N-CSR 1 form.htm Federated Investors, Inc.

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form N-CSR

Certified Shareholder Report of Registered Management Investment Companies

 

 

 

 

811-2677

 

(Investment Company Act File Number)

 

Federated Municipal Securities Fund, Inc.

_______________________________________________________________

 

(Exact Name of Registrant as Specified in Charter)

 

 

 

Federated Investors Funds

4000 Ericsson Drive

Warrendale, Pennsylvania 15086-7561

(Address of Principal Executive Offices)

 

 

(412) 288-1900

(Registrant's Telephone Number)

 

 

John W. McGonigle, Esquire

Federated Investors Tower

1001 Liberty Avenue

Pittsburgh, Pennsylvania 15222-3779

(Name and Address of Agent for Service)

(Notices should be sent to the Agent for Service)

 

 

 

 

 

 

Date of Fiscal Year End: 03/31/2012

 

 

Date of Reporting Period: 03/31/2012

 

 

 

 

 

 

 

Item 1. Reports to Stockholders

 

Annual Shareholder Report
March 31, 2012


Share Class Ticker
A LMSFX
B LMSBX
C LMSCX
F LMFFX

Federated Municipal Securities Fund, Inc.

Fund Established 1976

Dear Valued Shareholder,

I am pleased to present the Annual Shareholder Report for your fund covering the period from April 1, 2011 through March 31, 2012. This report includes Management's Discussion of Fund Performance, a complete listing of your fund's holdings, performance information and financial statements along with other important fund information.

In addition, our website, FederatedInvestors.com, offers easy access to Federated resources that include timely fund updates, economic and market insights from our investment strategists, and financial planning tools. We invite you to register to take full advantage of its capabilities.

Thank you for investing with Federated. I hope you find this information useful and look forward to keeping you informed.

Sincerely,

J. Christopher Donahue, President


Not FDIC Insured May Lose Value No Bank Guarantee

CONTENTS

Management's Discussion of Fund Performance (unaudited)

The Fund's total return, based on net asset value, for the 12-month reporting period ended March 31, 2012, was 13.21% for the Fund's Class A Shares and Class F Shares and 12.25% for the Fund's Class B Shares and Class C Shares. The total return for the S&P Municipal Bond Investment Grade Index (SPMBIGI),1 the Fund's broad-based securities market index, was 12.31% during the same period. The Fund's total return for the most recently completed fiscal year reflected actual cash flows, transaction costs and other expenses, which were not reflected in the total return of the SPMBIGI.

During the reporting period, the most significant factors affecting the Fund's performance relative to the SPMBIGI were: (a) the effective duration of its portfolio (which indicates the portfolio's sensitivity to changes in interest rates);2,3 (b) the allocation of the portfolio among securities of similar issuers (referred to as sectors); and (c) the credit rating of portfolio securities.

The following discussion will focus on the performance of the Fund's Class A Shares. The 13.21% total return for the Class A Shares for the reporting period consisted of 4.21% of tax-exempt dividends and reinvestments and 9.00% appreciation in the net asset value of the shares.4

Market Overview

During the 12-month reporting period, tax-exempt municipal bond yields dropped sharply. A lengthy rally in the fixed income markets generally received additional support from the “January Effect” at the beginning of 2012, which consisted of significant money being reinvested into the municipal market from bonds maturing and being called by issuers. Also, the amount of tax-exempt municipal bond issuance at that time of the year was muted, which created a favorable technical environment (supply/demand imbalance) within the municipal bond market. Tax-exempt municipal bonds began the reporting period from an overly cheap starting point as a result of negative headline risk concerning municipal credit quality and potentially increasing municipal defaults, which turned out to be unfounded. The reporting period also began with massive outflows from municipal bond funds that began in October of 2010 and continued through the first eight months of 2011. By late 2011 and early 2012, municipal bond fund flows began to turn consistently positive. Treasury yields also declined significantly during the reporting period and this powerful rally spilled over into the municipal bond market. The ten-year U.S. Treasury bond declined from a high of 3.59% in April of 2011 to a low of 1.72% in September of 2011. In an attempt to support a stronger economic recovery, the Federal Reserve maintained a highly accommodative monetary policy stance during the reporting period. Developments in Europe continued to be a central focus for investors as concerns persisted about the prospects for a durable solution to the European fiscal and financial difficulties, which indirectly effected rate levels in the municipal bond market. The overriding positives for Annual Shareholder Report

the tax-exempt municipal bond market during the reporting period were the sharp decline in Treasury yields, light tax-exempt new issue supply, the Federal Reserve maintaining its near zero interest rate policy and the extremely low rate of municipal defaults despite persistent budget pressures for municipal issuers. The continuing pressures on public pension plans and their unfunded liabilities continued to receive significant scrutiny. However, many state and local municipal entities took actions to control pension costs and this issue continued to be watched.

Duration

As determined at the end of the 12-month reporting period, the Fund's dollar-weighted average duration for the reporting period was 7.35 years. Duration management continued to be a significant component of the Fund's investment strategy. The Fund adjusted duration relative to the SPMBIGI several times during the reporting period. Tax-exempt municipal bond yields declined significantly during the period and decreased more for bonds with longer maturities as the yield curve significantly flattened during the period. The yield curve became flatter as a result of yields on longer maturity bonds declining more than bonds with shorter maturities. Bonds with a longer duration generally outperformed bonds with a shorter duration due to their differences in interest rate volatility. As a result of the Fund's allocation to bonds with shorter durations than those included in the SPMBIGI, duration detracted from Fund performance relative to the SPMBIGI.

Sector ALLOCATION

During the course of the 12-month reporting period, the Fund maintained a higher portfolio allocation, relative to the SPMBIGI, to securities issued by water and sewer projects and industrial development revenue bonds. These allocations helped the Fund's performance due to the narrowing of credit spreads within the essential service revenue bond sectors. The Fund's exposure to highly rated general obligation bonds issued by states had a negative performance impact during the period as higher quality municipal debt underperformed. The Fund also reduced its allocation to pre-refunded, tax-exempt municipal bonds (bonds for which the principal and interest payments are secured or guaranteed by cash or U.S. Treasury securities held in an escrow account). The reduced exposure to pre-refunded bonds aided Fund performance due to lower price volatility exhibited by pre-refunded bonds as compared to other sectors. The Fund was overweight in single family housing bonds relative to the SPMBIGI, which hurt performance, due to the underperformance in this sector.

Credit Quality5

Risk-taking returned for investors during the 12-month reporting period as absolute yields in the marketplace reached new lows and investors attempted to add income by reaching into lower credit quality categories. Headline risk Annual Shareholder Report

concerning municipal credit quality subsided, although the risk of a high profile municipal issuer becoming distressed continued to exist. This resulted in outperformance of bonds rated “A” or “BBB” (or unrated bonds of comparable quality) relative to bonds rated in the higher rating categories (or unrated bonds of comparable quality). With the decline in credit spreads over the reporting period, and the reduction of credit spreads to a lesser extent for “AAA” and “AA” rated (or unrated comparable quality) debt, the Fund's overweight position, relative to the SPMBIGI, in “A” and “BBB” rated (or unrated comparable quality) debt during the reporting period helped the Fund's performance, as the yield on “A” and ”BBB” rated (or unrated comparable quality) debt decreased to a greater extent than for other investment-grade securities. The Fund was negatively affected by the deterioration in a specific health care bond (Madison Center located in Indiana). The obligor went into default during the reporting period and suffered a significant deterioration in price.6

1 S&P Indices changed the name of the SPMBIGI from “S&P/Investortools Municipal Bond Investment Grade Index” to “S&P Municipal Bond Investment Grade Index.” Please see the footnotes to the line graphs under “Fund Performance and Growth of a $10,000 Investment” below for the definition of, and more information about, the SPMBIGI.
2 Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities with shorter durations. For purposes of this Management's Discussion of Fund Performance, duration is determined using a third-party analytical system.
3 Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.
4 Income may be subject to state and local taxes. The investment adviser normally (except as disclosed in the Fund's Prospectus) will invest the Fund's assets entirely in securities whose interest is not subject to the alternative minimum tax for individuals and corporations (AMT), such that, normally, distributions of annual interest income are exempt from the AMT (in addition to the federal regular income tax). However, in certain circumstances (such as, for example, when there is a lack of supply of non-AMT securities or there are advantageous market conditions, or there is a change in law relating to the AMT), to pursue the Fund's investment objective, the Fund's adviser may invest the Fund's assets in securities that may be subject to the AMT. When there is a lack of supply of non-AMT securities and/or other circumstances that exist, such circumstances may result in the Fund acquiring AMT securities that are consistent with the Fund's investment objective. These acquisitions may occur in the ordinary course or in connection with Fund reorganization transactions (i.e., transactions in which the Fund acquires the portfolio securities of other mutual funds), an issuer bankruptcy or another event or circumstance. In such circumstances, interest from the Fund's investments may be subject to the AMT.
5 Credit ratings pertain only to the securities in the portfolio and do not protect Fund shares against market risk.
6 Investment-grade securities and noninvestment-grade securities may either be: (a) rated by a nationally recognized statistical ratings organization or rating agency; or (b) unrated securities that the Fund's investment adviser (“Adviser”) believes are of comparable quality. The rating agencies that provided the ratings for rated securities include Standard and Poor's, Moody's Investor Services, Inc. and Fitch Rating Service. When ratings vary, the highest rating is used. Credit ratings of “AA” or better are considered to be high credit quality; credit ratings of “A” are considered high or medium/good quality; and credit ratings of “BBB” are considered to be medium/good credit quality and the lowest category of investment-grade securities; credit ratings of “BB” and below are lower-rated, noninvestment-grade securities or junk bonds; and credit ratings of “CCC” or below are noninvestment-grade securities that have high default risk. Any credit quality breakdown does not give effect to the impact of any credit derivative investments made by the Fund. Credit ratings are an indication of the risk that a security will default. They do not protect a security from credit risk. Lower-rated bonds typically offer higher yields to help compensate investors for the increased risk associated with them. Among these risks are lower creditworthiness, greater price volatility, more risk to principal and income than with higher-rated securities and increased possibilities of default.
Annual Shareholder Report

FUND PERFORMANCE AND GROWTH OF A $10,000 INVESTMENT

The Average Annual Total Return table below shows returns for each class averaged over the stated periods. The graphs below illustrate the hypothetical investment of $10,0001 in the Federated Municipal Securities Fund, Inc. (the “Fund”) from March 31, 2002 (or later Start of Performance, if applicable) to March 31, 2012, compared to the S&P Municipal Bond Investment Grade Index (SPMBIGI),2 S&P Municipal Bond Investment Grade, 3-year plus, Non-AMT (SPMBIG3)3 and the Morningstar Municipal National Long Funds Category Average (MNLFCA).4

Average Annual Total Returns for the Period Ended 3/31/2012

(returns reflect all applicable sales charges and contingent deferred sales charge as specified below in footnote #1)

Share Class 1 Year 5 Years 10 Years Start of
Performance*
Class A Shares 8.12% 2.87% 4.06%  — 
Class B Shares 6.75% 2.56% 3.80%  — 
Class C Shares 11.25% 2.92% 3.62%  — 
Class F Shares 11.05%  —   —  3.77%
* The Fund's Class F Shares commenced operations on May 31, 2007.

Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Mutual fund performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance and after-tax returns, visit FederatedInvestors.com or call 1-800-341-7400. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured.

Annual Shareholder Report

Growth of a $10,000 Investment – Class A Shares

  • Total returns shown include the maximum sales charge of 4.50% ($10,000 investment minus $450 sales charge = $9,550).

Growth of a $10,000 Investment – Class B Shares

  • Total returns shown include the maximum contingent deferred sales charge of 5.50% as applicable.

Annual Shareholder Report

Growth of a $10,000 Investment – Class C Shares

  • Total returns shown include the maximum contingent deferred sales charge of 1.00% as applicable.

Growth of a $10,000 Investment – Class F Shares

  • Total returns shown include the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charge = $9,900) and the maximum contingent deferred sales charge of 1.00% as applicable.

