium expressed as a percentage or percentages of $25,000 or expressed as a formula using
specified variables as determined by the Board of Trustees after consultation with the
Broker-Dealers.
(yyy) Standard Dividend Period means a Dividend Period of 7 days.
(zzz) Submission Deadline means 1:00 P.M., Eastern Standard time, on any Auction Date or
such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the
Auction Agent as specified by the Auction Agent from time to time.
(aaaa) Submitted Bid shall have the meaning specified in paragraph (a) of Section 3 of
Part II of this Statement.
(bbbb) Submitted Hold Order shall have the meaning specified in paragraph (a) of Section 3
of Part II of this Statement.
(cccc) Submitted Order shall have the meaning specified in paragraph (a) of Section 3 of
Part II of this Statement.
(dddd) Submitted Sell Order shall have the meaning specified in paragraph (a) of Section 3
of Part II of this Statement.
(eeee) Sufficient Clearing Bids shall have the meaning specified in paragraph (a) of
Section 3 of Part II of this Statement.
(ffff) Treasury Index Rate means the average yield to maturity for actively traded
marketable U.S. Treasury fixed interest rate securities having the same number of 30-day periods
A-23
to
maturity as the length of the applicable Dividend Period, determined, to the extent necessary, by
linear interpolation based upon the yield for such securities having the next shorter and next
longer number of 30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such longest maturity, in
all cases based upon data set forth in the most recent weekly statistical release published by the
Board of Governors of the Federal Reserve System (currently in H.15(519)); provided, however, if
the most recent such statistical release shall not have been published during the 15 days preceding
the date of computation, the foregoing computations shall be based upon the average of comparable
data as quoted to the Fund by at least three recognized dealers in U.S. Government securities
selected by the Fund.
(gggg) Valuation Date means every Friday, or, if such day is not a Business Day, the next
preceding Business Day; provided, however, that the first Valuation Date may occur on any other
date established by the Fund; provided, further, however, that such first Valuation Date shall be
not more than one week from the date on which MuniPreferred shares Series ___ or MuniPreferred
shares Series ___, as the case may be, initially are issued.
(hhhh) Winning Bid Rate has the meaning set forth in Section 3(a)(iii) of Part II of this
Statement.
18.
Interpretation
. References to sections, subsections, clauses, sub-clauses,
paragraphs and subparagraphs are to such sections, subsections, clauses, sub-clauses, paragraphs
and subparagraphs contained in this Part I or Part II hereof, as the case may be, unless
specifically identified otherwise.
PART II: AUCTION PROCEDURES
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date for shares of a series of
MuniPreferred shares:
(i) each Beneficial Owner of shares of such series may submit to its Broker-Dealer by
telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for shares of such Series for the next succeeding
Dividend Period of such shares;
(B) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell if the Applicable Rate
for shares of such Series for the next succeeding Dividend Period of shares of such
series shall be less than the rate per annum specified by such Beneficial Owner;
and/or
(C) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell without regard to the
Applicable Rate for shares of such Series for the next succeeding Dividend Period
of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial Owners, shall in
good faith for the purpose of conducting a competitive Auction in a commercially
A-24
reasonable manner, contact Potential Beneficial Owners (by telephone or otherwise), including Persons
that are not Beneficial Owners, on such lists to determine the number of shares, if any, of
such series which each such Potential Beneficial Owner offers to purchase if the Applicable
Rate for shares of such Series for the next succeeding Dividend Period of shares of such
series shall not be less than the rate per annum specified by such Potential Beneficial
Owner.
For the purposes hereof, the communication by a Beneficial Owner or Potential Beneficial Owner
to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent, of information referred to in
clause (i) (A), (i) (B), (i) (C) or (ii) of this paragraph (a) is hereinafter referred to as an
Order and collectively as Orders and each Beneficial Owner and each Potential Beneficial Owner
placing an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the Auction
Agent, is hereinafter referred to as a Bidder and collectively as Bidders; an Order containing
the information referred to in clause (i)(A) of this paragraph (a) is hereinafter referred to as a
Hold Order and collectively as Hold Orders; an Order containing the information referred to in
clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as a Bid and collectively
as Bids; and an Order containing the information referred to in clause (i)(C) of this
paragraph (a) is hereinafter referred to as a Sell Order and collectively as Sell Orders.
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a series of
MuniPreferred shares subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such Bid if
the Applicable Rate for shares of such series determined on such Auction Date shall
be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of such series to be
determined as set forth in clause (iv) of paragraph (a) of Section 4 of this Part II
if the Applicable Rate for shares of such series determined on such Auction Date
shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in such Bid if
the rate specified therein shall be higher than the Maximum Rate for shares of such
series, or such number or a lesser number of Outstanding shares of such series to be
determined as set forth in clause (iii) of paragraph (b) of Section 4 of this
Part II if the rate specified therein shall be higher than the Maximum Rate for
shares of such series and Sufficient Clearing Bids for shares of such series do not
exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of a series of
MuniPreferred shares subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such Sell
Order; or
(B) such number or a lesser number of Outstanding shares of such series as set
forth in clause (iii) of paragraph (b) of Section 4 of this Part II if Sufficient
Clearing Bids for shares of such series do not exist;
provided, however
,
that a Broker-Dealer that is an Existing Holder with respect to shares of a
series of MuniPreferred shares shall not be liable to any Person for failing to sell such shares
pursuant to a Sell Order described in the proviso to paragraph (c) of Section 2 of this Part II if
(1) such shares were
A-25
transferred by the Beneficial Owner thereof without compliance by such
Beneficial Owner or its transferee Broker-Dealer (or other transferee person, if permitted by the
Fund) with the provisions of Section 5 of Part I of the
Statement or (2) such Broker-Dealer has informed the
Auction Agent pursuant to the terms of its Broker-Dealer Agreement that, according to such
Broker-Dealers records, such Broker-Dealer believes it is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder of shares of a
series of MuniPreferred shares subject to an Auction on any Auction Date shall constitute an
irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in such Bid if
the Applicable Rate for shares of such series determined on such Auction Date shall
be higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding shares of such series as set
forth in clause (v) of paragraph (a) of Section 4 of this Part II if the Applicable
Rate for shares of such series determined on such Auction Date shall be equal to the
rate specified therein.
