0000935069-08-000938.txt : 20120813
0000935069-08-000938.hdr.sgml : 20120813
20080418112447
ACCESSION NUMBER: 0000935069-08-000938
CONFORMED SUBMISSION TYPE: DEF 14A
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 20080418
FILED AS OF DATE: 20080418
DATE AS OF CHANGE: 20080418
EFFECTIVENESS DATE: 20080418
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: Flaherty & Crumrine PREFERRED INCOME OPPORTUNITY FUND INC
CENTRAL INDEX KEY: 0000882071
IRS NUMBER: 954355600
STATE OF INCORPORATION: MD
FISCAL YEAR END: 1130
FILING VALUES:
FORM TYPE: DEF 14A
SEC ACT: 1934 Act
SEC FILE NUMBER: 811-06495
FILM NUMBER: 08763769
BUSINESS ADDRESS:
STREET 1: 301 E COLORADO BLVD STE 720
STREET 2: C/O FLAHERTY & CRUMRINE INC
CITY: PASADENA
STATE: CA
ZIP: 91101
BUSINESS PHONE: (626) 795-7300
MAIL ADDRESS:
STREET 1: 301 COLORADO BLVD STE 720
STREET 2: C/O FLAHERTY & CRUMRINE INC
CITY: PASADENA
STATE: CA
ZIP: 91101
FORMER COMPANY:
FORMER CONFORMED NAME: PREFERRED INCOME OPPORTUNITY FUND INC
DATE OF NAME CHANGE: 19920929
DEF 14A
1
pfo_wrapper.txt
FC PFO PREFERRED OPPORTUNITY DEF14A 0408
SCHEDULE 14A
PROXY STATEMENT
PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by Registrant [X]
Filed by Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential for Use of the Commission Only as permitted by Rule 14a-6(e)(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11c or Rule 14a-12
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
(Name of Registrant as Specified in Its Charter)
---------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 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 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: ___________________________________________________________
FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED (NYSE: PFD)
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED (NYSE: PFO)
301 E. Colorado Boulevard, Suite 720
Pasadena, California 91101
QUESTIONS AND ANSWERS
WHY DID THE BOARDS OF DIRECTORS CALL A SPECIAL MEETING?
The Funds currently use Preferred Stock leverage as a strategy to attempt to
enhance the dividends paid to Common Stock shareholders. The auction market that
sets the rates for this Preferred Stock has recently experienced severe
disruptions - consequently, the Funds are currently paying higher rates relative
to other short-term rates than they have historically. In light of this
turbulence, the Boards of Directors may determine to alter the leverage strategy
employed by the Funds. Potential alternatives could include modifying the terms
of the Preferred Stock, refinancing some or all of the Preferred Stock shares
with either a new preferred stock or refinancing some or all of the Preferred
Stock shares with debt financing. The Boards of Directors have not approved any
course of action and may decide to leave the current Preferred Stock outstanding
or redeem some or all of the shares of Preferred Stock.
As discussed in greater detail below and in the Joint Proxy Statement, the Funds
do not currently have the flexibility to pursue borrowing as a source of
financing - flexibility which is available to many other closed-end funds,
including the Funds' sister funds, Flaherty & Crumrine/Claymore Preferred
Securities Income Fund (FFC) and Flaherty & Crumrine/Claymore Total Return Fund
(FLC).
Your "Yes" vote on the Proposals will give the Funds greater flexibility to
respond to changing market conditions.
WHY ARE THE BOARDS OF DIRECTORS RECOMMENDING A CHANGE TO THE FUNDS' INVESTMENT
POLICIES?
As discussed above, the Boards of Directors may consider alternatives for
leveraging the returns to Common Stock shareholders. One path that the Boards of
Directors may select is debt financing - for example, by borrowing money from a
bank or other lender and then using the proceeds to redeem some or all of the
outstanding Preferred Stock.
When the Funds were designed over 15 years ago, it was contemplated that they
would always use Preferred Stock as leverage. Consequently, as discussed in
Proposal 1 of the attached Joint Proxy Statement, the Funds' investment policies
do not currently permit leveraging through borrowing, issuing debt securities or
using other debt financing strategies which are similar to borrowing.
These investment policies are more restrictive than legally required and more
restrictive than many other closed-end funds, such as the Funds' sister funds,
FFC and FLC.
After reviewing options available to the Funds, Fund management has recommended,
and the Boards of Directors have approved, modernizing each Fund's investment
policies to grant it flexibility to use debt financing for leverage.
The Boards of Directors unanimously recommend that shareholders vote "Yes" on
Proposals 1-A, 1-B and 1-C.
WHY DID THE BOARDS OF DIRECTORS APPROVE A CHANGE TO THE INVESTMENT ADVISORY
AGREEMENTS FOR THE FUNDS?
Each Fund has an investment advisory agreement with Flaherty & Crumrine
Incorporated. In exchange for the investment advice to and management of the
Funds, Flaherty & Crumrine receives a monthly fee. This fee is currently
assessed against the "net assets" of each Fund, with "net assets" calculated as
the difference between a Fund's total assets (i.e., the value of its portfolio)
and the Fund's liabilities. The Preferred Stock is explicitly excluded as a
liability of each Fund when calculating this fee.
If a Fund were to use a form of leverage other than Preferred Stock, the assets
attributable to that leverage would be a liability for purposes of the "net
assets" calculation, and would not count when calculating the fee paid to
Flaherty & Crumrine. The Boards of Directors have previously concluded (most
recently this past January) that the fees
being paid to Flaherty & Crumrine are reasonable. They do not favor lowering the
fees indirectly by changing the form of the Funds' leverage from Preferred Stock
to debt financing.
As discussed in Proposal 2 of the attached Joint Proxy Statement, the Boards of
Directors have approved the change to the investment advisory agreements to
clarify that financial leverage utilized by the Funds - whether in the form of
Preferred Stock or debt financing - does not constitute a liability for the
calculation of the investment advisory fee. Except for this change, the actual
fee calculation formula would not change (although the amount of the fee would
depend on the amount of leverage outstanding at any given time, whether in the
form of preferred stock or debt financing) - in other words, the Fund would
continue to pay the same percentage of net assets available to Common Stock
shareholders as it does currently.
The Boards of Directors unanimously recommend that shareholders vote "Yes" on
Proposal 2.
WHAT IF I HAVE ADDITIONAL QUESTIONS?
The Funds have engaged The Altman Group, Inc. to assist in the solicitation of
proxies. The Altman Group has set up a toll-free number, (866) 751-6315, for you
to call with any additional questions.
- ii -
FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED (NYSE: PFD)
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED (NYSE: PFO)
301 E. Colorado Boulevard, Suite 720
Pasadena, California 91101
NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS
To Be Held on May 21, 2008
To the Shareholders:
Notice is hereby given that Special Meetings of Shareholders of
Flaherty & Crumrine Preferred Income Fund Incorporated and Flaherty & Crumrine
Preferred Income Opportunity Fund Incorporated (each a "Fund" and collectively,
the "Funds"), each a Maryland corporation, will be held at the offices of the
Funds at 301 E. Colorado Boulevard, Suite 720, Pasadena, California 91101 at
9:00 a.m. PT, on May 21, 2008, for the following purposes:
1. To approve changes to certain fundamental investment policies
(Proposal 1).
2. To approve an amended investment advisory agreement (Proposal 2).
3. To transact such other business as may properly come before the
Special Meetings or any adjournments thereof.
YOUR VOTE IS IMPORTANT!
The Board of Directors of each Fund has fixed the close of business on
March 31, 2008 as the record date for the determination of shareholders of each
Fund entitled to notice of and to vote at the Special Meetings.
By Order of the Boards of Directors,
April 10, 2008 CHAD C. CONWELL
Secretary
--------------------------------------------------------------------------------
SEPARATE PROXY CARDS ARE ENCLOSED FOR EACH FUND IN WHICH YOU OWN SHARES.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETINGS ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD(S), OR VOTE BY TELEPHONE OR
INTERNET. The proxy card(s) should be returned in the enclosed envelope, which
needs no postage if mailed in the continental United States. Instructions for
the proper execution of proxies are set forth on the inside cover.
--------------------------------------------------------------------------------
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may minimize the time and expense to the Fund(s) involved
in validating your vote if you fail to sign your proxy card(s) properly.
1. Individual Accounts: Sign your name exactly as it appears in the registration
on the proxy card(s).
2. Joint Accounts: Either party may sign, but the name of the party signing
should conform exactly to a name shown in the registration.
3. All Other Accounts: The capacity of the individual signing the proxy card
should be indicated unless it is reflected in the form of registration. For
example:
REGISTRATION VALID SIGNATURE
------------ ---------------
CORPORATE ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAN OR ESTATE ACCOUNTS
(1) John B. Smith, Cust., John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Executor, John B. Smith, Jr., Executor
estate of Jane Smith
FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED (NYSE: PFD)
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED (NYSE: PFO)
301 E. Colorado Boulevard, Suite 720
Pasadena, California 91101
SPECIAL MEETINGS OF SHAREHOLDERS
May 21, 2008
JOINT PROXY STATEMENT
This document is a joint proxy statement ("Joint Proxy Statement") for
Flaherty & Crumrine Preferred Income Fund Incorporated ("PREFERRED INCOME FUND"
OR "PFD") and Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
("PREFERRED INCOME OPPORTUNITY FUND" OR "PFO") (EACH A "FUND" AND COLLECTIVELY,
THE "FUNDS"). This Joint Proxy Statement is furnished in connection with the
solicitation of proxies by each Fund's Board of Directors (each a "Board" and
collectively, the "Boards") for use at a Special Meeting of Shareholders of each
Fund to be held on May 21, 2008, at 9:00 a.m. PT, at the offices of the Funds,
301 E. Colorado Boulevard, Suite 720, Pasadena, California 91101 and at any
adjournments thereof (each a "Meeting" and collectively, the "Meetings").
On or about February 19, 2008, a Joint Proxy Statement was sent to you
so that you may vote on the election of Directors at the Funds' annual meeting
to be held on April 18, 2008, and you may have received proxy solicitations by
mail, telephone, or personal interview relating to the election of Directors at
the annual meeting. This new proxy statement is for a special meeting of each
Fund's shareholders on May 21, 2008 and involves new proposals relating to the
operation of the Funds. You will also receive new proxy solicitations by mail,
telephone, or personal interview for the new proposals described in this proxy
statement.