Annual Shareholder Report

1 Represents a hypothetical investment of $10,000 in the Fund after deducting applicable sales charges: For Class A Shares, the maximum sales charge of 4.50% ($10,000 investment minus $450 sales charge = $9,550); For Class B Shares, the maximum contingent deferred sales charge is 5.50% on any redemption less than one year from the purchase date; For Class C Shares, a 1.00% contingent deferred sales charge would be applied to any redemption less than one year from the purchase date; For Class F Shares, the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charge = $9,900) and the maximum contingent deferred sales charge is 1.00% on any redemption less than four years from the purchase date. The Fund's performance assumes the reinvestment of all dividends and distributions. The SPMBIGI, SPMBIG3 and the MNLFCA have been adjusted to reflect reinvestment of dividends on securities in the index and average.
2 S&P Indices changed the name of the SPMBIGI from “S&P/Investortools Municipal Bond Investment Grade Index” to “S&P Municipal Bond Investment Grade Index.” The SPMBIGI is the investment-grade component of the S&P Municipal Bond Index (“Main Index”). The Main Index is a broad, comprehensive, market value-weighted index composed of approximately 55,000 bond issues that are exempt from U.S. federal income taxes or subject to the alternative minimum tax (AMT). Eligibility criteria for inclusion in the Main Index include, but are not limited to: the bond issuer must be a state (including the Commonwealth of Puerto Rico and U.S. territories) or a local government or a state or local government entity where interest on the bond is exempt from U.S. federal income taxes or subject to the AMT; the bond must be held by a mutual fund for which Standard & Poor's Securities Evaluations, Inc. provides prices; it must be denominated in U.S. dollars and have a minimum par amount of $2 million; and the bond must have a minimum term to maturity and/or call date greater than or equal to one calendar month. The Main Index is rebalanced monthly. The SPMBIGI is not adjusted to reflect sales charges, expenses and other fees that the Securities and Exchange Commission (SEC) requires to be reflected in the Fund's performance. Unlike the Fund, the SPMBIGI is unmanaged and is not affected by cash flows. It is not possible to invest directly in this index.
3 S&P Indices changed the name of the SPMBIG3 from “S&P/Investortools Municipal Bond Investment Grade, 3-year plus, Non-AMT” to “S&P Municipal Bond Investment Grade, 3-year plus, Non-AMT. The SPMBIG3 represents the portion of the SPMBIGI composed solely of bonds with remaining maturities of three years or more that are not subject to AMT. The SPMBIG3 is not adjusted to reflect sales charges, expenses and other fees that the SEC requires to be reflected in the Fund's performance. Unlike the Fund, the SPMBIG3 is unmanaged and is not affected by cash flows. It is not possible to invest directly in this index.
4 Morningstar figures represent the average of the total returns reported by all the mutual funds designated by Morningstar as falling into the respective category indicated.

Annual Shareholder Report

Portfolio of Investments Summary Table (unaudited)

At March 31, 2012, the Fund's sector composition1 was as follows:

Sector Composition Percentage of
Total Net Assets
General Obligation — State 18.2%
Transportation 14.5%
Public Power 10.9%
Hospital 10.4%
Special Tax 8.6%
General Obligation — Local 8.5%
Water & Sewer 8.5%
Education 7.2%
Industrial Development Bond/Pollution Control Revenue 4.2%
Senior Care 2.2%
Other2 6.6%
Other Assets and Liabilities — Net3 0.2%
TOTAL 100.0%
1 Sector classifications, and the assignment of holdings to such sectors, are based upon the economic sector and/or revenue source of the underlying obligor, as determined by the Fund's Adviser. For securities that have been enhanced by a third party, including bond insurers and banks, sector classifications are based upon the economic sector and/or revenue source of the underlying obligor, as determined by the Fund's Adviser.
2 For purposes of this table, sector classifications constitute 93.2% of the Fund's total net assets. Remaining sectors have been aggregated under the designation “Other.”
3 Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities.
Annual Shareholder Report