(c) No Order for any number of MuniPreferred shares other than whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders for MuniPreferred shares of a series subject to an Auction
on such Auction Date obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Fund) as an Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of shares subject to
Orders submitted to it by Potential Beneficial Owners, and shall specify with respect to each Order
for such shares:
(i) the name of the Bidder placing such Order (which shall be the Broker-Dealer unless
otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares of such series:
(A) the number of shares, if any, of such series subject to any Hold Order of
such Existing Holder;
(B) the number of shares, if any, of such series subject to any Bid of such
Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of such series subject to any Sell Order of
such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of such series, the rate
and number of shares of such series specified in such Potential Holders Bid.
A-26
(b) If any rate specified in any Bid contains more than three figures to the right of the
decimal point, the Auction Agent shall round such rate up to the next highest one thousandth (.001)
of 1%.
(c) If an Order or Orders covering all of the Outstanding shares of MuniPreferred shares of a
series held by any Existing Holder is not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent shall deem a Hold Order to have been submitted by or on behalf of such
Existing Holder covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided, however, that if an
Order or Orders covering all of the Outstanding shares of such series held by any Existing Holder
is not submitted to the Auction Agent prior to the Submission Deadline for an Auction relating to a
Special Dividend Period consisting of more than 28 Dividend Period Days, the Auction Agent shall
deem a Sell Order to have been submitted by or on behalf of such Existing Holder covering the
number of outstanding shares of such series held by such Existing Holder and not subject to Orders
submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the Auction Agent covering in
the aggregate more than the number of Outstanding MuniPreferred shares of a series subject to an
Auction held by such Existing Holder, such Orders shall be considered valid in the following order
of priority:
(i) all Hold Orders for shares of such series shall be considered valid, but only up to
and including in the aggregate the number of Outstanding shares of such series held by such
Existing Holder, and if the number of shares of such series subject to such Hold Orders
exceeds the number of Outstanding shares of such series held by such Existing Holder, the
number of shares subject to each such Hold Order shall be reduced pro rata to cover the
number of Outstanding shares of such series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered valid up to
and including the excess of the number of Outstanding shares of such series held by
such Existing Holder over the number of shares of such series subject to any Hold
Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing Holder for
shares of such series is submitted to the Auction Agent with the same rate and the
number of Outstanding shares of such series subject to such Bids is greater than
such excess, such Bids shall be considered valid up to and including the amount of
such excess, and the number of shares of such series subject to each Bid with the
same rate shall be reduced pro rata to cover the number of shares of such series
equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent with different
rates, such Bids shall be considered valid in the ascending order of their
respective rates up to and including the amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding shares of such
series subject to any portion of Bids considered not valid in whole or in part under
this clause (ii) shall be treated as the subject of a Bid for shares of such series
by or on behalf of a Potential Holder at the rate therein specified; and
A-27
(iii) all Sell Orders for shares of such series shall be considered valid up to and
including the excess of the number of Outstanding shares of such series held by such
Existing Holder over the sum of shares of such series subject to valid Hold Orders referred
to in clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of MuniPreferred shares is
submitted to the Auction Agent by or on behalf of any Potential Holder, each such Bid submitted
shall be a separate Bid with the rate and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for shares of a series of
MuniPreferred shares, the Auction Agent shall assemble all valid Orders submitted or deemed
submitted to it by the Broker-Dealers in respect of shares of such series (each such Order as
submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a
Submitted Hold Order, a Submitted Bid or a Submitted Sell Order, as the case may be, or as a
Submitted Order and collectively as Submitted Hold Orders, Submitted Bids or Submitted Sell
Orders, as the case may be, or as Submitted Orders) and shall determine for such series:
(i) the excess of the number of Outstanding shares of such series over the number of
Outstanding shares of such series subject to Submitted Hold Orders (such excess being
hereinafter referred to as the Available MuniPreferred shares of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to Submitted Bids
of Potential Holders specifying one or more rates equal to or lower than the Maximum
Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to Submitted Bids
of Existing Holders specifying one or more rates equal to or lower than the Maximum
Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to Submitted Sell
Orders
(in the event such excess or such equality exists (other than because the number of shares
of such series in subclauses (B) and (C) above is zero because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), such Submitted Bids in subclause (A)
above being hereinafter referred to collectively as Sufficient Clearing Bids for shares of
such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist, the lowest rate
specified in such Submitted Bids (the Winning Bid Rate for shares of such series) which
if:
(A) (I) each such Submitted Bid of Existing Holders specifying such lowest rate
and (II) all other such Submitted Bids of Existing Holders specifying lower
A-28
rates were rejected, thus entitling such Existing Holders to continue to hold the shares
of such series that are subject to such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying such lowest
rate and (II) all other such Submitted Bids of Potential Holders specifying lower
rates were accepted;
would result in such Existing Holders described in subclause (A) above continuing to hold an
aggregate number of Outstanding shares of such series which, when added to the number of
Outstanding shares of such series to be purchased by such Potential Holders described in
subclause (B) above, would equal not less than the Available MuniPreferred shares of such
series.