YOUR VOTE IS IMPORTANT. EVEN IF YOU HAVE ALREADY VOTED FOR THE ELECTION
OF DIRECTORS AT THE ANNUAL MEETING, PLEASE VOTE ON THE PROPOSALS DESCRIBED
HEREIN. EVEN IF YOU PLAN TO ATTEND AND VOTE IN PERSON AT THE MEETINGS, PLEASE
PROMPTLY FOLLOW THE ENCLOSED INSTRUCTIONS TO SUBMIT A PROXY BY COMPLETING,
SIGNING, AND DATING THE ENCLOSED PROXY CARDS, OR ALTERNATIVELY PROVIDING A PROXY
BY TELEPHONE OR INTERNET. THE PROXY CARD(S) SHOULD BE RETURNED IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE CONTINENTAL UNITED STATES.
INSTRUCTIONS FOR THE PROPER EXECUTION OF PROXIES ARE SET FORTH ON THE PRIOR
PAGE.
A Notice of Special Meetings of Shareholders and proxy card for each
Fund of which you are a shareholder accompany this Joint Proxy Statement. Proxy
solicitations will be made beginning on or about April 18, 2008, primarily by
mail, but proxy solicitations may also be made by telephone, telefax or personal
interviews conducted by officers of each Fund, Flaherty & Crumrine Incorporated
("Flaherty & Crumrine" or the "Adviser"), the investment adviser of each Fund,
and PFPC Inc. ("PFPC"), the transfer agent and administrator of each Fund and a
member of The PNC Financial Services Group, Inc. The Adviser, on behalf of the
Funds, has also retained The Altman Group, Inc., a proxy solicitation firm, to
assist in the solicitation of proxies.
The costs of proxy solicitation and expenses incurred in connection
with the preparation of this Joint Proxy Statement and its enclosures will be
shared proportionally by the Funds. Each Fund also will reimburse brokerage
firms and others for their expenses in forwarding solicitation material to the
beneficial owners of its shares. This Joint Proxy Statement and the enclosed
form of proxy are first being sent to shareholders on or about April 18, 2008.
If you need more information or have any questions, please call The Altman Group
at (866)-751-6315.
THE ANNUAL REPORT OF EACH FUND, INCLUDING AUDITED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2007, IS AVAILABLE UPON REQUEST, WITHOUT
CHARGE, BY WRITING TO PFPC INC., P.O. BOX 43027, PROVIDENCE, RHODE ISLAND
02940-3027, OR CALLING 1-800-331-1710. EACH FUND'S ANNUAL REPORT IS ALSO
AVAILABLE ON THE FUNDS' WEBSITE - WWW.PREFERREDINCOME.COM - AND THE SECURITIES
AND EXCHANGE COMMISSION'S ("SEC") WEBSITE (WWW.SEC.GOV).
If the enclosed proxy card is properly executed and returned in time to
be voted at the relevant Meeting, the Shares (as defined below) represented
thereby will be voted in accordance with the instructions marked thereon. Unless
instructions to the contrary are marked thereon, a proxy will be voted "FOR"
Proposal 1 and Proposal 2. Any shareholder who has given a proxy has the right
to revoke it at any time prior to its exercise either by attending
the relevant Meeting and voting his or her Shares in person or by submitting a
letter of revocation or a later-dated proxy to the appropriate Fund delivered at
the above address prior to the date of the Meeting.
Under the Bylaws of each Fund, the presence in person or by proxy of
the holders of a majority of the outstanding shares of the Fund entitled to vote
shall be necessary and sufficient to constitute a quorum for the transaction of
business (a "Quorum") at that Fund's meeting. If a proposal is to be voted upon
by only one class of a Fund's shares, a Quorum of that class of shares must be
present at the Meeting in order for the proposal to be considered. In the event
that a Quorum is not present at a Meeting, or in the event that a Quorum is
present but sufficient votes to approve any of the proposals are not received,
the persons named as proxies may propose one or more adjournments of the Meeting
to permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those shares represented at the Meeting in
person or by proxy. If a Quorum is present, the persons named as proxies will
vote those proxies which they are entitled to vote "FOR" a proposal in favor of
such an adjournment with respect to that proposal and will vote those proxies
required to be voted "AGAINST" a proposal against any such adjournment with
respect to that proposal. A shareholder vote may be taken on a proposal in the
Joint Proxy Statement prior to any such adjournment if sufficient votes have
been received for approval of that proposal.
Each Fund has two classes of capital stock including common stock, par
value $0.01 per share (the "Common Stock") and preferred stock (the "Preferred
Stock" and together with the Common Stock, the "Shares"). Each Fund has one
series of Preferred Stock outstanding which is classified as Auction Preferred
Stock (formerly known as "Money Market Cumulative Preferred(TM) Stock"
(MMP(R))). Each Share is entitled to one vote at the Meeting with respect to
matters to be voted on by the class to which such Share belongs, with pro rata
voting rights for any fractional Shares. On the record date, March 31, 2008, the
following number of Shares of each Fund were issued and outstanding:
COMMON STOCK PREFERRED STOCK
NAME OF FUND OUTSTANDING OUTSTANDING
Preferred Income Fund (PFD) 10,550,676 800
Preferred Income Opportunity Fund (PFO) 11,793,857 700
To the knowledge of each Fund and its Board, the following
shareholder(s) or "group," as that term is defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), is the beneficial
owner or owner of record of more than 5% of the relevant Fund's outstanding
Shares as of March 31, 2008*:
NAME AND ADDRESS OF AMOUNT AND NATURE
BENEFICIAL/RECORD OWNER TITLE OF CLASS OF OWNERSHIP PERCENT OF CLASS
----------------------- -------------- ------------ ----------------
Cede & Co.** Common Stock PFD - 10,076,052 95.50%
Depository Trust Company (record)
55 Water Street, 25th Floor PFO - 11,332,078 96.08%
New York, NY 10041 (record)
Preferred Stock PFD - 800 (record) 100%
PFO - 700 (record) 100%
Fifth third Bancorp*** Common Stock PFO - 611,893 5.21%
Fifth Third Center (beneficial)
Cincinnati, Ohio 45263
----------------------
* As of March 31, 2008, the Directors and officers, as a group, owned
less than 1% of each class of Shares of each Fund.
** A nominee partnership of The Depository Trust Company.
*** Information obtained from a Schedule 13G, a Schedule 13F, and certain
other information, filed by Fifth Third Bancorp with the SEC reporting
share ownership as of December 31, 2007. Based on those filings, Fifth
Third Bancorp has the sole power to vote or direct the vote of 596,361
shares of Common Stock, the sole power to dispose or direct the
disposition of 590,196 shares of Common Stock, the shared power to vote
or direct the vote of 1,175 shares of Common Stock and the shared power
to dispose or direct the disposition of 20,767 shares of Common Stock.
This Joint Proxy Statement is being used in order to reduce the
preparation, printing, handling and postage expenses that would result from the
use of a separate proxy statement for each Fund. Shareholders of each Fund will
vote as a single class, except as described below, and will vote separately on
each proposal on which
2
shareholders of that Fund are entitled to vote. Separate proxy cards are
enclosed for each Fund in which a shareholder is a record owner of Shares. Thus,
if a proposal is approved by shareholders of one Fund and not approved by
shareholders of the other Fund, the proposal will be implemented for the Fund
that approved the proposal and will not be implemented for the Fund that did not
approve the proposal. It is therefore essential that shareholders complete, date
and sign each enclosed proxy card. Shareholders of each Fund are entitled to
vote on the proposals pertaining to that Fund.
In order that your Shares may be represented at the Meetings, you are
requested to vote on the following matters:
SUMMARY OF VOTING RIGHTS ON PROXY PROPOSALS
PREFERRED INCOME FUND (PFD)
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PROPOSAL VOTING REQUIREMENTS
--------------------------------------------------------------------------------
1. Changes in
Fundamental Common Stock and Preferred Stock Shareholders,
Investment Policies voting together as a single class, and also
separately the Preferred Stock Shareholders,
voting as a separate class.
--------------------------------------------------------------------------------
2. Amended Investment Common Stock and Preferred Stock
Advisory Agreement Shareholders, voting together as a single
class.
--------------------------------------------------------------------------------
3. Other Business Common Stock and Preferred Stock
Shareholders, voting together as a single
class
--------------------------------------------------------------------------------
PREFERRED INCOME OPPORTUNITY FUND (PFO)
--------------------------------------------------------------------------------
PROPOSAL VOTING REQUIREMENTS
--------------------------------------------------------------------------------
1. Changes in
Fundamental Investment Common Stock and Preferred Stock Shareholders,
Policies voting together as a single class, and also
separately the Preferred Stock Shareholders,
voting as a separate class.
--------------------------------------------------------------------------------
2. Amended Investment Common Stock and Preferred Stock Shareholders,
Advisory Agreement voting together as a single class.
--------------------------------------------------------------------------------
3. Other Business Common Stock and Preferred Stock Shareholders,
voting together as a single class
--------------------------------------------------------------------------------
PROPOSAL 1: REVISION OF FUNDAMENTAL INVESTMENT POLICIES
The Funds, like all registered funds, are required by law to have
policies governing those investment practices that may only be changed with the
prior approval of the holders of a majority of a Fund's outstanding voting
securities, voting as a single class, and approval of the holders of a majority
of a Fund's outstanding shares of Preferred Stock, voting as a separate class.
These policies are referred to as "fundamental."
When the Funds were organized, it was assumed that the Funds would only
leverage their portfolios through their issuance of preferred stock, and the
Funds' ability to leverage through debt financing was restricted. Each of PFD's
and PFO's Boards have reviewed the Fund's current fundamental policies on
borrowing, issuing senior securities and purchasing securities on margin and
have determined that each Fund has fundamental policies in these areas that are
more restrictive than the law requires. The Board of each Fund has concluded
that those policies should be revised to permit each Fund to leverage its
portfolio using debt financing in appropriate circumstances. At the Meetings,
shareholders of PFD and PFO will be asked to approve the revised policies.
