See notes to financial statements.
Opinion on the Financial Statements
We have audited the accompanying statement
of assets and liabilities of BNY Mellon High Yield Strategies Fund (the Fund), including the statement
of investments, as of March 31, 2023, the related statements of operations and cash flows for the
year then ended, the statements of changes in net assets for each of the years in the two-year period
then ended, and the related notes (collectively, the financial statements) and the financial highlights
for each of the years in the five-year period then ended. In our opinion, the financial statements and
financial highlights present fairly, in all material respects, the financial position of the Fund as
of March
31, 2023, the results of its operations and its cash flows for the year then ended, the
changes in its net assets for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in conformity with U.S. generally
accepted accounting principles.
Basis for Opinion
These
financial statements and financial highlights are the responsibility of the Fund’s management. Our
responsibility is to express an opinion on these financial statements and financial highlights based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of
the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements and financial highlights are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement
of the financial statements and financial highlights, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements and financial highlights. Such procedures also
included confirmation of securities owned as of March 31, 2023, by correspondence
with custodians and brokers or by other appropriate auditing procedures when replies from brokers were
not received. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements and financial
highlights. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more BNY Mellon Investment Adviser, Inc.
investment companies since 1994.
New York, New York
May 23, 2023
41
ADDITIONAL
INFORMATION (Unaudited)
Dividend
Reinvestment Plan
To participate automatically in the Dividend Reinvestment
Plan (the “Plan”) of the fund, fund shares must be registered in either your name, or, if your fund
shares are held in nominee or “street” name through your broker-dealer, your broker-dealer must be
a participant in the Plan. You may terminate your participation in the Plan, as set forth below. All
shareholders participating (the “Participants”) in the Plan will be bound by the following provisions:
Computershare Inc. (the “Agent”) will act as Agent for each Participant, and
will open an account for each Participant under the Plan in the same name as their present shares are
registered, and put into effect for them the dividends reinvestment option of the plan as of the first
record date for a dividend or capital gains distribution.
Whenever the fund declares
income dividend or capital gains distribution payable in shares of the fund or cash at the option of
the shareholders, each Participant that does not opt for cash distributions shall take such distribution
entirely in shares. If on the payment date for a dividend or capital gains distribution, the net asset
value is equal to or less than the market price per share plus estimated brokerage commissions, the Agent
shall automatically receive such shares, including fractions, for each Participant’s account except
in the circumstances described in the following paragraph. Except in such circumstances, the number of
additional shares to be credited to each Participant’s account shall be determined by dividing the
dollar amount of the income dividend or capital gains distribution payable on their shares by the greater
of the net asset value per share determined as of the date of purchase or 95% of the then current market
price per share of the fund’s shares on the payment date.
Should the net asset
value per share of the fund shares exceed the market price per share plus estimated brokerage commissions
on the payment date for a share or cash income dividend or capital gains distribution, the Agent or a
broker-dealer selected by the Agent shall endeavor, for a purchase period of 30 days to apply the amount
of such dividend or capital gains distribution on each Participant’s shares (less their pro rata share
of brokerage commissions incurred with respect to the Agent’s open-market purchases in connection with
the reinvestment of such dividend or distribution) to purchase shares of the fund on the open market
for each Participant’s account. In no event may such purchase be made more than 30 days after the payment
date for such dividend or distribution except where temporary curtailment or suspension of purchase is
necessary to comply with applicable provisions of federal securities laws. If, at the close of business
on any day during the purchase period the net asset value per share equals or is less than the market
price per share plus estimated brokerage commissions, the Agent will not make any further open-market
purchases in connection with the reinvestment of such dividend or distribution. If the Agent is unable
to invest the full dividend or distribution amount through open-market purchases during the purchase
period, the Agent shall request that, with respect to the uninvested portion of such dividend or distribution
amount, the fund issue new shares at the close of business on
42
the earlier of the last day of the purchase period or the first day during the
purchase period on which the net asset value per share equals or is less than the market price per share,
plus estimated brokerage commissions. These newly issued shares will be valued at the then-current market
price per share of the fund’s shares at the time such shares are to be issued.
For
purposes of making the dividend reinvestment purchase comparison under the Plan, (a) the market price
of the fund’s shares on a particular date shall be the last sales price on the NYSE on that date, or,
if there is no sale on such NYSE on that date, then the mean between the closing bid and asked quotations
for such shares on such NYSE on such date and (b) the net asset value per share of the fund’s shares
on a particular date shall be the net asset value per share most recently calculated by or on behalf
of the fund.