Portfolio of Investments

March 31, 2012

Principal
Amount		 Value
MUNICIPAL BONDS – 98.7%
Alabama – 0.3%
$1,250,000 Selma, AL IDB, Gulf Opportunity Zone Bonds (Series 2010A), 5.80% (International Paper Co.), 5/1/2034 1,330,313
Alaska – 0.1%
595,000 Valdez, AK Marine Terminal, Marine Terminal Revenue Refunding Bonds (Series 2003B), 5.00% (BP PLC), 1/1/2014 636,567
Arizona – 2.8%
1,545,000 Apache County, AZ IDA, PCRBs (Series 2012A), 4.50% (Tucson Electric Power Co.), 3/1/2030 1,546,792
1,000,000 Arizona Board of Regents, System Revenue Bonds
(Series 2008C), 6.00% (Arizona State University)/(Original
Issue Yield: 6.12%), 7/1/2028		 1,159,320
2,000,000 Arizona Transportation Board, Transportation Excise Tax Revenue Bonds (Series 2009), 5.00% (Maricopa County, AZ Regional Area Road Fund), 7/1/2023 2,345,640
2,000,000 Phoenix, AZ Civic Improvement Corp. — Wastewater System, Senior Lien Wastewater System Revenue Bonds (Series 2008), 5.50%, 7/1/2024 2,415,680
2,000,000 Pima County, AZ IDA, Revenue Bonds (Series 2008B), 5.75% (Tucson Electric Power Co.), 9/1/2029 2,118,240
4,000,000 Salt River Project, AZ Agricultural Improvement & Power District, Electric System Revenue Bonds (Series 2009A), 5.00% (Original Issue Yield: 5.03%), 1/1/2034 4,337,840
TOTAL 13,923,512
California – 13.4%
500,000 ABAG Finance Authority for Non-Profit Corporations, CA, Revenue Bonds, 6.125% (Southern California Presbyterian Homes)/(Original Issue Yield: 6.25%), 11/15/2032 505,545
500,000 Anaheim, CA Public Financing Authority, Lease Revenue Bonds (Series 1997C), 6.00% (Anaheim Public Improvements Project)/ (Assured Guaranty Municipal Corp. INS), 9/1/2016 561,695
1,000,000 Anaheim, CA Public Financing Authority, Revenue Bonds (Series 2009-A), 5.00% (Anaheim, CA Electric System), 10/1/2027 1,108,820
3,000,000 Bay Area Toll Authority, CA, San Francisco Bay Area Subordinate Toll Bridge Revenue Bonds (Series 2010 S-2), 5.00%, 10/1/2042 3,196,620
1,000,000 Bay Area Toll Authority, CA, San Francisco Bay Area Toll Bridge Revenue Bonds (Series 2009F-1), 5.625%, 4/1/2044 1,114,540
425,000 California Health Facilities Financing Authority, Health Facility Revenue Bonds (Series 2004I), 4.95% TOBs (Catholic Healthcare West), Mandatory Tender 7/1/2014 457,844
Annual Shareholder Report
Principal
Amount		 Value
$1,000,000 California Health Facilities Financing Authority, Revenue Bonds (Series 1998), 5.40% (Northern California Presbyterian Homes, Inc.)/(Original Issue Yield: 5.417%), 7/1/2028 999,990
1,000,000 California State Department of Water Resources, Water System Revenue Bonds (Series 2008AE), 5.00% (Central Valley Project), 12/1/2029 1,153,360
950,000 California State Public Works Board, Lease Revenue Bonds (Series 2007B), 4.75% (California Community Colleges)/(National Public Finance Guarantee Corporation INS), 3/1/2032 952,859
2,000,000 California State, Various Purpose GO Bonds, 6.00%, 11/1/2039 2,303,200
4,000,000 California State, Various Purpose UT GO Bonds, 5.75% (Original Issue Yield: 5.85%), 4/1/2029 4,611,000
1,000,000 California State, Various Purpose UT GO Bonds, 6.50%, 4/1/2033 1,216,060
1,000,000 El Centro, CA Financing Authority, INS Hospital Revenue Bonds (Series 2001), 5.25% (El Centro Regional Medical Center)/(California Mortgage Insurance GTD)/(Original Issue Yield: 5.32%), 3/1/2018 1,002,050
1,000,000 Fresno, CA Joint Powers Financing Authority, Lease Revenue Bonds (Series 2008C), 5.00% (Assured Guaranty Corp. INS), 4/1/2038 1,046,920
3,000,000 Golden State Tobacco Securitization Corp., CA, Enhanced Tobacco Settlement Asset-Backed Bonds (Series 2005A), 5.00% (California State)/(FGIC INS), 6/1/2035 3,023,400
1,800,000 Golden State Tobacco Securitization Corp., CA, Tobacco Settlement Asset-Backed Bonds (Series 2007A-1), 5.75%, 6/1/2047 1,375,902
1,000,000 Long Beach, CA Bond Financing Authority, Plaza Parking Facility Lease Revenue Bonds, 5.25% (Original Issue Yield: 5.54%), 11/1/2021 1,002,520
1,000,000 Long Beach, CA USD, UT GO Bonds (Series 2008A), 5.75%, 8/1/2033 1,155,610
5,000,000 Los Angeles, CA Department of Airports, Senior Revenue Bonds (Series 2010D), 5.25%, 5/15/2026 5,757,050
1,000,000 Los Angeles, CA Department of Water & Power, Power System Revenue Bonds (Series 2009A), 5.00% (Original Issue
Yield: 5.07%), 7/1/2034		 1,092,610
1,000,000 Los Angeles, CA Department of Water & Power, Power System Revenue Bonds (Series 2009A), 5.00% (Original Issue
Yield: 5.10%), 7/1/2039		 1,078,860
2,000,000 Los Angeles, CA USD, UT GO Bonds (Series 2009D), 5.20%, 7/1/2029 2,258,780
1,000,000 Los Angeles, CA Wastewater System, Refunding Revenue Bonds (Series 2009A), 5.75%, 6/1/2034 1,165,090
1,000,000 Metropolitan Water District of Southern California, Water Revenue Refunding Bonds (Series 2009C), 5.00%, 7/1/2031 1,125,280
500,000 Perris, CA Public Financing Authority, Tax Allocation Revenue Bonds (Series 2001A), 5.75% (Original Issue Yield: 5.85%), 10/1/2031 538,435
1,950,000 Poway, CA USD, Special Tax Bonds (Series 2005), 5.125%
(Community Facilities District No. 6 (4S Ranch))/(Original Issue
Yield: 5.21%), 9/1/2035		 1,901,893
Annual Shareholder Report
Principal
Amount		 Value
$6,000,000 Regents of the University of California Medical Center, Pooled Revenue Bonds (Series 2008D), 5.00%, 5/15/2024 6,743,760
3,000,000 Roseville, CA Natural Gas Financing Authority, Gas Revenue Bonds, 5.00% (Merrill Lynch & Co., Inc. GTD), 2/15/2025 3,154,290
1,500,000 Sacramento County, CA Airport System, Airport System Senior Revenue Bonds (Series 2009B), 5.50% (Assured Guaranty Corp. INS)/(Original Issue Yield: 5.60%), 7/1/2034 1,626,735
349,000 San Bernardino County, CA Housing Authority, Subordinated Revenue Bonds, 7.25% (Glen Aire Park & Pacific Palms), 4/15/2042 171,129
200,000 San Francisco, CA City & County Airport Commission, Revenue Refunding Bonds (Issue 34D), 5.25% (Assured Guaranty Corp. INS), 5/1/2025 225,488
1,000,000 Santa Barbara CCD, CA, UT GO Bonds (Series 2008A), 5.25%, 8/1/2028 1,152,720
3,000,000 Southern California Public Power Authority (Southern Transmission System), Transmission Project Revenue Bonds (2009 Subordinate Refunding Series A), 5.00%, 7/1/2023 3,430,170
400,000 Stockton, CA Community Facilities District No. 2001-1, Special Tax Revenue Bonds, 6.375% (Spanos Park West)/(United States Treasury PRF 9/1/2012@102)/(Original Issue Yield: 6.43%), 9/1/2032 418,224
1,000,000 Torrance, CA Hospital Revenue Bonds, (Series 2001 A), 5.50% (Torrance Memorial Medical Center)/(Original Issue
Yield: 5.65%), 6/1/2031		 1,001,770
1,000,000 Trustees of the California State University, Systemwide Revenue Bonds (Series 2009A), 6.00%, 11/1/2040 1,141,510
3,000,000 Trustees of the California State University, Systemwide Revenue Bonds (Series 2011A), 5.00%, 11/1/2037 3,219,510
1,000,000 University of California, General Revenue Bonds (Series 2009O), 5.75%, 5/15/2034 1,153,700
240,000 University of California, Revenue Bonds (Series A), 5.125% (United States Treasury PRF 5/15/2013@100), 5/15/2020 252,802
1,000,000 Vista, CA Community Development Commission, Tax Allocation Bonds (Series 2001), 5.80% (Vista Redevelopment Project Area)/(Original Issue Yield: 5.85%), 9/1/2030 1,000,680
TOTAL 66,398,421
Colorado – 0.9%
1,175,000 Colorado State Higher Education Capital Construction Lease
Purchase Financing Program, COPs (Series 2008), 5.50% (Original Issue Yield: 5.60%), 11/1/2027		 1,286,296
415,000 Colorado State Higher Education Capital Construction Lease
Purchase Financing Program, COPs (Series 2008), 5.50% (United
States Treasury PRF 11/1/2018@100)/(Original Issue
Yield: 5.60%), 11/1/2027		 518,816
Annual Shareholder Report
Principal
Amount		 Value
$2,500,000 University of Colorado, University Enterprise Revenue Bonds (Series 2011A), 5.25%, 6/1/2036 2,842,600
TOTAL 4,647,712
Connecticut – 1.0%
4,000,000 Connecticut State, Refunding UT GO Bonds (Series 2010C), 5.00%, 12/1/2019 4,919,440
Delaware – 0.5%
2,380,000 Delaware EDA, Gas Facilities Refunding Bonds, 5.40% (Delmarva Power and Light Co.), 2/1/2031 2,552,669
Florida – 4.3%
1,445,000 Broward County, FL Airport System, Airport System Revenue Refunding Bonds (Series 2009O), 5.375% (Original Issue
Yield: 5.48%), 10/1/2029		 1,602,303
1,700,000 Florida State Board of Education Administration, UT GO Capital Outlay Bonds, 9.125% (Florida State)/(Original Issue
Yield: 9.173%), 6/1/2014		 1,818,881
2,175,000 Florida State Board of Education, UT GO Capital Outlay Bonds (Series 2008F), 5.00% (Florida State), 6/1/2025 2,568,784
5,000,000 Miami-Dade County, FL Aviation, Revenue Bonds (Series 2008B), 5.00% (Assured Guaranty Corp. INS), 10/1/2028 5,328,000
1,250,000 Miami-Dade County, FL Expressway Authority, Toll System Revenue Bonds (Series 2010), 5.00% (Original Issue Yield: 5.10%), 7/1/2040 1,310,162
5,000,000 Orlando & Orange County Expressway Authority, FL, Revenue Bonds (Series 2010A), 5.00%, 7/1/2035 5,362,750
1,000,000 Orlando, FL Utilities Commission, System Revenue Refunding Bonds (Series 2009B), 5.00%, 10/1/2033 1,093,100
2,000,000 St. Johns County, FL IDA, Revenue Bonds (Series 2010A), 5.875% (Presbyterian Retirement Communities)/(Original Issue
Yield: 5.98%), 8/1/2040		 2,113,760
TOTAL 21,197,740
Georgia – 3.7%
5,000,000 Athens-Clarke County, GA Water & Sewerage, Revenue Bonds (Series 2008), 5.625% (Original Issue Yield: 5.78%), 1/1/2033 5,682,050
2,190,000 Atlanta, GA Airport General Revenue, Airport General Revenue Bonds (Series 2010A), 5.00%, 1/1/2035 2,319,648
2,000,000 Atlanta, GA Water & Wastewater, Revenue Bonds (Series 2009A), 6.00%, 11/1/2019 2,495,820
2,000,000 Burke County, GA Development Authority, PCRBs (Series 2008A), 5.50% (Oglethorpe Power Corp.), 1/1/2033 2,146,300
1,000,000 Georgia State, UT GO Bonds (Series 2009B), 5.00%, 1/1/2026 1,179,590
1,000,000 Municipal Electric Authority of Georgia, Project One Subordinated Bonds (Series 2008A), 5.25%, 1/1/2021 1,199,280
Annual Shareholder Report
Principal
Amount		 Value
$3,000,000 Municipal Electric Authority of Georgia, Project One Subordinated Bonds (Series 2008D), 5.50% (Original Issue Yield: 5.80%), 1/1/2026 3,348,450
TOTAL 18,371,138
Illinois – 5.9%
1,875,000 Chicago, IL O'Hare International Airport, General Airport Third Lien Revenue Bonds (Series 2011C), 6.50%, 1/1/2041 2,225,775
1,500,000 Chicago, IL Sales Tax, Revenue Bonds (Series 2011A), 5.25%, 1/1/2038 1,655,190
3,000,000 Chicago, IL Water Revenue, Second Lien Water Refunding Revenue Bonds (Series 2008), 5.00% (Assured Guaranty Municipal Corp. INS), 11/1/2028 3,264,420
2,765,000 Chicago, IL, UT GO Bonds (Project Series 2011A), 5.25%, 1/1/2035 2,975,638
1,000,000 Illinois Finance Authority, Recovery Zone Facility Revenue Bonds (Series 2010), 6.50% (Navistar International Corp.), 10/15/2040 1,075,860
2,145,000 Illinois Finance Authority, Revenue Refunding Bonds (Series 2007), 5.00% (Loyola University of Chicago), 7/1/2022 2,312,460
4,000,000 Illinois State Toll Highway Authority, Toll Highway Senior Refunding Revenue Bonds (Series 2010 A-1), 5.25%, 1/1/2030 4,363,640
5,000,000 Illinois State, GO Refunding Bonds (Series February 2010), 5.00%, 1/1/2024 5,371,550
2,250,000 Illinois State, UT GO Bonds (Series 2006), 5.00%, 1/1/2027 2,316,487
450,000 Illinois State, UT GO Bonds, 5.25% (National Public Finance Guarantee Corporation INS), 10/1/2018 458,483
1,500,000 Metropolitan Pier & Exposition Authority, IL, McCormick Place Expansion Project Bonds (Series 2010A), 5.50%, 6/15/2050 1,600,830
1,200,000 Railsplitter Tobacco Settlement Authority, IL, Tobacco
Settlement Revenue Bonds (Series 2010), 6.00% (Original Issue
Yield: 6.10%), 6/1/2028		 1,343,508
TOTAL 28,963,841
Indiana – 3.6%
2,200,000 Indiana Health Facility Financing Authority, Revenue Bonds (Series 2004A), 5.375% (Deaconess Hospital)/(AMBAC INS), 3/1/2029 2,243,450
1,005,000 Indiana Municipal Power Agency, Revenue Bonds (Series B), 5.25% (National Public Finance Guarantee Corporation INS), 1/1/2018 1,033,773
1,500,000 Indiana State Finance Authority, Revenue Refunding Bonds (Series 2010), 6.00% (United States Steel Corp.), 12/1/2026 1,534,815
1,715,000 Indiana State Finance Authority, First Lien Wastewater Utility Revenue Bonds (Series 2011A), 5.25% (CWA Authority), 10/1/2031 1,917,610
1,500,000 Indiana State Office Building Commission Capitol Complex, Revenue Bonds (Series 1990A: Senate Avenue Parking Facility), 7.40% (National Public Finance Guarantee Corporation INS)/(Original Issue Yield: 7.488%), 7/1/2015 1,697,355
Annual Shareholder Report
Principal
Amount		 Value
$4,000,000 Indianapolis, IN Gas Utility Distribution System, Second Lien Revenue Refunding Bonds (Series 2008C), 5.25% (Assured Guaranty Corp. INS), 6/1/2019 4,744,320
1,731,204 1,2 St. Joseph County, IN Hospital Authority, Health Facilities Revenue Bonds (Series 2005), 5.375% (Madison Center Obligated Group), 2/15/2034 247,389
4,000,000 Whiting, IN Environmental Facilities, Revenue Bonds (Series 2009), 5.00% (BP PLC), 1/1/2016 4,504,240
TOTAL 17,922,952
Kansas – 0.2%
1,010,000 Kansas State Development Finance Authority, Health Facilities Revenue Bonds (Series 2007L), 5.125% (Stormont-Vail HealthCare, Inc.)/(National Public Finance Guarantee Corporation INS), 11/15/2032 1,059,934
Kentucky – 1.1%
3,000,000 Kentucky Turnpike Authority, Economic Development Road Revenue Bonds (Series 2008A), 5.00%, 7/1/2023 3,425,940
2,000,000 Louisville & Jefferson County, KY Metropolitan Government, Revenue Bonds (Series 2012A), 5.00% (Catholic Health Initiatives), 12/1/2031 2,190,340
TOTAL 5,616,280
Maryland – 0.2%
1,060,000 Maryland State Economic Development Corp., Port Facilities Refunding Revenue Bonds (Series 2010), 5.75% (CONSOL Energy, Inc.), 9/1/2025 1,100,312
Massachusetts – 4.2%
4,000,000 Massachusetts Bay Transportation Authority General Transportation System, Assessment Bonds (Series 2008A), 5.25%, 7/1/2034 4,515,840
4,330,000 Massachusetts Department of Transportation, Metropolitan Highway System Revenue Bonds (Series 2010B), 5.00%, 1/1/2032 4,654,750
3,000,000 Massachusetts Development Finance Agency, Revenue Bonds (Series 2010B-2), 5.00% (Harvard University), 10/15/2020 3,763,380
1,000,000 Massachusetts HEFA, Revenue Bonds (Series 2002D), 6.50% (Milford Regional Medical Center)/(United States Treasury PRF 7/15/2012@101), 7/15/2023 1,028,370
1,000,000 Massachusetts School Building Authority, Senior Dedicated Sales Tax Bonds (Series 2011B), 5.25%, 10/15/2035 1,151,420
5,000,000 Massachusetts Water Resources Authority, General Revenue Refunding Bonds (Series 2010B), 5.00%, 8/1/2027 5,794,050
TOTAL 20,907,810
Michigan – 1.1%
1,500,000 Michigan State Hospital Finance Authority, Hospital Revenue Bonds (Series 2002A), 6.00% (Oakwood Obligated Group), 4/1/2022 1,623,165
Annual Shareholder Report
Principal
Amount		 Value
$1,000,000 Michigan State Hospital Finance Authority, Refunding Revenue Bonds (Series 2002A), 5.50% (Crittenton Hospital Medical Center)/(Original Issue Yield: 5.67%), 3/1/2022 1,011,090
2,470,000 Michigan State Housing Development Authority, SFM Revenue Bonds (Series 2009A), 5.35%, 6/1/2022 2,686,026
TOTAL 5,320,281
Minnesota – 0.2%
1,000,000 University of Minnesota, GO Bonds (Series 2011A), 5.25%, 12/1/2030 1,174,770
Mississippi – 2.1%
8,000,000 Mississippi State, UT GO Bonds (Series 2007B), 5.00%, 12/1/2024 9,161,760
940,000 Warren County, MS Gulf Opportunity Zone, Gulf Opportunity Zone Bonds (Series 2011A), 5.375% (International Paper Co.), 12/1/2035 985,064
TOTAL 10,146,824
Missouri – 0.3%
1,335,000 Missouri Development Finance Board, Infrastructure Facilities Revenue Bonds (Series 2005A), 5.00% (Branson, MO), 6/1/2035 1,363,128
Nebraska – 0.8%
625,000 Nebraska Investment Finance Authority, Single Family Housing Revenue Bonds (Series 2010A), 5.70%, 9/1/2031 696,513
2,800,000 Nebraska Public Power District, General Revenue Bonds (Series 2012A), 5.00%, 1/1/2027 3,196,564
TOTAL 3,893,077
Nevada – 0.9%
3,000,000 Clark County, NV School District, LT GO Building Bonds (Series 2008A), 5.00%, 6/15/2025 3,298,530
1,000,000 Henderson, NV, Health Facility Revenue Bonds (Series 2004A), 5.625% (Catholic Healthcare West)/(Original Issue Yield: 5.72%), 7/1/2024 1,045,260
TOTAL 4,343,790
New Hampshire – 0.4%
1,685,000 New Hampshire Higher Educational & Health Facilities Authority, Healthcare System Revenue Bonds (Series 2004), 5.375% (Covenant Health Systems)/(Original Issue Yield: 5.50%), 7/1/2024 1,726,114
New Jersey – 2.3%
3,000,000 New Jersey EDA, Revenue Bonds, Series 2004, 5.75% (NJ Dedicated Cigarette Excise Tax)/(Original Issue Yield: 5.89%), 6/15/2029 3,305,610
5,000,000 New Jersey State Transportation Trust Fund Authority, Transportation System Bonds (Series 2011A), 5.50% (New Jersey State), 6/15/2041 5,634,250
2,000,000 New Jersey Turnpike Authority, Revenue Bonds (Series 2009H), 5.00% (Original Issue Yield: 5.069%), 1/1/2036 2,163,920
TOTAL 11,103,780
Annual Shareholder Report
Principal
