Preferred Income Fund (PFD) Summary
This is not a prospectus. This summary is available for information purposes only and may not contain all of the information that is important to you. Additional information is available in the Fund's shareholder reports (Shareholder Reports) or at the SEC's website(SEC: PREFERRED INCOME FUND INC). The securities or financial instruments discussed in this summary may not be suitable for all investors. Like all securities, Fund shares can increase or decrease in price, and you can lose money on your investment. No offer or solicitation to buy or sell securities is being made by the Fund or Flaherty & Crumrine Incorporated.
& Crumrine Preferred Income Fund Incorporated is a diversified, closed-end
management investment company.
The initial offering of 6,700,000 shares of Common Stock closed on January 31, 1991 and was offered through a group of underwriters led by Lehman Brothers. On February 25, 1991 the lead underwriter exercised the overallotment option and issued an additional 900,000 shares. As of April 3, 2017 there were 11,138,587 shares outstanding. The increase is a result of additional issuance in accordance with the Dividend Reinvestment and Cash Purchase Plan (DRIP).
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The Fund's Common Stock is listed on the New York Stock Exchange under the symbol "PFD".
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Objective. The Fund's investment objective is high current income for holders of its Common Stock consistent with preservation of capital. Flaherty & Crumrine Incorporated, the Fund's investment adviser (the "Adviser"), intends to pursue strategies that it expects generally to result in the Fund's income increasing in response to significant increases in long-term interest rates while being relatively resistant to the impact of declines in long-term interest rates. This strategy involves hedging strategies and is described more fully below.
In seeking its objectives, the Fund normally will invest at least 80% of its total assets in a diversified portfolio of preferred securities, some or all of which are expected to be hedged. The Fund may also invest up to 20% of its total assets in debt securities and up to 15% of its total assets in common stocks. The portions of the Fund's assets invested in various types of preferred, debt or common stock may vary from time to time depending on market conditions. The portion of securities that the Fund will hedge, as well as the types of hedge positions utilized, may also vary significantly from time to time.
Credit Quality. At time of purchase, at least 75% of the securities that the Fund will acquire will be rated investment grade by any one of Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"), or Fitch Ratings Group ("Fitch"). In addition, the Fund may invest up to 25% of its assets at the time of purchase in securities rated below investment grade by all of Moody's, S&P and Fitch, as long (a) such securities are rated at least "Ba3" by Moody's, "BB-" by S&P, or "BB-" by Fitch or (b) such securities are issued by an issuer having an outstanding class of senior debt rated investment grade at the time of purchase. Thus, the Fund may invest in securities rated below "Ba3" by Moody's, "BB-" by S&P and "BB-" by Fitch if the issuer has investment grade senior debt outstanding. The Fund will apply the ratings criteria at the time of purchase, and the Fund will not be required to dispose of securities if, after purchase, they are downgraded, although the Adviser may take this into account in determining whether to retain the security. As a result, more than 25% of the Fund's holdings at any time may be rated below investment grade or in equivalent securities.
The Fund will not enter into a credit derivative transaction with a counterparty that is rated below investment grade.
Hedging Strategies. The Fund may hedge some or all of the general exposure to long-term U.S. Treasury interest rates inherent in its holdings of preferred and debt securities. The response of the Fund's income to changes in long-term interest rates will be impacted by the effectiveness and use of its hedging strategies. Under normal market conditions, this hedging would be accomplished principally by one or more of the following strategies: (1) purchasing put options (called a "long position in a put option") on Treasury Bond and/or Treasury Note futures contracts, (2) entering into futures contracts to sell Treasury Bonds and/or Treasury Notes (called a "short position in a futures contract"), (3) entering into interest rate swap agreements as a "fixed rate payer," (4) purchasing options to enter into interest rate swap agreements as a "fixed rate payer" (called a "pay fixed swaption"), and/or (5) entering into swap futures and Eurodollar futures contracts.
If a Fund hedged its U.S. Treasury interest rate exposure, the hedging positions that the Fund would hold normally appreciate in value when long-term interest rates rise significantly, reflecting either the expected rise in yields of long-term Treasury securities or interest rate swap yields, as applicable, and the associated decline in the prices of underlying Treasury securities or decreased net market value of an obligation to pay a fixed income stream in a higher interest rate environment.