Open-market purchases provided for above may be made on any
securities exchange where the fund’s shares are traded, in the over-the counter market or in negotiated
transactions and may be on such terms as to price, delivery and otherwise as the Agent shall determine.
Each Participant’s uninvested funds held by the Agent will not bear interest, and it is understood
that, in any event, the Agent shall have no liability in connection with any inability to purchase shares
within 30 days after the initial date of such purchase as herein provided, or with the timing of any
purchase effected. The Agent shall have no responsibility as to the value of the fund’s shares acquired
for each Participant’s account. For the purpose of cash investments, the Agent may commingle each Participant’s
fund with those of other shareholders of the fund for whom the Agent similarly acts as Agent, and the
average price (including brokerage commissions) of all shares purchased by the Agent as Agent shall be
the price per share allocable to each Participant in connection therewith.
The
Agent may hold each Participant’s shares acquired pursuant to the Plan together with the shares of
other shareholders of the fund acquired pursuant to the Plan in noncertificated form in the Agent’s
name or that of the Agent’s nominee. The Agent will forward to each Participant any proxy solicitation
material; and will vote any shares so held for each Participant first in accordance with the instructions
set forth on proxies returned by the Participant to the fund, and then with respect to any proxies not
returned by the Participant to the fund in the same portion as the Agent votes proxies returned by the
Participants to the fund. Upon a Participant’s written request, the Agent will deliver to the Participant,
without charge, a certificate or certificates for the full shares.
The Agent will confirm
to each Participant each acquisition made for their account as soon as practicable but not later than
60 days after the date thereof. Although each Participant may from time to time have an undivided fractional
interest (computed to four decimal places) in a share of the fund, no certificates for a fractional share
will be issued. However, dividends and distributions on fractional shares will be credited to each Participant’s
account. In the event of termination of a Participant’s account under the Plan, the Agent will adjust
for any such undivided fractional interest in cash at the market value of the fund’s shares at the
time of termination.
43
ADDITIONAL
INFORMATION (Unaudited) (continued)
Any share dividends or split shares distributed by the fund on shares held by
the Agent for Participants will be credited to their accounts. In the event that the fund makes available
to its shareholders rights to purchase additional shares of other securities, the shares held for each
Participant under the Plan will be added to other shares held by the Participant in calculating the number
of rights to be issued to each Participant.
The Agent’s service fee for handling
capital gains distributions or income dividends will be paid by the fund. Each Participant will be charged
their pro rata share of brokerage commissions on all open market purchases.
Each
Participant may terminate their account under the Plan by notifying the Agent in writing. Such termination
will be effective immediately if the Participant’s notice is received by the Agent not less than ten
days prior to any dividend or distribution record date, otherwise such termination will be effective
shortly after the investment of such dividend distributions with respect to any subsequent dividend or
distribution. The Plan may be terminated by the Agent or the fund upon notice in writing mailed to each
Participant at least 90 days prior to any record date for the payment of any dividend or distribution
by the fund. Upon any termination, the Agent will cause a certificate or certificates to be issued for
the full shares held for each Participant under the Plan and cash adjustment for any fraction to be delivered
to them without charge. If a Participant elects by notice to the Agent in writing in advance of such
termination to have the Agent sell part or all of their shares and remit the proceeds to them, the Agent
is authorized to deduct a $5.00 fee plus brokerage commission for this transaction from the proceeds.
These terms and conditions may be amended or supplemented by the Agent or the
fund at any time or times but, except when necessary or appropriate to comply with applicable law or
the rules or policies of the SEC or any other regulatory authority, only by mailing to each Participant
appropriate written notice at least 30 days prior to the effective date thereof. The amendment or supplement
shall be deemed to be accepted by each Participant unless, prior to the effective date thereof, the Agent
receives written notice of the termination of their account under the Plan. Any such amendment may include
an appointment by the Agent in its place and stead of a successor Agent under these terms and conditions,
with full power and authority to perform all or any of the acts to be performed by the Agent under these
terms and conditions. Upon any such appointment of any Agent for the purpose of receiving dividends and
distributions, the fund will be authorized to pay to such successor Agent, for each Participant’s account,
all dividends and distributions payable on shares of the fund held in their name or under the Plan for
retention or application by such successor Agent as provided in these terms and conditions.
The
Agent shall at all times act in good faith and agree to use its best efforts within reasonable limits
to insure the accuracy of all services performed under this Agreement and to comply with applicable law,
but assumes no responsibility and shall not be liable for loss or damage due to errors unless such error
is caused by the Agent’s negligence, bad faith, or willful misconduct or that of its employees. These
terms and conditions shall be governed by the laws of the State of New York.