Amount		 Value
New Mexico – 0.5%
$2,000,000 Albuquerque Bernalillo County, NM Water Utility Authority, Joint Water & Sewer System Improvement Revenue Bonds (Series 2009A-1), 5.25% (Original Issue Yield: 5.34%), 7/1/2034 2,255,120
New York – 9.8%
1,500,000 Brooklyn Arena Local Development Corporation, NY, Pilot Revenue Bonds (Series 2009), 6.375% (Original Issue Yield: 6.476%), 7/15/2043 1,656,045
2,000,000 Hempstead (town), NY IDA, Civic Facility Revenue Bonds, 5.25% (Hofstra University), 7/1/2018 2,091,160
1,500,000 New York City Liberty Development Corp., Revenue Bonds (Series 2005), 5.25% (Goldman Sachs Group, Inc.), 10/1/2035 1,627,845
4,000,000 New York City, NY IDA, CPI Pilot Revenue Bonds (Series 2006), 3.745% (Yankee Stadium LLC)/(FGIC INS), 3/1/2021 3,421,480
3,000,000 New York City, NY Municipal Water Finance Authority, Water & Sewer System Revenue Bonds (Fiscal 2005 Series C), 5.00%, 6/15/2030 3,295,920
4,000,000 New York City, NY TFA, Building Aid Revenue Bonds (Fiscal 2009 S-1), 5.50% (TFA State/School Building Aid)/(Original Issue
Yield: 5.60%), 7/15/2028		 4,564,360
2,725,000 New York City, NY TFA, Future Tax Secured Subordinate Bonds (Series 2011C), 5.50%, 11/1/2035 3,187,760
3,570,000 New York City, NY, UT GO Bonds (Series 2009E), 5.00%, 8/1/2026 4,023,854
5,000,000 New York City, NY, UT GO Bonds (Series 2009I-1), 5.375% (Original Issue Yield: 5.55%), 4/1/2036 5,620,700
2,470,000 New York Liberty Development Corporation, Revenue Refunding Bonds (Series 2012 Class 2), 5.00% (7 World Trade Center LLC), 9/15/2043 2,600,638
1,060,000 New York State Dormitory Authority, Revenue Bonds (Series 2007B), 5.25% (Health Quest Systems, Inc. Obligated Group)/(Assured Guaranty Corp. INS), 7/1/2027 1,131,985
2,000,000 New York State Dormitory Authority, Revenue Bonds (Series 2008A), 5.00% (New York State Personal Income Tax Revenue Bond Fund), 3/15/2028 2,299,060
2,500,000 New York State Thruway Authority, Revenue Bonds (Series 2007A), 5.25% (New York State Personal Income Tax Revenue Bond Fund), 3/15/2026 2,898,675
3,000,000 New York State, UT GO Bonds (Series 2011A), 5.00%, 2/15/2020 3,679,890
1,985,000 Suffolk County, NY Water Authority, Water System Revenue Bonds (Series 1994), 6.00% (Escrowed In Treasuries COL)/(National Public Finance Guarantee Corporation INS), 6/1/2014 2,167,620
4,000,000 Triborough Bridge & Tunnel Authority, NY, General Revenue Bonds (Series 2008A), 5.00% (Original Issue Yield: 5.10%), 11/15/2037 4,351,040
TOTAL 48,618,032
North Carolina – 6.3%
1,000,000 Charlotte, NC Water & Sewer System, Water & Sewer Revenue Bonds (Series 2008), 5.00%, 7/1/2028 1,130,140
Annual Shareholder Report
Principal
Amount		 Value
$1,000,000 Charlotte, NC Water & Sewer System, Water & Sewer Revenue Bonds (Series 2009), 5.25%, 7/1/2030 1,157,630
500,000 Charlotte-Mecklenburg Hospital Authority, NC, Health Care Revenue & Refunding Bonds (Series 2007A), 5.00% (Carolinas HealthCare System)/(Original Issue Yield: 5.09%), 1/15/2031 526,030
500,000 Charlotte-Mecklenburg Hospital Authority, NC, Health Care Revenue Refunding Bonds (Series 2008A), 5.25% (Carolinas HealthCare System), 1/15/2024 559,660
1,000,000 Cumberland County, NC, Refunding COPs (Series 2009B), 5.00%, 12/1/2024 1,134,970
500,000 Greenville, NC Combined Enterprise System, Revenue Bonds (Series 2008A), 5.00% (Assured Guaranty Municipal Corp. INS), 11/1/2025 554,775
800,000 High Point, NC Combined Enterprise System, Revenue Bonds (Series 2008), 5.00% (Assured Guaranty Municipal Corp. INS), 11/1/2028 905,656
500,000 Iredell County, NC, COPs (Series 2008), 5.125% (Assured Guaranty Municipal Corp. INS)/(Original Issue Yield: 5.13%), 6/1/2027 548,400
1,660,000 Johnston Memorial Hospital Authority, NC, FHA INS Mortgage Revenue Bonds (Series 2008), 5.25% (Johnston Memorial Hospital)/ (Assured Guaranty Municipal Corp. INS), 10/1/2036 1,784,417
2,000,000 North Carolina Capital Facilities Finance Agency, Educational Facilities Revenue Bonds (Series 2009), 5.00% (Wake Forest University), 1/1/2038 2,167,660
5,000,000 North Carolina Capital Facilities Finance Agency, Revenue Bonds (Series 2009B), 5.00% (Duke University), 10/1/2038 5,554,000
500,000 North Carolina Eastern Municipal Power Agency, Power System Refunding Revenue Bonds (Series 2003C), 5.375% (Original Issue Yield: 5.57%), 1/1/2017 515,895
500,000 North Carolina Eastern Municipal Power Agency, Power System Revenue Bonds (Series 2009A), 5.50%, 1/1/2026 568,665
3,915,000 North Carolina Eastern Municipal Power Agency, Power System Revenue Bonds (Series 2009C), 5.00%, 1/1/2026 4,324,705
1,500,000 North Carolina Medical Care Commission, Health Care Facilities First Mortgage Revenue Bonds (Series 2006A), 5.00% (The Pines at Davidson), 1/1/2036 1,501,410
1,000,000 North Carolina Medical Care Commission, Health Care Facilities Revenue Bonds (Series 1999), 6.25% (Stanly Memorial Hospital Project)/(Original Issue Yield: 6.40%), 10/1/2019 1,001,850
1,205,000 North Carolina Medical Care Commission, Health Care Facilities Revenue Bonds (Series 2004A), 5.25% (Cleveland Community Healthcare)/(AMBAC INS), 7/1/2021 1,250,898
590,000 North Carolina Medical Care Commission, Health Care Facilities Revenue Bonds, 5.50% (Scotland Memorial Hospital)/(Radian Asset Assurance, Inc. INS)/(Original Issue Yield: 5.593%), 10/1/2019 590,968
Annual Shareholder Report
Principal
Amount		 Value
$500,000 North Carolina Medical Care Commission, Health Care Facilities Revenue Refunding Bonds (Series 2008D), 6.25% (University Health Systems of Eastern Carolina)/(Original Issue Yield: 6.75%), 12/1/2033 575,355
250,000 North Carolina Medical Care Commission, Retirement Facilities First Mortgage Revenue Bonds (Series 2002), 6.25% (Forest at Duke)/ (United States Treasury PRF 9/1/2012@100)/(Original Issue
Yield: 6.35%), 9/1/2021		 256,308
500,000 North Carolina Medical Care Commission, Retirement Facilities First Mortgage Revenue Bonds (Series 2003A), 6.375% (Givens Estates)/
(United States Treasury PRF 7/1/2013@101)/(Original Issue
Yield: 6.50%), 7/1/2023		 543,065
250,000 North Carolina Medical Care Commission, Retirement Facilities First Mortgage Revenue Refunding Bonds (Series 2007), 5.125% (Forest at Duke), 9/1/2032 253,945
500,000 North Carolina State, Grant Anticipation Revenue Vehicle Bonds (Series 2007), 5.00% (National Public Finance Guarantee Corporation INS), 3/1/2019 579,185
500,000 Pitt County, NC, Refunding Bonds, 5.25% (Pitt County Memorial Hospital)/(Escrowed In Treasuries COL)/(Original Issue
Yield: 5.85%), 12/1/2021		 537,775
500,000 Raleigh & Durham, NC Airport Authority, Revenue Bonds (Series 2005A), 5.00% (AMBAC INS), 5/1/2030 534,545
850,000 University of North Carolina at Chapel Hill, Refunding General Revenue Bonds (Series 2005A), 5.00%, 12/1/2034 948,710
500,000 University of North Carolina Wilmington, COPs (Series 2008), 5.00% (Assured Guaranty Corp. INS), 6/1/2022 566,575
525,000 University of North Carolina Wilmington, COPs, 5.25% (FGIC and National Public Finance Guarantee Corporation INS), 6/1/2022 564,275
TOTAL 31,137,467
Ohio – 4.3%
5,000,000 American Municipal Power-Ohio, Inc., Revenue Bonds (Series 2008A), 5.25% (American Municipal Power, Prairie State Energy Campus Project), 2/15/2028 5,505,450
2,000,000 Cleveland, OH Airport System, Revenue Bonds (Series 2012A), 5.00%, 1/1/2029 2,099,060
1,700,000 Cleveland, OH Municipal School District, UT GO Bonds, 5.25% (Assured Guaranty Municipal Corp. INS), 12/1/2024 1,826,463
720,000 Ohio HFA, Residential Mortgage Revenue Bonds (Series 2008F), 5.25% (GNMA COL Home Mortgage Program GTD), 9/1/2028 754,480
1,345,000 Ohio State Building Authority, State Facilities Bonds (Series 2002A), 5.00% (United States Treasury PRF 4/1/2012@100), 4/1/2022 1,345,175
5,000,000 Ohio State Turnpike Commission, Revenue Refunding Bonds (Series 2010A), 5.00%, 2/15/2031 5,501,300
Annual Shareholder Report
Principal
Amount		 Value
$60,000 Ohio State Water Development Authority, Revenue Bonds
(Series I), 7.00% (Escrowed In Treasuries COL)/(Original Issue
Yield: 7.45%)/(AMBAC INS), 12/1/2014		 65,186
1,800,000 Ohio State, Hospital Revenue Refunding Bonds (Series 2008A), 5.25% (Cleveland Clinic)/(Original Issue Yield: 98.376%), 1/1/2033 1,930,734
2,000,000 Ohio State, Infrastructure Improvement GO Bonds (Series 2008A), 5.375% (Original Issue Yield: 5.50%), 9/1/2028 2,312,880
TOTAL 21,340,728
Oklahoma – 0.2%
1,000,000 Tulsa, OK Industrial Authority, Revenue Bonds, Series A, 6.00% (University of Tulsa)/(National Public Finance Guarantee Corporation INS), 10/1/2016 1,106,610
Pennsylvania – 7.9%
3,890,000 Allegheny County, PA HDA, Hospital Revenue Bonds (Series 2008A), 5.00% (UPMC Health System), 6/15/2018 4,542,548
1,280,000 Allegheny County, PA HDA, Refunding Revenue Bonds (Series 1998A), 5.125% (Jefferson Regional Medical Center, PA)/(Original Issue Yield: 5.40%), 5/1/2029 1,235,443
1,085,000 Allegheny County, PA IDA, Environmental Improvement Refunding Revenue Bonds (Series 2005), 5.50% (United States Steel Corp.), 11/1/2016 1,108,946
2,570,000 Allegheny County, PA Port Authority, Special Revenue Transportation Refunding Bonds (Series 2011), 5.75%, 3/1/2029 2,935,583
4,935,000 Commonwealth of Pennsylvania, UT GO Bonds
(Second Series 2010A), 5.00%, 5/1/2017		 5,882,816
5,000,000 Delaware Valley, PA Regional Finance Authority, Revenue Bonds, 5.75%, 7/1/2017 5,789,950
3,000,000 Pennsylvania EDFA, Exempt Facilities Revenue Bonds (Series 2009), 7.00% (Allegheny Energy Supply Company LLC), 7/15/2039 3,445,470
1,500,000 Pennsylvania State Higher Education Facilities Authority, Revenue Bonds (Series 2009A), 5.25% (University of Pennsylvania Health System), 8/15/2022 1,726,470
3,125,000 Pennsylvania State Higher Education Facilities Authority, Revenue Bonds (Series 2010E), 5.00% (UPMC Health System)/(Original Issue Yield: 5.10%), 5/15/2031 3,360,031
3,000,000 Pennsylvania State Turnpike Commission, Subordinate Revenue Bonds (Series 2008 B-1), 5.50%, 6/1/2033 3,252,210
1,000,000 Pennsylvania State Turnpike Commission, Turnpike Subordinated Revenue Bonds (Series 2008A), 5.00% (Assured Guaranty Corp. INS), 6/1/2033 1,054,700
2,000,000 Pennsylvania State Turnpike Commission-Motor License Fund Enhanced, Motor License Fund-Enhanced Turnpike Subordinate Special Revenue Bonds (Series 2011A), 6.00%, 12/1/2036 2,382,540
Annual Shareholder Report
Principal
Amount		 Value
$1,000,000 Philadelphia, PA Water & Wastewater System, Water and
Wastewater Revenue Bonds (Series 2009A), 5.25% (Original
Issue Yield: 5.29%), 1/1/2032		 1,074,490
1,000,000 University of Pittsburgh, University Capital Project Bonds (Series 2009B), 5.50%, 9/15/2024 1,211,320
TOTAL 39,002,517
Puerto Rico – 0.5%
1,000,000 Commonwealth of Puerto Rico, Public Improvement GO Bonds (Series 2008A), 5.50%, 7/1/2018 1,121,890
1,000,000 Puerto Rico Electric Power Authority, Power Refunding Revenue Bonds (Series 2007VV), 5.25% (National Public Finance Guarantee Corporation INS), 7/1/2029 1,114,820
TOTAL 2,236,710
Rhode Island – 0.6%
2,500,000 Rhode Island State Health and Educational Building Corp., Higher Education Facilities Revenue Bonds (Series 2007), 5.00% (Brown University), 9/1/2037 2,703,950
South Carolina – 1.4%
2,000,000 Lexington County, SC Health Services District, Inc., Revenue Refunding Bonds, 5.00%, 11/1/2026 2,241,080
3,000,000 Piedmont Municipal Power Agency, SC, Electric Revenue Refunding Bonds (Series 2009A-3), 5.00%, 1/1/2018 3,460,230
1,000,000 South Carolina State Public Service Authority (Santee Cooper), Revenue Obligations (Series 2008A), 5.375% (Original Issue
Yield: 5.60%), 1/1/2028		 1,142,840
TOTAL 6,844,150
Tennessee – 1.6%
1,000,000 Metropolitan Government Nashville & Davidson County, TN Water & Sewer, Subordinate Lien Water & Sewer Revenue Refunding Bonds (Series 2012), 5.00%, 7/1/2021 1,220,580
935,000 Sullivan County, TN Health Educational & Housing Facilities Board, Revenue Bonds, 6.25% (Wellmont Health System)/(United States Treasury PRF 9/1/2012@101)/(Original Issue Yield: 6.45%), 9/1/2022 968,015
1,565,000 Sullivan County, TN Health Educational & Housing Facilities Board, Revenue Bonds, 6.25% (Wellmont Health System)/(United States Treasury PRF 9/1/2012@101)/(Original Issue Yield: 6.45%), 9/1/2022 1,620,260
2,725,000 Tennessee Energy Acquisition Corp., Gas Revenue Bonds (Series 2006A), 5.25% (Goldman Sachs & Co. GTD), 9/1/2023 2,995,974
1,000,000 Tennessee State, GO Bonds (Series 2009A), 5.00% (United States Treasury PRF 5/1/2017@100), 5/1/2027 1,197,870
TOTAL 8,002,699
Annual Shareholder Report
Principal
Amount		 Value
Texas – 8.2%
$2,795,000 Bexar County, TX, HFDC, Revenue Bonds (Series 2010), 6.20% (Army Retirement Residence Foundation), 7/1/2045 3,017,314
5,000,000 Dallas, TX Area Rapid Transit, Senior Lien Sales Tax Revenue Bonds, 5.25%, 12/1/2038 5,491,250
4,000,000 Dallas-Fort Worth, TX International Airport, Joint Revenue Refunding Bonds (Series 2012B), 5.000%, 11/01/2035 4,273,120
500,000 Harris County, TX Metropolitan Transit Authority, Sales & Use Tax Bonds (Series 2011A), 5.00%, 11/1/2031 567,590
2,000,000 Harris County, TX, Toll Road Senior Lien Revenue & Refunding Bonds (Series 2008B), 5.00% (Harris County, TX Toll Road Authority)/
(Original Issue Yield: 5.08%), 8/15/2033		 2,168,820
2,000,000 Houston, TX Airport System, Senior Lien Revenue & Refunding Bonds (Series 2009A), 5.50% (Original Issue Yield: 5.67%), 7/1/2034 2,192,180
1,000,000 Humble, TX ISD, UT GO Bonds, 5.00% (FGIC and National Public Finance Guarantee Corporation INS), 2/15/2024 1,070,480
2,500,000 North Texas Tollway Authority, System First Tier Revenue Refunding Bonds (Series 2011B), 5.00% (Original Issue Yield: 5.12%), 1/1/2038 2,637,575
1,000,000 Sam Rayburn, TX Municipal Power Agency, Refunding Revenue Bonds (Series 2002A), 6.00%, 10/1/2021 1,014,250
1,000,000 Socorro, TX ISD, School Building UT GO Bonds (Series 2006A), 5.00% (PSFG), 8/15/2026 1,141,270
2,500,000 Tarrant County, TX Cultural Education Facilities Finance Corp., Revenue Bonds, Series 2006A, 6.00% (Northwest Senior Housing Corp. Edgemere Project), 11/15/2036 2,524,875
2,030,000 Texas Municipal Gas Acquisition & Supply Corp. I, Gas Supply Senior Lien Revenue Bonds (Series 2006A), 5.25%, 12/15/2026 2,192,421
1,525,000 Texas State Public Finance Authority, GO Bonds (Series 2007), 5.00% (Texas State), 10/1/2027 1,759,255
5,000,000 Texas State Transportation Commission, Mobility Fund Revenue Bonds (Series 2007), 4.75% (Texas State), 4/1/2027 5,606,450
4,000,000 Texas State, Water Financial Assistance UT GO Bonds (Series 2009A), 5.00%, 8/1/2029 4,717,360
TOTAL 40,374,210
Virginia – 1.7%
3,900,000 Virginia Peninsula Port Authority, Coal Terminal Revenue Refunding Bonds (Series 2003), 6.00% (Brinks Co. (The)), 4/1/2033 3,989,778
4,000,000 Virginia Resources Authority, Subordinated Revenue Bonds (Series 2008), 5.00% (Virginia State Clean Water Revolving Fund), 10/1/2027 4,513,280
TOTAL 8,503,058
Washington – 1.5%
2,000,000 Port of Seattle, WA, Revenue & Refunding Bonds (Series 2010B), 5.00%, 6/1/2040 2,158,340
Annual Shareholder Report
Principal
Amount		 Value
$3,060,000 Tobacco Settlement Authority, WA, Tobacco Settlement Asset-Backed Revenue Bonds, 6.625% (Original Issue Yield: 6.875%), 6/1/2032 3,175,607
2,000,000 Washington State Health Care Facilities Authority, Revenue Bonds (Series 2009A), 6.50% (Swedish Health Services)/(Original Issue
Yield: 6.73%), 11/15/2033		 2,172,180
TOTAL 7,506,127
Wisconsin – 3.7%
1,425,000 Wisconsin Housing & EDA, Housing Revenue Bonds (Series 2002C), 5.35% (National Public Finance Guarantee Corporation INS), 11/1/2022 1,436,984
6,000,000 Wisconsin State General Fund Appropriation, Revenue Bonds (Series 2009A), 6.00% (Wisconsin State)/(Original Issue
Yield: 6.02%), 5/1/2033		 7,115,940
3,000,000 Wisconsin State HEFA, 6.625% (ProHealth Care, Inc.)/(Original Issue Yield: 6.87%), 2/15/2039 3,384,540
1,595,000 Wisconsin State HEFA, Revenue Bonds, 6.00% (SynergyHealth, Inc.)/(Original Issue Yield: 6.10%), 11/15/2023 1,648,847
4,000,000 Wisconsin State, UT GO Bonds (Series 2008C), 5.00%, 5/1/2028 4,463,120
TOTAL 18,049,431
Wyoming – 0.2%
1,000,000 Laramie County, WY , Hospital Revenue Bonds (Series 2012), 5.00% (Cheyenne Regional Medical Center), 5/1/2032 1,075,520
TOTAL MUNICIPAL BONDS
(IDENTIFIED COST $453,636,080)		 487,376,734
SHORT-TERM MUNICIPALS – 1.1%3
New York – 0.9%
4,500,000 New York City, NY, (Series 2008J-8) Daily VRDNs (Landesbank Baden-Wurttemberg LOC), 0.310%, 4/2/2012 4,500,000
Pennsylvania – 0.2%
1,000,000 Pennsylvania State Higher Education Facilities Authority, (Series 2007B) Weekly VRDNs (La Salle University)/(Citizens Bank of Pennsylvania LOC), 0.200%, 4/4/2012 1,000,000
TOTAL SHORT-TERM MUNICIPALS (AT AMORTIZED COST) 5,500,000
TOTAL INVESTMENTS — 99.8%
(IDENTIFIED COST $459,136,080)4 		492,876,734
OTHER ASSETS AND LIABILITIES - NET — 0.2%5 1,107,877
TOTAL NET ASSETS — 100% $493,984,611

