PRE 14A 1 form.txt SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [ X ] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ X ]Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a- 6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12 FEDERATED MUNICIPAL HIGH YIELD ADVANTAGE FUND, INC. (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [ X ] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1. Title of each class of securities to which transaction applies: 2. Aggregate number of securities to which transaction applies: 3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): 4. Proposed maximum aggregate value of transaction: 5. Total fee paid: [ ] Fee paid previously with preliminary proxy materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: ____________________________________________________________ 2) Form, Schedule or Registration Statement No.: ____________________________________________________________ 3) Filing Party: ____________________________________________________________ 4) Date Filed: ____________________________________________________________ FEDERATED MUNICIPAL HIGH YIELD ADVANTAGE FUND, INC. NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD OCTOBER 19, 2006 A special meeting of the shareholders of Federated Municipal High Yield Advantage Fund, Inc. (the "Fund" or "Corporation") will be held at 5800 Corporate Drive, Pittsburgh, Pennsylvania 15237-7000, at 2:00 p.m. (Eastern Time), on October 19, 2006 to consider proposals: (1)To approve or disapprove a proposed Agreement and Plan of Reorganization between the Fund and Federated Municipal Securities Income Trust, on behalf of its series, the Federated Municipal High Yield Advantage Fund (the "Reorganized Fund"), whereby the Reorganized Fund would acquire all of the assets (subject to the stated liabilities) of the Fund in exchange for shares of beneficial interest of the Reorganized Fund to be distributed pro rata by the Fund to its shareholders in complete liquidation and dissolution of the Fund. (2)To transact such other business as may properly come before the meeting or any adjournment thereof. The Board of Directors has fixed August 22, 2006 as the record date for determination of shareholders entitled to vote at the meeting. By Order of the Board of Directors, John W. McGonigle Secretary September 13, 2006 YOU CAN HELP THE FUND AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP LETTERS TO ENSURE A QUORUM BY PROMPTLY SIGNING AND RETURNING THE ENCLOSED PROXY. IF YOU ARE UNABLE TO ATTEND THE MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY SO THAT THE NECESSARY QUORUM MAY BE REPRESENTED AT THE SPECIAL MEETING. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. TABLE OF CONTENTS ABOUT THE PROXY SOLICITATION AND THE SPECIAL MEETING................ APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION.................... DESCRIPTION OF THE REORGANIZATION AGREEMENT...................... REASONS FOR THE PROPOSED REORGANIZATION.......................... COMPARISON OF THE FUND AND THE REORGANIZED FUND..................... COMPARISON OF INVESTMENT OBJECTIVES, STRATEGY AND RISKS.......... COMPARISON OF INVESTMENT LIMITATIONS............................. COMPARISON OF SHARE CLASSES, LOADS, AND EXPENSES................. COMPARISON OF MASSACHUSETTS AND MARYLAND LAW..................... COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS AND OBLIGATIONS.... ADDITIONAL INFORMATION REGARDING THE REORGANIZATION................. PROXIES, QUORUM AND VOTING AT THE SPECIAL MEETING................... OTHER MATTERS AND DISCRETION OF ATTORNEYS NAMED IN THE PROXY........ PRELIMINARY PROXY STATEMENT FEDERATED MUNICIPAL HIGH YIELD ADVANTAGE FUND, INC. Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 ABOUT THE PROXY SOLICITATION AND THE SPECIAL MEETING The enclosed proxy is solicited on behalf of the Board of Directors of the Fund (the "Board"). The proxies will be voted at the special meeting of shareholders of the Fund to be held on October 19, 2006 at 5800 Corporate Drive, Pittsburgh, Pennsylvania 15237-7000, at 2:00 p.m. (Eastern time) (such special meeting and any adjournment or postponement thereof are referred to as the "Special Meeting"). The cost of the solicitation, including the printing and mailing of proxy materials, will be borne by the Fund. In addition to solicitations through the mails, proxies may be solicited by officers, employees, and agents of the Fund or through a communications firm retained for this purpose. Such solicitations may be by telephone, telegraph, through the Internet or otherwise. Any telephonic solicitations will follow procedures designed to ensure accuracy and prevent fraud, including requiring identifying shareholder information, recording the shareholder's instructions, and confirming to the shareholder after the fact. Shareholders who communicate proxies by telephone or by other electronic means have the same power and authority to issue, revoke, or otherwise change their voting instruction as shareholders submitting proxies in written form. The Fund will reimburse custodians, nominees, and fiduciaries for the reasonable costs incurred by them in connection with forwarding solicitation materials to the beneficial owners of shares held of record by such persons. At its meeting on May 18, 2006, the Board reviewed the proposed reorganization of the Fund and approved it subject to shareholder approval. The purposes of the Special Meeting are set forth in the accompanying Notice. The Directors know of no business other than that mentioned in the Notice that will be presented for consideration at the Special Meeting. Should other business properly be brought before the Special Meeting, proxies will be voted in accordance with the best judgment of the persons named as proxies. This proxy statement and the enclosed proxy card are expected to be mailed on or about September 13, 2006, to shareholders of record at the close of business on August 22, 2006 (the "Record Date"). On the Record Date, the Fund had outstanding __________________ shares of common stock. At a meeting on February 16, 2006, the Board approved revisions to certain investment limitations of the Fund, which action did not require shareholder approval. This action was reflected in a supplement to the Fund's Statement of Additional Information, which was dated and filed with the Securities and Exchange Commission ("SEC") on February 22, 2006, and is available, free of charge, by calling the Fund's toll-free telephone number identified below. The Fund's annual report, which includes audited financial statements for the fiscal year ended August 31, 2005, was previously mailed to shareholders. A copy of the Fund's most recent annual report is available free of charge by calling the Fund's toll-free number identified below. The Fund's principal executive offices are located at Federated Investors Funds, 5800 Corporate Drive, Pittsburgh, Pennsylvania 15237-7000. The Fund's toll-free telephone number is 1- 800-341-7400. PROPOSAL #1: APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION The Board of Directors of the Fund has voted to recommend to shareholders of the Fund the approval of an Agreement and Plan of Reorganization (the "Reorganization Agreement") whereby Federated Municipal Securities Income Trust, a Massachusetts business trust ("FMSIT"), on behalf of its portfolio, Federated Municipal High Yield Advantage Fund (the "Reorganized Fund"), would acquire all of the assets (subject to stated liabilities) of the Fund in exchange for shares of beneficial interest of the Reorganized Fund to be distributed pro rata by the Fund to its shareholders in complete liquidation and dissolution of the Fund (the "Reorganization"). A copy of the Reorganization Agreement is attached as Appendix I to this Proxy Statement. As a result of the Reorganization, each shareholder of the Fund will become the owner of the same number of Reorganized Fund shares having a total net asset value equal to the total net asset value of his or her holdings in the Fund on the date of the Reorganization. FMSIT will not issue share certificates with respect to shares of the Reorganized Fund issued in connection with the Reorganization. Shareholders who currently hold certificates for their Fund shares are urged to surrender those certificates before the Reorganization takes place. Description of the Reorganization Agreement Significant aspects of the Reorganization and provisions of the Reorganization Agreement are summarized below; however, this summary of the Reorganization Agreement is qualified in its entirety by reference to the full text of the Reorganization Agreement between the Fund and FMSIT, a copy of which is attached as Appendix I to this Proxy Statement. The Reorganization Agreement provides that all of the assets of the Fund will be transferred to the Reorganized Fund, subject to the stated liabilities of the Fund. In exchange for these assets, the Reorganized Fund will issue shares in the same amount as each class of outstanding shares of the Fund at the time of the Reorganization. The Fund will distribute these shares so that each holder of shares of the Fund will receive the same number (with the same aggregate value) of the same class of shares of the Reorganized Fund as the shareholder had in the Fund immediately prior to the Reorganization. The Fund's shareholders will not pay a sales charge, commission or other transaction cost in connection with their receipt of the shares of the Reorganized Fund. Any contingent deferred sales charges payable upon redemption of shares received in the Reorganization will be calculated as if those shares had continued to be Fund shares. As a condition to the Reorganization, the Fund and FMSIT will receive an opinion of counsel that the Reorganization will be considered a tax-free "reorganization" under applicable provisions of the Internal Revenue Code, so that no gain or loss for federal income tax purposes will be recognized by either the Fund or the Reorganized Fund or by the shareholders of the Fund. The tax basis of the Reorganized Fund shares received by Fund shareholders will be the same as the tax basis of their shares in the Fund. Reasons for the Proposed Reorganization The Reorganization is being proposed to convert the Fund from a Maryland corporation to a series of a Massachusetts business trust in order to eliminate the need to pay Pennsylvania franchise tax. Unlike the Fund, as a portfolio of FMSIT, the Reorganized Fund will not be subject to the Pennsylvania franchise tax. Due to the differences in investment limitations between the Fund and the Reorganized Fund as described below (See "Comparison of Investment Limitations" below), after the Reorganization, the Trustees of the Reorganized Fund will have the ability to respond more quickly to changes in competitive and regulatory conditions, which will also allow the Reorganized Fund to operate in a more efficient and economical manner. COMPARISON OF THE FUND AND THE REORGANIZED FUND The Fund is an open-end management investment company currently organized as a Maryland corporation. The Fund offers four classes of shares (Class A, Class B, Class C and Class F Shares). FMSIT is an open-end management investment company that consists of a number of portfolios, each of which has its own investment objective. The Reorganized Fund is a newly organized portfolio of FMSIT that will offer four classes of shares that are identical to each of the four classes of shares offered by the Fund. The Reorganized Fund will not engage in any operations prior to the Reorganization. Comparison of Investment Objectives, Strategy, and Risks The investment objective, investment strategy, and risks of the Reorganized Fund are the same as the investment objective, investment strategy and risks of the Fund. The Fund's investment objective is to provide a high level of current income which is generally exempt from the federal regular income tax. The Fund invests its assets so that, normally, distributions of annual interest income are exempt from federal regular income tax (except when investing for "defensive" purposes). Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations ("AMT"). The Fund invests primarily in long-term, tax-exempt securities that are: (1) medium quality (i.e., securities rated in the third or fourth highest rating category by a nationally recognized statistical rating organization (NRSRO) or unrated securities of comparable quality); or (2) non-investment grade or unrated securities of comparable quality. The Fund's investment adviser (Adviser) actively manages the Fund's portfolio, seeking to manage credit risk assumed by the Fund and provide superior levels of income. The Adviser manages credit risk by performing a fundamental credit analysis on all tax-exempt securities before the Fund purchases such securities. The Adviser considers various factors, including the economic feasibility of revenue bond financings and general purpose financings; the financial condition of the issuer or guarantor; and political developments that may affect credit quality. The Adviser monitors the credit risks of all tax exempt securities on an ongoing basis by reviewing periodic financial data and ratings of NRSROs. The Adviser performs a more intensive credit analysis on non-investment grade, tax-exempt securities. In addition to the review process described above, the Adviser may visit the site that the issuer is developing with the proceeds of the offering and engages in detailed discussions with the issuer regarding the offering. The Adviser also attempts to provide superior levels of income by investing in long-term, tax-exempt securities and managing the duration of the Fund. "Duration" measures the sensitivity of a security's price to changes in interest rates. The greater a portfolio's duration, the greater the change in the portfolio's value in response to a change in market interest rates. The Adviser increases or reduces the Fund's portfolio duration based on its interest rate outlook. When the Adviser expects interest rates to fall, it maintains a longer portfolio duration. When the Adviser expects interest rates to increase, it shortens the portfolio duration. The Adviser uses hedging transactions for purposes of duration management. The Adviser considers a variety of factors in formulating its interest rate outlook, including current and expected U.S. economic growth; current and expected interest rates and inflation; the Federal Reserve's monetary policy; and supply and demand factors related to the municipal market and the effect they may have on the returns offered for various bond maturities. Duration management is less important when a greater portion of the Fund is allocated to non-investment grade, tax-exempt securities, because such securities are less sensitive to interest rate changes. The Adviser also attempts to provide superior levels of income by investing in non-investment grade, tax-exempt securities, which generally provide higher yields. The percentage that the Adviser allocates to non- investment grade securities will vary depending on the supply of non-investment grade, tax-exempt securities and the credit spread between investment grade, tax-exempt securities and non-investment grade, tax-exempt securities. If the credit spread narrows, the Adviser may increase its allocation to investment grade securities without limitation; if the credit spread broadens, the Adviser may increase its allocation to non-investment grade securities without limitation. The Adviser may invest up to 100% of the Fund's assets in non- investment grade, tax-exempt securities. The Fund may enter into derivatives contracts as hedging transactions, as more fully described herein. The Fund also may use derivative contracts to implement its overall investment strategies in a more cost effective or efficient manner. For example, the Fund may purchase derivatives contracts rather than individual securities in order to gain exposure to the municipal bond sector. The Fund invests its assets so that at least 80% of the income that it distributes will be exempt from federal regular income tax, except when investing for "defensive" purposes. The Fund is subject to credit risk, call risk, sector risk, tax risk, leverage risks, liquidity risks, prepayment risks, the risks of investing in derivative contracts, the risks associated with non-investment grade securities and non-diversification risk. As noted above, the investment objective, investment strategy, and risks of the Reorganized Fund are the same as the investment objective, investment strategy and risks of the Fund. Also, like the Fund, the Reorganized Fund will be non-diversified. Comparison of Investment Limitations In addition to the investment objectives and strategy described above, the Fund and the Reorganized Fund are each subject to certain investment limitations. A summary of the fundamental and non-fundamental investment limitations of the Fund and the Reorganized Fund is set forth below. "Fundamental investment limitations" cannot be changed unless authorized by the Board of Directors/Trustees of a mutual fund and by the "vote of a majority of its outstanding voting securities" as defined in the Investment Company Act of 1940 ("1940 Act"). "Non-fundamental investment limitations" may be changed by the Board of Directors/Trustees of a mutual fund without shareholder approval.
FUND REORGANIZED FUND EXPLANATION OF DIFFERENCES DIVERSIFICATION DIVERSIFICATION No difference. The Fund does not The Reorganized have a Fund does not diversification have a limitation. It diversification is a non- limitation. It diversified fund. is a non- diversified fund. BUYING ON MARGIN BUYING ON MARGIN "Buying on Margin" is a non-fundamental investment limitation for the Reorganized Fund, meaning (Fundamental) (Non- that this investment limitation may be changed by the Board of Trustees of the Reorganized Fund The Fund will not Fundamental) without shareholder approval. purchase any The Reorganized The Reorganized Fund's "Buying on Margin" non-fundamental investment limitation also differs from securities on Fund does not the Fund's fundamental investment limitation in that the types of derivatives contracts for which margin, but may have a similar margin deposits can be made are not limited to certain specific-types of derivatives contracts obtain such fundamental enumerated in the investment limitation. This difference is reflected in the generic reference short-term investment to "permissible activities" in the Reorganized Fund's investment limitation (rather than listing credits as are limitation. specific types of derivatives contracts). necessary for The Reorganized clearance of Fund has a transactions. similar non- The deposit or fundamental payment by the investment Fund of initial limitation, or variation which reads as margin in follows: connection with "The Fund will financial futures not purchase any contracts or securities on related options margin, provided transactions is that the Fund not considered may obtain the purchase of a short-term security on credits margin. necessary for the clearance of purchases and sales of securities, and further provided that the Fund may make margin deposits and/or collateral arrangements in connection with permissible activities." SELLING SHORT SELLING SHORT The Reorganized Fund does not have an investment limitation prohibiting the Reorganized Fund from The Fund will not selling securities short. sell securities The Reorganized Certain restrictions imposed by state laws and regulations were preempted by the National short. Fund does not Securities Markets Improvement Act of 1996 ("NSMIA") and no longer apply to mutual funds created have a similar after 1996. Until NSMIA was adopted in 1996, the securities laws of several states required fundamental or every investment company which intended to sell its shares in those states to adopt policies non-fundamental governing a variety of operational issues, including investments in certain securities. As a investment consequence of those restrictions, the Fund adopted the investment limitation on "Selling Short" limitation. and agreed that the limitation would be changed only upon the approval of shareholders. Since these prohibitions are no longer required under current law, the Board of the Reorganized Fund did not believe this policy was necessary. Without this policy, the Reorganized Fund has greater flexibility in the management of the Reorganized Fund because the Reorganized Fund is permitted to purchase a broader range of securities that are permitted investments and that are consistent with the Reorganized Fund's investment objectives and policies. ISSUING SENIOR BORROWING MONEY The Reorganized Fund's fundamental investment limitation on SECURITIES AND AND ISSUING Borrowing Money and Issuing Senior Securities" differs from the Fund's fundamental investment BORROWING MONEY SENIOR limitation in that the Reorganized Fund's investment limitation will permit the Adviser to borrow (Fundamental) SECURITIES money and engage in reverse repurchase agreement transactions, including for investment leverage, The Fund will not (Fundamental) subject only to the limitations on borrowing under the 1940 Act. The Reorganized Fund also will issue senior The Reorganized be able to issue senior securities to the maximum extent permitted under the 1940 Act. securities except Fund may borrow that the Fund may money, directly borrow money and or indirectly, engage in reverse and issue senior repurchase securities to agreements in the maximum amounts up to extent permitted one-third of the under the 1940 value of its Act, any rule or total assets, order including the thereunder, or amounts borrowed. any SEC staff The Fund will not interpretation borrow money or thereof. engage in reverse repurchase agreements for investment leverage, but rather as a temporary, extraordinary, or emergency measure or to facilitate management of the portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. During the period any reverse repurchase agreements are outstanding, but only to the extent necessary to assure completion of the reverse repurchase agreements, the Fund will restrict the purchase of portfolio instruments to money market instruments maturing on or before the expiration date of the reverse repurchase agreements. PLEDGING ASSETS PLEDGING ASSETS "Pledging Assets" is a non-fundamental investment limitation for the Reorganized Fund, meaning (Fundamental) (Non- that this investment limitation may be changed by the Board of Trustees of the Reorganized Fund The