The revised fundamental policies are expected to give the Funds the
flexibility to pursue debt financing as a means of leverage, in addition to
their existing option of using preferred stock. The revised policies will not
affect the investment objectives of the Funds, which will remain unchanged. The
Funds will continue to be managed in accordance with the investment parameters
described in their prospectuses and in accordance with applicable law.
3
The revised fundamental policies maintain important shareholder
protections, while providing the Funds with greater flexibility to leverage the
Funds' assets than is currently available. Accordingly, the policies are written
and will be interpreted broadly. For example, the revised policies allow the
investment practice in question to be conducted to the extent permitted by the
Investment Company Act of 1940, as amended (the "1940 Act"). It is possible
that, as the financial markets continue to evolve over time, the 1940 Act and
the related rules may be further amended to address changed circumstances and
new investment opportunities. It is also possible that the 1940 Act and the
related rules could change for other reasons. For flexibility, the revised
policies will be interpreted to refer to the 1940 Act and the related rules as
they are in effect from time to time. This will allow the Funds to benefit from
future changes in applicable law without seeking additional costly and
time-consuming shareholder approvals. To the extent the Funds engage in new
investment practices, the Funds may be subject to additional risks. Before a
material change is made in a Fund's investment practices in response to the
revised policies, the Fund's Board will consider and approve such change and the
Fund's shareholders will be notified, as appropriate.
Two of the revised fundamental policies also refer to interpretations
or modifications of, or relating to, the 1940 Act from the SEC or members of its
staff, as well as interpretations or modifications of other authorities having
jurisdiction over the Funds. These authorities could include courts. From time
to time the SEC and members of its staff issue formal or informal views on
various provisions of the 1940 Act and the related rules, including through
no-action letters and exemptive orders. The revised policies will be interpreted
to refer to these interpretations or modifications as they are given from time
to time. Again, this will allow the Funds the flexibility to benefit from future
changes in the positions taken by regulators and others without the expense and
delay of seeking further shareholder approvals.
When a revised policy provides that an investment practice may be
conducted as permitted by the 1940 Act, the policy will be interpreted to mean
either that the 1940 Act expressly permits the practice or that the 1940 Act
does not prohibit the practice.
If the revised policies are approved, subject to future Board approval,
the policies could permit the Funds to engage in borrowing or other forms of
debt leverage in order to potentially redeem Shares of Preferred Stock. As
discussed in a website posting dated February 14, 2008, the auction process for
the Funds' Preferred Stock began to fail and has continued to fail. This means
that there has not been sufficient interest from bidders in the auctions to
purchase all the Shares being offered for sale. In a "failed" auction, existing
Preferred Stock shareholders are able to sell some of their Shares to the extent
that there are buyers, but are not able to sell their remaining Shares. Rather,
they continue to hold their Shares and earn a "maximum rate" set according to a
pre-determined formula. A failed auction is not an event of default. A failed
auction does not require the redemption of Preferred Stock by the Funds.
Therefore, the Shares remain outstanding, and pay the maximum rate until "buy"
and "hold" orders again exceed "sell" orders in a future auction.
The provisions allowing for failed auctions are intended to provide
fair compensation for Preferred Stock shareholders during periods of
disruptions, while also allowing the Funds the necessary time to properly
consider the situation and explore potential alternatives. One potential
alternative that would be permitted as a result of the proposed changes in
fundamental policies would be the redemption of some or all of the Preferred
Stock through the use of borrowing, issuing senior debt securities or purchasing
securities on margin. THE BOARDS HAVE NOT DETERMINED TO REDEEM ANY PREFERRED
STOCK AND THE PRESENTATION OF THIS PROPOSAL SHOULD NOT BE INTERPRETED TO MEAN
THAT EITHER PFD OR PFO HAS DETERMINED TO REDEEM ANY SHARES OF PREFERRED STOCK.
THE FOLLOWING DESCRIBES RISKS ASSOCIATED WITH LEVERAGING EACH FUND
THROUGH THE USE OF BORROWING, ISSUING SENIOR SECURITIES AND PURCHASING
SECURITIES ON MARGIN, WHICH DO NOT MATERIALLY DIFFER FROM THE RISKS EACH FUND
CURRENTLY FACES THROUGH LEVERAGING USING PREFERRED STOCK.
Borrowing, issuing senior securities and purchasing securities on
margin are forms of leverage. Because this leverage would subject a Fund to
additional costs, the Fund would only engage in these transactions when the
Adviser and the Board of Directors believe that the cost of carrying the assets
to be acquired through leverage would be lower than the Fund's expected return
on its investment. Should this differential narrow, a Fund would realize less of
a positive return, with the additional risk that, during periods of adverse
market conditions, the market value of the Fund's entire portfolio holdings
(including those acquired through leverage) may decline far in excess of the
4
incremental returns the Fund may have achieved, resulting in a loss to the Fund.
Indeed, any such leveraging tends to magnify market exposure and can result in
higher than expected losses to a Fund.
Because the investment risk associated with investment assets purchased
with funds obtained through leveraging would be borne solely by a Fund's Common
Stock shareholders, adverse movements in the price of a Fund's portfolio
holdings would have a more severe effect on a Fund's net asset value than if a
Fund were not leveraged. Leverage creates risks for a Fund's Common Stock
shareholders, including the likelihood of greater volatility of a Fund's net
asset value and the market price of its shares, and the risk that fluctuations
in interest rates on borrowings or in the dividend rates on any Preferred Stock
may affect the return to Common Stock shareholders. If the income from the
securities purchased with such funds is not sufficient to cover the cost of
leverage, the net income of a Fund would be less than if leverage had not been
used, and therefore the amount available for distribution to Common Stock
shareholders as dividends will be reduced. In such an event, a Fund may
nevertheless determine to maintain its leveraged position in order to avoid
capital losses on securities purchased with the leverage. Further, all expenses
associated with borrowing, such as interest expenses and transaction costs, will
be borne solely by a Fund's Common Stock shareholders.
Also, if the asset coverage for borrowing or other senior securities of
a Fund declines below the limits specified in the 1940 Act, the Fund may be
required to sell a portion of its investments when it may not be advantageous to
do so. In the extreme, sales of investments required to meet asset coverage
tests imposed by the 1940 Act could also cause a Fund to lose its status as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). If a Fund were unable to make adequate distributions to
shareholders because of asset coverage or other restrictions, it could fail to
qualify as a regulated investment company for federal income tax purposes and,
even if it did not fail to so qualify, it could become liable for income and
excise tax on the portion of its earnings which are not distributed on a timely
basis in accordance with applicable provisions of the Code. A Fund's willingness
to engage in leverage transactions, and the amount of such transactions, will
depend on many factors, the most important of which are investment outlook,
market conditions and interest rates. Successful use of a leveraging strategy
depends on the Adviser's ability to predict correctly interest rates and market
movements, and there is no assurance that a leveraging strategy will be employed
or will be successful during any period in which it is employed. If Proposal 2
is approved by shareholders and a Fund leverages using borrowing, senior debt
securities or margin purchases, the Adviser could be viewed as having an
economic incentive to utilize leverage because the use of leverage would
increase the Fund's "net assets" (as defined below) and hence the fee paid by
the Funds to the Adviser. However, the Funds were initially structured to be
leveraged with Preferred Stock, so that changing the form of leverage, in whole
or in part, should not enhance any such incentive. In fact, this consideration
would be mitigated because of the higher asset coverage requirements under the
1940 Act if the Funds, engaged in leverage through debt financing.
Flaherty & Crumrine has advised the Boards of PFD and PFO that, except
as described herein, the proposed revisions to the fundamental policies are not
expected to materially affect the manner in which each Fund is being managed at
this time. On this basis, the Boards of PFD and PFO recommend that shareholders
of PFD and PFO vote to revise the fundamental policies as discussed below.
PROPOSAL 1-A: REVISE THE FUNDAMENTAL POLICY RELATING TO BORROWING MONEY.
The Funds currently have a fundamental investment policy relating to
borrowing money. Each Fund may not:
BORROW MONEY, EXCEPT FOR TEMPORARY OR EMERGENCY PURPOSES, OR IN
CONNECTION WITH REPURCHASES OF ITS SHARES OR FOR CLEARANCE OF
TRANSACTIONS, AND THEN ONLY IN AMOUNTS NOT EXCEEDING 10% OF ITS TOTAL
ASSETS (NOT INCLUDING THE AMOUNT BORROWED) AND AS OTHERWISE DESCRIBED
IN THIS PROSPECTUS. WHEN THE FUND'S BORROWINGS EXCEED 5% OF THE VALUE
OF ITS TOTAL ASSETS, THE FUND WILL NOT MAKE ANY ADDITIONAL INVESTMENTS.
If shareholders of a Fund approve this proposal, the Fund's current
fundamental policy relating to the borrowing of money will be revised so that
the Fund may not:
5
BORROW MONEY, EXCEPT AS PERMITTED UNDER THE 1940 ACT, AS AMENDED, AND
AS INTERPRETED OR MODIFIED BY REGULATORY AUTHORITY HAVING JURISDICTION,
FROM TIME TO TIME.
DISCUSSION OF PROPOSED MODIFICATION. All registered funds are required
to have a fundamental policy about the borrowing of money. The 1940 Act
generally requires a registered fund to maintain asset coverage of 300% for
so-called "senior securities" that represent indebtedness. This means that,
generally speaking, for the registered fund to borrow or otherwise issue debt
(other than limited exceptions such as temporary borrowing or a borrowing for
emergency purposes up to 5% of the fund's total assets), the fund must have
total assets of at least twice the amount borrowed. A registered fund that
issues preferred stock must maintain asset coverage of at least 200% with
respect to the preferred stock. Asset coverage means the ratio that the value of
the fund's total assets, minus liabilities other than borrowings, bears to the
aggregate amount of all borrowings. Certain widely used investment practices
that involve a commitment by a fund to deliver money or securities in the future
are not considered by the SEC to be senior securities. These include repurchase
and reverse repurchase agreements, dollar rolls, options, futures and forward
contracts, provided that in each case a fund segregates cash or liquid
securities in an amount necessary to pay the obligation or the fund holds an
offsetting commitment from another party. The revised policy will not affect the
Funds' existing abilities to engage in these practices. Similarly, the revised
policy will be interpreted not to prevent collateral arrangements with respect
to swaps, options, forward or futures contracts or other derivatives, or the
posting of initial or variation margin.