44
Investment
Objective and Principal Investment Strategies
Investment Objective. The fund’s primary
investment objective is to seek high current income. The fund will also seek capital growth as a secondary
objective, to the extent consistent with its objective of seeking high current income. The fund’s
investment objectives are fundamental and may not be changed without the affirmative vote of the holders
of a majority (as defined in the Act) of the fund’s outstanding voting securities. There is no assurance
the fund will achieve its investment objectives.
Principal Investment Strategies.
Under normal market conditions, the fund will invest at least 65% of its total assets in income securities
of U.S. issuers rated below investment grade quality (lower than Baa by Moody’s Investors Service,
Inc. (“Moody’s”) or lower than BBB by S&P Global Ratings (“S&P”) or comparably rated
by another nationally recognized securities rating organization (each, a “Rating Agency”)) or in
unrated income securities that the Sub-Adviser determines to be of comparable quality. Lower Grade income
securities are commonly known as “junk bonds.” The fund may also invest up to 10% of its total assets
in securities that are the subject of bankruptcy proceedings or otherwise in default as to the repayment
of principal and/or payment of interest at the time of acquisition by the fund or are rated in the lower
rating categories (Ca or lower by Moody’s and CC or lower by S&P) or which, if unrated, are in
the judgment of the Sub-Adviser of equivalent quality (“Distressed Securities”). The fund is also
permitted to invest up to 10% of the fund’s total assets in floating rate loans.
The
fund will invest primarily in bonds, debentures, notes and other debt instruments. The fund’s portfolio
securities may have fixed or variable rates of interest and may include asset-backed securities, such
as CLOs, and government securities. Although not a principal investment strategy, the fund’s portfolio
securities also may include zero coupon securities, payment in kind securities or other deferred payment
securities, convertible debt obligations and convertible preferred stock, participation interests in
commercial loans, mortgage-related securities, municipal obligations, stripped securities, commercial
paper and other short-term debt obligations. The issuers of the fund’s portfolio securities may include
domestic and foreign corporations, partnerships, trusts or similar entities, and governmental entities
or their political subdivisions, agencies or instrumentalities. The fund may invest in companies in,
or governments of, developing countries. The fund may invest up to 25% of its total assets in securities
of issuers domiciled outside the United States or that are denominated in various foreign currencies
and multinational currency units.
The fund may engage in various portfolio
strategies to seek to enhance income and hedge its portfolio against investment and interest rate risks,
including the use of leverage and, to a limited effect, the use of derivative financial instruments.
Although the fund is not limited in the types of derivatives it can use, the fund is required to limit
its derivatives exposure so that the total notional value of derivatives does not exceed 10% of the fund's
net asts. The fund currently expects that its use of derivatives will consist principally of foreign
currency forward contracts.
45
ADDITIONAL
INFORMATION (Unaudited) (continued)
The fund’s portfolio will be invested without regard to maturity. In connection
with its investments in corporate debt securities, or restructuring of investments owned by the fund,
the fund may receive warrants or other non-income producing equity securities. The fund may retain such
securities, including equity shares received upon conversion of convertible securities, until the Sub-Adviser
determines it is appropriate in light of current market conditions to effect a disposition of such securities.
The fund also may invest up to 5% of its assets directly in the common stock of junk bond issuers. This
percentage will be in addition to any other common stock holdings acquired as part of warrants or “units”,
so that the fund’s total common stock holdings could exceed 5% at a particular time. However, the fund
currently intends to invest directly in common stocks (including those offered in an initial public offering)
to gain sector exposure and when suitable junk bonds are not available for sale. The fund expects to
sell the common stock promptly when suitable junk bonds are subsequently acquired.
The
fund is permitted to invest in asset-backed securities, including up to 5% of its total assets in CLOs.
CLOs and other structured credit investments are generally backed by an asset or a pool of assets (typically
senior secured loans, certain subordinated loans and other credit-related assets in the case of a CLOs)
which serve as collateral. The cash flows from CLOs and structured credit investments are split into
two or more portions, called tranches, varying in risk and yield. The fund and other investors in CLOs
and structured finance securities ultimately bear the credit risk of the underlying collateral. If there
are defaults or the relevant collateral otherwise underperforms, scheduled payments to senior tranches
of such securities take precedence over those of mezzanine tranches, and scheduled payments to mezzanine
tranches take precedence over those to subordinated/equity tranches. The fund may invest in any tranche,
including the equity tranche. The riskiest portion is the “equity” tranche, which is subordinate
to the other tranches in the event of defaults. Senior tranches typically have higher ratings and lower
yields than its underlying securities, and may be rated investment grade. The ratings reflect both the
credit quality of underlying collateral as well as how much protection a given tranche is afforded by
tranches that are subordinate to it.