Fund will not Fundamental) without shareholder approval. mortgage, pledge The Reorganized The Reorganized Fund's "Pledging Assets" non-fundamental investment limitation also differs from or hypothecate Fund does not the Fund's fundamental investment limitation in that there is no express 10% of total assets any assets except have a similar limitation on the amount of assets the Reorganized Fund is permitted to pledge to secure to secure fundamental permitted borrowings and the Reorganized Fund's non-fundamental investment policy makes clear permitted investment that the Reorganized Fund may pledge assets for collateral arrangements in connection with borrowings. In limitation. permissible activities, such as, for example, derivative contracts (rather than listing specific those cases, it The Reorganized types of instruments for which collateral arrangements may be made without being deemed a pledge may pledge assets Fund has a of assets). having a market similar non- value not fundamental exceeding the investment lesser of the limitation, dollar amounts which reads as borrowed or 10% follows: of the value of "The Reorganized total assets at Fund will not the time of the mortgage, borrowing. pledge, or Neither the hypothecate any deposit of of its assets, underlying provided that securities and this shall not other assets in apply to the escrow in transfer of connection with securities in the writing of connection with put or call any permissible options on borrowing or to municipal bonds collateral nor margin arrangements in deposits for the connection with purchase and sale permissible of financial activities." futures contracts and related options are deemed to be a pledge. INVESTING IN REAL INVESTING IN The Reorganized Fund's fundamental investment limitation on "Investing in Real Estate" differs ESTATE REAL ESTATE from the Fund's fundamental investment limitation in that it makes clear that the Reorganized (Fundamental) (Fundamental) Fund may invest in issuers which not only invest, but also deal or otherwise engage in, The Fund will not The Reorganized transactions in real estate, or interests therein, and that the Reorganized Fund may exercise buy or sell real Fund may not rights under arrangements relating to securities that are secured by real estate, including the estate, although purchase or sell right to enforce security interests and to hold real estate acquired by reason of such it may invest in real estate, enforcement until that real estate can be liquidated. securities of provided that companies whose this restriction business involves does not prevent the purchase or the Reorganized sale of real Fund from estate or in investing in securities which issuers which are secured by invest, deal, or real estate or otherwise engage interests in real in transactions estate. in real estate or interests therein, or investing in securities that are secured by real estate or interests therein. The Reorganized Fund may exercise its rights under agreements relating to such securities, including the right to enforce security interests and to hold real estate acquired by reason of such enforcement until that real estate can be liquidated in an orderly manner. INVESTING IN INVESTING IN The Reorganized Fund's fundamental investment limitation on "Investing in Commodities" differs COMMODITIES COMMODITIES from the Fund's fundamental investment limitation in that the Reorganized Fund is permitted to (Fundamental) (Fundamental) invest in commodities to the maximum extent permitted under the 1940 Act (rather than The Fund will not specifically listing the types of activities that the Reorganized Fund may engage in). This purchase or sell The Fund may difference makes clear that the Board and Adviser have greater flexibility as to the types of commodities, invest in instruments in which the Reorganized Fund may invest (such as, for example, particular types of except that the commodities to derivative contracts, including non-cash settled, as well as cash settled, derivatives Fund may purchase the maximum contracts). and sell extent permitted financial futures under the 1940 contracts and Act. related options. UNDERWRITING UNDERWRITING The Reorganized Fund's fundamental investment limitation on "Underwriting" differs from the (Fundamental) (Fundamental) Fund's fundamental investment limitation in that it makes clear that the Reorganized Fund may The Fund will not The Fund may not engage in transactions involving the acquisition, disposition or resale of its portfolio underwrite any underwrite the securities (rather than just "restricted securities," or securities subject to restrictions on issue of securities of resale under federal securities laws) under circumstances where the Reorganized Fund may be securities, other issuers, considered to be an underwriter under the Securities Act of 1933. except as it may except that the be deemed to be Fund may engage an underwriter in transactions under the involving the Securities Act of acquisition, 1933 in disposition or connection with resale of its the sale of portfolio restricted securities, securities which under the Fund may circumstances purchase pursuant where it may be to its investment considered to be objective, an underwriter policies and under the limitations. Securities Act of 1933. LENDING LENDING The Reorganized Fund's fundamental investment limitation on "Lending" differs from the Fund's (Fundamental) (Fundamental) fundamental investment limitation in that there is no express reference to the "one-third of the The Fund will not The Reorganized value of its total assets" limitation contained in the Fund's fundamental investment limitation, lend any of its Fund may not and the Reorganized Fund is expressly permitted to engage in inter-fund lending with affiliated assets except make cash loans, investment companies. portfolio provided that securities up to this restriction The SEC has granted an exemption that permits the Reorganized Fund and all other funds advised by one-third of the does not prevent subsidiaries of Federated Investors, Inc. (Federated funds) to lend and borrow money for certain value of its the Reorganized temporary purposes directly to and from other Federated funds. Participation in this inter-fund total assets Fund from lending program is voluntary for both borrowing and lending Federated funds, and an inter-fund (this shall not purchasing debt loan is only made if it benefits each participating Federated fund. Federated Investors, Inc. prevent the obligations, (Federated) and its subsidiaries, administers the program according to procedures approved by the purchase or entering into Reorganized Fund's Board, and the Board monitors the operation of the program. Any inter-fund holding of repurchase loan must comply with certain conditions set out in the exemption, which are designed to assure municipal bonds, agreements fairness and protect all participating Federated funds. repurchase and/or agreements, or derivative For example, inter-fund lending is permitted only (a) to meet shareholder redemption requests, other contracts, and (b) to meet commitments arising from "failed" trades. All inter-fund loans must be repaid in transactions lending its seven days or less. The Reorganized Fund's participation in this program must be consistent with which are assets to its investment policies and limitations, and must meet certain percentage tests. Inter-fund permitted by the broker/dealers loans may be made only when the rate of interest to be charged is more attractive to the lending Fund's investment or institutional Federated fund than market-competitive rates on overnight repurchase agreements (Repo Rate) and objective and investors, more attractive to the borrowing Federated fund than the rate of interest that would be charged policies). making loans to by an unaffiliated bank for short-term borrowings (Bank Loan Rate), as determined by the Board. affiliated The interest rate imposed on inter-fund loans is the average of the Repo Rate and the Bank Loan investment Rate. companies pursuant to an inter-fund lending program, and investing in loans, including assignments and participation interests. CONCENTRATION CONCENTRATION The Reorganizing Fund's fundamental investment limitation on "Concentration" differs from the (Fundamental) (Fundamental) Fund's fundamental investment limitation in that it clarifies, by eliminating certain language, The Fund will not The Fund will that the concentration policy of the Reorganizing Fund applies to its investments in industrial make investments not make development bonds and that bank instruments are not included as a type of securities (such as that will result investments that government securities and municipal securities) that will not be deemed to constitute an in the will result in industry. concentration of the its investments concentration of in the securities its investments of issuers in the primarily engaged securities of in the same issuers industry, primarily provided that the engaged in the Fund may invest same industry. more than 25% of For purposes of the value of its this limitation, assets in the term industrial concentration development has the meaning bonds. For set forth in the purposes of this 1940 Act, any restriction, the rule or order term thereunder, or concentration has any SEC staff the meaning set interpretation forth in the 1940 thereof. Act, any rule or Government order thereunder, securities and or any SEC staff municipal interpretation securities will thereof. not be deemed to Government constitute an securities, industry. municipal securities and bank instruments will not be deemed to constitute an industry. As to industrial development bonds, the Fund may purchase securities of an issuer resulting in the ownership of more than 25% of the Fund's assets in one industry, and the Fund reserves the right to invest more than 25% of its assets in industrial development bonds in the same state. RESTRICTED RESTRICTED There are no significant differences with respect to the Fund's and Reorganized Fund's non- ILLIQUID SECURITIES AND fundamental investment limitations on investments in restricted or illiquid securities. SECURITIES ILLIQUID (Non-Fundamental) SECURITIES The Fund may (Non- invest in Fundamental) restricted The Reorganized securities. Fund's Restricted investment securities are limitations on any securities "Restricted that are subject Securities" and to restrictions "Illiquid on resale under Securities" are federal broken out securities law. separately as Under criteria follows: established by RESTRICTED the Directors, SECURITIES certain The Reorganized restricted Fund may securities are purchase determined to be securities liquid. To the subject to extent that restriction on restricted resale under the securities are federal not determined to securities laws. be liquid, the ILLIQUID Fund will limit SECURITIES their purchase, The Reorganized together with Fund will not other illiquid purchase securities, to securities for 15% of its net which there is assets. no readily available market, or enter into repurchase agreements or purchase time deposits that the Fund cannot dispose of within seven days, if immediately after and as a result, the value of such securities would exceed, in the aggregate, 15% of the Reorganized Fund's net assets.