The revised policy will permit the Funds to borrow money, and to engage
in trading practices that may be considered to be borrowing, to the fullest
extent permitted by the 1940 Act and related interpretations, as in effect from
time to time. The revised policy will be interpreted to permit a Fund to engage
in trading practices and investments that may be considered to be borrowing,
such as reverse repurchase agreements, dollar rolls, options, futures, options
on futures and forward contracts. In addition, short-term credits necessary for
the settlement of securities transactions and arrangements with respect to
securities lending will not be considered to be borrowings under the revised
policy. Practices and investments that may involve leverage but are not
considered to be borrowings are not subject to the revised policy.
EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 1-A.
PROPOSAL 1-B: REVISE THE FUNDAMENTAL POLICY RELATING TO ISSUING SENIOR
SECURITIES.
The Funds currently have a fundamental investment policy relating to
senior securities. Each Fund may not:
ISSUE SENIOR SECURITIES OTHER THAN PREFERRED STOCK.
If shareholders of a Fund approve this proposal, the Fund's current
fundamental policy relating to issuing senior securities will be revised so that
the Fund may not:
ISSUE SENIOR SECURITIES TO THE EXTENT SUCH ISSUANCE WOULD VIOLATE
APPLICABLE LAW.
DISCUSSION OF PROPOSED POLICY. All registered funds are required to
have a fundamental policy about issuing "senior securities," which are defined
as fund obligations that have a priority over the fund's common shares with
respect to the payment of dividends or the distribution of fund assets. The 1940
Act establishes limits on the ability of the Funds to engage in leverage through
the issuance of "senior securities." The revised policy will permit the Funds to
issue senior securities to the fullest extent permitted by the 1940 Act and
related interpretations, as in effect from time to time.
Certain widely used investment practices that involve a commitment by a
fund to deliver money or securities in the future are not considered by the SEC
to be senior securities. These include repurchase and reverse repurchase
agreements, dollar rolls, options, futures and forward contracts, provided that
in each case a fund segregates cash or liquid securities in an amount necessary
to pay the obligation or the fund holds an offsetting commitment from another
party. The revised policy will not affect the Funds' existing abilities to
engage in these
6
practices. Similarly, the revised policy will be interpreted not to prevent
collateral arrangements with respect to swaps, options, forward or futures
contracts or other derivatives, or the posting of initial or variation margin.
EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 1-B.
PROPOSAL 1-C: REVISE THE FUNDAMENTAL POLICY RELATING TO PURCHASING SECURITIES ON
MARGIN.
The Funds currently have a fundamental investment policy relating to
the purchase of securities on margin. Each Fund may not:
SELL SECURITIES SHORT OR PURCHASE SECURITIES ON MARGIN, EXCEPT FOR SUCH
SHORT-TERM CREDITS AS ARE NECESSARY FOR THE CLEARANCE OF TRANSACTIONS,
BUT THE FUND MAY MAKE MARGIN DEPOSITS IN CONNECTION WITH TRANSACTIONS
IN OPTIONS ON SECURITIES, FUTURES AND OPTIONS ON FUTURES, AND MAY MAKE
SHORT SALES OF SECURITIES "AGAINST THE BOX."
If shareholders of a Fund approve this proposal, the Fund's current
fundamental policy relating to the purchase of securities on margin will be
revised so that a Fund may not:
SELL SECURITIES SHORT OR PURCHASE SECURITIES ON MARGIN, EXCEPT AS
PERMITTED UNDER THE 1940 ACT, AS AMENDED, AND AS INTERPRETED OR
MODIFIED BY REGULATORY AUTHORITY HAVING JURISDICTION, FROM TIME TO
TIME.
DISCUSSION OF PROPOSED POLICY. Section 12 of the 1940 Act authorizes
the SEC to regulate two trading practices that may result in leverage: margin
purchases and short sales. The SEC has not adopted any rules under Section 12,
but instead has regulated margin purchases and short sales under Section 18,
which limits the ability of the Funds to engage in leverage through the issuance
of "senior securities." The revised policy will permit the Funds to sell
securities short and purchase securities on margin to the fullest extent
permitted by the 1940 Act and related interpretations, as in effect from time to
time.
Certain widely used investment practices that involve a commitment by a
fund to deliver money or securities in the future are not considered by the SEC
to be senior securities. These include repurchase and reverse repurchase
agreements, dollar rolls, options, futures and forward contracts, provided that
in each case a fund segregates cash or liquid securities in an amount necessary
to pay the obligation or the fund holds an offsetting commitment from another
party. The revised policy will not affect the Funds' existing abilities to
engage in these practices. Similarly, the revised policy will be interpreted not
to prevent collateral arrangements with respect to swaps, options, forward or
futures contracts or other derivatives, or the posting of initial or variation
margin.
EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 1-C.
REQUIRED VOTE
Approval of the change in fundamental policies, with respect to each of
Proposals 1-A, 1-B and 1-C, will require the approval of the holders of a
majority of the Fund's outstanding voting securities, voting as a single class,
and approval of the holders of a majority of the Fund's outstanding shares of
Preferred Stock, voting as a separate class. A "majority of the Fund's
outstanding voting securities" for this purpose means the lesser of (1) 67% or
more of the Shares of Common Stock and Shares of Preferred Stock, present at a
meeting of shareholders, voting as a single class, if the holders of more than
50% of such Shares are present or represented by proxy at the meeting, or (2)
more than 50% of the outstanding Shares of Common Stock and outstanding Shares
of Preferred Stock, voting as a single class. A majority of the Fund's
outstanding Shares of Preferred Stock for this purpose is determined in a
similar manner, by applying the percentages in the previous sentence to
outstanding Shares of Preferred Stock.
7
PROPOSAL 2: APPROVAL OF AN AMENDED INVESTMENT ADVISORY AGREEMENT
At the Meetings, you will be asked to approve an amended and restated
investment advisory agreement (each, an "Amended Investment Advisory Agreement"
and collectively, the "Amended Investment Advisory Agreements") between your
Fund and the Adviser. The Adviser currently provides investment advisory
services to each Fund under investment advisory agreements currently in effect
(each, a "Current Investment Advisory Agreement" and collectively, the "Current
Investment Advisory Agreements"), and is responsible for each Fund's overall
investment strategy and its implementation. PFD's Current Investment Advisory
Agreement is dated as of January 24, 1991 and was last approved by PFD
shareholders on January 22, 1991, in connection with the initial approval of the
Agreement. PFO's Current Investment Advisory Agreement is dated as of February
5, 1992 and was last approved by PFO shareholders on February 3, 1992, in
connection with the initial approval of the Agreement. The Board of Directors of
each Fund last approved the continuance of an additional year for the Current
Investment Advisory Agreements on January 29, 2008. The form of Amended
Investment Advisory Agreement for the Funds, marked to show changes from the
Current Investment Advisory Agreement, is attached hereto as Exhibit A, and the
description of the Amended Investment Advisory Agreements in this Joint Proxy
Statement is qualified in its entirety by reference to Exhibit A.
TERMS OF THE CURRENT INVESTMENT ADVISORY AGREEMENTS
Under the terms of the Current Investment Advisory Agreements, the
Adviser is responsible for making investment decisions and placing orders for
the purchase and sale of a Fund's investments directly with the issuers or with
brokers or dealers selected by the Adviser at its discretion. The Adviser also
furnishes to the Boards, which have overall responsibility for the business and
affairs of the Funds, periodic reports on the investment performance of the
Funds.
The Adviser is obligated to manage a Fund in accordance with applicable
laws and regulations. Consistent with the requirements of the 1940 Act, the
Current Investment Advisory Agreements provide that the Adviser generally is not
liable to a Fund for any error in judgment, mistake of law, or any act or
omission or any loss suffered by a Fund in connection with the Agreement, except
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under the Agreement.
The Current Investment Advisory Agreements may be terminated by a Fund
without penalty upon 60 days' written notice by the Boards of Directors or by a
vote of the holders of a majority of the Fund's outstanding Shares, or upon 60
days' written notice by the Adviser. The Current Investment Advisory Agreements
terminate automatically in the event of an "assignment" (as defined in the 1940
Act).
For the fiscal year ended November 30, 2007, PFD paid the Adviser
$1,312,364 in advisory fees, and PFO paid the Adviser $1,173,308 in advisory
fees.
COMPARISON OF AMENDED INVESTMENT ADVISORY AGREEMENTS AND CURRENT INVESTMENT
ADVISORY AGREEMENTS
The only change to the Current Investment Advisory Agreements is to
amend the description of the Adviser's fee to clarify that any debt representing
financial leverage will not be considered a liability. Section 6(a) of the
Current Investment Advisory Agreement of each Fund describes the fee to be paid
to the Adviser as follows:
IN CONSIDERATION OF THE SERVICES RENDERED PURSUANT TO THIS AGREEMENT,
THE [FUND] WILL PAY THE ADVISER AFTER THE END OF THE CALENDAR MONTH
DURING WHICH THE CLOSING DATE (AS DEFINED BELOW) OCCURS AND AFTER THE
END OF EACH CALENDAR MONTH THEREAFTER A FEE FOR THE PREVIOUS MONTH
COMPUTED MONTHLY AT THE ANNUAL RATE OF .625 OF 1.00% ON THE [FUND]'S
AVERAGE MONTHLY NET ASSETS UP TO $100 MILLION AND .50 OF 1.00% ON THE
[FUND]'S AVERAGE MONTHLY NET ASSETS OF $100 MILLION OR MORE.
The Current Investment Advisory Agreements do not define the term "net
assets" but instead refer to the description as included in the Funds'
registration statements. The Funds' registration statements, dated as of January
24, 1991 for PFD and February 6, 1992 for PFO, each define "net assets" to mean,
for purposes of
8
calculating the advisory fee, the average monthly value of the Fund's total
assets minus the sum of the Fund's liabilities, which liabilities exclude the
aggregate liquidation preference of the outstanding Preferred Stock, and
accumulated dividends, if any, on the Preferred Stock.