At times, the fund expects to utilize
financial leverage through borrowings, including the issuance of debt securities, or the issuance of
preferred shares or through other transactions, such as reverse repurchase agreements, which have the
effect of financial leverage. The fund currently utilizes financial leverage through its $125,000,000
Committed fiacility pursuant to the BNPP Agreement. The fund generally will not utilize leverage if it
anticipates that the fund’s leveraged capital structure would result in a lower return to shareholders
than that obtainable over time with an unleveraged capital structure. Use of financial leverage creates
an opportunity for increased income and capital growth for the shareholders but, at the same time, creates
special risks, and there can be no assurance that a leveraging strategy will be successful during any
period in which it is employed.
In selecting investments for the fund’s
portfolio, the Sub-Adviser will seek to identify issuers and industries that the Sub-Adviser believes
are likely to experience stable or improving financial conditions. The Sub-Adviser believes that this
strategy should
46
enhance the fund’s ability to earn high current income while also providing
opportunities for capital growth. The Sub-Adviser’s analysis may include consideration of general industry
trends, the issuer’s managerial strength, changing financial condition, borrowing requirements or debt
maturity schedules, and its responsiveness to changes in business conditions and interest rates. The
Sub-Adviser may also consider relative values based on anticipated cash flow, interest or dividend coverage,
asset coverage and earnings prospects. Of course there can be no assurances that this strategy will be
successful. The fund will seek its secondary objective of capital growth by investing in securities that
the Sub-Adviser expects may appreciate in value as a result of favorable developments affecting the business
or prospects of the issuer, which may improve the issuer’s financial condition and credit rating, or
as a result of declines in long-term interest rates.
In certain market conditions,
the Sub-Adviser may determine that securities rated investment grade (i.e., at least Baa by Moody’s
or BBB by S&P or comparably rated by another Rating Agency) offer significant opportunities for high
income and capital growth. In such conditions, the fund may invest less than 65% of its total assets
in lower grade income securities of U.S. issuers. In addition, the fund may implement various temporary
“defensive” strategies at times when the Sub-Adviser determines that conditions in the markets make
pursuing the fund’s basic investment strategy inconsistent with the best interests of its shareholders.
These strategies may include investing all or a portion of the fund’s assets in higher-quality debt
securities.
Principal
Risk Factors
An investment in the fund involves special risk considerations,
which are described below. The fund is a diversified, closed-end management investment company designed
primarily as a long-term investment and not as a vehicle for short-term trading purposes. An investment
in the fund may be speculative and it involves a high degree of risk. The fund should not constitute
a complete investment program. Due to the uncertainty in all investments, there can be no assurance that
the fund will achieve its investment objectives. Different risks may be more significant at different
times depending on market conditions. Your shares at any point in time may be worth less than your original
investment.
High Yield Securities Risk. Below investment grade instruments are
commonly referred to as “junk” or “high yield” instruments and are regarded as predominantly
speculative with respect to the issuer’s capacity to pay interest and repay principal. Below investment
grade instruments, though generally higher yielding, are characterized by higher risk. These instruments
are especially sensitive to adverse changes in general economic conditions, to changes in the financial
condition of their issuers and to price fluctuation in response to changes in interest rates. During
periods of economic downturn or rising interest rates, issuers of below investment grade instruments
may experience financial stress that could adversely affect their ability to make payments of principal
and interest and increase the possibility of default. The secondary market for below investment grade
instruments may not be as liquid as the secondary market for more highly rated instruments, a factor
which may have an adverse effect on the fund’s
47
ADDITIONAL
INFORMATION (Unaudited) (continued)
ability to dispose of a particular security. There are fewer dealers in the market
for high yield instruments than for investment grade instruments. The prices quoted by different dealers
may vary significantly, and the spread between the bid and asked price is generally much larger for high-yield
securities than for higher quality instruments. Under adverse market or economic conditions, the secondary
market for below investment grade instruments could contract, independent of any specific adverse changes
in the condition of a particular issuer, and these instruments may become illiquid. In addition, adverse
publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of below investment grade instruments, especially in a market characterized by a
low volume of trading.