At March 31, 2012, the Fund holds no securities that are subject to the federal alternative minimum tax (AMT) (unaudited).

1 Non-income producing security.
2 Security in default.
3 Current rate and next reset date shown for Variable Rate Demand Notes.
Annual Shareholder Report

4 The cost of investments for federal tax purposes amounts to $459,103,847.
5 Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities.

Note: The categories of investments are shown as a percentage of total net assets at March 31, 2012.

Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:

Level 1 — quoted prices in active markets for identical securities, including investment companies with daily net asset values, if applicable.

Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost.

Level 3 — significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).

The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.

As of March 31, 2012, all investments of the Fund utilized Level 2 inputs in valuing the Fund's assets carried at fair value.

The following acronyms are used throughout this portfolio:

AMBAC  — American Municipal Bond Assurance Corporation
CCD  — Community College District
COL  — Collateralized
COPs  — Certificates of Participation
CPI  — Consumer Price Index
EDA  — Economic Development Authority
EDFA  — Economic Development Finance Authority
FGIC  — Financial Guaranty Insurance Company
FHA  — Federal Housing Administration
GNMA  — Government National Mortgage Association
GO  — General Obligation
GTD  — Guaranteed
HDA  — Hospital Development Authority
HEFA  — Health and Education Facilities Authority
HFA  — Housing Finance Authority
HFDC  — Health Facility Development Corporation
IDA  — Industrial Development Authority
IDB  — Industrial Development Bond
INS  — Insured
ISD  — Independent School District
LOC  — Letter of Credit
LT  — Limited Tax
PCRBs  — Pollution Control Revenue Bonds
PRF  — Pre-refunded
PSFG  — Public School Fund Guaranteed
SFM  — Single Family Mortgage
TFA  — Transitional Finance Authority
TOBs  — Tender Option Bonds
USD  — Unified School District
UT  — Unlimited Tax
VRDNs  — Variable Rate Demand Notes

See Notes which are an integral part of the Financial Statements

Annual Shareholder Report

Financial Highlights – Class A Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31 2012 2011 2010 2009 2008
Net Asset Value, Beginning of Period $9.56 $9.99 $9.41 $10.05 $10.65
Income From Investment Operations:
Net investment income1 0.38 0.42 0.41 0.43 0.44
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts 0.86 (0.44) 0.59 (0.64) (0.59)
TOTAL FROM INVESTMENT OPERATIONS 1.24 (0.02) 1.00 (0.21) (0.15)
Less Distributions:
Distributions from net investment income (0.38) (0.41) (0.42) (0.43) (0.45)
Net Asset Value, End of Period $10.42 $9.56 $9.99 $9.41 $10.05
Total Return2 13.21% (0.24)% 10.78% (2.14)% (1.48)%
Ratios to Average Net Assets:
Net expenses 0.87% 0.87% 0.87% 0.87%3 0.88%4
Net investment income 3.79% 4.16% 4.20% 4.40% 4.28%
Expense waiver/reimbursement5 0.09% 0.10% 0.09% 0.15% 0.13%
Supplemental Data:
Net assets, end of period (000 omitted) $437,968 $438,344 $511,709 $396,603 $431,074
Portfolio turnover 14% 21% 23% 52% 37%
1 Per share numbers have been calculated using the average shares method.
2 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable.
3 The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratio is 0.87% for the year ended March 31, 2009, after taking into account this expense reduction.
4 Includes interest and trust expenses related to the Fund's participation in certain inverse floater structures of less than 0.01% for the year ended March 31, 2008.
5 This expense decrease is reflected in both the net expense and net investment income ratios shown above.

See Notes which are an integral part of the Financial Statements

Annual Shareholder Report

Financial Highlights – Class B Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31 2012 2011 2010 2009 2008
Net Asset Value, Beginning of Period $9.56 $9.99 $9.41 $10.05 $10.65
Income From Investment Operations:
Net investment income1 0.30 0.33 0.33 0.34 0.35
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts 0.86 (0.43) 0.58 (0.64) (0.60)
TOTAL FROM INVESTMENT OPERATIONS 1.16 (0.10) 0.91 (0.30) (0.25)
Less Distributions:
Distributions from net investment income (0.30) (0.33) (0.33) (0.34) (0.35)
Net Asset Value, End of Period $10.42 $9.56 $9.99 $9.41 $10.05
Total Return2 12.25% (1.12)% 9.81% (3.01)% (2.35)%
Ratios to Average Net Assets:
Net expenses 1.72% 1.73% 1.73% 1.76%3 1.76%4
Net investment income 2.95% 3.31% 3.35% 3.52% 3.39%
Expense waiver/reimbursement5 0.00%6 0.00%6 0.00%6 0.01% 0.00%6
Supplemental Data:
Net assets, end of period (000 omitted) $11,174 $13,402 $19,606 $15,105 $18,246
Portfolio turnover 14% 21% 23% 52% 37%
1 Per share numbers have been calculated using the average shares method.
2 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable.
3 The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratio is 1.76% for the year ended March 31, 2009, after taking into account this expense reduction.
4 Includes interest and trust expenses related to the Fund's participation in certain inverse floater structures of less than 0.01% for the year ended March 31, 2008.
5 This expense decrease is reflected in both the net expense and net investment income ratios shown above.
6 Represents less than 0.01%.

See Notes which are an integral part of the Financial Statements

Annual Shareholder Report

Financial Highlights – Class C Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31 2012 2011 2010 2009 2008
Net Asset Value, Beginning of Period $9.56 $9.99 $9.41 $10.05 $10.65
Income From Investment Operations:
Net investment income1 0.30 0.33 0.33 0.34 0.35
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts 0.86 (0.43) 0.58 (0.64) (0.59)
TOTAL FROM INVESTMENT OPERATIONS 1.16 (0.10) 0.91 (0.30) (0.24)
Less Distributions:
Distributions from net investment income (0.30) (0.33) (0.33) (0.34) (0.36)
Net Asset Value, End of Period $10.42 $9.56 $9.99 $9.41 $10.05
Total Return2 12.25% (1.12)% 9.81% (3.00)% (2.34)%
Ratios to Average Net Assets:
Net expenses 1.72% 1.73% 1.73% 1.76%3 1.75%4
Net investment income 2.95% 3.31% 3.35% 3.54% 3.42%
Expense waiver/reimbursement5 0.00%6 0.00%6 0.00%6 0.01% 0.00%6
Supplemental Data:
Net assets, end of period (000 omitted) $25,267 $24,635 $26,570 $20,376 $15,434
Portfolio turnover 14% 21% 23% 52% 37%
1 Per share numbers have been calculated using the average shares method.
2 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable.
3 The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratio is 1.76% for the year ended March 31, 2009, after taking into account this expense reduction.
4 Includes interest and trust expenses related to the Fund's participation in certain inverse floater structures of less than 0.01% for the year ended March 31, 2008.
5 This expense decrease is reflected in both the net expense and net investment income ratios shown above.
6 Represents less than 0.01%.