If approved by shareholders, the Amended Investment Advisory Agreement
of each Fund will describe the fee to be paid to the Adviser as follows:
IN CONSIDERATION OF THE SERVICES RENDERED PURSUANT TO THIS AGREEMENT,
THE [FUND] WILL PAY THE ADVISER AFTER THE END OF EACH CALENDAR MONTH A
FEE FOR THE PREVIOUS MONTH COMPUTED MONTHLY AT THE ANNUAL RATE OF .625
OF 1.00% ON THE [FUND]'S AVERAGE MONTHLY TOTAL MANAGED ASSETS UP TO
$100 MILLION AND .50 OF 1.00% ON THE [FUND]'S AVERAGE MONTHLY TOTAL
MANAGED ASSETS OF $100 MILLION OR MORE. FOR PURPOSES OF CALCULATING
SUCH FEE, THE [FUND]'S TOTAL MANAGED ASSETS MEANS THE TOTAL ASSETS OF
THE [FUND] (INCLUDING ANY ASSETS ATTRIBUTABLE TO ANY [FUND] AUCTION
RATE PREFERRED STOCK THAT MAY BE OUTSTANDING OR OTHERWISE ATTRIBUTABLE
TO THE USE OF LEVERAGE) MINUS THE SUM OF ACCRUED LIABILITIES (OTHER
THAN DEBT, IF ANY, REPRESENTING FINANCIAL LEVERAGE). FOR PURPOSES OF
DETERMINING TOTAL MANAGED ASSETS, THE LIQUIDATION PREFERENCE OF THE
[FUND] PREFERRED STOCK IS NOT TREATED AS A LIABILITY.
As described in the Funds' registration statements, the calculation of
net assets for purposes of calculating the advisory fees payable pursuant to the
Current Investment Advisory Agreements excludes the liquidation value of any
outstanding preferred stock, including the Preferred Stock, from the Funds'
liabilities. However, debt representing financial leverage is not similarly
excluded. Therefore, the amount of outstanding debt would reduce the amount of
Fund assets on which the Adviser's fee is paid.
At the time the Funds were launched it was not contemplated that the
Funds would engage in any debt financings and the Funds' fundamental investment
policies in this area severely limited the Funds' ability to do so. If the
changes in the Funds' fundamental investment policies on borrowing, issuing
senior debt securities and purchasing securities on margin as described in
Proposal 1 are approved, however, the Funds could borrow up to the limits
permitted under applicable law. Any such amounts borrowed or the proceeds of any
debt issuance would, like the Preferred Stock, form part of the total assets
being actively managed by the Adviser. The Boards of Directors are of the view
that it is fair and appropriate for the Adviser to be paid for doing so and that
there is no reason to make a distinction based on whether a Fund is leveraged
with preferred stock or with debt. Therefore, the Boards are proposing that the
provision in the Current Investment Advisory Agreements concerning the
calculation of the advisory fee be amended to exclude from liabilities, in
addition to the liquidation value of preferred stock, debt representing
financial leverage, as is typical for closed-end funds such as the Funds.
If the proposed change in the fee language of the Amended Investment
Advisory Agreements had been in effect during a Fund's most recently completed
fiscal year, there would have been no change in the fees paid by the Fund to the
Adviser because the Fund did not borrow during that time. There will be no
increase in the fees payable to the Adviser unless or until action is taken that
increases a Fund's assets under management through borrowing or other forms of
debt leverage in amounts greater than the amount of assets currently
attributable to a Fund's outstanding Preferred Stock. If the amount of a Fund's
assets under management increases through debt financing, this could result in
an increase in the amount of the fees payable by a Fund under the Amended
Investment Advisory Agreement. However, the net impact on fees would depend on
the net increase in Fund assets that would result from those activities, which
cannot be predicted.
BOARD CONSIDERATION OF THE AMENDED INVESTMENT ADVISORY AGREEMENTS
In connection with the decision of each Board of Directors to seek
shareholder approval of amendments of the Funds' fundamental investment policies
regarding borrowing, issuing senior securities and purchasing securities on
margin, it was determined that, as currently formulated, the language for
calculating the fees paid by the Funds to the Adviser was not written in a way
that permitted the calculation of net assets to exclude debt leverage as a
liability. The current fee formulation provides that fees shall be based on the
Funds' "net assets," and Fund liabilities did not exclude debt leverage in the
way that the liquidation value of Preferred Stock had been excluded. The Boards
considered this omission to be related to the Funds' initial structure, which
did not contemplate debt financing.
9
In considering this matter, each Board of Directors noted that the
proceeds of any borrowings used by the Funds could increase the amount of Fund
assets for which the Adviser would be expected to provide services to the Fund.
In addition to being attentive to the various technical concerns in dealing with
senior securities and borrowings, each Board noted that the Adviser would be
responsible for identifying additional investment opportunities for the proceeds
of these securities and borrowings and for managing the additional investments.
Each Board also determined that the original formulation of the fee language in
the Current Investment Advisory Agreement was designed to compensate the Adviser
on the basis of the amount of assets as to which it makes investment decisions.
Each Board noted that they had determined to seek shareholder approval to
broaden the Funds' authority to borrow, issue senior securities and purchase
securities on margin. The Boards of Directors have determined those actions to
be in the best interests of the Funds and the Funds' shareholders (see Proposals
1-A, 1-B and 1-C). In the view of the Boards of Directors, it would be unfair to
take actions that increase assets which the Adviser is obliged by the Current
Investment Advisory Agreements to manage without compensating the Adviser for
doing so. In this regard, the Boards of Directors considered that many funds
that engage in leveraging activity provide for compensation of their investment
adviser on the basis of total managed assets, including Flaherty &
Crumrine/Claymore Preferred Securities Income Fund Incorporated and Flaherty &
Crumrine/Claymore Total Return Fund Incorporated, two other closed-end funds
managed by the Adviser. In considering this matter, the Independent Directors
had the opportunity to consult with counsel to the Directors who are not
"interested persons" (as defined in the 1940 Act) of the Funds or the Adviser
("Independent Directors") regarding the proposed Amended Investment Advisory
Agreements.
At a meeting held on March 13, 2008, the Board of Directors of each
Fund, including the Independent Directors present in-person at the meeting,
voting separately, unanimously determined to recommend that shareholders of each
Fund approve its Amended Investment Advisory Agreement.
In their review of the Amended Investment Advisory Agreement, the Board
of Directors of each Fund assessed the nature, extent and quality of the
services to be provided to the Fund by the Adviser. In their deliberations, the
Boards of Directors considered information received in connection with their
most recent approval of the continuation of the Current Investment Advisory
Agreement, in addition to information provided by the Adviser in connection with
their evaluation of the terms and conditions of the Amended Investment Advisory
Agreement. The Boards of Directors did not identify any particular information
that was all-important or controlling, and Directors may have attributed
different weights to the various factors. The Directors evaluated all
information available to them. The Directors, including a majority of the
Independent Directors, concluded that the terms of the Amended Investment
Advisory Agreements are appropriate, that the fees to be paid are reasonable in
light of the services to be provided to the Funds, and that the Amended
Investment Advisory Agreements should be approved and recommended to the Funds'
shareholders.
NATURE, EXTENT AND QUALITY OF THE SERVICES TO BE PROVIDED UNDER THE
AMENDED INVESTMENT ADVISORY AGREEMENTS. The Directors considered the nature,
extent and quality of management services proposed to be provided to the Funds
under the Amended Investment Advisory Agreements. The Directors took note that
the Adviser had advised the Boards that there is not expected to be any change
in the nature, extent and quality of services provided to the Funds and their
shareholders under the Amended Investment Advisory Agreements. The Boards'
evaluation of the services expected to be provided by the Adviser took into
account the Directors' knowledge and familiarity gained as Directors of funds in
the Flaherty & Crumrine Fund Family. The Boards recognized that they received
information at regular meetings throughout the year regarding the services
rendered by the Adviser, noting that these services included the management of
each Fund's investment program, as well as providing significant administrative
services beyond what the Current Investment Advisory Agreements provided. The
Directors also noted that they had engaged in an extensive review of the
services provided to the Funds by the Adviser at the Boards' last annual
contract renewal meeting.
The Boards concluded that, overall, they were satisfied with the
nature, extent and quality of services expected to be provided to the Funds
under the Amended Investment Advisory Agreements.
INVESTMENT PERFORMANCE. The Directors noted that they received
information throughout the year at periodic intervals with respect to each
Fund's performance, and had engaged in an extensive review of Fund performance
at their last annual contract renewal meeting on January 29, and had determined
at that time that each Fund's performance was satisfactory. As the services to
be provided under the Amended Investment Advisory
10
Agreements in comparison with the Current Investment Advisory Agreements were
not proposed to be changed in connection with the approval of the Amended
Investment Advisory Agreements, the Directors did not specifically re-consider
Fund performance in their consideration of the Amended Investment Advisory
Agreements.
ADVISER PROFITABILITY. Profitability of the Adviser in providing
services to each Fund under the Amended Investment Advisory Agreements was not a
factor considered by the Directors. The Directors noted that they expect to
receive cost, expense and profitability information at the next annual Board
contract renewal meeting and, thus, be in a position to evaluate at that time
whether any adjustments in Fund fees would be appropriate in connection with a
renewal of the Amended Investment Advisory Agreements. The Directors also
recognized that they had reviewed the profitability of the Adviser at its last
annual contract renewal meeting.
ECONOMIES OF SCALE. The Directors considered whether any changes in the
economies of scale realized (or potentially realized) by the Adviser and any
benefits the Funds may incur from such economies of scale were proposed to be
changed if the Amended Investment Advisory Agreements were approved. The
Directors noted that the Funds, as closed-end investment companies, were not
expected to increase materially in size; thus, the Adviser would not benefit
from economies of scale. The Directors considered whether economies of scale
could be realized because the Adviser advises other similar funds. Based on
their experience, the Directors accepted the Adviser's explanation that
significant economies of scale would not be realized because of the complexity
of managing preferred securities for separate funds and other portfolios.
Nonetheless, the Directors noted that the Funds' advisory fee schedule declines
as assets increase beyond a certain level (commonly known as a "breakpoint"),
and that breakpoints provide for a sharing with shareholders of benefits derived
as a result of economies of scale arising from increased assets. Accordingly,
the Directors determined that the existing advisory fee levels reflect possible
economies of scale.