Default, or the market’s perception that an issuer is likely
to default, could reduce the value and liquidity of below investment grade instruments held by the fund,
thereby reducing the value of an investment in the fund’s shares. In addition, default, or the market’s
perception that an issuer is likely to default, may cause the fund to incur expenses, including legal
expenses, in seeking recovery of principal or interest on its portfolio holdings, including litigation
to enforce the fund’s rights. In any reorganization or liquidation proceeding relating to a portfolio
company, the fund may lose its entire investment or may be required to accept cash or securities with
a value less than its original investment. Among the risks inherent in investments in a troubled entity
is the fact that it frequently may be difficult to obtain information as to the true financial condition
of such issuer. The Sub-Adviser’s judgment about the credit quality of an issuer and the relative value
of its securities may prove to be wrong. In addition, not only may the fund lose its entire investment
on one or more instruments, fund shareholders may also lose their entire investments in the fund. Investments
in below investment grade instruments may present special tax issues for the fund to the extent that
the issuers of these securities default on their obligations pertaining thereto, and the U.S. federal
income tax consequences to the fund as a holder of such securities may not be clear.
Because
of the greater number of investment considerations involved in investing in below investment grade instruments,
the ability of the fund to meet its investment objectives depends more on the Sub-Adviser’s judgment
and analytical abilities than would be the case if the portfolio invested primarily in securities in
the higher rating categories. While the Sub-Adviser will attempt to reduce the risks of investing in
below investment grade instruments through active portfolio management, diversification, credit analysis
and attention to current developments and trends in the economy and the financial markets, there can
be no assurance that a broadly diversified portfolio of such instruments would substantially lessen the
risks of defaults brought about by an economic downturn or recession.
Distressed Securities
Risk.
The fund may invest in credit instruments of distressed or defaulted issuers. Such instruments may be
rated in the lower rating categories (Caa1 or lower by Moody’s, or CCC+ or lower by S&P or Comparably
rated by another Rating Agency) or, if unrated, are considered by the Sub-Adviser to be of comparable
quality. For these securities, the risks associated with below investment grade instruments are
48
more pronounced. Instruments rated in the lower rating categories are subject
to higher credit risk with extremely poor prospects of ever attaining any real investment standing, to
have a current identifiable vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or economic conditions and/or
to be in default or not current in the payment of interest or principal. Ratings may not accurately reflect
the actual credit risk associated with a corporate security.
Investing in distressed or defaulted securities
is speculative and involves substantial risks. The fund may make such investments when, among other circumstances,
the Sub-Adviser believes it is reasonably likely that the issuer of the distressed or defaulted securities
will make an exchange offer or will be the subject of a plan of reorganization pursuant to which the
fund will receive new securities in return for the distressed or defaulted securities. There can be no
assurance, however, that such an exchange offer will be made or that such a plan of reorganization will
be adopted. In addition, a significant period of time may pass between the time at which the fund makes
its investment in distressed or defaulted securities and the time that any such exchange offer or plan
of reorganization is completed, if at all. During this period, it is unlikely that the fund would receive
any interest payments on the distressed or defaulted securities, the fund would be subject to significant
uncertainty whether the exchange offer or plan of reorganization will be completed and the fund may be
required to bear certain extraordinary expenses to protect and recover its investment. The fund also
will be subject to significant uncertainty as to when, in what manner and for what value the obligations
evidenced by the distressed or defaulted securities will eventually be satisfied (e.g., through a liquidation
of the issuer’s assets, an exchange offer or plan of reorganization involving the distressed or defaulted
securities or a payment of some amount in satisfaction of the obligation). Even if an exchange offer
is made or plan of reorganization is adopted with respect to distressed or defaulted securities held
by the fund, there can be no assurance that the securities or other assets received by the fund in connection
with the exchange offer or plan of reorganization will not have a lower value or income potential than
may have been anticipated when the investment was made, or no value.
Fixed-Income Market
Risk. The market value of a fixed-income security may decline due to general market
conditions that are not specifically related to a particular company, such as real or perceived adverse
economic conditions, changes in the outlook for corporate earnings, changes in interest or currency rates
or adverse investor sentiment generally. The fixed-income securities market can be susceptible to increases
in volatility and decreases in liquidity. Liquidity can decline unpredictably in response to overall
economic conditions or credit tightening. Increases in volatility and decreases in liquidity may be caused
by a rise in interest rates (or the expectation of a rise in interest rates). An unexpected increase
in fund redemption requests, including requests from shareholders who may own a significant percentage
of the fund’s shares, which may be triggered by market turmoil or an increase in interest rates, could
cause the fund to sell its holdings at a loss or at undesirable prices and adversely affect the fund’s
share price and increase the fund’s liquidity risk, fund expenses and/or taxable distributions. Federal
Reserve policy
49
ADDITIONAL
INFORMATION (Unaudited) (continued)
in response to market conditions, including with respect to interest rates, may
adversely affect the value, volatility and liquidity of dividend and interest paying securities. Policy
and legislative changes world-wide are affecting many aspects of financial regulation. The impact of
these changes on the markets and the practical implications for market participants may not be fully
known for some time.