(b) Promptly after the Auction Agent has made the determinations pursuant to paragraph (a) of
this Section 3, the Auction Agent shall advise the Fund of the Maximum Rate for shares of the
series of MuniPreferred shares for which an Auction is being held on the Auction Date and, based on
such determination, the Applicable Rate for shares of such series for the next succeeding Dividend
Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series exist, that the Applicable
Rate for all shares of such series for the next succeeding Dividend Period thereof shall be
equal to the Winning Bid Rate for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such series do not exist (other than
because all of the Outstanding shares of such series are subject to Submitted Hold Orders),
that the Applicable Rate for all shares of such series for the next succeeding Dividend
Period thereof shall be equal to the Maximum Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to Submitted Hold
Orders, that the Applicable Rate for all shares of such series for the next succeeding
Dividend Period thereof shall be All Hold Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares. Existing Holders shall continue to hold the MuniPreferred shares that are subject to
Submitted Hold Orders, and, based on the determinations made pursuant to paragraph (a) of Section 3
of this Part II, the Submitted Bids and Submitted Sell Orders shall be accepted or rejected by the
Auction Agent and the Auction Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of MuniPreferred shares have been made,
all Submitted Sell Orders with respect to shares of such series shall be accepted and, subject to
the provisions of paragraphs (d) and (e) of this Section 4, Submitted Bids with respect to shares
of such series shall be accepted or rejected as follows in the following order of priority and all
other Submitted Bids with respect to shares of such series shall be rejected:
(i) Existing Holders Submitted Bids for shares of such series specifying any rate that
is higher than the Winning Bid Rate for shares of such series shall be accepted, thus
requiring each such Existing Holder to sell the MuniPreferred shares subject to such
Submitted Bids;
(ii) Existing Holders Submitted Bids for shares of such series specifying any rate
that is lower than the Winning Bid Rate for shares of such series shall be rejected, thus
entitling each such Existing Holder to continue to hold the MuniPreferred shares subject to
such Submitted Bids;
A-29
(iii) Potential Holders Submitted Bids for shares of such series specifying any rate
that is lower than the Winning Bid Rate for shares of such series shall be accepted;
(iv) each Existing Holders Submitted Bid for shares of such series specifying a rate
that is equal to the Winning Bid Rate for shares of such series shall be rejected, thus
entitling such Existing Holder to continue to hold the MuniPreferred shares subject to such
Submitted Bid, unless the number of Outstanding MuniPreferred shares subject to all such
Submitted Bids shall be greater than the number of MuniPreferred shares (remaining
shares) in the excess of the Available MuniPreferred shares of such series over the number
of MuniPreferred shares subject to Submitted Bids described in clauses (ii) and (iii) of
this paragraph (a), in which event such Submitted Bid of such Existing Holder shall be
rejected in part, and such Existing Holder shall be entitled to continue to hold
MuniPreferred shares subject to such Submitted Bid, but only in an amount equal to the
number of MuniPreferred shares of such series obtained by multiplying the number of
remaining shares by a fraction, the numerator of which shall be the number of Outstanding
MuniPreferred shares held by such Existing Holder subject to such Submitted Bid and the
denominator of which shall be the aggregate number of Outstanding MuniPreferred shares
subject to such Submitted Bids made by all such Existing Holders that specified a rate equal
to the Winning Bid Rate for shares of such series; and
(v) each Potential Holders Submitted Bid for shares of such series specifying a rate
that is equal to the Winning Bid Rate for shares of such series shall be accepted but only
in an amount equal to the number of shares of such series obtained by multiplying the number
of shares in the excess of the Available MuniPreferred shares of such series over the number
of MuniPreferred shares subject to Submitted Bids described in clauses (ii) through (iv) of
this paragraph (a) by a fraction, the numerator of which shall be the number of Outstanding
MuniPreferred shares subject to such Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding MuniPreferred shares subject to such Submitted Bids made by
all such Potential Holders that specified a rate equal to the Winning Bid Rate for shares of
such series.
(b) If Sufficient Clearing Bids for shares of a series of MuniPreferred shares have not been
made (other than because all of the Outstanding shares of such series are subject to Submitted Hold
Orders), subject to the provisions of paragraph (d) of this Section 4, Submitted Orders for shares
of such series shall be accepted or rejected as follows in the following order of priority and all
other Submitted Bids for shares of such series shall be rejected:
(i) Existing Holders Submitted Bids for shares of such series specifying any rate that
is equal to or lower than the Maximum Rate for shares of such series shall be rejected, thus
entitling such Existing Holders to continue to hold the MuniPreferred shares subject to such
Submitted Bids;
(ii) Potential Holders Submitted Bids for shares of such series specifying any rate
that is equal to or lower than the Maximum Rate for shares of such series shall be accepted;
and
(iii) Each Existing Holders Submitted Bid for shares of such series specifying any
rate that is higher than the Maximum Rate for shares of such series and the Submitted Sell
Orders for shares of such series of each Existing Holder shall be accepted, thus entitling
each Existing Holder that submitted or on whose behalf was submitted any such Submitted Bid
or Submitted Sell Order to sell the shares of such series subject to such Submitted Bid or
Submitted Sell Order, but in both cases only in an amount equal to the number of shares of
such series obtained by multiplying the number of shares of such series subject to Submitted
Bids
A-30
described in clause (ii) of this paragraph (b) by a fraction, the numerator of which
shall be the number of Outstanding shares of such series held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be
the aggregate number of Outstanding shares of such series subject to all such Submitted Bids
and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of MuniPreferred shares are subject to
Submitted Hold Orders, all Submitted Bids for shares of such series shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of paragraph (a) or
clause (iii) of paragraph (b) of this Section 4, any Existing Holder would be entitled or required
to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a share
of a series of MuniPreferred shares on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, round up or down the number of MuniPreferred shares of
such series to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date
as a result of such procedures so that the number of shares so purchased or sold by each Existing
Holder or Potential Holder on such Auction Date shall be whole shares of MuniPreferred shares.
(e) If, as a result of the procedures described in clause (v) of paragraph (a) of this
Section 4, any Potential Holder would be entitled or required to purchase less than a whole share
of a series of MuniPreferred shares on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, allocate MuniPreferred shares of such series or purchase
among Potential Holders so that only whole shares of MuniPreferred shares of such series are
purchased on such Auction Date as a result of such procedures by any Potential Holder, even if such
allocation results in one or more Potential Holders not purchasing MuniPreferred shares of such
series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of MuniPreferred shares, the
Auction Agent shall determine the aggregate number of shares of such series to be purchased and the
aggregate number of shares of such series to be sold by Potential Holders and Existing Holders and,
with respect to each Potential Holder and Existing Holder, to the extent that such aggregate number
of shares to be purchased and such aggregate number of shares to be sold differ, determine to which
other Potential Holder(s) or Existing Holder(s) they shall deliver, or from which other Potential
Holder(s) or Existing Holder(s) they shall receive, as the case may be, MuniPreferred shares of
such series. Notwithstanding any provision of the Auction Procedures or the Settlement Procedures
to the contrary, in the event an Existing Holder or Beneficial Owner of shares of a series of
MuniPreferred shares with respect to whom a Broker-Dealer submitted a Bid to the Auction Agent for
such shares that was accepted in whole or in part, or submitted or is deemed to have submitted a
Sell Order for such shares that was accepted in whole or in part, fails to instruct its Agent
Member to deliver such shares against payment therefor, partial deliveries of shares of
MuniPreferred shares that have been made in respect of Potential Holders or Potential Beneficial
Owners Submitted Bids for shares of such series that have been accepted
in whole or in part shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate of either shall have any
responsibility or liability with respect to the failure of an Existing Holder, a Potential Holder,
a Beneficial Owner, a Potential Beneficial Owner or its respective Agent Member to deliver
MuniPreferred shares of any series or to pay for MuniPreferred shares of any series sold or
purchased pursuant to the Auction Procedures or otherwise.
[Signature Page Follows]
A-31
IN WITNESS WHEREOF, NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND 2 has caused these presents
to be signed as of
, 200___ in its name and on its behalf by its Vice-President, and its
corporate seal to be hereunto affixed and attested by its Assistant Secretary. The Funds
Declaration of Trust is on file with the Secretary of State of the Commonwealth of Massachusetts,
and the said officers of the Fund have executed this Statement as officers and not individually,
and the obligations and rights set forth in this Statement are not binding upon any such officers,
or the Trustees or shareholders of the Fund, individually, but are binding only upon the assets and
property of the Fund.