FEES. The Directors considered the fees to be paid to the Adviser under
the Amended Investment Advisory Agreements. The Boards noted that although the
contractual investment advisory fee rate payable under each proposed Amended
Investment Advisory Agreement with the Adviser is the same as under the Current
Investment Advisory Agreement, the method for calculating the fee is different
because it would exclude from liabilities, in addition to the liquidation value
of Preferred Stock, debt representing financial leverage. The Directors noted
that the proceeds of any borrowings or other forms of leverage used by the Funds
would increase the amount of Fund assets for which the Adviser would be expected
to provide services to the Fund, and that the Adviser would be responsible for
managing such proceeds. The Boards noted that the original fee language in the
Current Investment Advisory Agreements was designed and intended to compensate
the Adviser on the basis of the amount of assets as to which it makes investment
decisions. The Boards of Directors reviewed pro forma fiscal 2007 fees that
would have been paid to the Adviser under the calculation methodology in the
Current Investment Advisory Agreements and under the Amended Investment Advisory
Agreements, based on whether the Funds used 100% Preferred Stocks as leverage,
50% Preferred Stock and 50% debt leverage, and 100% debt leverage. The Boards of
Directors noted that under both the Current Investment Advisory Agreements and
the Amended Investment Advisory Agreements, pro forma advisory fees would have
remained the same if the Funds used only Preferred Stock as leverage. However,
the Boards of Directors noted that, if the Funds only used debt leverage, the
pro forma fee paid to the Adviser would be greater under a Fund's Amended
Investment Advisory Agreement than it would be under its Current Investment
Advisory Agreement, but that total fees were less than those actually paid when
the Funds only used Preferred Stock as leverage.
The Boards of Directors concluded that, because the rates for advisory
services were the same and that the new calculation methodology was reasonable
and fair, it was appropriate for the Adviser to be compensated on the amount of
borrowings, proceeds of debt issuances and margin borrowings, as it would be
responsible for managing assets attributable to such amounts. The Directors,
including a majority of the Independent Directors, concluded that the fees to be
paid are reasonable in light of the services to be provided to the Funds. In
this regard, the Boards considered that many funds that engage in leveraging
activity provide for compensation of their investment adviser on the basis of
total managed assets, including Flaherty & Crumrine/Claymore Preferred
Securities Income Fund Incorporated and Flaherty & Crumrine/Claymore Total
Return Fund Incorporated, two other closed-end funds managed by the Adviser.
CONCLUSION. After the Independent Directors of the Funds deliberated in
executive session, the entire Board of Directors of each Fund, including the
Independent Directors, approved each Amended Investment Advisory
11
Agreement, concluding that the advisory fee rate was reasonable in relation to
the services provided and that each Amended Investment Advisory Agreement was in
the best interests of the shareholders.
INFORMATION ABOUT THE ADVISER
Flaherty & Crumrine serves as the investment adviser to each Fund, and
its business address is 301 E. Colorado Boulevard, Suite 720, Pasadena,
California 91101. The Adviser, which was organized in 1983, specializes in the
management of portfolios of preferred securities, including related hedging
activities, for institutional investors and had aggregate assets under
management, as of December 31, 2007 (which include the total net assets of the
Funds) of approximately $3.67 billion. The Adviser is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended. The
Adviser is owned by Donald F. Crumrine, Robert M. Ettinger, R. Eric Chadwick,
Bradford S. Stone, and Robert T. Flaherty, each of whose address is 301 E.
Colorado Boulevard, Suite 720, Pasadena, California 91101.
For the most recently completed fiscal year ended November 30, 2007,
the Funds did not pay any brokerage commissions to any broker affiliated with
the Adviser. The Adviser has no affiliates that are engaged in brokerage.
The names of each Director and Principal Officer of the Adviser is set
forth below. The address of each Director and Principal Officer of the Adviser
is 301 E. Colorado Boulevard, Suite 720, Pasadena, California 91101.
NAME POSITION
---- --------
Donald F. Crumrine Director and Chairman of the Board
Robert M. Ettinger Director and President
R. Eric Chadwick Director and Vice President
Chad C. Conwell Chief Compliance Officer and Vice President
Bradford S. Stone Director and Vice President
Rick J. Seto Vice President
Laurie C. Lodolo Assistant Compliance Officer, Secretary, and Account
Administrator
OTHER FUNDS ADVISED BY THE ADVISER AND FEE SCHEDULES
The following table lists certain information regarding funds for which
the Adviser provides investment advisory services. All of the information below
is given as of the end of the last fiscal year of each fund.
TOTAL NET INVESTMENT ADVISORY FEE
ASSETS ($ (AS A PERCENTAGE OF AVERAGE DAILY
FUND MILLIONS) NET ASSETS) (%) (1)
------------------------------------------------- --------- -----------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities 1,363,177 0.525 of 1.00% on the first $200 million
Income Fund Incorporated of the fund average weekly total managed
assets, .45 of 1.00% on the next $300
million of the fund's average weekly
total managed assets and .40 of 1.00%
on the fund's average weekly total
managed assets above $500 million
12
TOTAL NET INVESTMENT ADVISORY FEE
ASSETS ($ (AS A PERCENTAGE OF AVERAGE DAILY
FUND MILLIONS) NET ASSETS) (%) (1)
------------------------------------------------- --------- -----------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund 321,237 0.575 of 1.00% on the first $200 million
Incorporated of the fund's average weekly total managed
assets, 0.50 of 1.00% on the next $300
million of the fund's average weekly total
managed assets and 0.45 of 1.00% on the
fund's average weekly total managed assets
above $500 million
(1) For purposes of calculating such fee, the fund's total managed assets
means the total assets of the fund (including any assets attributable
to any fund auction rate preferred stock that may be outstanding or
otherwise attributable to the use of leverage) minus the sum of accrued
liabilities (other than debt, if any, representing financial leverage).
For purposes of determining total managed assets, the liquidation
preference of auction rate preferred stock is not treated as a
liability.
REQUIRED VOTE
To become effective for a Fund, the Amended Investment Advisory
Agreement must be approved by the holders of a majority of the Fund's
outstanding voting securities, voting as a single class. A "majority of the
Fund's outstanding voting securities" for this purpose means the lesser of (1)
67% or more of the Shares of Common Stock and Shares of Preferred Stock, present
at a meeting of shareholders, voting as a single class, if the holders of more
than 50% of such Shares are present or represented by proxy at the meeting, or
(2) more than 50% of the outstanding Shares of Common Stock and outstanding
Shares of Preferred Stock, voting as a single class.
EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 2.
ADDITIONAL INFORMATION
ADMINISTRATOR
PFPC acts as the administrator to each Fund and is located at 4400
Computer Drive, Westborough, Massachusetts 01581.
COMPLIANCE WITH THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the 1934 Act and Section 30(h) of the 1940 Act require
each Fund's Directors and officers, certain persons affiliated with Flaherty &
Crumrine and persons who beneficially own more than 10% of a registered class of
each Fund's securities, to file reports of ownership and changes of ownership
with the SEC, the NYSE and each Fund. Directors, officers and greater-than-10%
shareholders are required by SEC regulations to furnish each Fund with copies of
such forms they file. Based solely upon its review of the copies of such forms
received by it and written representations from certain of such persons, each
Fund believes that during 2007, all such filing requirements applicable to such
persons were met.
BROKER NON-VOTE AND ABSTENTIONS
A proxy which is properly executed and returned accompanied by
instructions to withhold authority to vote represents an abstention or a broker
"non-vote" (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or the persons
entitled to vote and (ii) the broker or nominee does not have discretionary
voting power on a particular matter). Proxies that reflect abstentions or broker
non-votes (collectively, "abstentions") will be counted as shares that are
present and entitled to vote at the meeting for purposes of determining the
presence of a Quorum. With respect to Proposals 1 and 2, abstentions do not
constitute a vote "for" the proposal and will instead count as a vote "against"
the proposal.
13
OTHER MATTERS TO COME BEFORE THE MEETING
Each Fund does not intend to present any other business at the relevant
Meeting, nor is any Fund aware that any shareholder intends to do so. If,
however, any other matters are properly brought before the Meeting, the persons
named in the accompanying form of proxy will vote thereon in accordance with
their judgment.
EXPENSES OF PROXY SOLICITATION
The total expenses of the Meetings, including the solicitation of
proxies and the expenses incurred in connection with the preparation of this
Joint Proxy Statement, are approximately $62,000 for PFD and $58,000 for PFO.
The Adviser, on behalf of the Funds, has retained The Altman Group, Inc., a
proxy solicitation firm, to assist in the solicitation of proxies. It is
anticipated that The Altman Group will be paid approximately $35,000 by each
Fund for such solicitation services (plus reimbursements of out-of-pocket
expenses). The Altman Group also may solicit proxies personally and by
telephone.
VOTING RESULTS
Each Fund will advise its shareholders of the voting results of the
matters voted upon at its Meeting in its next Semi-Annual Report to
Shareholders.
NOTICE TO BANKS, BROKER/DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise the Funds whether other persons are the beneficial owners
of the Funds' Shares for which proxies are being solicited from you, and, if so,
the number of copies of the Joint Proxy Statement and other soliciting material
you wish to receive in order to supply copies to the beneficial owners of the
Funds' Shares.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE MEETINGS ARE THEREFORE URGED TO COMPLETE, SIGN, DATE AND
RETURN ALL PROXY CARDS AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
SEPARATE PROXY CARDS ARE ENCLOSED FOR EACH FUND IN WHICH YOU OWN SHARES.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETINGS ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD(S), OR VOTE BY TELEPHONE OR
INTERNET. The proxy card(s) should be returned in the enclosed envelope, which
needs no postage if mailed in the continental United States. Instructions for
the proper execution of proxies are set forth on the inside cover.
14
This Page Left Blank Intentionally.
Exhibit A
[Deleted words are bracketed and new words are uppercase]
FORM OF
AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT
[_____ __, ____]
As amended and restated [_____, __], 2008
Flaherty & Crumrine Incorporated
301 E. Colorado Boulevard
Suite 720
Pasadena, California 91101
Ladies and Gentlemen:
[Fund] (the "Company"), a corporation organized under the laws of the
State of Maryland, herewith confirms its agreement with Flaherty & Crumrine
Incorporated (the "Adviser"), a corporation organized under the laws of the
State of California, as follows:
1. INVESTMENT DESCRIPTION; APPOINTMENT
The Company desires to employ its capital by investing and reinvesting
in investments of the kind and in accordance with the limitations specified in
its Articles of Incorporation, as the same may from time to time be amended, and
in its Registration Statement as from time to time in effect, and in such manner
and to such extent as may from time to time be approved by the Board of
Directors of the Company. Copies of the Company's Registration Statement and
Articles of Incorporation, as amended, have been or will be submitted to the
Adviser. The Company agrees to provide copies of all amendments to the Company's
Registration Statement and Articles of Incorporation to the Adviser on an
on-going basis. The Company desires to employ and hereby appoints the Adviser to
act as investment adviser to the Company. The Adviser accepts the appointment
and agrees to furnish the services described herein for the compensation set
forth below.