In addition to the investment limitations noted above, the Board of Directors of the Fund adopted the following clarifying language related to the Fund's investment limitations: "The Fund considers certificates of deposits and demand and time deposits issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of investment to be "cash items. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such limitation. The preceding limitations regarding buying on margin, borrowing money and pledging assets do not apply to intra-day cash advances made by the Fund's custodian, or the grant of a security interest in securities by the Fund to its custodian to collateralize such intra-day cash advances, in order to enable the Fund to settle securities purchases or to redeem Shares of the Fund." The Board of Trustees of the Reorganized Fund also adopted the above language regarding the Reorganized Fund's investment limitations, as well as the following additional language: "In applying the Fund's concentration limitation, investments in certain industrial development bonds funded by activities in a single industry will be deemed to constitute investment in an industry. The Fund's concentration limitation will not restrict the Fund's investment in economic sectors. The Fund will consider concentration to be the investment of more than 25% of the value of its total assets in any one industry." "The Fund will not invest more than 25% of the value of its total assets in securities insured by the same single bond insurer." "The preceding limitations regarding buying on margin, borrowing money, lending, and pledging assets do not apply to the Fund's use of derivative contracts, including, without limitation, the Fund's granting of a security interest in connection with such permissible activities." Of the differences in investment limitations between the Fund and the Reorganized Fund noted above, the most significant difference is that, under the investment limitations of the Reorganized Fund, the Reorganized Fund, unlike the Fund, is permitted to borrow money and engage in reverse repurchase agreement transactions for the purpose of investment leverage. Reverse repurchase agreements involve the purchase of securities with the agreement to sell them at a higher price at a specific future date. For the party selling the security (and agreeing to repurchase it in the future) it is a repurchase agreement transaction (a "repo"); for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. For example, in a repurchase agreement transaction, the Reorganized Fund could buy a security from a dealer or bank and agree to sell the security back at a mutually agreed upon time and price. The repurchase price would exceed the sale price, reflecting the Reorganized Fund's return on the transaction. This return is unrelated to the interest rate on the underlying security. The Reorganized Fund's custodian or subcustodian typically would take possession of the securities subject to repurchase agreements, and the Adviser would monitor the value of the underlying security each day to ensure that the value of the security equals or exceeds the repurchase price. Reverse repurchase agreements are repurchase agreements in which the Reorganized Fund is the seller (rather than the buyer) of the securities, and agrees to repurchase them at an agreed upon time and price. A reverse repurchase agreement may be viewed as a type of borrowing by the Reorganized Fund. Reverse repurchase agreements are subject to credit risks. In addition, reverse repurchase agreements create leverage risks because the Reorganized Fund must repurchase the underlying security at a higher price, regardless of the market value of the security at the time of repurchase. Using leverage, the Reorganized Fund may invest more than it owns, up to the limit permitted under the 1940 Act (or one-third of its total assets). The Fund's fundamental investment limitation regarding issuing senior securities and borrowing money limits the ability of the Fund to borrow money or engage in reverse repurchase agreements to one-third of the total assets of the Fund and prevents borrowing money or the use of reverse repurchase agreements for investment leverage (borrowing money and reverse repurchase agreements may only be used for temporary, extraordinary, or emergency measures or to facilitate the management of the Fund's portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous). Under the Fund's fundamental investment limitation, during the period any reverse repurchase agreements are outstanding, but only to the extent necessary to assure completion of the reverse repurchase agreements, the Fund also is required to restrict the purchase of portfolio instruments to money market instruments maturing on or before the expiration date of the reverse repurchase agreement. Comparison of Share Classes, Loads and Expenses Like the Fund, the Reorganized Fund will have four share classes: Class A Shares; Class B Shares; Class C Shares and Class F Shares. Like the Fund, the Reorganized Fund's share classes will have expense ratios and fees, after the Reorganization, as described below.
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS F SHARES Maximum Front End Sales Load 4.50% None 1.00% 1.00% Maximum Deferred Sales Load 0.00% 5.50% 1.00% 1.00% Management Fee 0.60% 0.60% 0.60% 0.60% 12b-1 Fees 0.25% 0.75% 0.75% 0.25%
Like the Fund, the Adviser will waive management fees on the Reorganized Fund in compliance with the Assurance of Discontinuance dated November 17, 2005. The net management fee on the Reorganized Fund will be reduced to 0.3233% and will not be able to be increased until after December 31, 2010. Also, like the Fund, as a separate matter, although not obligated to do so, the Adviser will waive the amount, if any, by which the Reorganized Fund's aggregate annual operating expenses for Class A Shares, Class B Shares, Class C Shares and Class F Shares exceed 0.7949%, 1.5449%, 1.5449% and 0.7949%, respectively. The Adviser also has no present intention of paying or accruing the distribution (12b-1) fee for Class A Shares and Class F Shares during the Reorganized Fund's fiscal year ending August 31, 2006. Comparison of Massachusetts and Maryland Law The table below compares certain important aspects of Maryland corporate law and Massachusetts trust law. The Reorganized Fund is a series of a business trust organized under the laws of the Commonwealth of Massachusetts. and will operate under Massachusetts law. The Fund is organized as a Maryland corporation. For purposes of the Reorganization, it is important to note the differences between Massachusetts trust law and Maryland corporate law.