See Notes which are an integral part of the Financial Statements

Annual Shareholder Report

Financial Highlights – Class F Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31, Period
Ended
3/31/20081
2012 2011 2010 2009
Net Asset Value, Beginning of Period $9.56 $9.99 $9.41 $10.05 $10.56
Income From Investment Operations:
Net investment income2 0.38 0.42 0.41 0.43 0.37
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts 0.86 (0.44) 0.59 (0.64) (0.51)
TOTAL FROM INVESTMENT OPERATIONS 1.24 (0.02) 1.00 (0.21) (0.14)
Less Distributions:
Distributions from net investment income (0.38) (0.41) (0.42) (0.43) (0.37)
Net Asset Value, End of Period $10.42 $9.56 $9.99 $9.41 $10.05
Total Return3 13.21% (0.24)% 10.78% (2.14)% (1.33)%
Ratios to Average Net Assets:
Net expenses 0.87% 0.87% 0.87% 0.87%4 0.87%5
Net investment income 3.79% 4.17% 4.20% 4.46% 4.42%5
Expense waiver/reimbursement6 0.09% 0.11% 0.11% 0.11% 0.13%5
Supplemental Data:
Net assets, end of period (000 omitted) $19,575 $17,739 $18,298 $11,361 $4,292
Portfolio turnover 14% 21% 23% 52% 37%7
1 Reflects operations for the period from May 31, 2007 (date of initial investment) to March 31, 2008.
2 Per share numbers have been calculated using the average shares method.
3 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized.
4 The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratio is 0.87% for the year ended March 31, 2009, after taking into account this expense reduction.
5 Computed on an annualized basis.
6 This expense decrease is reflected in both the net expense and net investment income ratios shown above.
7 Portfolio turnover is calculated at the Fund level. Percentage indicated was calculated for the fiscal year ended March 31, 2008.

See Notes which are an integral part of the Financial Statements

Annual Shareholder Report

Statement of Assets and Liabilities

March 31, 2012

Assets:
Total investments in securities, at value (identified cost $459,136,080) $492,876,734
Cash 207,570
Income receivable 6,896,934
Receivable for shares sold 145,396
TOTAL ASSETS 500,126,634
Liabilities:
Payable for investments purchased $4,763,137
Payable for shares redeemed 762,743
Income distribution payable 302,907
Payable for shareholder services fee (Note 5) 184,765
Payable for distribution services fee (Note 5) 23,107
Payable for Directors'/Trustees' fees 314
Accrued expenses 105,050
TOTAL LIABILITIES 6,142,023
Net assets for 47,403,549 shares outstanding $493,984,611
Net Assets Consist of:
Paid-in capital $485,652,978
Net unrealized appreciation of investments 33,740,654
Accumulated net realized loss on investments (25,247,297)
Distributions in excess of net investment income (161,724)
TOTAL NET ASSETS $493,984,611
Annual Shareholder Report Statement of Assets and Liabilities — continued
Net Asset Value, Offering Price and Redemption Proceeds Per Share
Class A Shares:
Net asset value per share ($437,968,489 ÷ 42,028,138 shares outstanding),
$0.01 par value, 375,000,000 shares authorized		 $10.42
Offering price per share (100/95.50 of $10.42) $10.91
Redemption proceeds per share $10.42
Class B Shares:
Net asset value per share ($11,174,495 ÷ 1,072,388 shares outstanding),
$0.01 par value, 250,000,000 shares authorized		 $10.42
Offering price per share $10.42
Redemption proceeds per share (94.50/100 of $10.42) $9.85
Class C Shares:
Net asset value per share ($25,266,655 ÷ 2,424,701 shares outstanding),
$0.01 par value, 375,000,000 shares authorized		 $10.42
Offering price per share $10.42
Redemption proceeds per share (99.00/100 of $10.42) $10.32
Class F Shares:
Net asset value per share ($19,574,972 ÷ 1,878,322 shares outstanding),
$0.01 par value, 150,000,000 shares authorized		 $10.42
Offering price per share (100/99.00 of $10.42) $10.53
Redemption proceeds per share (99.00/100 of $10.42) $10.32

See Notes which are an integral part of the Financial Statements

Annual Shareholder Report

Statement of Operations

Year Ended March 31, 2012

Investment Income:
Interest $22,949,565
Expenses:
Investment adviser fee (Note 5) $2,515,487
Administrative fee (Note 5) 384,009
Custodian fees 25,981
Transfer and dividend disbursing agent fees and expenses 288,695
Directors'/Trustees' fees 14,252
Auditing fees 23,524
Legal fees 7,784
Portfolio accounting fees 113,151
Distribution services fee (Note 5) 269,978
Shareholder services fee (Note 5) 1,224,621
Account administration fee (Note 2) 5,391
Share registration costs 76,428
Printing and postage 39,688
Insurance premiums 5,356
Taxes 33,513
Miscellaneous 12,572
TOTAL EXPENSES 5,040,430
Waiver and Reimbursement (Note 5):
Waiver of administrative fee $(9,593)
Reimbursement of shareholder services fee (422,864)
TOTAL WAIVER AND REIMBURSEMENT (432,457)
Net expenses 4,607,973
Net investment income 18,341,592
Realized and Unrealized Gain on Investments:
Net realized gain on investments 923,967
Net change in unrealized depreciation of investments 41,260,880
Net realized and unrealized gain on investments 42,184,847
Change in net assets resulting from operations $60,526,439

See Notes which are an integral part of the Financial Statements

Annual Shareholder Report

Statement of Changes in Net Assets

Year Ended March 31 2012 2011
Increase (Decrease) in Net Assets
Operations:
Net investment income $18,341,592 $22,787,637
Net realized gain on investments 923,967 1,095,730
Net change in unrealized appreciation/depreciation of investments 41,260,880 (24,593,976)
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 60,526,439 (710,609)
Distributions to Shareholders:
Distributions from net investment income
Class A Shares (16,697,429) (20,485,239)
Class B Shares (337,056) (559,822)
Class C Shares (725,968) (890,161)
Class F Shares (691,391) (825,320)
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS (18,451,844) (22,760,542)
Share Transactions:
Proceeds from sale of shares 32,447,007 64,639,636
Net asset value of shares issued to shareholders in payment of distributions declared 14,205,707 16,814,665
Cost of shares redeemed (88,863,953) (140,045,477)
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS (42,211,239) (58,591,176)
Change in net assets (136,644) (82,062,327)
Net Assets:
Beginning of period 494,121,255 576,183,582
End of period (including undistributed (distributions in excess of) net investment income of $(161,724) and $1,948, respectively) $493,984,611 $494,121,255

See Notes which are an integral part of the Financial Statements

Annual Shareholder Report

Notes to Financial Statements

March 31, 2012

1. Organization

Federated Municipal Securities Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as a diversified, open-end management investment company. The Fund offers four classes of shares: Class A Shares, Class B Shares, Class C Shares and Class F Shares. All shares of the Fund have equal rights with respect to voting, except on class-specific matters. The investment objective of the Fund is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. Interest income from the Fund's investments normally will not be subject to federal AMT for individuals and corporations, but may be subject to state and local taxes.

2. Significant Accounting Policies

The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).

Investment Valuation

In calculating its net asset value (NAV), the Fund generally values investments as follows:

  • Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Fund's Board of Directors (the “Directors”).
  • Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium), which approximates market value.
  • Shares of other mutual funds are valued based upon their reported NAVs.
  • Derivative contracts listed on exchanges are valued at their reported settlement or closing price.
  • Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Directors.
  • For securities that are fair valued in accordance with procedures established by and under the general supervision of the Directors, certain factors may be considered such as: the purchase price of the security, information obtained by contacting the issuer, analysis of the issuer's financial statements or other available documents, fundamental analytical data, the nature and duration of restrictions on disposition, the movement of the market in which the security is normally traded and public trading in similar securities of the issuer or comparable issuers.

If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund's NAV.

Annual Shareholder Report

Fair Valuation and Significant Events Procedures

The Directors have authorized the use of pricing services to provide evaluations of the current fair value of certain investments for purposes of calculating the NAV. Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a “mid” evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities, mortgage-backed securities and municipal securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Directors.

The Directors also have adopted procedures requiring an investment to be priced at its fair value whenever the Adviser determines that a significant event affecting the value of the investment has occurred between the time as of which the price of the investment would otherwise be determined and the time as of which the NAV is computed. An event is considered significant if there is both an affirmative expectation that the investment's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Examples of significant events that may occur after the close of the principal market on which a security is traded, or after the time of a price evaluation provided by a pricing service or a dealer, include:

  • With respect to price evaluations of fixed-income securities determined before the close of regular trading on the NYSE, actions by the Federal Reserve Open Market Committee and other significant trends in U.S. fixed-income markets;
  • Political or other developments affecting the economy or markets in which an issuer conducts its operations or its securities are traded; and
  • Announcements concerning matters such as acquisitions, recapitalizations, litigation developments, a natural disaster affecting the issuer's operations or regulatory changes or market developments affecting the issuer's industry.

The Fund may seek to obtain more current quotations or price evaluations from alternative pricing sources. If a reliable alternative pricing source is not available, the Fund will determine the fair value of the investment using another method approved by the Directors.

Annual Shareholder Report

Investment Income, Gains and Losses, Expenses and Distributions

Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Distributions to shareholders are recorded on the ex-dividend date. Distributions of net investment income are declared daily and paid monthly. Non-cash dividends included in dividend income, if any, are recorded at fair value. Investment income, realized and unrealized gains and losses, and certain fund-level expenses are allocated to each class based on relative average daily net assets, except that Class A Shares, Class B Shares, Class C Shares and Class F Shares may bear account administration fees, distribution services fees and shareholder services fees unique to those classes. For the year ended March 31, 2012, account administration fees for the Fund were as follows:

Account
Administration
Fees Incurred
Class A Shares $5,391

Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.

Premium and Discount Amortization

All premiums and discounts on fixed-income securities are amortized/accreted using the effective interest rate method.

Federal Taxes

It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended March 31, 2012, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of March 31, 2012, tax years 2009 through 2012 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America, the state of Maryland and the Commonwealth of Pennsylvania.

Other Taxes

As an open-end management investment company incorporated in the state of Maryland but domiciled in the Commonwealth of Pennsylvania, the Fund is subject to the Pennsylvania Franchise Tax. This franchise tax is assessed annually on the value of the Fund, as represented by average net assets for the tax year.

When-Issued and Delayed Delivery Transactions

The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.

Annual Shareholder Report

Other

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.

3. Capital Stock

The following tables summarize capital stock activity:

Year Ended March 31 2012 2011
Class A Shares: Shares Amount Shares Amount
Shares sold 2,296,357 $23,253,976 4,805,739 $48,259,048
Shares issued to shareholders in
payment of distributions declared		 1,261,216 12,753,519 1,502,999 14,952,779
Shares redeemed (7,358,564) (73,817,657) (11,698,178) (115,983,512)
NET CHANGE RESULTING FROM
CLASS A SHARE TRANSACTIONS		 (3,800,991) $(37,810,162) (5,389,440) $(52,771,685)
Year Ended March 31 2012 2011
Class B Shares: Shares Amount Shares Amount
Shares sold 209,433 $2,140,026 271,596 $2,726,467
Shares issued to shareholders in
payment of distributions declared		 28,317 285,868 46,040 458,536
Shares redeemed (566,554) (5,649,883) (878,843) (8,738,624)
NET CHANGE RESULTING FROM
CLASS B SHARE TRANSACTIONS		 (328,804) $(3,223,989) (561,207) $(5,553,621)
Year Ended March 31 2012 2011
Class C Shares: Shares Amount Shares Amount
Shares sold 327,525 $3,332,887 772,531 $7,719,617
Shares issued to shareholders in
payment of distributions declared		 53,857 544,478 65,573 651,711
Shares redeemed (532,278) (5,360,142) (921,888) (9,043,854)
NET CHANGE RESULTING FROM
CLASS C SHARE TRANSACTIONS		 (150,896) $(1,482,777) (83,784) $(672,526)
Year Ended March 31 2012 2011
Class F Shares: Shares Amount Shares Amount
Shares sold 366,181 $3,720,118 591,997 $5,934,504
Shares issued to shareholders in
payment of distributions declared		 61,385 621,842 75,617 751,639
Shares redeemed (403,858) (4,036,271) (644,619) (6,279,487)
NET CHANGE RESULTING FROM
CLASS F SHARE TRANSACTIONS		 23,708 $305,689 22,995 $406,656
NET CHANGE RESULTING FROM
TOTAL FUND SHARE TRANSACTIONS		 (4,256,983) $(42,211,239) (6,011,436) $(58,591,176)
Annual Shareholder Report

4. Federal Tax Information

The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These differences are due in part to differing treatments for discount accretion/premium amortization on debt securities and interest on a defaulted security.

For the year ended March 31, 2012, permanent differences identified and reclassified among the components of net assets were as follows:

Increase (Decrease)
Undistributed
Net Investment
Income (Loss)		 Accumulated
Net Realized
Gain (Loss)
$(53,420) $53,420

Net investment income (loss), net realized gains (losses) and net assets were not affected by this reclassification.