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NUVEEN MUNICIPAL HIGH INCOME
OPPORTUNITY FUND 2
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By:
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Kevin J. McCarthy, Vice President
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ATTEST:
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Virginia L. ONeal, Assistant Secretary
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APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poors Corporation
A brief description of the applicable Standard & Poors
Corporation, a division of The McGraw-Hill Companies (Standard & Poors or S&P) rating symbols
and their meanings (as published by S&P) follows:
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of financial obligations,
or a specific financial program (including ratings on medium term note programs and commercial
paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the currency in which
the obligation is denominated. The issue credit rating is not a recommendation to purchase, sell,
or hold a financial obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.
Issue credit ratings are based on current information furnished by the obligors or obtained by
Standard & Poors from other sources it considers reliable. Standard & Poors does not perform an
audit in connection with any credit rating and may, on occasion, rely on unaudited financial
information. Credit ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally
assigned to those obligations considered short-term in the relevant market. In the U.S., for
example, that means obligations with an original maturity of no more then 365 days including
commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor with respect
to put features on long-term obligations. The result is a dual rating, in which the short-term
ratings address the put feature, in addition to the usual long-term rating. Medium-term notes are
assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based in varying degrees, on the following considerations:
1. Likelihood of payment capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors rights.
The issue ratings definitions are expressed in terms of default risk. As such, they pertain
to senior obligations of an entity. Junior obligations are typically rated lower than senior
obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation
applies when an entity has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations). Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
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AAA
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An obligation rated AAA has the highest rating assigned by
Standard & Poors. The obligors capacity to meet its financial
commitment on the obligation is extremely strong.
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B-1
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AA
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An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligors capacity to meet its financial
commitment on the obligation is very strong.
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A
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An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligors
capacity to meet its financial commitment on the obligation is still
strong.
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BBB
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An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
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BB, B, CCC, CC, And
C
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Obligations rated BB, B, CCC, CC, and C are regarded as
having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such
obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
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BB
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An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions,
which could lead to the obligors inadequate capacity to meet its
financial commitment on the obligation.
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B
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An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligors
capacity or willingness to meet its financial commitment on the
obligation.
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CCC
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An obligation rated CCC is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet
its financial commitment on the obligation.
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CC
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An obligation rated CC is currently highly vulnerable to nonpayment.
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C
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A Subordinated debt or preferred stock obligation rated C is
CURRENTLY HIGHLY VULNERABLE to nonpayment. The C rating may be
used to cover a situation where a bankruptcy petition has been filed
or similar action has been taken, but payments on this obligation are
being continued. A C also will be assigned to a preferred stock
issue in arreas on dividends or sinking fund payments, but that is
currently paying.
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D
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An obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poors believes that such payments will be made during
such grace period. The D rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
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Plus (+) or minus
(-).
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The ratings from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
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r
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This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating.
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N.R.
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This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that
Standard & Poors does not rate a particular obligation as a matter
of policy.
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B-2
Short-Term Issue Credit Ratings
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A-1
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A short-term obligation rated A-1 is rated in the highest category
by Standard & Poors. The obligors capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligors capacity to meet its financial commitment on these
obligations is extremely strong.
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A-2
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A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the
obligors capacity to meet its financial commitment on the obligation
is satisfactory.
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A-3
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A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
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B
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A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity
to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligors
inadequate capacity to meet its financial commitment on the
obligation.
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C
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A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment
on the obligation.
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D
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A short-term obligation rated D is in payment default. The D
rating category is used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poors believes that such payments will be made
during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
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Moodys Investors Service, Inc. A brief description of the applicable Moodys Investors
Service, Inc. (Moodys) rating symbols and their meanings (as published by Moodys) follows:
Municipal Bonds
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Aaa
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Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as gilt edged. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
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Aa
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Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
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A
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Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment
sometime in the future.
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Baa
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Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
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B-3
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speculative characteristics as well.
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Ba
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Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
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B
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Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
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Caa
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Bonds that are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
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Ca
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Bonds that are rated Ca represent obligations that are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
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C
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Bonds that are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
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#(hatchmark): Represents issues that are secured by escrowed funds held in cash, held in
trust, invested and reinvested in direct, non-callable, non-prepayable United States government
obligations or non-callable, non-prepayable obligations unconditionally guaranteed by the U.S.
Government, Resolution Funding Corporation debt obligations.
Con. (...): Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in operation experience,
(c) rentals that begin when facilities are completed, or (d) payments to which some other limiting
condition attaches. The parenthetical rating denotes probable credit stature upon completion of
construction or elimination of the basis of the condition.
(P): When applied to forward delivery bonds, indicates the rating is provisional pending
delivery of the bonds. The rating may be revised prior to delivery if changes occur in the legal
documents or the underlying credit quality of the bonds.
Note: Moodys applies numerical modifiers 1, 2 and 3 in each generic rating classification
from Aa through Caa. The modifier 1 indicates that the issue ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
Short-Term Loans
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MIG 1/VMIG 1
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This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based
access to the market for refinancing.
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MIG 2/VMIG 2
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This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the
preceding group.
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MIG 3/VMIG 3
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This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and market
access for refinancing is likely to be less well-established.
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B-4
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SG
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This designation denotes speculative-grade credit quality.
Debt instruments in this category may lack sufficient margins
of protection.
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Commercial Paper
Issuers (or supporting institutions) rated Prime-1 have a superior ability for repayment of
senior short-term debt obligations. Prime-1 repayment ability will normally be evidenced by the
following characteristics:
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Leading market positions in well-established industries.
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High rates of return on funds employed.
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Conservative capitalization structures with moderate reliance on debt and ample
asset protection.
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Broad margins in earnings coverage of fixed financial charges and high internal cash
generation.
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Well-established access to a range of financial markets and assured sources of
alternate liquidity.
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Issuers (or supporting institutions) rated Prime-2 have a strong ability for repayment of
senior short-term debt obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation than is the case for Prime-2 securities. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability for repayment of
senior short-term debt obligations. The effect of industry characteristics and market composition
may be more pronounced. Variability in earnings and profitability may result in changes in the
level of debt protection measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch Ratings A brief description of the applicable Fitch Ratings, Inc. (Fitch) ratings
symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
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AAA
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Highest credit quality. AAA ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
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AA
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Very high credit quality. AA ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment
of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
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A
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High credit quality. A ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more
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B-5
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vulnerable to changes in circumstances or in economic conditions than
is the case for higher ratings.