The Fund may also buy and sell credit derivatives, including credit default swaps and market spread swaps, to manage credit risk and, in certain instances, to increase total return.
The Fund expects to use gains, if any, on its hedging instruments to purchase additional preferred securities, potentially increasing dividends available to the Fund's Common Shareholders.
The response of the Fund's income to changes in interest rates or credit spreads will be impacted by the effectiveness and use of hedging strategies. There are economic costs of hedging reflected in the pricing of futures, interest rate swaps, options and swaptions contracts and credit derivatives which can be significant, particularly in periods when long-term interest rates are substantially above short-term interest rates or when credit spreads are wide and the Fund buys credit protection. In addition, in times of market dislocation, there can be additional economic costs of using any of the above strategies that could potentially diminish, or even outweigh, the benefits of hedging. Consequently, in those circumstances, the Adviser may elect to reduce or potentially eliminate the Fund's hedging activity. Of course, if significant increases in long-term Treasury rates cause preferred securities prices to fall when hedging instruments are not being employed by the Fund or are being employed to a limited extent, the Fund's income would not increase in response and Fund's total return can be expected to decline.
Securities. Preferred securities in which the Fund may invest
include (i) traditional preferred/preference stock whose dividends qualify
for the inter-corporate dividends received deduction ("DRD")
that meet certain criteria (as described below) and (ii) "hybrid"
or taxable preferred securities. Most of the traditional preferred securities
pay Qualified Dividend Income ("QDI"), which is eligible for
lower individual tax rates under the Jobs and Growth Tax Relief Reconciliation
Act of 2003. The portion of the Fund's assets that generate dividends
qualifying for the DRD and constituting QDI will vary depending on market
conditions. The preferred securities in which the Fund invests consist
principally of fixed rate and adjustable rate securities, some or all
of which are expected to be hedged against changes in the general level
of interest rates. Hybrid preferred securities include securities that
are commonly known as MIPs, QUIPS, TOPrS, TrUPS, QUIBS, QUIDS, CorTS,
Trust Preferred Securities or capital securities. A security will be characterized
as a hybrid preferred security (a) if an issuer can defer payment of income
for eighteen months or more without triggering an event of default and
(b) if such issue is a junior and fully subordinated liability of an issuer
or its ultimate guarantor. Certain of the Fund's investments in hybrid,
i.e., fully taxable, preferred securities will be considered debt securities
to the extent that, in the opinion of the Adviser, such investments are
deemed not to have these characteristics.
Under normal market conditions, the Fund will invest 25% or more of its total assets in securities of companies in the financials sector, which for this purpose is comprised of the bank, thrifts & mortgage finance, diversified financial services, finance, consumer finance, capital markets, asset management & custody, investment banking & brokerage, insurance, insurance brokers and real estate investment trust (REIT) industries. The Fund's holdings of securities of companies in any industry not comprising the financials sector will at all times be less than 25% of the Fund's total assets. Consistent with the limitations described above, the proportion of the Fund's assets invested in the financials sector and other industries may vary from time to time, depending on market conditions.
Debt Securities. The Fund may invest, under normal market conditions, up to 20% of its assets in debt securities. Certain of its investments in hybrid, i.e., fully taxable, preferred securities will be subject to the 20% limitation to the extent that, in the opinion of the Adviser, such investments are deemed to be debt like in key characteristics.
Common Stock. The Fund may invest, under normal market conditions, up to 15% of its assets in common stocks.
Convertible Securities. Certain preferred securities and debt securities are convertible into the common stock of the associated issuer. To the extent that such securities, because of their terms and market conditions, trade in close relationship to the underlying common stock of the issuer, they will be subject to the limit of 15% of total assets, under normal market conditions, that also applies to common stocks. Otherwise, such convertible preferred and debt securities will be treated by the Fund in the same manner as non-convertible securities.