CATEGORY MARYLAND MASSACHUSETTS TRUST LAW CORPORATE LAW Liability of Under Maryland Under Massachusetts law, shareholders of a fund operating as a Massachusetts business trust could Shareholders corporate law under certain circumstances be held personally liable for the obligations of the trust. Typically no personal this liability can be waived by the declaration of trust. If the declaration of trust includes a liability provision declaring shareholders will not be subject to any personal liability in connection with the passes through assets of the trust or the acts, obligations or affairs of the trust, then the liability of the to shareholders will be waived. However, the waiver of liability must be accomplished through an shareholders affirmative provision within the fund's organizational documents. of the fund. Under Maryland The Declaration of Trust for the Fund provides that the Trustees, officers, employees or agents of corporate law, the Trust shall have no power to bind any shareholder of any series or class personally or to call there is upon any shareholder for the payment of any sum of money or assessment whatsoever, other than such as generally no the shareholder may at any time agree to pay by way of subscription to any shares or otherwise. The shareholder Declaration of Trust for the Reorganized Fund also provides that no shareholder or former shareholder liability for of any series or class shall be liable solely by reason of his being or having been a shareholder for acts or any debt, claim, action, demand, suit, proceeding, judgment, decree, liability or obligation of any obligations of kind, against, or with respect to the Trust or any series or class arising out of any action taken or the omitted for or on behalf of the Trust or such series or class, and the Trust or such series or class corporation. shall be solely liable therefore and resort shall be had solely to the property of the relevant series or class of the Trust for the payment or performance thereof. Liquidation or Maryland law The trustees of a Massachusetts business trust may resolve to liquidate or dissolve a fund or new Dissolution requires fund, or any class thereof, without prior shareholder approval and without first redeeming all of the shareholder shares of the respective fund. Although Massachusetts law allows the trust to liquidate without approval to shareholder approval, the declaration of trust can amend this allowance. The declaration of trust dissolve a for the Federated Municipal Securities Income Trust provides that the Trust may sell all of its fund. To assets upon approval by a majority of the shareholders. circumvent the shareholder approval requirement, the Directors can first redeem all of the outstanding shares of the fund. The Directors can redeem the shares without shareholder approval, and once the shares have been redeemed, the Directors can liquidate the series or class without shareholder approval. Also, in the event that no shares of a class or series are outstanding, a majority of the Directors may vote to liquidate any class or series without shareholder approval. Liability of The Fund's The Declaration of Trust for the Reorganized Fund provides that Trustees acting on behalf of the Trustees and Articles of trust will be indemnified for their actions provided those actions were not the result of (i) willful Indemnification Incorporation misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties involved provide that in the conduct of his office. Directors The Bylaws for the Reorganized Fund provide that indemnitee was not liable for an act of willful acting on misfeasance, bad faith, gross negligence, or reckless disregard of duties. behalf of a Maryland corporation will be indemnified for their actions to the extent permitted by law, provided those actions were not the result of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties involved in the conduct of the office. Rights of Under the Under Massachusetts law, and under the Bylaws of the Trust, the trustees of a Massachusetts business Inspection General Laws trust may from time to time determine whether and to what extent, and at what times and places, and of the State under what conditions and regulations the accounts and books of the trust maintained on behalf of of Maryland, each series and class of shares of the trust or any of them may be open to the inspection of the the by-laws shareholders of any series or class; and no shareholder may have any right to inspect any account or and the book or document of the trust except that, to the extent such account or book or document relates to minutes must the series or class in which he is a shareholder or the trust generally, such shareholder will have be available such right of inspection as conferred by laws or authorized by the trustees or by resolution of the for inspection shareholders of the relevant series or class. by shareholders. Maryland law provides that one or more persons who together are shareholders of at least 5% of the outstanding shares of the corporation for at least six months may inspect the fund's books of account and stock ledger, statement of the corporation's affairs, and present to any officer or resident agent a written request for a list of the Maryland fund's shareholders. Derivative and Under Maryland Massachusetts law applicable to business trusts is silent on this issue. Massachusetts corporate Class Actions law, law, while not entirely on point for Massachusetts business trusts, can provide persuasive authority shareholders for matters concerning derivative actions by a Massachusetts business trust's shareholders. Under may not bring Massachusetts corporate law any shareholder, who was a shareholder at the time that the act or derivative omission occurred, may commence a derivative proceeding after written demand has been made upon the actions unless corporation to take suitable action and at least 90 days have elapsed. The 90-day period can be they have avoided if it is shown that irreparable injury to the corporation will occur as a result of waiting first made a for the expiration of such 90-day period. demand upon the corporation to sue on its own behalf, and that demand was subsequently refused. If the Directors improperly refuse demand to bring a derivative suit or if demand is excused, the shareholders bring the derivative suit must then make demand on the corporation's other shareholders before commencing suit.
Comparative Information on Shareholder Rights and Obligations As noted above, the Fund is organized as a Maryland corporation, while the Reorganized Fund is a series of a business trust organized under the laws of the Commonwealth of Massachusetts. The rights of shareholders of the Fund, as defined in its Charter, By-Laws and under the laws of the State of Maryland, and the rights of shareholders of the Reorganized Fund, as set forth in FMSIT's Charter, By-Laws, and under the laws of the Commonwealth of Massachusetts, relating to voting, distributions and redemptions, are substantively similar. The chart below describes certain differences between your rights as a shareholder of the Fund and your rights as a shareholder of the Reorganized Fund.
FUND REORGANIZED FUND CATEGORY Preemptive None None Rights Appraisal None None Rights Conversion None None Rights (other than the automatic conversion of Class B into Class A shares as provided in prospectuses of the Fund and the Reorganized Fund) Exchange None None Rights (other than the right to exchange for shares of other mutual funds as provided in the prospectuses of the Fund and the Reorganized Fund) Minimum None Determined by the Trustees in Account Size their sole discretion. Annual The Corporation is not required to hold an annual meeting of shareholders in any year No annual meeting held. Meetings in which the election of directors is not required to be acted upon under the 1940 Shareholder meeting held after Act. The Board of Directors must meet annually to elect officers and conduct any the initial public offering as other business. set by the Trustees. Right to Call May be called as requested in writing by Shareholders entitled to cast at least 10% of Special Meetings of the Shareholder the shares entitled to be cast at the meeting. shareholders may be called by Meetings the Trustees or the Chief Executive Officer of the Trust and must be called by the Trustees upon the written request of shareholders owning at least one-tenth of the outstanding shares entitled to fifteen days' notice of any meeting. Notice of Not less than ten or more than ninety days before the date of every Special Meeting of Notice must be given by the Meetings shareholders, the Secretary of the Corporation must give each shareholder written Secretary of the Trust at notice of such meeting. least 15 days before the meeting. Action by Action taken at any meeting of shareholders may be taken without a meeting, if a Any action required or Unanimous consent signed by all the shareholders entitled to vote on the subject matter thereof, permitted to be taken at any Written and any other shareholders, entitled to notice of a meeting, but not entitled to vote, meeting of shareholders may be Consent of have waived in writing any rights which they may have to dissent from such action, and taken without a meeting, if a Shareholders such consent and waiver are filed with the records of the Corporation. consent in writing, setting forth such action, is signed by all the shareholders entitled to vote on the subject matter thereof, and such consent is filed with the records of the Trust. Personal The Corporation will indemnify its directors to the fullest extent that The Trust will indemnify liability of indemnification of directors is permitted by the Maryland General Corporation Law. Trustees against liabilities Directors or This does not protect such person against any liability to the Corporation to which and expenses that are incurred Trustees the person would otherwise be subject by reason of (i) willful misfeasance, (ii) bad by virtue of having been a faith, (iii) gross negligence or (iv) reckless disregard of the duties involved in the Trustee. However, Trustees conduct of the office. and officers of the Trust will be liable for their willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee or officer, as the case may be, and for nothing else. Election of Requires a majority shareholder vote under the Investment Company Act of 1940. A plurality of the votes cast Directors or is required to elect a Trustees Trustee. (All other matters must be decided by a majority of the votes cast entitled to vote thereon). Removal of At any meeting of shareholders duly called for the purpose, any Director may be A Trustee may be removed at Directors or removed from office by the vote of a majority of all of the shares entitled to vote. any special meeting of Trustees by shareholders of the Trust by a Shareholders vote of two-thirds of the outstanding shares. Quorum for Presence in person or by proxy of holders of (a) one-half of the shares of stock of There must be present in Shareholder the Corporation on all matters requiring a majority shareholder vote or (b) one-third person or by proxy, holders of Meeting of shares of stock of the Corporation on all other matters permitted by law. more than fifty percent of the total number of outstanding Shares of all series or class entitled to vote. Adjournment Meetings may be adjourned from time to time without further notice other than by In the absence of a quorum, a of Meetings announcement to be given at the meeting to a date not more than 120 days after the majority of the Trustees record date and any business may be transacted at the meeting as originally called. present may adjourn the meeting from time to time until a quorum is present. Notice of any adjourned meeting need not be given. Quorum for One-third of the entire Board of Directors but not less than two directors constitutes A majority of the Trustees Director or a quorum. constitutes a quorum for the Trustee transaction of business. Meeting Number of 500,000,000 shares of the Class A Shares; 500,000,000 shares of the Class B Shares; The number of shares for the Authorized 500,000,000 shares of the Class C Shares; 500,000,000 shares of the Class F Shares. newly created series of the Shares; Par Trust will be unlimited. Value The Articles of Incorporation provide that par value will be $0.001 per share. The beneficial interest in the Trust shall at all times be divided into transferable Shares, without par value.