The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended March 31, 2012 and 2011, was as follows:

2012 2011
Tax-exempt income $18,451,844 $22,760,542

As of March 31, 2012, the components of distributable earnings on a tax basis were as follows:

Undistributed tax-exempt income $14,671
Net unrealized appreciation $33,596,492
Capital loss carryforwards $(25,279,530)

The difference between book-basis and tax-basis net unrealized appreciation/depreciation is attributable to differing treatments for discount accretion/premium amortization on debt securities and defaulted securities.

At March 31, 2012, the cost of investments for federal tax purposes was $459,103,847. The net unrealized appreciation of investments for federal tax purposes was $33,772,887. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $36,897,234 and net unrealized depreciation from investments for those securities having an excess of cost over value of $3,124,347.

At March 31, 2012, the Fund had a capital loss carryforward of $25,279,530 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, a net capital loss incurred in taxable years beginning on or before December 22, 2010, is characterized as short-term and may be carried forward for a maximum of eight tax years (“Carryforward Limit”), whereas a net capital loss incurred in taxable years beginning after December 22, 2010, retains its character as either short-term or long-term, does not expire and is required to be utilized prior to the losses which have a Carryforward Limit.

Annual Shareholder Report

The following schedule summarizes the Fund's capital loss carryforwards and expiration years:

Expiration Year Short-Term Long-Term Total
No expiration $831,035  —  $831,035
2016 $1,218,209 N/A $1,218,209
2017 $16,161,827 N/A $16,161,827
2018 $7,068,459 N/A $7,068,459

5. Investment Adviser Fee and Other Transactions with Affiliates

Investment Adviser Fee

Federated Investment Management Company is the Fund's investment adviser (the “Adviser”). The advisory agreement between the Fund and the Adviser provides for an annual fee equal to: (a) 0.30% of the Fund's average daily net assets; and (b) 4.50% of the gross income of the Fund, excluding capital gains or losses. Subject to the terms described in the Expense Limitation note, the Adviser may voluntarily choose to waive any portion of its fee.

Administrative Fee

Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:

Administrative Fee Average Aggregate Daily Net Assets
of the Federated Funds
0.150% on the first $5 billion
0.125% on the next $5 billion
0.100% on the next $10 billion
0.075% on assets in excess of $20 billion

The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended March 31, 2012, the net fee paid to FAS was 0.076% of average daily net assets of the Fund. FAS waived $9,593 of its fee.

Annual Shareholder Report

Distribution Services Fee

The Fund has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. (FSC), the principal distributor, from the daily net assets of the Fund's Class B Shares and Class C Shares to finance activities intended to result in the sale of these shares. The Plan provides that the Fund may incur distribution expenses at the following percentages of average daily net assets annually, to compensate FSC:

Share Class Name Percentage of Average Daily
Net Assets of Class
Class B Shares 0.75%
Class C Shares 0.75%

Subject to the terms described in the Expense Limitation note, FSC may voluntarily choose to waive any portion of its fee. For the year ended March 31, 2012, distribution services fees for the Fund were as follows:

Distribution
Services Fees
Incurred
Class B Shares $85,556
Class C Shares 184,422
TOTAL $269,978

When FSC receives fees, it may pay some or all of them to financial intermediaries whose customers purchase shares. For the year ended March 31, 2012, FSC retained $34,942 of fees paid by the Fund.

Sales Charges

Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. They are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. For the year ended March 31, 2012, FSC retained $26,494 in sales charges from the sale of Class A Shares and $148 from the sale of Class F Shares. FSC also retained $6,368 of CDSC relating to redemptions of Class A Shares, $6,443 of CDSC relating to redemptions of Class B Shares, $3,931 of CDSC relating to redemptions of Class C Shares and $21,368 of CDSC relating to redemptions of Class F Shares.

Annual Shareholder Report

Shareholder Services Fee

The Fund may pay fees (“Service Fees”) up to 0.25% of the average daily net assets of the Fund's Class A Shares, Class B Shares, Class C Shares and Class F Shares to financial intermediaries or to Federated Shareholder Services Company (FSSC) for providing services to shareholders and maintaining shareholder accounts. Subject to the terms described in the Expense Limitation note, FSSC may voluntarily reimburse the Fund for Services Fees. For the year ended March 31, 2012, Services Fees for the Fund were as follows:

Service Fees
Incurred		 Service Fees
Reimbursed
Class A Shares $1,089,245 $(406,106)
Class B Shares 28,519  — 
Class C Shares 61,474  — 
Class F Shares 45,383 (16,758)
TOTAL $1,224,621 $(422,864)

For the year ended March 31, 2012, FSSC did not receive any fees paid by the Fund.

Interfund Transactions

During the year ended March 31, 2012, the Fund engaged in purchase and sales transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees and/or common Officers. These purchase and sale transactions complied with Rule 17a-7 under the Act and amounted to $132,405,000 and $125,430,813, respectively.

Expense Limitation

Effective June 1, 2012, the Adviser and its affiliates (which may include FSC, FAS and FSSC) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total annual fund operating expenses (as shown in the financial highlights) paid by the Fund's Class A Shares, Class B Shares, Class C Shares and Class F Shares (after the voluntary waivers and reimbursements) will not exceed 0.87%, 1.73%, 1.73% and 0.87% (the “Fee Limit”), respectively, up to but not including the later of (the “Termination Date”): (a) June 1, 2013; or (b) the date of the Fund's next effective Prospectus. While the Adviser and its affiliates currently do not anticipate terminating or increasing these arrangements prior to the Termination Date, these arrangements may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Directors.

General

Certain Officers and Directors of the Fund are Officers and Directors or Trustees of the above companies.

Annual Shareholder Report

6. Investment Transactions

Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations, for the year ended March 31, 2012, were as follows:

Purchases $68,192,350
Sales $110,335,994

7. Line of Credit

The Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate offered to the Fund by PNC Bank at the time of the borrowing. As of March 31, 2012, there were no outstanding loans. During the year ended March 31, 2012, the Fund did not utilize the LOC.

8. Interfund Lending

Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the Fund to borrow from other participating affiliated funds. As of March 31, 2012, there were no outstanding loans. During the year ended March 31, 2012, the program was not utilized.

9. Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This ASU amends FASB Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing”; specifically the criteria required to determine whether a repurchase agreement and similar agreements should be accounted for as sales of financial assets or secured borrowings with commitments. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-03 is not expected to have a material impact on the Fund's financial statements and the accompanying notes, net assets or results of operations.

In addition, in May 2011, FASB released ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU amends FASB ASC Topic 820, “Fair Value Measurement,” to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-04 is not expected to have a material impact on the Fund's financial statements and the accompanying notes.

10. FEDERAL TAX INFORMATION (UNAUDITED)

For the year ended March 31, 2012, 100% of the distributions from net investment income is exempt from federal income tax, other than the federal AMT.

Annual Shareholder Report

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Federated Municipal Securities Fund, Inc.:

We have audited the accompanying statement of assets and liabilities of Federated Municipal Securities Fund, Inc. (the “Fund”), including the portfolio of investments, as of March 31, 2012, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of March 31, 2012, by correspondence with the custodian and others or by other appropriate auditing procedures where replies from others were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Federated Municipal Securities Fund, Inc. at March 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Boston, Massachusetts
May 23, 2012

Annual Shareholder Report

Shareholder Expense Example (unaudited)

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase or redemption payments; and (2) ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from October 1, 2011 to March 31, 2012.

ACTUAL EXPENSES

The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES

The second section of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Annual Shareholder Report

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as sales charges (loads) on purchase or redemption payments. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.

Beginning
Account Value
10/1/2011 		Ending
Account Value
3/31/2012		 Expenses Paid
During Period1
Actual:
Class A Shares $1,000 $1,045.50 $4.45
Class B Shares $1,000 $1,041.20 $8.73
Class C Shares $1,000 $1,041.20 $8.73
Class F Shares $1,000 $1,045.50 $4.45
Hypothetical (assuming a 5% return
before expenses):
Class A Shares $1,000 $1,020.65 $4.39
Class B Shares $1,000 $1,016.45 $8.62
Class C Shares $1,000 $1,016.45 $8.62
Class F Shares $1,000 $1,020.65 $4.39
1 Expenses are equal to the Fund's annualized net expense ratios, multiplied by the average account value over the period, multiplied by 183/366 (to reflect the one-half-year period). The annualized net expense ratios are as follows:
Class A Shares 0.87%
Class B Shares 1.71%
Class C Shares 1.71%
Class F Shares 0.87%

Annual Shareholder Report

Board of Directors and Fund Officers

The Board of Directors is responsible for managing the Fund's business affairs and for exercising all the Fund's powers except those reserved for the shareholders. The following tables give information about each Director and the senior officers of the Fund. Where required, the tables separately list Directors who are “interested persons” of the Fund (i.e., “Interested” Directors) and those who are not (i.e., “Independent” Directors). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Directors listed is 4000 Ericsson Drive, Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2011, the Fund comprised one portfolio(s), and the Federated Fund Family consisted of 43 investment companies (comprising 134 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Director oversees all portfolios in the Federated Fund Family and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Fund Directors and is available, without charge and upon request, by calling 1-800-341-7400.

Interested DIRECTORS Background

Name
Birth Date
Positions Held with Fund
Date Service Began		 Principal Occupation(s) for Past Five Years,
Other Directorships Held and Previous Position(s)
John F. Donahue*
Birth Date: July 28, 1924
Director
Began serving: September 1976		 Principal Occupations: Director or Trustee of the Federated Fund Family; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Family's Executive Committee.

Previous Positions: Chairman of the Federated Fund Family; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling.
J. Christopher Donahue*
Birth Date: April 11, 1949
President and Director
Began serving: December 1986		 Principal Occupations: Principal Executive Officer and President of the Federated Fund Family; Director or Trustee of some of the Funds in the Federated Fund Family; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company.

Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd.

* Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries.
Annual Shareholder Report

INDEPENDENT DIRECTORS Background

Name
Birth Date
Positions Held with Fund
Date Service Began		 Principal Occupation(s) for Past Five Years,
Other Directorships Held, Previous Position(s) and Qualifications
Nicholas P. Constantakis, CPA
Birth Date: September 3, 1939
Director
Began serving: February 1998		 Principal Occupation: Director or Trustee of the Federated Fund Family.

Other Directorship Held: Director, Chairman of the Audit Committee, and member of the Compensation Committee, Michael Baker Corporation (architecture, engineering and construction services).

Previous Position: Partner, Andersen Worldwide SC.

Qualifications: Public accounting and director experience.
John F. Cunningham
Birth Date: March 5, 1943
Director
Began serving: June 1999		 Principal Occupation: Director or Trustee of the Federated Fund Family.

Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College.

Previous Positions: Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc.

Qualifications: Business management and director experience.
Maureen Lally-Green
Birth Date: July 5, 1949
Director
Began serving: August 2009		 Principal Occupations: Director or Trustee of the Federated Fund Family; Director, Office of Church Relations, Diocese of Pittsburgh; Adjunct Professor of Law, Duquesne University School of Law.

Other Directorships Held: Director, Auberle; Member, Pennsylvania State Board of Education; Director, Saint Vincent College; Director, Ireland Institute of Pittsburgh; Chair and Director, UPMC Mercy Hospital; Regent, St. Vincent Seminary; Director, Epilepsy Foundation of Western and Central Pennsylvania; Director, Saint Thomas More Society, Allegheny County.

Previous Position: Pennsylvania Superior Court Judge.

Qualifications: Legal and director experience.
Peter E. Madden
Birth Date: March 16, 1942
Director
Began serving: August 1991		 Principal Occupation: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Family.

Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, Chief Operating Officer and Director, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange.

Qualifications: Business management, mutual fund services and director experience.
Annual Shareholder Report
Name
Birth Date
Positions Held with Fund
Date Service Began		 Principal Occupation(s) for Past Five Years,
Other Directorships Held, Previous Position(s) and Qualifications
Charles F. Mansfield, Jr.
Birth Date: April 10, 1945
Director
Began serving: June 1999		 Principal Occupations: Director or Trustee of the Federated Fund Family; Management Consultant.

Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President, DVC Group, Inc. (marketing, communications and technology).

Qualifications: Banking, business management, education and director experience.
Thomas M. O'Neill
Birth Date: June 14, 1951
Director
Began serving: October 2006		 Principal Occupations: Director or Trustee, Vice Chairman of the Audit Committee of the Federated Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting).

Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College; Board of Directors, Medicines for Humanity; Board of Directors, The Golisano Children's Museum of Naples, Florida.

Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank; Director and Consultant, EZE Castle Software (investment order management software); Director, Midway Pacific (lumber).

Qualifications: Business management, mutual fund, director and investment experience.
John S. Walsh
Birth Date: November 28, 1957
Director
Began serving: January 1999		 Principal Occupations: Director or Trustee, Chairman of the Audit Committee of the Federated Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc.

Previous Position: Vice President, Walsh & Kelly, Inc.

Qualifications: Business management and director experience.
Annual Shareholder Report

OFFICERS**

Name
Birth Date
Positions Held with Fund
Date Service Began		 Principal Occupation(s) and Previous Position(s)
John W. McGonigle
Birth Date: October 26, 1938
EXECUTIVE VICE PRESIDENT AND SECRETARY
Began serving: September 1976		 Principal Occupations: Executive Vice President and Secretary of the Federated Fund Family; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc.

Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp.
Richard A. Novak
Birth Date: December 25, 1963
TREASURER
Began serving: January 2006		 Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc.

Previous Positions: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co.
Richard B. Fisher
Birth Date: May 17, 1923
VICE PRESIDENT
Began serving: January 1985		 Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Family; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp.

Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Family; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp.
Brian P. Bouda
Birth Date: February 28, 1947
CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT
Began serving: August 2004		 Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Family; Vice President and Chief Compliance Officer of Federated Investors, Inc. and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin.
Robert J. Ostrowski
Birth Date: April 26, 1963
CHIEF INVESTMENT OFFICER
Began serving: February 2010		 Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University.
J. Scott Albrecht
Birth Date: June 1, 1960
VICE PRESIDENT
Began serving: May 2004		 Principal Occupations: J. Scott Albrecht has been the Fund's portfolio manager since May 1996. He is Vice President of the Fund. Mr. Albrecht joined Federated in 1989. He became a Senior Vice President of the Fund's Adviser in January 2005 and served as a Vice President of the Fund's Adviser from 1994 through 2004. He has been a Senior Portfolio Manager since 1997 and was a Portfolio Manager from 1994 to 1996. Mr. Albrecht has received the Chartered Financial Analyst designation and holds an M.S. in Public Management from Carnegie Mellon University.

Annual Shareholder Report

Evaluation and Approval of Advisory Contract – May 2011

Federated Municipal Securities Fund, Inc. (the “Fund”)

The Fund's Board reviewed the Fund's investment advisory contract at meetings held in May 2011. The Board's decision regarding the contract reflects the exercise of its business judgment on whether to continue the existing arrangements.

In this connection, the Federated Funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below (the “Evaluation”). The Board considered that Evaluation, along with other information, in deciding to approve the advisory contract.

During its review of the contract, the Board considered compensation and benefits received by the Adviser. This included the fees received for services provided to the Fund by other entities in the Federated organization and research services (if any) received by the Adviser from brokers that execute Federated fund trades, as well as advisory fees. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize “economies of scale” as a fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with a fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser's services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser for what might be viewed as like services, and the cost to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates for supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.

Annual Shareholder Report

The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's Evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional information in connection with the particular meeting at which the Board's formal review of the advisory contract occurred. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory contract included review of the Senior Officer's Evaluation, accompanying data and additional information covering such matters as: the Adviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.

With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be relevant, given the high degree of competition in the mutual fund business. The Board focused on comparisons with other similar Annual Shareholder Report

mutual funds more heavily than non-mutual fund products or services because it is believed that they are more relevant. For example, other mutual funds are the products most like the Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group was a useful indicator of how the Adviser is executing the Fund's investment program, which in turn assisted the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services were such as to warrant continuation of the advisory contract. In this regard, the Senior Officer has reviewed Federated's fees for providing advisory services to products outside the Federated family of funds (e.g., institutional and separate accounts). He concluded that mutual funds and institutional accounts are inherently different products. Those differences include, but are not limited to, different types of targeted investors; being subject to different laws and regulations; different legal structures; different average account sizes; different associated costs; different portfolio management techniques made necessary by different cash flows; and portfolio manager time spent in review of securities pricing. The Senior Officer did not consider these fee schedules to be determinative in judging the appropriateness of mutual fund advisory contracts.

The Senior Officer reviewed information compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are relevant in judging the reasonableness of proposed fees.

The Fund's performance fell below the median of the relevant peer group for the one-year, three-year and five-year periods covered by the Evaluation. The Board discussed the Fund's performance with the Adviser and recognized the efforts being undertaken by the Adviser. The Board will continue to monitor these efforts and the performance of the Fund.

The Board also received financial information about Federated, including information regarding the compensation and benefits Federated derived from its relationships with the Federated funds. This information covered not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The information also detailed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees Annual Shareholder Report

and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate. Moreover, the Board receives regular reporting as to the institution or elimination of these voluntary waivers.

Federated furnished information, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation information unreliable. The allocation information was considered in the analysis by the Board but was determined to be of limited use.

The Board and the Senior Officer also reviewed information compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive and the Board agreed.

The Senior Officer's Evaluation also discussed the notion of possible realization of “economies of scale” as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, compliance, internal audit, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's Evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.

It was noted in the materials for the Board meeting that for the period covered by the Evaluation, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was above the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive. The Board will continue to monitor advisory fees and other expenses borne by the Fund.

The Senior Officer noted that, considering the totality of the circumstances, and all of the factors referenced within his Evaluation, he had concluded that, subject to comments and recommendations made within his Evaluation, his observations and the information accompanying the Evaluation supported a finding by the Board that the management fees for each of the funds are Annual Shareholder Report

reasonable and that Federated appeared to provide appropriate administrative services to the Fund for the fees paid. Under these circumstances, no changes were recommended to, and no objection was raised to, the continuation of the Fund's advisory contract. The Board concluded that the nature, quality and scope of services provided the Fund by the Adviser and its affiliates were satisfactory.

In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund.

The Board based its decision to approve the advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.

Annual Shareholder Report

Voting Proxies on Fund Portfolio Securities

A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Proxy Voting Record Report (Form N-PX).” Form N-PX filings are also available at the SEC's website at www.sec.gov.

Quarterly Portfolio Schedule

The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “Products” section of Federated's website at FederatedInvestors.com. From the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Form N-Q.”

Annual Shareholder Report

Mutual funds are not bank deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Investment in mutual funds involves investment risk, including the possible loss of principal.

This Report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.

Federated Municipal Securities Fund, Inc.
Federated Investors Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561

Contact us at FederatedInvestors.com
or call 1-800-341-7400.

Federated Securities Corp., Distributor

CUSIP 313913105
CUSIP 313913204
CUSIP 313913303
CUSIP 313913402

8042830 (5/12)

Federated is a registered trademark of Federated Investors, Inc.
2012  © Federated Investors, Inc.

 

Item 2. Code of Ethics

 

(a) As of the end of the period covered by this report, the registrant has adopted a code of ethics (the "Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers") that applies to the registrant's Principal Executive Officer and Principal Financial Officer; the registrant's Principal Financial Officer also serves as the Principal Accounting Officer.

(c) Not Applicable

(d) Not Applicable

(e) Not Applicable

(f)(3) The registrant hereby undertakes to provide any person, without charge, upon request, a copy of the code of ethics. To request a copy of the code of ethics, contact the registrant at 1-800-341-7400, and ask for a copy of the Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers.

Item 3. Audit Committee Financial Expert

The registrant's Board has determined that each of the following members of the Board's Audit Committee is an “audit committee financial expert,” and is "independent," for purposes of this Item:   Nicholas P. Constantakis, Charles F. Mansfield, Jr., Thomas M. O'Neill and John S. Walsh. 

 

Item 4. Principal Accountant Fees and Services

 

(a) Audit Fees billed to the registrant for the two most recent fiscal years:

Fiscal year ended 2012 - $24,450

Fiscal year ended 2011 - $23,500

 

(b) Audit-Related Fees billed to the registrant for the two most recent fiscal years:

Fiscal year ended 2012 - $0

Fiscal year ended 2011 - $24

Travel to Audit Committee Meeting.

 

Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.

 

(c) Tax Fees billed to the registrant for the two most recent fiscal years:

Fiscal year ended 2012 - $0

Fiscal year ended 2011 - $0

 

Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $3,718 and $0 respectively. Fiscal year ended 2012- Tax preparation fees for fiscal year end 2011.

 

(d) All Other Fees billed to the registrant for the two most recent fiscal years:

Fiscal year ended 2012 - $0

Fiscal year ended 2011 - $0

 

Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.

 

(e)(1) Audit Committee Policies regarding Pre-approval of Services.

 

The Audit Committee is required to pre-approve audit and non-audit services performed by the independent auditor in order to assure that the provision of such services do not impair the auditor’s independence. Unless a type of service to be provided by the independent auditor has received general pre-approval, it will require specific pre-approval by the Audit Committee. Any proposed services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee.

Certain services have the general pre-approval of the Audit Committee. The term of the general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The Audit Committee will annually review the services that may be provided by the independent auditor without obtaining specific pre-approval from the Audit Committee and may grant general pre-approval for such services. The Audit Committee will revise the list of general pre-approved services from time to time, based on subsequent determinations. The Audit Committee will not delegate its responsibilities to pre-approve services performed by the independent auditor to management.

The Audit Committee has delegated pre-approval authority to its Chairman. The Chairman will report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Committee will designate another member with such pre-approval authority when the Chairman is unavailable.

 

AUDIT SERVICES

The annual Audit services engagement terms and fees will be subject to the specific pre-approval of the Audit Committee. The Audit Committee must approve any changes in terms, conditions and fees resulting from changes in audit scope, registered investment company (RIC) structure or other matters.

In addition to the annual Audit services engagement specifically approved by the Audit Committee, the Audit Committee may grant general pre-approval for other Audit Services, which are those services that only the independent auditor reasonably can provide. The Audit Committee has pre-approved certain Audit services, all other Audit services must be specifically pre-approved by the Audit Committee.

 

AUDIT-RELATED SERVICES

Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements or that are traditionally performed by the independent auditor. The Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor, and has pre-approved certain Audit-related services, all other Audit-related services must be specifically pre-approved by the Audit Committee.

 

TAX SERVICES

The Audit Committee believes that the independent auditor can provide Tax services to the Company such as tax compliance, tax planning and tax advice without impairing the auditor’s independence. However, the Audit Committee will not permit the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported in the Internal Revenue Code and related regulations. The Audit Committee has pre-approved certain Tax services, all Tax services involving large and complex transactions must be specifically pre-approved by the Audit Committee.

 

ALL OTHER SERVICES

With respect to the provision of services other than audit, review or attest services the pre-approval requirement is waived if:

 

(1) The aggregate amount of all such services provided constitutes no more than five percent of the total amount of revenues paid by the registrant, the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant to its accountant during the fiscal year in which the services are provided;

 

(2) Such services were not recognized by the registrant, the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant at the time of the engagement to be non-audit services; and

 

(3) Such services are promptly brought to the attention of the Audit Committee of the issuer and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the Audit Committee.

 

The Audit Committee may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, and would not impair the independence of the auditor.

 

The SEC’s rules and relevant guidance should be consulted to determine the precise definitions of prohibited non-audit services and the applicability of exceptions to certain of the prohibitions.

 

PRE-APPROVAL FEE LEVELS

Pre-approval fee levels for all services to be provided by the independent auditor will be established annually by the Audit Committee. Any proposed services exceeding these levels will require specific pre-approval by the Audit Committee.

 

 

 

PROCEDURES

Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the independent auditor and the Principal Accounting Officer and/or Internal Auditor, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.

 

(e)(2) Percentage of services identified in items 4(b) through 4(d) that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X:

 

4(b)

Fiscal year ended 2012 – 0%

Fiscal year ended 2011 - 0%

Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.

 

4(c)

Fiscal year ended 2012 – 0%

Fiscal year ended 2011 – 0%

Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.

 

4(d)

Fiscal year ended 2012 – 0%

Fiscal year ended 2011 – 0%

Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.

 

(f) NA

 

(g) Non-Audit Fees billed to the registrant, the registrant’s investment adviser, and certain entities controlling, controlled by or under common control with the investment adviser:

Fiscal year ended 2012 - $403,918

Fiscal year ended 2011 - $292,632

 

(h) The registrant’s Audit Committee has considered that the provision of non-audit services that were rendered to the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.

 

Item 5. Audit Committee of Listed Registrants

 

Not Applicable

 

Item 6. Schedule of Investments

 

(a) The registrant’s Schedule of Investments is included as part of the Report to Stockholders filed under Item 1 of this form.

 

(b) Not Applicable; Fund had no divestments during the reporting period covered since the previous Form N-CSR filing.

 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies

 

Not Applicable

 

Item 8. Portfolio Managers of Closed-End Management Investment Companies

 

Not Applicable

 

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers

 

Not Applicable

 

Item 10. Submission of Matters to a Vote of Security Holders

 

Not Applicable

 

Item 11. Controls and Procedures

 

(a) The registrant’s President and Treasurer have concluded that the

registrant’s disclosure controls and procedures (as defined in rule 30a-3(c) under the Act) are effective in design and operation and are sufficient to form the basis of the certifications required by Rule 30a-(2) under the Act, based on their evaluation of these disclosure controls and procedures within 90 days of the filing date of this report on Form N-CSR.

 

(b) There were no changes in the registrant’s internal control over financial reporting (as defined in rule 30a-3(d) under the Act) during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

Item 12. Exhibits

 

(a)(1) Code of Ethics- Not Applicable to this Annual Report.

 

(a)(2) Certifications of Principal Executive Officer and Principal Financial Officer.

 

(a)(3) Not Applicable.

 

(b) Certifications pursuant to 18 U.S.C. Section 1350.

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Registrant Federated Municipal Securities Fund, Inc.

 

By /S/ Richard A. Novak

 

Richard A. Novak, Principal Financial Officer

 

Date May 21, 2012

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

By /S/ J. Christopher Donahue

 

J. Christopher Donahue, Principal Executive Officer

 

Date May 21, 2012

 

 

By /S/ Richard A. Novak

 

Richard A. Novak, Principal Financial Officer

 

Date May 21, 2012