Credit Derivatives. The Fund may sell credit derivative as an alternative to buying a corporate security, up to a limit of 1/3 of Fund assets. This allows the Fund to pursue various "synthetic asset" strategies, whereby it can acquire exposure to particular credits and manage its interest rate exposure more efficiently than it could in dealing in only cash securities. The Fund will not use credit derivatives to leverage credit exposure, but rather as an alternative to buying a security of a particular issuer.
Option Spreads. The Fund may buy or sell option spreads, which may allow the Fund to reduce the cost of hedging or add total return in periods of high implied volatility.
Securities Lending. The Fund may engage in securities lending on up to 15% of total assets. Proceeds from any securities loan will be invested in a fund managed according to SEC guidelines applicable to money market funds.
Securities. The Fund will invest primarily in the securities
of U.S. issuers. However, the Fund may invest up to 30% of total assets
in the securities other than money market securities of companies organized
outside the United States. Outside of this limit, the Fund may invest
in foreign money market securities. All foreign securities held by the
Fund will be denominated in U.S. dollars.
Flaherty & Crumrine Incorporated, a registered investment adviser, acts as the Fund's investment adviser. The Adviser has been active in the management of portfolios of preferred securities, including related interest rate hedging activities, since 1983. The Adviser had aggregate assets under management, as of February 28, 2011 (including the net assets of the Fund), equal to approximately $4.3 billion.
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The Fund pays the Adviser a monthly fee for its advisory services equal to an annual rate of 0.625% on the first $100 million of the Fund's average monthly total managed assets, which is reduced to 0.50% on the value of the Fund's managed assets in excess of $100 million.
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BNY Mellon Investment Servicing (U.S.), Inc. ("BNY Mellon")., serves as the Fund's administrator (the "Administrator"). The Administrator calculates the net asset value of the Fund's shares of Common Stock and generally assists in all aspects of the Fund's administration and operation. As compensation for the Administrator's services, the Fund pays the Administrator a monthly fee at an annual rate of 0.10% of the first $200 million of the Fund's average weekly total managed assets, 0.04% of the next $300 million of the Fund's average weekly total managed assets, .03% of the next $500 million of the Fund's average weekly total managed assets and .02% of the Fund's average weekly total managed assets over $1 billion. BNY Mellon also serves as the Fund's Common Stock dividend-paying agent and registrar (Transfer Agent). As compensation for BNY Mellon's services, the Fund pays BNY Mellon a fee at an annual rate of 0.02% of the first $150 million of the Funds's average weekly net assets attributable to Common Stock, 0.0075% of the next $350 million of the Fund's average weekly net assets attributable to Common Stock, and 0.0025% of the Fund's average weekly net assets attributable to Common Stock above $500 million, plus certain our of pocket expenses.
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The Fund leverages common shareholders' investment in the shares of Common Stock.
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Fund anticipates that, while the Fund's leverage is based on short-term interest rates, the income on the Fund's
portfolio will exceed the cost of leverage. Of
course, no assurance can be given that the use of leverage
will result in higher income for Common Stock shareholders. So long
as the Fund is able to invest the proceeds of the borrowing
in securities that provide higher yields then its cost of leverage, the effect of leverage will be
to cause the Common Stock shareholders to earn more income than if the Fund were not leveraged. If the cost of leverage were to approach the net return
on the Fund's investment portfolio after expenses, however, the benefit
of leverage to the Common Stock shareholders would be reduced. Moreover,
if the cost of leverage were
to exceed the net return on the Fund's portfolio, the Fund's
leveraged capital structure would result in a lower rate of return to the
Common Stock shareholders than if the Fund were unleveraged.
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Fund expects to distribute through the year, primarily in the form of regular
monthly distributions, substantially all (on an annual basis) of its net
investment income (that is, income other than net realized long-term and
short-term capital gains) and its net realized short-term capital gains,
if any. Realized long term capital gains, if any, are expected to be distributed
annually. Investors should note that the portion of the Fund's income
that qualifies for the DRD and QDI will vary. In addition, Fund distributions
will retain the tax characteristics of the underlying dividends received
from the Fund's investments. Thus, Fund distributions that derive
from dividends paid by corporations out of previously taxed corporate income
will be characterized as QDI for individual shareholders and will be eligible
for the DRD for corporate shareholders, subject to the Fund meeting certain
investment holding period requirements. Fund distributions that derive from
interest on debt securities and dividends on "hybrid" or taxable
preferred securities are generally fully taxable to shareholders.