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BBB
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Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
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Speculative Grade
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BB
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Speculative. BB ratings indicate that there is a
possibility of credit risk developing, particularly
as the result of adverse economic change over time;
however, business or financial alternatives may be
available to allow financial commitments to be met.
Securities rated in this category are not
investment grade.
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B
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Highly speculative. B ratings indicate that
significant credit risk is present, but a limited
margin of safety remains. Financial commitments
are currently being met; however, capacity for
continued payment is contingent upon a sustained,
favorable business and economic environment.
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CCC, CC, C
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High default risk. Default is a real possibility.
Capacity for meeting financial commitments is
solely reliant upon sustained, favorable business
or economic developments. A CC rating indicates
that default of some kind appears probable. C
ratings signal imminent default.
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DDD, DD, and D Default
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The ratings of obligations in this category are
based on their prospects for achieving partial or
full recovery in a reorganization or liquidation of
the obligor. While expected recovery values are
highly speculative and cannot be estimated with any
precision, the following serve as general
guidelines. DDD obligations have the highest
potential for recovery, around 90%-100% of
outstanding amounts and accrued interest. DD
indicates potential recoveries in the range of
50%-90%, and D the lowest recovery potential,
i.e., below 50%. Entities rated in this category
have defaulted on some or all of their obligations.
Entities rated DDD have the highest prospect for
resumption of performance or continued operation
with or without a formal reorganization process.
Entities rated DD and D are generally
undergoing a formal reorganization or liquidation
process; those rated DD are likely to satisfy a
higher portion of their outstanding obligations,
while entities rated D have a poor prospect for
repaying all obligations.
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Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most obligations, or up to
three years for U.S. public finance securities, and thus places greater emphasis on the liquidity
necessary to meet financial commitments in a timely manner.
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F1
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Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added + to denote any
exceptionally strong credit feature.
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F2
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Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
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F3
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Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade. B Speculative.
Minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic
conditions.
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B-6
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B
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Speculative Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
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C
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High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
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D
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Default. Denotes actual or imminent payment default.
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Notes to Long-term and Short-term ratings
: + or - may be appended to a rating to denote
relative status within major rating categories. Such suffixes are not added to the AAA Long-term
rating category, to categories below CCC, or to Short-term ratings other than F1.
NR
indicates that Fitch Ratings does not rate the issuer or issue in question.
Withdrawn
: A rating is withdrawn when Fitch Ratings deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures, is called, or
refinanced.
Rating Watch
: Ratings are placed on Rating Watch to notify investors that there is a
reasonable probability of a rating change and the likely direction of such change. These are
designated as Positive, indicating a potential upgrade, Negative, for a potential downgrade, or
Evolving, if ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over a one to two year
period. Outlooks may be positive, stable, or negative. A positive or negative Rating Outlook does
not imply a rating change is inevitable. Similarly, ratings for which outlooks are stable could
be downgraded before an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these
cases, the Rating Outlook may be described as evolving.
B-7
PART C OTHER INFORMATION
Item 25: Financial Statements and Exhibits
1. Financial Statements:
Statement of Assets and Liabilities, October 16, 2007 (audited)
Statement of Operations from September 13, 2007 (date of organization) through October 16,
2007 (audited)
Statement of Assets and Liabilities,
, 200___ (unaudited) (to be filed by pre-effective
amendment)
Statement of Operations from
, 2007 through
, 200___ (unaudited) (to be filed by
pre-effective amendment)
Statement of Changes in Net Assets from September 13, 2007 (date of organization) through
, 200___ (unaudited) (to be filed by pre-effective amendment)
2. Exhibits:
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a.1
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Declaration of Trust dated September 13, 2007. Filed on September 17,
2007 as Exhibit a to Registrants Registration Statement on Form N-2
(File No. 333-146117) and incorporated by reference herein.
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a.2
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Amended and Restated Declaration of Trust, dated October 4, 2007.
Filed on October 5, 2007 as Exhibit a.2 to Pre-Effective Amendment
No. 1 to Registrants Registration Statement on Form N-2 (File
No. 333-146117) and incorporated by reference herein.
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b.
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By-laws of Registrant. Filed on September 17, 2007 as Exhibit b to
Registrants Registration Statement on Form N-2 (File No. 333-146117)
and incorporated by reference herein.
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c.
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None.
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d.1
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Form of Share Certificate.*
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d.2
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Rating Agency Guidelines.*
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e.
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Terms and Conditions of the Automatic Dividend Reinvestment Plan.
Filed on October 24, 2007 as Exhibit e to Pre-Effective Amendment
No. 2 to Registrants Registration Statement on Form N-2 (File
No. 333-146117) and incorporated by reference herein.
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f.
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None.
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g.
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Investment Management Agreement between Registrant and Nuveen Asset
Management dated November 13, 2007. Filed on November 14, 2007 as
Exhibit g to Pre-Effective Amendment No. 3 to Registrants
Registration Statement on Form N-2 (File No. 333-146117) and
incorporated by reference herein.
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h.1
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Form of Underwriting Agreement.*
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h.2
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Form of Merrill Lynch & Co. Standard Dealer Agreement.*
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h.3
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Form of Nuveen Master Selected Dealer Agreement. Filed on
November 14, 2007 as Exhibit h.3 to Pre-Effective Amendment No. 3 to
Registrants Registration Statement on Form N-2 (File No. 333-146117)
and incorporated by reference herein.
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h.4
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Form of Merrill Lynch & Co. Master Agreement Among Underwriters.
Filed on November 14, 2007 as Exhibit h.4 to Pre-Effective Amendment
No. 3 to Registrants
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C-1
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Registration Statement on Form N-2 (File
No. 333-146117) and incorporated by reference herein.
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h.5
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Form of Dealer Letter Agreement. Filed on November 14, 2007 as
Exhibit h.5 to Pre-Effective Amendment No. 3 to Registrants
Registration Statement on Form N-2 (File No. 333-146117) and
incorporated by reference herein.
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i.
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Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees. Filed on October 24, 2007 as
Exhibit i to Pre-Effective Amendment No. 2 to Registrants
Registration Statement on Form N-2 (File No. 333-146117) and
incorporated by reference herein.
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j.
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Amended and Restated Master Custodian Agreement between Registrant and
State Street Bank and Trust Company dated February 25, 2005. Filed on
November 14, 2007 as Exhibit j to Pre-Effective Amendment No. 3 to
Registrants Registration Statement on Form N-2 (File No. 333-146117)
and incorporated by reference herein.