Interest Rate Risk. Prices of bonds and other fixed-income securities tend to
move inversely with changes in interest rates. Typically, a rise in rates will adversely affect fixed-income
securities and, accordingly, will cause the value of the fund’s investments in these securities to
decline. Interest rates in the United States have been rising and are expected to continue to increase
in the near future. A wide variety of market factors can cause interest rates to rise, including central
bank monetary policy, rising inflation and changes in general economic conditions. During periods of
very low interest rates, which occur from time to time due to market forces or actions of governments
and/or their central banks, including the Board of Governors of the Federal Reserve System in the U.S.,
the fund may be subject to a greater risk of principal decline from rising interest rates. When interest
rates fall, the values of already-issued fixed-income securities generally rise. However, when interest
rates fall, the fund’s investments in new securities may be at lower yields and may reduce the fund’s
income. The magnitude of these fluctuations in the market price of fixed-income securities is generally
greater for securities with longer effective maturities and durations because such instruments do not
mature, reset interest rates or become callable for longer periods of time. The change in the value of
a fixed-income security or portfolio can be approximated by multiplying its duration by a change in interest
rates. For example, the market price of a fixed-income security with a duration of three years would
be expected to decline 3% if interest rates rose 1%. Conversely, the market price of the same security
would be expected to increase 3% if interest rates fell 1%. Unlike investment grade bonds, however, the
prices of high yield bonds may fluctuate unpredictably and not necessarily inversely with changes in
interest rates. Changing interest rates, may have unpredictable effects on markets, may result in heightened
market volatility and may detract from fund performance.
Credit Risk. Credit risk is the
risk that one or more fixed-income instruments in the fund’s portfolio will decline in price, or the
issuer or obligor thereof will fail to pay interest or repay principal when due, because the issuer or
obligor experiences a decline or there is a perception of a decline in its financial status. Below investment
grade instruments involve greater credit risk than investment grade instruments.
Liquidity Risk.
When there is little or no active trading market for specific types of securities, it can become more
difficult to sell the securities in a timely manner at or near their perceived value. In such a market,
the value of such securities and the fund’s net asset value per share may fall dramatically, even during
periods of declining interest rates. Other market developments can adversely affect fixed-income securities
markets. Regulations and business practices, for example, have led some financial intermediaries to curtail
their capacity to engage in trading (i.e., “market making”) activities for certain
fixed-income securities, which could have the potential to decrease liquidity and increase
50
volatility in the fixed-income securities markets. Investments that are illiquid
or that trade in lower volumes may be more difficult to value. Liquidity can declaim unpredictably in
response to overall economic conditions or credit tightening. Increases in volatility and decreases in
liquidity may be caused by a rise in interest rates (or the expectation of a rise in interest rates).
The market for below investment grade securities may be less liquid and therefore these securities may
be harder to value or sell at an acceptable price, especially during times of market volatility or decline.
Investments in foreign securities tend to have greater exposure to liquidity risk than domestic securities.
No active trading market may exist for some of the floating rate loans in which the fund invests and
certain loans may be subject to restrictions on resale. Because some floating rate loans that the fund
invests in may have a more limited secondary market, liquidity risk is more pronounced for the fund than
for mutual funds that invest primarily in other types of fixed-income instruments or equity securities.
CLO
Risk.
Holders of CLOs and other types of structured products bear risks of the underlying investments, index
or reference obligation and are subject to counterparty risk. The fund may have the right to receive
payments only from the issuers of the structured product, and generally does not have direct rights against
the issuer or the entity that sold the assets to be securitized. While certain structured products enable
the investor to acquire interests in a pool of securities without the brokerage and other expenses associated
with directly holding the same securities, investors in structured products generally pay their share
of the investment’s administrative and other expenses. Although it is difficult to predict whether
the prices of indices and securities underlying structured products will rise or fall, these prices (and,
therefore, the prices of structured products) will be influenced by the same types of political and economic
events that affect issuers of securities and capital markets generally. If the issuer of a structured
product uses shorter term financing to purchase longer term securities, the issuer may be forced to sell
its securities at below market prices if it experiences difficulty in obtaining such financing, which
may adversely affect the value of the structured products owned by the fund.