ADDITIONAL INFORMATION REGARDING THE REORGANIZATION The Reorganization is subject to certain conditions, including: approval of the Reorganization Agreement and the transactions and exchange contemplated thereby as described in this Proxy Statement by the shareholders of the Fund; the receipt of a legal opinion described in the Reorganization Agreement regarding tax matters; the receipt of certain certificates from the parties concerning the continuing accuracy of the representations and warranties in the Reorganization Agreement and other matters; and the parties' performance, in all material respects, of the agreements and undertakings in the Reorganization Agreement. The Fund is not aware that any federal or state regulatory requirement must be complied with or approval must be obtained in connection with the Reorganization. Assuming satisfaction of the conditions in the Reorganization Agreement, the Reorganization is expected to occur on or after October 19, 2006. The Reorganization may be terminated at any time prior to its consummation by either the Fund or FMSIT if circumstances should develop that, in the opinion of either the Board of Directors of the Fund or the Board of Trustees of FMSIT, make proceeding with the Reorganization Agreement inadvisable. The Reorganization Agreement provides further that at any time prior to the consummation of the Reorganization: (i) the parties thereto may amend or modify any of the provisions of the Reorganization Agreement provided that such amendment or modification would not have a material adverse effect on the benefits intended under the Reorganization Agreement and would be consistent with the best interests of the shareholders of the Fund and the Reorganized Fund; and (ii) either party may waive any of the conditions set forth in the Reorganization Agreement if, in the judgment of the waiving party, such waiver will not have a material adverse effect on the benefits intended under the Reorganization Agreement to the shareholders of the Fund or the shareholders of the Reorganized Fund, as the case may be. Following the Reorganization, shareholders of the Fund will be shareholders of the Reorganized Fund. Upon the completion of the Reorganization, the Fund will be deregistered as an investment company under the 1940 Act and its existence terminated under state law. The stock transfer books of the Fund will be permanently closed after the Reorganization. FMSIT will not issue share certificates with respect to shares of the Reorganized Fund issued in connection with the Reorganization. Shareholders who currently hold certificates for their Fund shares are urged to surrender those certificates before the Reorganization takes place. In considering the Reorganization, the Board of Directors of the Fund and the Board of Trustees of FMSIT determined that the Reorganization is in the best interest of the Reorganized Fund and the Fund, and will not dilute the interests of the shareholders of the Reorganized Fund and the Fund. The Board also requested and evaluated certain other information necessary for it to make these determinations, including, without limitation, that (1) there would be no adverse tax consequences to either the Reorganized Fund or the Fund, or their respective shareholders; (2) the investment objectives and policies of the Reorganized Fund and the Fund are the same, except for the differences in investment limitations described above (See "Comparison of Investment Limitations" above), and (3) that the Fund and Reorganized Fund are to bear registration fees, on an as incurred basis, and the expenses of soliciting the Fund's shareholders. Regarding the last factor, the Board considered that the Reorganization is being proposed to benefit the shareholders of the Fund by reducing operating expenses and that, due to the differences in investment limitations between the Fund and the Reorganized Fund as described above (See "Comparison of Investment Limitations" above), after the Reorganization, the Trustees of the Reorganized Fund will have the ability to act more quickly to changes in competitive and regulatory conditions, which will also allow the Reorganized Fund to operate in a more efficient and economical manner. Finally, the Board considered that expenses to shareholders are not expected to increase as a result of the Reorganization and that shareholders of the Fund are expected to get the benefit of cost savings through an elimination of the Pennsylvania franchise tax (which was payable by the Fund as a Maryland corporation) and increased efficiency and business flexibility. INFORMATION ABOUT THE FUND PROXIES, QUORUM AND VOTING AT THE SPECIAL MEETING Only shareholders of record on the Record Date will be entitled to vote at the Special Meeting. Each share of the Fund is entitled to one vote. Fractional shares are entitled to proportionate shares of one vote. The favorable vote of: (a) the holders of 67% or more of the outstanding voting securities present at the Special Meeting, if the holders of 50% or more of the outstanding voting securities of the Fund are present or represented by proxy; or (b) the vote of the holders of more than 50% of the outstanding voting securities, whichever is less, is required to approve all of the proposals, except the election of Directors and the ratification of the selection of the Auditors. Any person giving a proxy has the power to revoke it any time prior to its exercise by executing a superseding proxy or by submitting a written notice of revocation to the Secretary of the Fund. In addition, although mere attendance at the Special Meeting will not revoke a proxy, a shareholder present at the Special Meeting may withdraw his or her proxy and vote in person. All properly executed and unrevoked proxies received in time for the Special Meeting will be voted in accordance with the instructions contained in the proxies. If no instruction is given ON THE PROXY, the persons named as proxies will vote the shares represented thereby in favor of the matters set forth in the attached Notice. In order to hold the Special Meeting, a "quorum" of shareholders must be present. Holders of one-half of the total number of outstanding shares of the Fund, present in person or by proxy, are required to constitute a quorum for the purpose of voting on the proposals made. For purposes of determining a quorum for transacting business at the Special Meeting, abstentions and broker "non-votes" (that is, proxies from brokers or nominees indicating that such persons have not received instructions from the beneficial owner or other persons entitled to vote shares on a particular matter with respect to which the brokers or nominees do not have discretionary power) will be treated as shares that are present but which have not been voted. For this reason, abstentions and broker non-votes will have the effect of a "no" vote for purposes of obtaining the requisite approval of some of the proposals. If a quorum is not present, the persons named as proxies may vote those proxies that have been received to adjourn the Special Meeting to a later date. In the event that a quorum is present but sufficient votes in favor of one or more of the proposals have not been received, the persons named as proxies may propose one or more adjournments of the Special Meeting to permit further solicitations of proxies with respect to such proposal(s). All such adjournments will require the affirmative vote of a majority of the shares present in person or by proxy at the session of the Special Meeting to be adjourned. The persons named as proxies will vote AGAINST an adjournment those proxies that they are required to vote against the proposal, and will vote in FAVOR of such an adjournment all other proxies that they are authorized to vote. A shareholder vote may be taken on the proposals in this proxy statement prior to any such adjournment if sufficient votes have been received for approval. SHARE OWNERSHIP OF THE FUND Officers and Directors of the Fund own less than 1% of the Fund's outstanding shares. At the close of business on the Record Date, the following persons owned, to the knowledge of management, more than 5% of the outstanding shares of the Fund: {INSERT 5% SHAREHOLDERS WHEN AVAILABLE} OTHER MATTERS AND DISCRETION OF ATTORNEYS NAMED IN THE PROXY The Fund is not required, and does not intend, to hold regular meetings of shareholders. Shareholders wishing to submit proposals for consideration for inclusion in a proxy statement for the next meeting of shareholders should send their written proposals to Federated Municipal High Yield Advantage Fund, Inc., Federated Investors Funds, 5800 Corporate Drive, Pittsburgh, Pennsylvania 15237- 7000, so that they are received within a reasonable time before any such meeting. Any proposal submitted after this date will be deemed untimely and not considered. No business other than the matters described above is expected to come before the Special Meeting, but should any other matter requiring a vote of shareholders arise, including any question as to an adjournment or postponement of the Special Meeting, the persons named on the enclosed proxy card will vote on such matters according to their best judgment in the interests of the Fund. SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. By Order of the Board of Directors, John W. McGonigle Secretary September 13, 2006 IMPORTANT NOTICE ABOUT FUND DOCUMENT DELIVERY In an effort to reduce costs and avoid duplicate mailings, the Fund intends to deliver a single copy of certain documents to each household in which more than one shareholder of the Fund resides so-called "householding", as permitted by applicable rules. The Fund's "householding" program covers their Prospectuses and Statements of Additional Information, and supplements to each, as well as Semi-Annual and Annual Shareholder Reports and any Proxies or information statements. Shareholders must give their written consent to participate in the "householding" program. The Fund is also permitted to treat a shareholder as having given consent "implied consent" if (i) shareholders with the same last name, or believed to be members of the same family, reside at the same street address or receive mail at the same post office box, (ii) the Fund gives notice of its intent to "household" at least sixty 60 days before they begin "householding" and (iii) none of the shareholders in the household have notified the Fund or its agent of the desire to "opt out" of "householding." Shareholders who have granted written consent, or have been deemed to have granted implied consent, can revoke that consent and opt out of "householding" at any time by contacting the Fund by mail at: Federated Investors Funds., 5800 Corporate Drive, Pittsburgh Pennsylvania 15237-7000: shareholders who purchased shares through a financial intermediary should contact their representative; other shareholders may call the Fund at 1-800-341-7400. FEDERATED MUNICIPAL HIGH YIELD ADVANTAGE FUND, INC. INVESTMENT ADVISER FEDERATED INVESTMENT MANAGEMENT COMPANY Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 DISTRIBUTOR FEDERATED SECURITIES CORP. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 ADMINISTRATOR FEDERATED ADMINISTRATIVE SERVICES Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Cusip 313910200 Cusip 313910309 Cusip 313910408 Cusip 313910101 (08/06) APPENDIX I AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION, dated as of August ___________, 2006 (the "Agreement") is made between Federated Municipal High Yield Advantage Fund, Inc. a Maryland corporation (the "Fund"), with its principal place of business at 5800 Corporate Drive, Pittsburgh, Pennsylvania 15237, and Federated Municipal Securities Income Trust, (the "Federated Trust"), with its principal place of business located at 5800 Corporate Drive, Pittsburgh, Pennsylvania 15237, on behalf of its portfolio, Federated Municipal High Yield Advantage Fund (the "Successor Fund"). RECITALS WHEREAS, the Board of Trustees of the Federated Trust and the Board of Directors of the Fund have determined that it is in the best interests of the Federated Trust and the Fund, respectively, that the assets of the Fund be acquired by the Successor Fund pursuant to this Agreement; and WHEREAS, the parties desire to enter into a plan of exchange which would constitute a "reorganization" within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"). AGREEMENT NOW THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Plan of Exchange. (a) Subject to the terms and conditions set forth herein, the Fund shall assign, transfer and convey its assets, including all securities and cash held by the Fund (subject to the stated liabilities of the Fund which shall be assumed by the Successor Fund) to the Successor Fund, and the Successor Fund shall acquire all of the assets of the Fund (subject as aforesaid to the stated liabilities of the Fund) in exchange for full and fractional shares of beneficial interest of the Successor Fund (the "Successor Fund Shares"), to be issued by the Federated Trust, in an aggregate number equal to the number of shares of the Fund then outstanding, and having an aggregate net asset value equal to the net assets of the Fund. The value of the assets of the Fund and the net asset value per share of the Successor Fund Shares shall be computed as of the close of the New York Stock Exchange (normally 4:00 p.m. Eastern time) on the Exchange Date (as hereinafter defined) (such time and date being hereinafter called the "Valuation Time") in accordance with the procedures for determining the value of the Successor Fund's assets set forth in the Successor Fund's organizational documents and the then-current prospectus and statement of additional information for the Successor Fund that forms a part of the Successor Fund's Registration Statement on Form N-1A (the "Registration Statement"). Successor Fund will not issue certificates representing Successor Fund Shares in connection with the Reorganization. In lieu of delivering certificates for the Successor Fund Shares, the Federated Trust shall credit the Successor Fund Shares to the Fund's account on the share record books of the Federated Trust and shall deliver a confirmation thereof to the Fund. The Fund shall then deliver written instructions to the Federated Trust's transfer agent to establish accounts for the shareholders on the share record books relating to the Successor Fund. (b) When the Successor Fund Shares are distributed pursuant to paragraph 1(a), all outstanding shares of the Fund, including any represented by certificates, shall be canceled on the Fund's share transfer books. No redemption or repurchase of Successor Fund Shares credited to a shareholder's account in respect of shares of the Fund represented by unsurrendered share certificates shall be permitted until such certificates have been surrendered to the Federated Trust for cancellation or, if such certificates are lost or misplaced, lost certificate affidavits and/or such other documentation that is satisfactory to the Federated Trust or its transfer agent have been executed and delivered thereto. (c) Delivery of the assets of the Fund to be transferred shall be made on the Exchange Date (as hereinafter defined). Assets transferred shall be delivered to State Street Bank and Trust Company, the Federated Trust's custodian (the "Custodian"), for the account of the Federated Trust and the Successor Fund with all securities not in bearer or book entry form duly endorsed, or accompanied by duly executed separate assignments or stock powers, in proper form for transfer, with signatures guaranteed, and with all necessary stock transfer stamps, sufficient to transfer good and marketable title thereto (including all accrued interest and dividends and rights pertaining thereto) to the Custodian for the account of the Federated Trust and the Successor Fund free and clear of all liens, encumbrances, rights, restrictions and claims. All cash delivered shall be in the form of immediately available funds payable to the order of the Custodian for the account of the Federated Trust and the Successor Fund. (d) The Fund will pay or cause to be paid to the Federated Trust any interest received on or after the Exchange Date with respect to assets transferred from the Fund to the Successor Fund hereunder and any distributions, rights or other assets received by the Fund after the Exchange Date as distributions on or with respect to the securities transferred from the Fund to the Successor Fund hereunder. All such assets shall be deemed included in assets transferred to the Successor Fund on the Exchange Date and shall not be separately valued. (e) The Exchange Date shall be October 20, 2006, or such earlier or later date as may be mutually agreed upon by the parties. (f) As soon as practicable after the Exchange Date, the Fund shall distribute all of the Successor Fund Shares received by it to the shareholders of the Fund in numbers equal to the number of shares that each such shareholder holds in the Fund, and shall take all other steps necessary to effect its dissolution and termination. After the Exchange Date, the Fund shall not conduct any business except in connection with its dissolution and termination. 2. The Fund's Representations and Warranties. The Fund represents and warrants to and agrees with the Federated Trust on behalf of the Successor Fund as follows: (a) The Fund is a Maryland corporation duly organized, validly existing and in good standing under the laws of the State of Maryland and has power to own all of its properties and assets and, subject to the approval of its shareholders as contemplated hereby, to carry out this Agreement. (b) This Agreement has been duly authorized, executed and delivered by and is valid and binding on the Fund, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, and other similar laws of general applicability relating to or affecting creditors' rights and to general principles of equity. The execution and delivery of this Agreement does not and will not, and the consummation of the transactions contemplated by this Agreement will not, violate the Fund's Articles of Incorporation or By-Laws or any agreement or arrangement to which it is a party or by which it is bound. (c) The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and such registration has not been revoked or rescinded and is in full force and effect. (d) Except as shown on the audited financial statements of the Fund for its most recently completed fiscal period and as incurred in the ordinary course of the Fund's business since then, the Fund has no liabilities of a material amount, contingent or otherwise, and there are no legal, administrative or other proceedings pending or, to the Fund's knowledge, threatened against the Fund. (e) On the Exchange Date, the Fund will have full right, power and authority to sell, assign, transfer and deliver the Fund's assets and stated liabilities to be transferred by it hereunder. (f) For each taxable year of its operation (including the taxable year ending on the Exchange Date), the Fund has met the requirements of Subchapter M of the Code for qualification and treatment as a regulated investment company. (g) At the Exchange Date, all Federal and other tax returns and reports of the Fund required by law then to be filed shall have been filed, and all Federal and other taxes shall have been paid so far as due or provision shall have been made for the payment thereof, and to the best of the Fund's knowledge no such return is currently under audit and no assessment has been asserted with respect to such returns. 3. The Federated Trust's Representations and Warranties. The Federated Trust, on behalf of the Successor Fund, represents and warrants to and agrees with the Fund as follows: (a) The Federated Trust is a business trust duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts; the Successor Fund is a duly organized portfolio of the Federated Trust; and the Federated Trust has the power to carry on its business as it is now being conducted and to carry out this Agreement. (b) This Agreement has been duly authorized, executed and delivered by the Federated Trust and is valid and binding on the Federated Trust, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, and other similar laws of general applicability relating to or affecting creditors' rights and to general principles of equity. The execution and delivery of this Agreement does not and will not, and the consummation of the transactions contemplated by this Agreement will not, violate the Federated Trust's Declaration of Trust or By- Laws or any agreement or arrangement to which it is a party or by which it is bound. (c) The Federated Trust is registered under the 1940 Act as an open-end management investment company and such registration has not been revoked or rescinded and is in full force and effect. (d) The Successor Fund does not have any liabilities of a material amount, contingent or otherwise, and there are no legal, administrative or other proceedings pending or, to the Federated Trust's knowledge, threatened against the Successor Fund. Other than organizational activities, the Successor Fund has not engaged in any business activities. (e) At the Exchange Date, the Successor Fund Shares to be issued to the Fund will have been duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and non-assessable by the Federated Trust. No Federated Trust or Successor Fund shareholder will have any preemptive right of subscription or purchase in respect thereof. 