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k.1
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Transfer Agency and Service Agreement between Registrant and State
Street Bank and Trust Company dated October 7, 2002. Filed on
November 14, 2007 as Exhibit k to Pre-Effective Amendment No. 3 to
Registrants Registration Statement on Form N-2 (File No. 333-146117)
and incorporated by reference herein.
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k.2
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Form of Auction Agency Agreement.*
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k.3
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Form of Broker-Dealer Agreement.*
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k.4
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Form of DTC Representation Letter.*
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l.1
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Opinion and consent of Vedder, Price, Kaufman & Kammholz, P.C.*
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l.2
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Opinion and consent of Bingham McCutchen LLP.*
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m.
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Not Applicable.
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n.
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Consent of [Independent Auditor].*
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o.
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None.
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p.
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Subscription Agreement of Nuveen Asset Management dated October 16,
2007. Filed on October 24, 2007 as Exhibit p to Pre-Effective
Amendment No. 2 to Registrants Registration Statement on Form N-2
(File No. 333-146117) and incorporated by reference herein.
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q.
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None.
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r.
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Code of Ethics of Nuveen Exchange-Traded Funds and Nuveen Asset
Management. Filed on October 24, 2007 as Exhibit r to Pre-Effective
Amendment No. 2 to Registrants Registration Statement on Form N-2
(File No. 333-146117) and incorporated by reference herein.
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s.
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Powers of Attorney.**
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*
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To be filed by amendment.
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**
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Filed herewith.
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Item 26: Marketing Arrangements
See Sections 2, 3(j) and 3(m) of the Form of Purchase Agreement filed as Exhibit h.1 to this
Registration Statement.
See the Introductory Paragraph and Paragraphs 2, 3, and 4 of the Form of Merrill Lynch & Co.
Standard Dealer Agreement filed as Exhibit h.2 to this Registration Statement and the Introductory
Paragraph and Sections 2 and 3 of the Form of Nuveen Master Selected Dealer Agreement filed as
Exhibit h.3 to this Registration Statement.
C-2
See the Introductory Paragraph and Sections 2 through 9 and 14 of the Form of Merrill Lynch &
Co. Master Agreement Among Underwriters filed as Exhibit h.4 to this Registration Statement.
See Paragraph e of the Form of Dealer Letter Agreement between Nuveen and the underwriters
filed as Exhibit h.5 to this Registration Statement.
Item 27: Other Expenses of Issuance and Distribution
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Securities and Exchange Commission fees
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$
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*
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Financial Industry Regulatory Authority fees
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*
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Printing and engraving expenses
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*
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Legal Fees
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*
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Exchange listing fees
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*
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Blue Sky filing fees and expenses
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*
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Miscellaneous expenses
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*
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Total
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$
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*
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*
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To be completed by amendment.
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Item 28: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 29: Number of Holders of Securities
At November 14th, 2007:
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Number of
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Title of Class
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Record Holders
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Common Shares, $.01 par value
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1
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Item 30: Indemnification
Section 4 of Article XII of the Registrants Declaration of Trust provides as follows:
Subject to the exceptions and limitations contained in this Section 4, every person who is, or
has been, a Trustee, officer, employee or agent of the Trust, including persons who serve at the
request of the Trust as directors, trustees, officers, employees or agents of another organization
in which the Trust has an interest as a shareholder, creditor or otherwise (hereinafter referred to
as a Covered Person), shall be indemnified by the Trust to the fullest extent permitted by law
against liability and against all expenses reasonably incurred or paid by him in connection with
any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by
virtue of his being or having been such a Trustee, director, officer, employee or agent and against
amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason of a final adjudication
by the court or other body before which the proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(b) with respect to any matter as to which he shall have been finally adjudicated not to have
acted in good faith in the reasonable belief that his action was in the best interests of the
Trust; or
C-3
(c) in the event of a settlement or other disposition not involving a final adjudication (as
provided in paragraph (a) or (b)) and resulting in a payment by a Covered Person, unless there has
been
either a determination that such Covered Person did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the conduct of his office
by the court or other body approving the settlement or other disposition or a reasonable
determination, based on a review of readily available facts (as opposed to a full trial-type
inquiry), that he did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act on the matter);
or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by policies maintained by
the Trust, shall be severable, shall not affect any other rights to which any Covered Person may
now or hereafter be entitled, shall continue as to a person who has ceased to be such a Covered
Person and shall inure to the benefit of the heirs, executors and administrators of such a person.
Nothing contained herein shall affect any rights to indemnification to which Trust personnel other
than Covered Persons may be entitled by contract or otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action, suit or proceeding
subject to a claim for indemnification under this Section 4 shall be advanced by the Trust prior to
final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay
such amount if it is ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other appropriate security or the
Trust shall be insured against losses arising out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the matter (provided that a majority of
the Disinterested Trustees then in office act on the matter) or independent legal counsel in a
written opinion shall determine, based upon a review of the readily available facts (as opposed to
a full trial-type inquiry), that there is reason to believe that the recipient ultimately will be
found entitled to indemnification.
As used in this Section 4, a Disinterested Trustee is one (x) who is not an Interested
Person of the Trust (including anyone, as such Disinterested Trustee, who has been exempted from
being an Interested Person by any rule, regulation or order of the Commission), and (y) against
whom none of such actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
As used in this Section 4, the words claim, action, suit or proceeding shall apply to
all claims, actions, suits, proceedings (civil, criminal, administrative or other, including
appeals), actual or threatened; and the words liability and expenses shall include without
limitation, attorneys fees, costs, judgments, amounts paid in settlement, fines, penalties and
other liabilities.
The trustees and officers of the Registrant are covered by Investment Adviser and Mutual Fund
Professional and Directors and Officers Liability policies in the aggregate amount of $50,000,000
against liability and expenses of claims of wrongful acts arising out of their position with the
Registrant and other Nuveen funds, except for matters that involve willful acts, bad faith, gross
negligence and willful disregard of duty (i.e., where the insured did not act in good faith for a
purpose he or she reasonably believed to be in the best interest of the Registrant or where he or
she had reasonable cause to believe this conduct was unlawful). The policy has a $1,000,000
deductible for operational failures (after the
C-4
deductible is satisfied, the insurer would cover 80%
of any operational failure claims and the Fund would
be liable for 20% of any such claims) and $1,000,000 deductible for all other claims, with $0
deductible for individual insureds.