Collateralized
debt obligations, such as CLOs, may be thinly traded or have a limited trading market. CLOs are typically
privately offered and sold, and thus are not registered under the securities laws. As a result, investments
in CLOs may be characterized by the fund as illiquid securities, especially investments in mezzanine
and subordinated/equity tranches of CLOs; however, an active dealer market may exist for certain investments
and more senior CLO tranches, which would allow such securities to be considered liquid in some circumstances.
In addition to the general risks associated with credit instruments, CLOs carry additional risks, including,
but not limited to: (i) the possibility that distributions from collateral securities will not be adequate
to make interest or other payments; (ii) the quality of the collateral may decline in value or default;
(iii) the possibility that the class of CLO held by the fund is subordinate to other classes; and (iv) the
complex structure of the security may not be fully understood at the time of investment and may produce
disputes with the issuer or unexpected investment results.
51
ADDITIONAL
INFORMATION (Unaudited) (continued)
Floating
Rate Loan Risk. Unlike publicly traded common stocks which trade on national exchanges, there
is no central market or exchange for loans to trade. Loans trade in an over-the-counter market, and confirmation
and settlement, which are effected through standardized procedures and documentation, may take significantly
longer than seven days to complete. The secondary market for floating rate loans also may be subject
to irregular trading activity and wide bid/ask spreads. The lack of an active trading market for certain
floating rate loans may impair the ability of the fund to realize full value in the event of the need
to sell a floating rate loan and may make it difficult to value such loans. There may be less readily
available, reliable information about certain floating rate loans than is the case for many other types
of securities, and the fund’s portfolio managers may be required to rely primarily on their own evaluation
of a borrower’s credit quality rather than on any available independent sources. The value of collateral,
if any, securing a floating rate loan can decline, and may be insufficient to meet the issuer’s obligations
in the event of non-payment of scheduled interest or principal or may be difficult to readily liquidate.
In the event of the bankruptcy of a borrower, the fund could experience delays or limitations imposed
by bankruptcy or other insolvency laws with respect to its ability to realize the benefits of the collateral
securing a loan. The floating rate loans in which the fund invests typically will be below investment
grade quality and, like other below investment grade securities, are inherently speculative. As a result,
the risks associated with such floating rate loans are similar to the risks of below investment grade
securities, although senior loans are typically senior and secured in contrast to other below investment
grade securities, which are often subordinated and unsecured. Floating rate loans may not be considered
to be “securities” for purposes of the anti-fraud protections of the federal securities laws, including
those with respect to the use of material non-public information, so that purchasers, such as the fund,
may not have the benefit of these protections.
LIBOR Risk. Many credit instruments,
derivatives and other financial instruments, including those in which the fund may invest, utilize LIBOR
as the reference or benchmark rate for variable interest rate calculations. However, the use of LIBOR
started to come under pressure following manipulation allegations in 2012. Despite increased regulation
and other corrective actions since that time, concerns have arisen regarding its viability as a benchmark,
due largely to reduced activity in the financial markets that it measures. In July 2017, the Financial
Conduct Authority announced plans to phase out the use of LIBOR by the end of 2021. It was subsequently
announced that tenors of US Dollar LIBOR would continue to be published through June 30, 2023, other
than one week and two month USD LIBOR settings which ceased publication on December 31, 2021. Various
financial industry groups around the world have begun planning the transition to the use of different
benchmarks. In the United States, the Federal Reserve Board and the New York Fed convened the Alternative
Reference Rates Committee, comprised of a group of private-market participants, which recommended the
Secured Overnight Financing Rate as an alternative reference rate to USD LIBOR. Neither the effect of
the transition process, in the United States or elsewhere, nor its ultimate success, can yet be known.
While some instruments tied to LIBOR may include a replacement rate in the event LIBOR is discontinued,
not all
52
instruments have such fallback provisions and the effectiveness of such replacement
rates remains uncertain. The cessation of LIBOR could affect the value and liquidity of investments tied
to LIBOR, especially those that do not include fallback provisions, and may result in costs incurred
in connection with closing out positions and entering into new trades.
Market Risk.
The value of the securities in which the fund invests may be affected by political, regulatory, economic
and social developments, and developments that impact specific economic sectors, industries or segments
of the market. In addition, turbulence in financial markets and reduced liquidity in equity, credit and/or
fixed-income markets may negatively affect many issuers, which could adversely affect the fund. Global
economies and financial markets are becoming increasingly interconnected, and conditions and events in
one country, region or financial market may adversely impact issuers in a different country, region or
financial market. These risks may be magnified if certain events or developments adversely interrupt
the global supply chain; in these and other circumstances, such risks might affect companies world-wide.