2. SERVICES AS INVESTMENT ADVISER
Subject to the supervision and direction of the Board of Directors of
the Company, the Adviser will (a) act in accordance with the Company's Articles
of Incorporation, the Investment Company Act of 1940, and the Investment
Advisers Act of 1940, as the same may from time to time be amended, (b) manage
the Company's portfolio on a discretionary basis in accordance with its
investment objective and policies as stated in the Company's Registration
Statement as from time to time in effect, (c) make investment decisions and
exercise voting rights in respect of portfolio securities for the Company, (d)
place purchase and sale orders on behalf of the Company and (e) employ
professional portfolio managers and securities analysts to provide research
services to the Company. The Adviser is authorized to retain the services of an
economic consultant at the expense of the Fund to provide such services with
respect to the Company as the parties to any agreement may agree upon. In
providing these services, the Adviser will provide investment research and
supervision of the Company's evaluation and, if appropriate, sale and
reinvestment of the Company's assets. In addition, the Adviser will furnish the
Company with whatever statistical information the Company may reasonably request
with respect to the securities that the Company may hold or contemplate
purchasing.
3. BROKERAGE
In executing transactions for the Company and selecting brokers or
dealers, the Adviser will use its best efforts to seek the best overall terms
available. In assessing the best overall terms available for any Company
transaction, the Adviser will consider all factors it deems relevant including,
but not limited to, breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer and the reasonableness of any commission for the specific transaction and
on a continuing basis. In selecting brokers or dealers to execute any
transaction and in evaluating the best overall terms available, the Adviser may
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities and Exchange Act of 1934) provided to the
Company and/or other accounts over which the Adviser or an affiliate exercises
investment discretion.
4. INFORMATION PROVIDED TO THE COMPANY
The Adviser will use its best efforts to keep the Company informed of
developments materially affecting the Company, and will, on its own initiative,
furnish the Company from time to time with whatever information the Adviser
believes is appropriate for this purpose.
5. STANDARD OF CARE
The Adviser shall exercise its best judgment in rendering the services
described in paragraphs 2, 3, and 4 above. The Adviser shall not be liable for
any error of judgment or mistake of law or for any act or omission or any loss
suffered by the Company in connection with the matters to which this Agreement
relates, provided that nothing herein shall be deemed to protect or purport to
protect the Adviser against any liability to the Company or its shareholders to
which the Adviser would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or
from reckless disregard by it of its obligations and duties under this Agreement
("disabling conduct"). The Company will indemnify the Adviser against, and hold
it harmless from, any and all losses, claims, damages, liabilities or expenses
(including reasonable counsel fees and expenses), including any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Adviser. Indemnification shall be made only
following: (i) a final decision on the merits by a court or other body before
whom the proceeding was brought that the Adviser was not liable by reason of
disabling conduct or (ii) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the Adviser was not liable
by reason of disabling conduct by (a) the vote of a majority of a quorum of
directors of the Company who are neither "interested persons" of the Company nor
parties to the proceeding ("disinterested non-party directors") or (b) an
independent legal counsel in a written opinion. The Adviser shall be entitled to
advances from the Company for payment of the reasonable expenses incurred by it
in connection with the matter as to which it is seeking indemnification in the
manner and to the fullest extent permissible under the Maryland General
Corporation law. The Adviser shall provide to the Company a written affirmation
of its good faith belief that the standard of conduct necessary for
indemnification by the Company has been met and a written undertaking to repay
any such advance if it should ultimately be determined that the standard of
conduct has not been met. In addition, at least one of the following additional
conditions shall be met: (a) the Adviser shall provide a security in form and
amount acceptable to the Company for its undertaking; (b) the Company is insured
against losses arising by reason of the advance; or (c) a majority of a quorum
of disinterested non-party directors, or independent legal counsel, in a written
opinion, shall have determined, based on a review of facts readily available to
the Company at the time the advance is proposed to be made, that there is reason
to believe that the Adviser will ultimately be found to be entitled to
indemnification.
6. COMPENSATION
(a) In consideration of the services rendered pursuant to this
Agreement, the Company will pay the Adviser after the end of [the calendar month
during which the closing date (as defined below) occurs and after the end of]
each calendar month [thereafter] a fee for the previous month computed monthly
at the annual rate of .625 of 1.00% on the Company's average [net] monthly TOTAL
MANAGED assets up to $100 million and .50 of 1.00% on the Company's average
monthly [net] TOTAL MANAGED assets of $100 million or more. [The fee payable to
the Adviser for the period from the date of the closing of the offering
contemplated by the Company's initial registration statements (the "Closing
Date") to the end of the first calendar month during which the closing date
occurs shall be prorated according to the proportion that such period bears to
the full monthly period.]
17
FOR PURPOSES OF CALCULATING SUCH FEE, THE COMPANY'S TOTAL MANAGED ASSETS MEANS
THE TOTAL ASSETS OF THE COMPANY (INCLUDING ANY ASSETS ATTRIBUTABLE TO ANY
COMPANY AUCTION RATE PREFERRED STOCK THAT MAY BE OUTSTANDING OR OTHERWISE
ATTRIBUTABLE TO THE USE OF LEVERAGE) MINUS THE SUM OF ACCRUED LIABILITIES (OTHER
THAN DEBT, IF ANY, REPRESENTING FINANCIAL LEVERAGE). FOR PURPOSES OF DETERMINING
TOTAL MANAGED ASSETS, THE LIQUIDATION PREFERENCE OF THE COMPANY PREFERRED STOCK
IS NOT TREATED AS A LIABILITY.
(b) Upon any termination of the Agreement before the end of a month,
the fee for such part of that month shall be prorated according to the
proportion that such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. For the purpose of
determining fees payable to the Adviser, the value of the Company's average
monthly net assets shall be computed at the times and in the manner specified in
the Company's Registration Statement as from time to time in effect.
7. EXPENSES
The Adviser will bear all expenses in connection with the performance
of its services under this Agreement, including compensation of an office space
for its officers and employees connected with investment and economic research,
trading and investment management and administration of the Company, as well as
the fees of all directors of the Company who are affiliated with the Adviser or
any of its affiliates; provided that the Company shall reimburse the Adviser for
the travel and out-of-pocket expenses or an appropriate portion thereof of
directors, officers and employees of the Adviser in connection with attendance
at meetings of the Board of Directors of the Fund of any committee thereof. The
Company will bear all other expenses to be incurred in its operation other than
those that other parties have agreed to bear, including: organizational
expenses; taxes, interest, brokerage costs and commissions and stock exchange
fees; fees of directors of the Company who are not officers, directors or
employees of the Adviser; Securities and Exchange Commission fees; state Blue
Sky qualification fees; charges of the custodian, any subcustodians and transfer
and dividend-paying agent; expenses in connection with the Company's Dividend
Reinvestment and Cash Purchase Plan; insurance premiums; outside auditing and
legal expenses; costs of maintenance of the Company's existence; costs
attributable to investor services, including, without limitation, telephone and
personnel expenses; costs of printing stock certificates; costs of shareholders'
reports and meetings of the shareholders of the Company and of the officers or
Board of Directors of the Company; membership fees in trade associations; stock
exchange listing fees and expenses; expenses in connection with auctions of
shares of auction rate preferred stock proposed to be issued by the Company;
litigation and other extraordinary or non-recurring expenses.
8. SERVICES TO OTHER COMPANIES OR ACCOUNTS
The Company understands that the Adviser now acts, will continue to act
or may in the future act, as investment adviser to fiduciary and other managed
accounts or as investment adviser to one or more other investment companies, and
the Company has no objection to the Adviser so acting, provided that whenever
the Company and one or more other accounts or investment companies advised by
the Adviser have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with procedures believed by
the Adviser to be equitable to each entity. Similarly, opportunities to sell
securities will be allocated in an equitable manner. The Company recognizes that
in some cases this procedure may adversely affect the size of the position
obtained for or disposed of by the Company. In addition, the Company understands
that the persons employed by the Adviser to assist in the performance of the
Adviser's duties hereunder will not devote their full time to such service and
nothing contained herein shall be deemed to limit or restrict the right of the
Adviser or any affiliate of the Adviser to engage in and devote time and
attention to other business or to render services or whatever kind or nature.
9. TERM OF AGREEMENT
This Agreement shall become effective as of the date the Company's
Registration Statement is declared effective by the Securities and Exchange
Commission and shall continue for an initial two-year term and shall continue
thereafter so long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company or (ii) a vote of a
"majority" (as defined in the Investment Company Act of 1940, as amended) of the
Company's outstanding voting securities, provided that in either event the
continuance is also approved by a majority of the Board of Directors who are not
"interested persons" (as defined in said Act) of any
18
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of Directors of the Company or
by vote of holders of a majority of the Company's shares, or upon 60 days'
written notice, by the Adviser. This Agreement will also terminate automatically
in the event of its assignment (as defined in said 1940 Act).
10. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties
hereto.
11. GOVERNING LAW
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
conflicts of laws principles thereof.
If the foregoing accurately sets forth our agreement, kindly indicate
your acceptance hereof by signing and returning the enclosed copy hereof.
Very truly yours.
[Fund]
By: _________________
Title:
Accepted:
FLAHERTY & CRUMRINE INCORPORATED
By: _______________
Title:
19
o PLEASE FOLD ALONG THE PERFORATION, DETACH AND
RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
--------------------------------------------------------------------------------
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
--------------------------------------------------------------------------------
PROXY -- FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
--------------------------------------------------------------------------------
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned holder of shares of Common Stock of Flaherty & Crumrine
Preferred Income Opportunity Fund Incorporated, a Maryland incorporation (the
"Fund"), hereby appoints Chad C. Conwell, Robert M. Ettinger, and Laurie C.