4. The Federated Trust's Conditions Precedent. The obligations of the Federated Trust hereunder shall be subject to the following conditions: (a) The Fund shall have furnished to the Federated Trust a statement of the Fund's assets, including a list of securities owned by the Fund with their respective tax costs and values determined as provided in Section 1 hereof, all as of the Exchange Date. (b) As of the Exchange Date, all representations and warranties of the Fund made in this Agreement shall be true and correct as if made at and as of such date, and the Fund shall have complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such date. (c) A meeting of the shareholders of the Fund to approve this Agreement and the transactions and exchange contemplated hereby shall have been duly called and held on this Agreement and the transactions contemplated hereby shall have been approved by the vote required by applicable law. 5. The Fund's Conditions Precedent. The obligations of the Fund hereunder shall be subject to the condition that as of the Exchange Date all representations and warranties of the Federated Trust and the Successor Fund made in this Agreement shall be true and correct as if made at and as of such date, and that the Federated Trust and the Successor Fund shall have complied with all of the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such date. 6. The Federated Trust's and Fund's Conditions Precedent. The obligations of both the Federated Trust and the Fund hereunder shall be subject to the following conditions: (a) The Federated Trust's initial Registration Statement, filed on Form N-1A, relating to the Successor Fund under the Securities Act of 1933, as amended, and the 1940 Act shall have become effective, and any additional post- effective amendments to such Registration Statement as are determined by the Trustees of the Federated Trust to be necessary and appropriate shall have been filed with the Securities and Exchange Commission and shall have become effective. (b) No action, suit or other proceeding shall be threatened or pending before any court or governmental agency which seeks to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the transactions contemplated herein. (c) Each party shall have received an opinion of Reed Smith LLP to the effect that the reorganization contemplated by this Agreement qualifies as a "reorganization" under Section 368(a)(1)(F) of the Code. (d) The Fund and Successor Fund shall receive an opinion of Reed Smith LLP, counsel to the Successor Fund and the Fund, in form and substance reasonably acceptable to the Fund and Successor Fund, covering such matters as may be reasonably requested (unless the officers of the Fund and Successor Fund determine that such opinion is not required). Provided, however, that at any time prior to the Exchange Date, any of the foregoing conditions in this Section 6 may be waived by the parties if, in the judgment of the parties, such waiver will not have a material adverse effect on the benefits intended under this Agreement to the shareholders of the Fund. 7. Expenses. The Successor Fund, the Fund, and the Federated Trust will bear the expenses associated with the transactions contemplated by this Agreement, including that the Successor Fund may incur registration fees, on an as incurred basis, as the parties mutually agree. 8. Termination of Agreement. This Agreement and the transactions contemplated hereby may be terminated and abandoned by the mutual agreement of the Federated Trust and the Fund. In addition, either the Federated Trust or the Fund may at its option terminate this Agreement at or before the Exchange Date due to: (a) a material breach by the other of any material representation, warranty, or agreement contained herein to be performed at or before the Exchange Date, if not cured within 30 days; (b) a condition herein expressed to be a precedent to the obligations of the terminating party that has not been met and it reasonably appears that it will not or cannot be met; (c) a resolution of the Board of Trustees of the Federated Trust or the Board of Directors of the Fund at any time prior to the Exchange Date (and notwithstanding any vote of the shareholders of the Fund) if circumstances should develop that, in the opinion of either the Board of Trustees of the Federated Trust or the Board of Directors of the Fund, proceeding with this Agreement is no longer in the best interests of the Fund or the Successor Fund, respectively. If this Agreement is terminated and the exchange contemplated hereby is abandoned pursuant to the provisions of this Section 8, this Agreement shall become void and have no effect, without any liability on the part of any party hereto or the Directors, officers or shareholders of the Fund or the Trustees, officers or shareholders of the Federated Trust, in respect of this Agreement. 9. Waiver and Amendments. At any time prior to the Exchange Date, any of the conditions set forth in Section 4 may be waived by the Board of Trustees of the Federated Trust, and any of the conditions set forth in Section 5 may be waived by the Board of Directors of the Fund, if, in the judgment of the waiving party, such waiver will not have a material adverse effect on the benefits intended under this Agreement to the shareholders of the Fund or the shareholders of the Successor Fund, as the case may be. In addition, prior to the Exchange Date, any provision of this Agreement may be amended or modified by the Boards of the Fund and the Federated Trust if such amendment or modification would not have a material adverse effect upon the benefits intended under this Agreement and would be consistent with the best interests of the Fund and the Successor Fund. 10. No Survival of Representations. None of the representations and warranties included or provided for herein shall survive consummation of the transactions contemplated hereby. 11. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to principles of conflict of laws. 12. Capacity of Trustees, Etc. (a) The names "Federated Municipal High Yield Advantage Fund" and "Board of Trustees of the Federated Municipal High Yield Advantage Fund" refer, respectively, to the trust created and the trustees, as trustees but not individually or personally, acting from time to time under the Federated Trust's Declaration of Trust, which is hereby referred to and a copy of which is on file at the office of the State Secretary of the Commonwealth of Massachusetts and at the principal office of the Federated Trust. The obligations of the Federated Trust entered into in the name or on behalf of the Successor Fund by any of the trustees, representatives or agents are made not individually, but in such capacities, and are not binding upon any of the trustees, shareholders or representatives of the Federated Trust personally, but bind only the Successor Fund's trust property, and all persons dealing with any portfolio of shares of the Federated Trust must look solely to the trust property belonging to such portfolio for the enforcement of any claims against the Federated Trust. (b) Both parties specifically acknowledge and agree that any liability of the Federated Trust under this Agreement, or in connection with the transactions contemplated herein, shall be discharged only out of the assets of the Successor Fund and that no other portfolio of the Federated Trust shall be liable with respect thereto. 13. Counterparts. This Agreement may be executed in counterparts, each of which, when executed and delivered, shall be deemed to be an original. IN WITNESS WHEREOF, the Federated Trust and the Fund have caused this Agreement and Plan of Reorganization to be executed as of the date above first written. Federated Municipal High Yield Advantage Fund, Inc., By:_______________________________ Title:____________________________ Federated Municipal Securities Income Trust, on behalf of its portfolio, Federated Municipal High Yield Advantage Fund By:_______________________________ Title:____________________________ KNOW ALL PERSONS BY THESE PRESENTS that the undersigned Shareholders of Federated Municipal High Yield Advantage Fund, Inc. (the "Fund"), a hereby appoint George Magera, Jamie Whetzel, Catherine Ryan, Allison Miller, Alicia Allison and Suzy Land, or any one of them, true and lawful attorneys, with the power of substitution of each, to vote all shares of the Fund which the undersigned is entitled to vote at the Special Meeting of Shareholders (the "Meeting") to be held on October 19, 2006, at 5800 Corporate Drive, Pittsburgh, Pennsylvania, at 2:00 p.m. and at any adjournment thereof. The attorneys named will vote the shares represented by this proxy in accordance with the choices made on this ballot. If no choice is indicated as to the item, this proxy will be voted affirmatively on the matters. Discretionary authority is hereby conferred as to all other matters as may properly come before the Meeting or any adjournment thereof. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FEDERATED MUNICIPAL HIGH YIELD ADVANTAGE FUND, INC. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE PROPOSALS. PROPOSAL 1 TO APPROVE OR DISAPPROVE A PROPOSED AGREEMENT AND PLAN OF REORGANIZATION BETWEEN THE FUND AND FEDERATED MUNICIPAL SECURITIES INCOME TRUST, ON BEHALF OF ITS SERIES, THE FEDERATED MUNICIPAL HIGH YIELD ADVANTAGE FUND (THE "REORGANIZED FUND"), WHEREBY THE REORGANIZED FUND WOULD ACQUIRE ALL OF THE ASSETS (SUBJECT TO THE STATED LIABILITIES) OF THE FUND IN EXCHANGE FOR SHARES OF BENEFICIAL INTEREST OF THE REORGANIZED FUND TO BE DISTRIBUTED PRO RATA BY THE FUND TO ITS SHAREHOLDERS IN COMPLETE LIQUIDATION AND DISSOLUTION OF THE FUND.. FOR [ ] AGAINST [ ] ABSTAIN [ ] YOUR VOTE IS IMPORTANT Please complete, sign and return this card as soon as possible. Dated Signature Signature (Joint Owners) Please sign this proxy exactly as your name appears on the books of the Trust. Joint owners should each sign personally. Directors and other fiduciaries should indicate the capacity in which they sign, and where more than one name appears, a majority must sign. If a corporation, this signature should be that of an authorized officer who should state his or her title. YOU MAY ALSO VOTE YOUR SHARES BY TOUCHTONE PHONE BY CALLING 1-800-690-6903 OR THROUGH THE INTERNET AT WWW.PROXYVOTE.COM