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Under the Fund's Dividend Reinvestment and Cash Purchase Plan, a Common Stock shareholder whose shares are registered in his or her own name will have all dividends or distributions with respect to his or her shares of Common Stock reinvested automatically in additional shares of the Fund's Common Stock, unless the shareholder elects to receive distributions in cash.
addition, a Common Stock shareholder whose shares are held in the name
of a broker/dealer or nominee may have, depending on the broker/dealer
or nominee's participation, all distributions reinvested automatically
by the broker/dealer or nominee in additional shares of Common Stock under
the plan unless the shareholder elects to receive distributions in cash.
A Common Stock shareholder whose shares are held in the name of a broker/dealer
or nominee should contact his or her respective broker/dealer or nominee
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 buying shares of the Fund you should consider carefully the following risks that you assume when you invest in shares of the Fund's Common Stock:
Interest Rate Risk. Fixed income securities typically decline in value when correlated interest rates rise and increase in value when correlated interest rates fall. Changes in the level of long-term interest rates are expected to affect the value of the Fund's portfolio holdings of fixed rate securities and, under certain circumstances, its holdings of adjustable rate securities. Subject to certain limitations described herein, the Fund currently anticipates hedging, from time to time, some or all of its holdings of fixed rate and adjustable rate securities, for the purposes of (1) protecting against declines in value attributable to significant increases in long-term interest rates and (2) providing increased income in the event of significant increases in long-term interest rates while maintaining the Fund's relative resistance to a reduction in income in the event of declines in long-term interest rates. There can be no guarantee that such hedging strategies will be successful. Significant changes in the interest rate environment, as well as other factors, may cause the Fund's holdings of preferred and debt securities to be redeemed by the issuers, thereby reducing the Fund's holdings of higher income-paying securities at a time when the Fund may be unable to acquire other securities paying comparable income rates with the redemption proceeds. In addition to fluctuations due to changes in long-term interest rates, the value of the Fund's holdings of preferred securities, and, as a result, the Fund's net asset value, may also be affected by other market and credit factors, as well as by actual or anticipated changes in tax laws.
Hedging Strategy Risk. Certain of the investment techniques that the Fund may employ for hedging or, under certain circumstances, to increase income or total return will expose the Fund to risks. There are economic costs of hedging reflected in the pricing of futures, swaps, options, swaption contracts, and credit derivatives which can be significant. There may be an imperfect correlation between changes in the value of the Fund's portfolio holdings and hedging positions entered into by the Fund, which may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. In addition, the Fund's success in using hedge instruments is subject to the Adviser's ability to predict correctly changes in the relationships of such hedge instruments to the Fund's portfolio holdings, and there can be no assurance that the Adviser's judgment in this respect will be accurate. In addition to the hedging techniques described elsewhere, i.e., positions in Treasury Bond or Treasury Note futures contracts, use of options on these positions, positions in interest rate swaps and options thereon ("swaptions"), and positions in credit derivatives, such investment techniques may include entering into interest rate and stock index futures contracts and options on interest rate and stock index futures contracts, purchasing and selling put and call options on securities and stock indices, purchasing and selling securities on a when-issued or delayed delivery basis, entering into repurchase agreements, lending portfolio securities and making short sales of securities "against the box." The Fund intends to comply with regulations of the Securities and Exchange Commission (and with the limitations of the Fund's credit rating agencies in connection with the Fund's leverage) involving "covering" or segregating assets in connection with the Fund's use of options, futures and other derivatives contracts.