Section 6 of the Form of Purchase Agreement filed as Exhibit h.1 to this Registration
Statement provides for each of the parties thereto, including the Registrant and the underwriters,
to indemnify the others, their trustees, directors, certain of their officers, trustees, directors
and persons who control them against certain liabilities in connection with the offering described
herein, including liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities Act of 1933, as amended
(the Securities Act), may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised
that, in the opinion of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final adjudication of such
issue.
Item 31: Business and Other Connections of Investment Adviser
Nuveen Asset Management (NAM) serves as investment adviser to separately managed accounts,
closed-end management investment companies and to the following open-end management type investment
companies: Nuveen Multistate Trust I, Nuveen Multistate Trust II, Nuveen Multistate Trust III,
Nuveen Multistate Trust IV, Nuveen Municipal Trust, Nuveen Investment Trust, Nuveen Investment
Trust II, Nuveen Investment Trust III, Nuveen Investment Trust V and Nuveen Managed Accounts
Portfolios Trust.
NAM has no other clients or business at the present time. For a description of any other
business, profession, vocation or employment of a substantial nature in which any director or
officer of the investment adviser who serves as officer or Trustee of the Registrant has engaged
during the last two years for his or her account or in the capacity of director, officer, employee,
partner or trustee, see the descriptions under Management of the Fund in Part B of this
Registration Statement. Such information for the remaining executive officers of NAM appears
below:
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Other Business Profession, Vocation or Employment During
|
Name and Position with NAM
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|
Past Two Fiscal Years
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John P. Amboian, Chief Executive Officer,
President and Director
|
|
Chief Executive Officer,
President and Director of
Nuveen Investments, Inc.,
Nuveen Investments, LLC,
Rittenhouse Asset
Management, Inc., Nuveen
Investments Advisers,
Inc., NWQ Holdings, LLC
and Nuveen Investments
Institutional Services
Group LLC.
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C-5
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|
|
|
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Other Business Profession, Vocation or Employment During
|
Name and Position with NAM
|
|
Past Two Fiscal Years
|
Stuart J. Cohen, Managing Director, Assistant
Secretary and Assistant General Counsel
|
|
Managing Director,
Assistant Secretary and
Assistant General Counsel
of Nuveen Investments,
LLC; Vice President and
Assistant Secretary of
Nuveen Investments
Holdings, Inc., NWQ
Holdings, LLC, Nuveen
Investments Institutional
Services Group LLC and
Rittenhouse Asset
Management, Inc.; Vice
President of Nuveen
Investments Advisers Inc;
Assistant Secretary of
Tradewinds Global
Investors, LLC, Santa
Barbara Asset Management,
LLC and Symphony Asset
Management, LLC.
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|
|
Sherri A. Hlavacek, Vice President and
Corporate Controller
|
|
Vice President and
Corporate Controller of
Nuveen Investments, Inc.,
Nuveen Investments, LLC,
Nuveen Investments
Holdings, Inc., Nuveen
Investments Advisers Inc.
and Rittenhouse Asset
Management, Inc.; Vice
President of NWQ
Holdings, LLC, Nuveen
Investments Advisers Inc.
and Nuveen Investments
Institutional Services
Group LLC; Certified
Public Accountant.
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Mary E. Keefe, Managing Director and Chief
Compliance Officer
|
|
Managing Director (since
2004) and Director of
Compliance of Nuveen
Investments, Inc.;
Managing Director and
Chief Compliance Officer
of Nuveen Investments,
LLC, Nuveen Investments
Advisers Inc., Nuveen
Investments Institutional
Services Group LLC and
Rittenhouse Asset
Management, Inc.; Chief
Compliance Officer of
Symphony Asset
Management, LLC, NWQ
Investment Management
Company, LLC and Nuveen
HydePark Group, LLC.
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John L. MacCarthy, Senior Vice President and
Secretary
|
|
Senior Vice President,
Secretary and General
Counsel (since 2006) of
Nuveen Investments, Inc.,
Nuveen Investments, LLC,
Rittenhouse Asset
Management, Inc. and
Nuveen Investments
Holdings, Inc.; Senior
Vice President and
Secretary (since 2006) of
Nuveen Investments
Advisers Inc., NWQ
Holdings, LLC and Nuveen
Investments Institutional
Services Group LLC;
Assistant Secretary
(since 2006) of NWQ
Investment Management
Company, LLC and
Tradewinds Global
Investors, LLC; Secretary
of Symphony Asset
Management, LLC and Santa
Barbara Asset Management,
LLC; formerly, Partner at
law firm of Winston &
Strawn LLP.
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|
|
Glenn R. Richter, Executive Vice President
|
|
Executive Vice President,
Chief Administrative
Officer of Nuveen
Investments, Inc. (since
2006); Executive Vice
President of Nuveen
Investments, LLC;
Executive Vice President
of Nuveen Investments
Holdings, Inc.; Chief
Administrative Officer of
NWQ Holdings, LLC;
formerly, Executive Vice
President and Chief
Financial Officer of RR
Donnelley & Sons
(2004-2005); prior
thereto, Executive Vice
President (2004) and
Chief Financial Officer
of Sears, Roebuck and Co.
(2002).
|
The principal business address of Nuveen Investments, Inc. and its affiliates is 333 West
Wacker Drive, Chicago, Illinois 60606.
Item 32: Location of Accounts and Records
NAM, 333 West Wacker Drive, Chicago, Illinois 60606, maintains the Declaration of Trust,
By-laws, minutes of Trustees and shareholders meetings and contracts of the Registrant and all
advisory material of the investment adviser.
C-6
State Street Bank and Trust Company, 250 Royall Street, Canton, Massachusetts 02021, maintains
all general and subsidiary ledgers, journals, trial balances, records of all portfolio purchases
and sales, and all other required records not maintained by NAM.
Item 33: Management Services
Not applicable.
Item 34: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it amends its prospectus
if: (1) subsequent to the effective date of its Registration Statement, the net asset value
declines more than 10 percent from its net asset value as of the effective date of the Registration
Statement; or (2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule
497(h) under the Securities Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
b. For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means designed to ensure
equally prompt delivery, within two business days of receipt of a written or oral request, any
Statement of Additional Information.
C-7
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in this City of Chicago, and State of Illinois, on the
12th day of December, 2007.
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NUVEEN MUNICIPAL HIGH INCOME
|
|
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OPPORTUNITY FUND 2
|
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/s/ Kevin J. McCarthy
|
|
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Kevin J. McCarthy, Vice President and
|
|
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|
|
Secretary
|
|
|
Pursuant to the requirements of the Securities Act, this Registration Statement has been
signed below by the following persons in the capacities and on the date indicated.