Lodolo, attorneys and proxies for the undersigned, each with full powers of
substitution and revocation to represent the undersigned and to vote at the
Special Meeting of Shareholders of the Fund to be held at the offices of
Flaherty & Crumrine Incorporated, 301 E. Colorado Boulevard, Suite 720,
Pasadena, California 91101, at 9:00 a.m. PT, on May 21, 2008, and any
adjournments or postponements thereof. The undersigned hereby acknowledges
receipt of the Notice of Special Meeting and Proxy Statement and hereby
instructs said attorneys and proxies to vote said shares as indicated hereon. In
their discretion the proxies are authorized to vote upon such other business as
may properly come before the Meeting. A majority of the proxies present and
acting at the Meeting in person or by substitute (or, if only one shall be so
present, then that one) shall have and may exercise all of the power and
authority of said proxies hereunder. The undersigned hereby revokes any proxy
previously given.
----------- -----------
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
----------- -----------
[BAR CODE]
FLAHERTY & CRUMRINE PREFERRED
INCOME OPPORTUNITY FUND INCORPORATED
[BAR CODE] C123456789
000004 000000000.000000 ext 000000000.000000 ext
000000000.000000 ext 000000000.000000 ext
[BAR CODE] MR A SAMPLE 000000000.000000 ext 000000000.000000 ext
DESIGNATION (IF ANY)
ADD 1
ADD 2
ADD 3
ADD 4
ADD 5
ADD 6
[IMAGE]
Using a BLACK INK pen, mark your votes with an X
as shown in this example. Please do not write outside
the designated areas. [X]
------------------------------------------------------------------------------------------------------------------------------------
SPECIAL MEETING PROXY CARD
------------------------------------------------------------------------------------------------------------------------------------
o PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
------------------------------------------------------------------------------------------------------------------------------------
1-A Approval of Revised Fundamental Policy Relating to Borrowing Money
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
1-B Approval of Revised Fundamental Policy Relating to Issuing Senior Securities
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
1-C Approval of Revised Fundamental Policy Relating to Purchasing Securities on Margin
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
2 Approval of an Amended Investment Advisory Agreement
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. THIS PROXY, IF
PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR THE PROPOSALS.
PLEASE REFER TO THE PROXY STATEMENT FOR A DISCUSSION OF THE PROPOSALS.
NON-VOTING ITEMS
CHANGE OF ADDRESS -- Please print new address below.
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
AUTHORIZED SIGNATURES -- THIS SECTION MUST BE COMPLETED FOR YOUR VOTE TO BE COUNTED. -- DATE AND SIGN BELOW
Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator,
corporate officer, trustee, guardian, or custodian, please give full title.
Date (mm/dd/yyyy) -- Please print Signature 1 -- Please keep signature Signature 2 -- Please keep signature
date below. within the box. within the box.
----------------------------------- -------------------------------------- -----------------------------------------------------
/ /
----------------------------------- -------------------------------------- -----------------------------------------------------
C 1234567890 J N T MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE
140 CHARACTERS) MR A SAMPLE AND MR A SAMPLE AND
MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND
[IMAGE] [BAR CODE] 1 0 A V 0 1 6 3 8 1 1 MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND +
(STOCK#) 00U5CC
o PLEASE FOLD ALONG THE PERFORATION, DETACH AND
RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
--------------------------------------------------------------------------------
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
--------------------------------------------------------------------------------
PROXY -- FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
--------------------------------------------------------------------------------
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned holder of shares of Preferred Stock of Flaherty & Crumrine
Preferred Income Opportunity Fund Incorporated, a Maryland corporation (the
"Fund"), hereby appoints Chad C. Conwell, Robert M. Ettinger, and Laurie C.
Lodolo, attorneys and proxies for the undersigned, each with full powers of
substitution and revocation, to represent the undersigned and to vote on behalf
of the undersigned all shares of Preferred Stock which the undersigned is
entitled to vote at the Special Meeting of Shareholders of the Fund to be held
at the offices of Flaherty & Crumrine Incorporated, 301 E. Colorado Boulevard,
Suite 720, Pasadena, California 91101, at 9:00 a.m. PT, on May 21, 2008, and any
adjournments or postponements thereof. The undersigned hereby acknowledges
receipt of the Notice of Special Meeting and Proxy Statement and hereby
instructs said attorneys and proxies to vote said shares as indicated hereon. In
their discretion the proxies are authorized to vote upon such other business as
may properly come before the Meeting. A majority of the proxies present and
acting at the Meeting in person or by substitute (or, if only one shall be so
present, then that one) shall have and may exercise all of the power and
authority of said proxies hereunder. The undersigned hereby revokes any proxy
previously given.
----------- -----------
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
----------- -----------
[BAR CODE]
FLAHERTY & CRUMRINE PREFERRED
INCOME OPPORTUNITY FUND INCORPORATED
[BAR CODE] C123456789
000004 000000000.000000 ext 000000000.000000 ext
000000000.000000 ext 000000000.000000 ext
[BAR CODE] MR A SAMPLE 000000000.000000 ext 000000000.000000 ext
DESIGNATION (IF ANY)
ADD 1
ADD 2
ADD 3
ADD 4
ADD 5
ADD 6
[IMAGE]
Using a BLACK INK pen, mark your votes with an X
as shown in this example. Please do not write outside
the designated areas. [X]
------------------------------------------------------------------------------------------------------------------------------------
SPECIAL MEETING PROXY CARD
------------------------------------------------------------------------------------------------------------------------------------
o PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
------------------------------------------------------------------------------------------------------------------------------------
1-A Approval of Revised Fundamental Policy Relating to Borrowing Money
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
1-B Approval of Revised Fundamental Policy Relating to Issuing Senior Securities
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
1-C Approval of Revised Fundamental Policy Relating to Purchasing Securities on Margin
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
2 Approval of an Amended Investment Advisory Agreement
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. THIS PROXY, IF
PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR THE PROPOSALS.
PLEASE REFER TO THE PROXY STATEMENT FOR A DISCUSSION OF THE PROPOSALS.
NON-VOTING ITEMS
CHANGE OF ADDRESS -- Please print new address below.
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
AUTHORIZED SIGNATURES -- THIS SECTION MUST BE COMPLETED FOR YOUR VOTE TO BE COUNTED. -- DATE AND SIGN BELOW
Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator,
corporate officer, trustee, guardian, or custodian, please give full title.
Date (mm/dd/yyyy) -- Please print Signature 1 -- Please keep signature Signature 2 -- Please keep signature
date below. within the box. within the box.
----------------------------------- -------------------------------------- -----------------------------------------------------
/ /
----------------------------------- -------------------------------------- -----------------------------------------------------
C 1234567890 J N T MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE
140 CHARACTERS) MR A SAMPLE AND MR A SAMPLE AND
MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND
[IMAGE] [BAR CODE] 1 0 A V 0 1 6 3 8 1 2 MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND +
(STOCK#) 00U5DD
COVER
2
filename2.txt
[WILLKIE FARR & GALLAGHER LLP LETTERHEAD]
VIA EDGAR
---------
April 18, 2008
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Attn: Mr. James O'Connor
Re: Definitive Proxy Materials for
Flaherty & Crumrine Preferred Income Fund Incorporated
(File No. 811-06179)
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
(File No. 811-06495)
Dear Mr. O'Connor:
On behalf of each of the funds listed above (each, a "Fund" and
collectively, the "Funds"), transmitted herewith are the definitive proxy
materials consisting of the Notice of Special Meeting of Shareholders, the Joint
Proxy Statement and the Form of Proxy to be used in connection with the special
meeting of shareholders of the Funds to be held on May 21, 2008 (the "Meeting").
It is anticipated that these definitive copies of the proxy materials
will be mailed to shareholders on or about April 18, 2008.
In this letter we are also responding to the comments of the Securities
and Exchange Commission's staff (the "Staff") that you provided on the
preliminary proxy materials for the special meeting of shareholders filed on
March 21, 2008 (the "Initial Filing") in a telephone call with Mary Carty of
this firm on March 31, 2008. For the convenience of the Staff, those comments
have been restated below in their entirety. The Funds' responses to a particular
comment are set out immediately under the restated comment.
1. Comment: Please explain supplementally whether a redemption of the
------- auction preferred stock of either Fund would require a change
in that Fund's name.
Response: A redemption of the outstanding auction preferred stock of
-------- either Fund would not require a change in that Fund's name.
Each Fund's name indicates in part that it invests primarily in
preferred stock. Each Fund's investment objective is to provide its
common shareholders with high current income consistent with the
preservation of capital. Under normal market conditions, at least 80%
of the value of each Fund's net assets will be invested in preferred
securities. Each Fund's investment objective and policy of investing at
least 80% of the value of its net assets in preferred securities are
not proposed to be changed in connection with the proposals in the
proxy statement or any redemption of the auction preferred stock.
2. Comment: The Initial Filing indicated that the Board of Directors of
------- each Fund (the "Boards") did not consider the performance of
that Fund as a factor in considering whether to approve, subject to
shareholder approval, the amended investment advisory agreement. Please
explain why the Boards did not believe it necessary to consider Fund
performance.
Response: The Board of each Fund most recently extensively considered
-------- Fund performance at its annual contract renewal meeting on
January 29, 2008 and had determined at that time that Fund performance
was satisfactory. The Boards also receive information at each regular
Board meeting throughout the year on Fund performance and consider
performance at each such regular meeting. Each Board is aware of its
fiduciary obligations to its Fund and understands that it has an
ongoing duty to monitor the performance of the Fund. As each Board had
engaged in an extensive review of Fund performance six weeks prior to
the meeting at which it considered the amended investment advisory
agreement, it did not believe that the very short-term (i.e., six week)
performance of the Fund was a salient factor in considering whether to
approve the amended investment advisory agreement. In accordance with
Instruction 2 to Item 22(c)(11)(i) of Schedule 14A, this relevant
factor in the Boards' consideration and approval of the amended
investment advisory agreements is included in the Joint Proxy Statement.
We hope the Staff finds this letter and the revisions in the definitive
proxy materials responsive to the Staff's comments on the Initial Filing.
Please do not hesitate to contact me at (212) 728-8555 if you require
additional information regarding the enclosed materials.
Very truly yours,
/s/ Edward Gizzi
Edward Gizzi