Credit Risk. Credit risk is the risk that an issuer of a preferred or debt security will become unable to meet its obligation to make dividend, interest and principal payments. In general, lower rated preferred or debt securities carry a greater degree of credit risk. If rating agencies lower their ratings of preferred or debt securities in the Fund's portfolio, the value of those obligations could decline, which could jeopardize the rating agencies' ratings of Fund Preferred Shares. In addition, the underlying revenue source for a preferred or debt security may be insufficient to pay dividends, interest or principal in a timely manner. Because the primary source of income for the Fund is the dividend, interest and principal payments on the preferred or debt securities in which it invests, any default by an issuer of a preferred or debt security could have a negative impact on the Fund's ability to pay dividends on Common Stock. Even if the issuer does not actually default, adverse changes in the issuer's financial condition may negatively affect its credit rating or presumed creditworthiness. These developments would adversely affect the market value of the issuer's obligations or the value of credit derivatives if the Fund has sold credit protection.
Securities Lending Risk. Counterparty risk on the securities lending side of the transaction exists. Although risk is limited since the loan is collateralized by cash, the Fund could suffer losses if the counterparty fails to return securities that have risen in value. There is also investment risk on the proceeds from the securities loans: These monies are invested in short-term investments, and if those investments lose value, the Fund will still owe the amount borrowed.
Liquidity Risk. The Fund intends to invest in securities and derivatives contracts with varying degrees of market liquidity and may invest up to 20% of its total assets in illiquid securities. Preferred securities may be substantially less liquid than many other securities such as Government Securities, corporate debt, or common stocks. At any particular time, a preferred security may not be actively traded in the secondary market, even though it may be listed on the New York Stock Exchange or other securities exchange. Many preferred securities currently outstanding are listed on the New York Stock Exchange, although secondary market transactions in preferred securities are frequently effected in the over-the-counter market, even in those preferred securities that are listed. Over-the-counter derivatives contracts, including credit derivatives, also may be substantially less liquid than many other securities such as Government Securities, corporate debt or common stocks. They are not traded on an exchange, may not be actively traded, and are individual contracts between counterparties. The prices of illiquid securities and the market-to-market values of illiquid derivatives contracts may be more volatile than more actively traded securities or derivatives due to a variety of factors, such as there being fewer active buyers and sellers and the lower frequency of trading. The absence of a liquid secondary market may adversely affect the ability of the Fund to buy or sell its preferred securities or derivatives holdings at the times and prices desired and the ability of the Fund to determine its net asset value.
Leverage Risk. The Fund's use of leverage creates an opportunity for increased Common Stock net income, but also creates special risks for Common Stockholders. There is no assurance that the Fund's leveraging strategy will be successful. Risks affecting the Fund's net asset value are magnified. If the Fund's current net investment income and capital gains are not sufficient to meet collateral requirements, the Fund may need to liquidate certain of its investments, thereby possibly reducing the net asset value attributable to the Common Stock. Such redemptions may also cause the Fund to incur additional transaction costs, including costs associated with the sale of portfolio securities.
Leverage creates two additional major types of risks for Common Stockholders:
When the Fund is utilizing leverage, the fees paid to the Adviser and other service providers will be higher than if the Fund did not utilize leverage because the fees paid will be calculated based on the Fund's managed assets (which include the principal amount of any borrowings used for leverage).
Industry Concentration Risk. The Fund concentrates its investments in the utilities and banking industries. As a result, the Fund's investments may be subject to greater risk and market fluctuation than a fund that had securities representing a broader range of investment alternatives. Banks and utilities are subject to such risks as changes in law, regulatory policies or accounting standards, regulatory restrictions, increased competition and general economic and political conditions.
Preferred Securities Risk. In addition to credit risk, investment in preferred securities carries certain risks including:
Debt Securities Risk. In addition to credit risk, investment in debt securities carries certain risks including:
Credit Derivatives Risk. In addition to credit risk, investment in credit derivatives carries certain risks including:
Market Discount Risk. As with any stock, the price of the Fund's shares will fluctuate with market conditions and other factors. Shares of closed-end investment companies frequently trade at discounts from net asset value. This characteristic of shares of a closed-end fund is a risk separate and distinct from the risk that the fund's net asset value may decrease. The Fund cannot predict whether the Common Stock will trade at, above or below net asset value. The Common Stock is designed for long-term investors and should not be treated as a trading vehicle. For those investors, realization of gain or loss on their investment is likely to be more dependent upon the existence of a premium or discount than upon portfolio performance.