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Signature
|
|
Title
|
|
Date
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|
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|
|
|
/s/ Stephen D. Foy
|
|
Vice President and Controller
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|
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(principal
financial and accounting
|
|
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|
|
officer)
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|
December 12, 2007
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/s/ Gifford R. Zimmerman
|
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Chief Administrative Officer
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(principal
executive officer)
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December 12, 2007
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Timothy R. Schwertfeger*
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Chairman of the Board and Trustee
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Robert P. Bremmer*
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Trustee
|
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Jack B. Evans*
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Trustee
|
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William C. Hunter*
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Trustee
|
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|
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David J. Kundert*
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Trustee
|
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William J. Schneider*
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Trustee
|
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|
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Judith M. Stockdale*
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Trustee
|
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|
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Carole E. Stone*
|
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Trustee
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By:
|
|
/s/ Kevin J. McCarthy
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|
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|
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Kevin J. McCarthy
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|
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Attorney-In-Fact
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|
|
|
|
December 12, 2007
|
|
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*
|
|
The original powers of attorney authorizing Kevin J. McCarthy, Larry W. Martin, Gifford R.
Zimmerman and Eric Fess to execute this Registration Statement, and Amendments thereto, for
the trustees of the Registrant on whose behalf this Registration Statement is filed, have been
executed and are filed herewith as Exhibit S.
|
C-8
INDEX TO EXHIBITS
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|
|
a.1
|
|
Declaration of Trust dated September 13, 2007. Filed on September 17, 2007 as Exhibit a
to Registrants Registration Statement on Form N-2 (File No. 333-146117) and
incorporated by reference herein.
|
|
|
|
a.2
|
|
Amended and Restated Declaration of Trust, dated October 4, 2007. Filed on October 5,
2007 as Exhibit a.2 to Pre-Effective Amendment No. 1 to Registrants Registration
Statement on Form N-2 (File No. 333-146117) and incorporated by reference herein.
|
|
|
|
b.
|
|
By-laws of Registrant. Filed on September 17, 2007 as Exhibit b to Registrants
Registration Statement on Form N-2 (File No. 333-146117) and incorporated by reference
herein.
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|
|
|
c.
|
|
None.
|
|
|
|
d.1
|
|
Form of Share Certificate. (to be filed by amendment)
|
|
|
|
d.2
|
|
Rating Agency Guidelines. (to be filed by amendment)
|
|
|
|
e.
|
|
Terms and Conditions of the Automatic Dividend Reinvestment Plan. Filed on October 24,
2007 as Exhibit e to Pre-Effective Amendment No. 2 to Registrants Registration
Statement on Form N-2 (File No. 333-146117) and incorporated by reference herein.
|
|
|
|
f.
|
|
None.
|
|
|
|
g.
|
|
Investment Management Agreement between Registrant and Nuveen Asset Management dated
November 13, 2007. Filed on November 14, 2007 as Exhibit g to Pre-Effective Amendment
No. 3 to Registrants Registration Statement on Form N-2 (File No. 333-146117) and
incorporated by reference herein.
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|
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h.1
|
|
Form of Underwriting Agreement. (to be filed by amendment)
|
|
|
|
h.2
|
|
Form of Merrill Lynch & Co. Standard Dealer Agreement. (to be filed by amendment)
|
|
|
|
h.3
|
|
Form of Nuveen Master Selected Dealer Agreement. Filed on November 14, 2007 as
Exhibit h.3 to Pre-Effective Amendment No. 3 to Registrants Registration Statement on
Form N-2 (File No. 333-146117) and incorporated by reference herein.
|
|
|
|
h.4
|
|
Form of Merrill Lynch & Co. Master Agreement Among Underwriters. Filed on November 14,
2007 as Exhibit h.4 to Pre-Effective Amendment No. 3 to Registrants Registration
Statement on Form N-2 (File No. 333-146117) and incorporated by reference herein.
|
|
|
|
h.5
|
|
Form of Dealer Letter Agreement. Filed on November 14, 2007 as Exhibit h.5 to
Pre-Effective Amendment No. 3 to Registrants Registration Statement on Form N-2 (File
No. 333-146117) and incorporated by reference herein.
|
|
|
|
i.
|
|
Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for Independent
Directors and Trustees. Filed on October 24, 2007 as Exhibit i to Pre-Effective
Amendment No. 2 to Registrants Registration Statement on Form N-2 (File No. 333-146117)
and incorporated by reference herein.
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j.
|
|
Amended and Restated Master Custodian Agreement between Registrant and State Street Bank
and Trust Company dated February 25, 2005. Filed on November 14, 2007 as Exhibit j to
Pre-Effective Amendment No. 3 to Registrants Registration Statement on Form N-2 (File
No. 333-146117) and incorporated by reference herein.
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|
|
k.1
|
|
Transfer Agency and Service Agreement between Registrant and State Street Bank and Trust
Company dated October 7, 2002. Filed on November 14, 2007 as Exhibit k to Pre-Effective
Amendment No. 3 to Registrants Registration Statement on Form N-2 (File No. 333-146117)
and incorporated by reference herein.
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|
|
|
k.2
|
|
Form of Auction Agency Agreement. (to be filed by amendment)
|
C-9
|
|
|
k.3
|
|
Form of Broker-Dealer Agreement. (to be filed by amendment)
|
|
|
|
k.4
|
|
Form of DTC Representation Letter. (to be filed by amendment)
|
|
|
|
l.1
|
|
Opinion and consent of Vedder, Price, Kaufman & Kammholz, P.C. (to be filed by amendment)
|
|
|
|
l.2
|
|
Opinion and consent of Bingham McCutchen LLP. (to be filed by amendment)
|
|
|
|
m.
|
|
Not Applicable.
|
|
|
|
n.
|
|
Consent of [Independent Auditor]. (to be filed by amendment)
|
|
|
|
o.
|
|
None.
|
|
|
|
p.
|
|
Subscription Agreement of Nuveen Asset Management dated October 16, 2007. Filed on
October 24, 2007 as Exhibit p to Pre-Effective Amendment No. 2 to Registrants
Registration Statement on Form N-2 (File No. 333-146117) and incorporated by reference
herein.
|
|
|
|
q.
|
|
None.
|
|
|
|
r.
|
|
Code of Ethics of Nuveen Exchange-Traded Funds and Nuveen Asset Management. Filed on
October 24, 2007 as Exhibit r to Pre-Effective Amendment No. 2 to Registrants
Registration Statement on Form N-2 (File No. 333-146117) and incorporated by reference
herein.
|
|
|
|
s.
|
|
Powers of Attorney.
|
C-10
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