Management Risk. The Fund is subject to management risk because it is an actively managed portfolio. The Adviser will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
Lower-rated Securities Risk. The Fund may invest up to 25% of its total assets in its holdings of securities rated below investment grade at the time of purchase or judged to be comparable in quality at the time of purchase. Lower rated preferred or debt securities, or equivalent unrated securities, which are commonly known as "junk bonds," generally involve greater volatility or price and risk of loss of income and principal, and may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher grade securities. It is reasonable to expect that any adverse economic conditions could disrupt the market for lower-rated securities, have an adverse impact on the value of those securities, and adversely affect the ability of the issuers of those securities to repay principal, dividends and interest on those securities.
Conversion Risk. Under the Fund's Bylaws, if at any time shares of the Common Stock publicly trade for a substantial period of time at a significant discount from the Fund's then current net asset value per share, the Board of Directors of the Fund is obligated to consider taking various actions designed to reduce or eliminate the discount, including recommending to shareholders amendments to the Fund's Articles of Incorporation (together with any amendments or supplements thereto, including any articles supplementary, the "Articles" or "Articles of Incorporation") to convert the Fund to an open-end investment company, which would result in the redemption of Fund Preferred Shares then outstanding and the potential subsequent sale of Fund assets during unfavorable market conditions. In addition, the Board may consider taking actions designed to eliminate the discount whenever it deems it to be appropriate.
Anti-Takeover Provisions. The Fund's Articles of Incorporation and Bylaws include provisions that could have the effect of inhibiting the Fund's possible conversion to open-end status and limiting the ability of other entities or persons to acquire control of the Fund's Board of Directors. In certain circumstances, these provisions might also inhibit the ability of shareholders to sell their shares at a premium over prevailing market prices.
Inflation Risk. Inflation risk is the risk that the value of assets or income from the Fund's investments will be worth less in the future as inflation decreases the value of payments at future dates.
Deflation Risk. Deflation risk is the risk that the Fund's dividends may be reduced in the future as deflation reduces interest rates in general, resulting in higher-yielding assets owned by the Fund being redeemed by their issuers.
Tax Risk. Future changes in tax law or regulation could adversely affect the Fund and its portfolio holdings, including their valuation, which could negatively impact the Fund's shareholders and distributions they receive from the Fund. Tax changes can be given retroactive effect.
Foreign Security Risk. The prices of foreign securities may be affected by factors not present with U.S. securities, including currency exchange rates, political and economic conditions, less stringent regulation and higher volatility. As a result, many foreign securities may be less liquid and more volatile than U.S. securities.
Turnover Risk. The techniques and strategies contemplated
by the Fund might result in a high degree of portfolio turnover. The Fund
cannot accurately predict its securities portfolio turnover rate, but
anticipates that its annual portfolio turnover rate will not exceed 150%
under normal market conditions, although it could be materially higher
under certain conditions. Higher portfolio turnover rates could result
in corresponding increases in brokerage commissions and generate short-term
capital gains taxable as ordinary income.
Fund's Board of Directors currently contemplates that the Fund, at
least once each year, may consider repurchasing shares of Common Stock in
the open market or in private transactions, or tendering for shares, in
an attempt to reduce or eliminate a persistent and material market value
discount from net asset value, if one should occur. Due to the outstanding
Fund Preferred Shares, the Fund's ability to repurchase shares of,
or tender for, its Common Stock may be limited by the asset coverage requirements
of the 1940 Act and by asset coverage and other requirements imposed by
Moody's as a condition to rating the Fund Preferred Shares. No assurance
can be given that the Board of Directors will decide to undertake share
repurchases or tenders or, if undertaken, that repurchases and/or tender
offers will result in the Fund's Common Stock trading at a price that
is close to, equal to or above net asset value. Subject to rating agency
limitations, the Fund may borrow to finance repurchases and/or tender offers.
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The Bank of New York Mellon serves as the Fund's custodian. BNY Mellon Investment Servicing (U.S.), Inc. serves
as the Fund's transfer agent, dividend-paying agent and registrar
for the Common Stock.