Recent examples include pandemic risks related to COVID-19 and aggressive measures taken world-wide in
response by governments, including closing borders, restricting international and domestic travel, and
the imposition of prolonged quarantines of large populations, and by businesses, including changes to
operations and reducing staff. The effects of COVID-19 have contributed to increased volatility in global
markets and will likely affect certain countries, companies, industries and market sectors more dramatically
than others. The COVID-19 pandemic has had, and any other outbreak of an infectious disease or other
serious public health concern could have, a significant negative impact on economic and market conditions
and could trigger a prolonged period of global economic slowdown. To the extent the fund may overweight
its investments in certain countries, companies, industries or market sectors, such positions will increase
the fund’s exposure to risk of loss from adverse developments affecting those countries, companies,
industries or sectors.
Management Risk. The fund is subject to management risk because the Sub-Adviser
actively manages the fund. The Sub-Adviser and the fund’s portfolio managers will apply investment
techniques and risk analyses in making investment decisions for the fund, but there can be no guarantee
that these will produce the desired results.
Leverage Risk. The use of leverage
by the fund creates an opportunity for increased net income and capital growth for the fund’s shares,
but, at the same time, creates special risks. There can be no assurance that a leveraging strategy will
be successful during any period in which it is employed. Leverage creates risks for holders of the fund’s
shares including the likelihood of greater volatility of net asset value and market price of the fund’s
shares and the risk that fluctuations in interest rates on borrowings may affect the return to the holders
of the fund’s shares. To the extent the income or capital growth derived from securities purchased
with funds received from leverage exceeds the cost of leverage, the fund’s return will be greater than
if leverage had not been used. Conversely, if the income or capital growth from the securities purchased
with such funds is not sufficient to cover the cost of leverage, the return to the fund will be less
than if leverage
53
ADDITIONAL
INFORMATION (Unaudited) (continued)
had not been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, the Sub-Adviser in its best
judgment may nevertheless determine to maintain the fund’s leveraged position if it deems such action
to be appropriate under the circumstances. During periods in which the fund is utilizing financial leverage,
the investment management and administration fee, which is payable to the Adviser as a percentage of
the fund’s Managed Assets, will be higher than if the fund did not utilize a leveraged capital structure.
Under the BNPP Agreement, the fund is subject to certain covenants, including those relating to asset
coverage and portfolio composition requirements. It is not anticipated that these covenants will impede
the Sub-Adviser in managing the fund’s portfolio in accordance with the fund’s investment objectives
and policies.
Use of Derivatives Risk. The fund is subject to additional risks
with respect to the use of derivatives. Derivatives can be volatile and involve various types and degrees
of risk, depending upon the characteristics of the particular derivative and the portfolio as a whole.
Derivatives permit the fund to increase or decrease the level of risk, or change the character of the
risk, to which its portfolio is exposed in much the same way as the fund can increase or decrease the
level of risk, or change the character of the risk, of its portfolio by making investments in specific
securities. However, derivatives may entail investment exposures that are greater than their cost would
suggest, meaning that a small investment in derivatives could have a large potential impact on the fund’s
performance. If the fund invests in derivatives at inopportune times or judges market conditions incorrectly,
such investments may lower the fund’s return or result in a loss. The fund also could experience losses
if its derivatives were poorly correlated with the underlying instruments or the fund’s other investments,
or if the fund were unable to liquidate its position because of an illiquid secondary market. The market
for many derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant,
rapid and unpredictable changes in the prices for derivatives. If a derivative transaction is particularly
large or if the relevant market is illiquid, it may not be possible to initiate a transaction or liquidate
a position at an advantageous time or price. Additionally, some derivatives the fund may use may involve
economic leverage, which may increase the volatility of these instruments as they may increase or decrease
in value more quickly than the underlying security, index, currency, futures contract, or other economic
variable.
Derivatives may be purchased on established exchanges or through
privately negotiated transactions referred to as OTC derivatives. Exchange-traded derivatives generally
are guaranteed by the clearing agency that is the issuer or counterparty to such derivatives. As a result,
unless the clearing agency defaults, there is relatively little counterparty credit risk associated with
derivatives purchased on an exchange. In contrast, no clearing agency guarantees OTC derivatives. Therefore,
many of the regulatory protections afforded participants on organized exchanges for futures contracts
and exchange-traded options, such as the performance guarantee of an exchange clearing house, are not
available in connection with OTC derivative transactions. As a result, each party to an OTC derivative
bears the risk that the counterparty will default. Accordingly, the Sub-Adviser will consider the creditworthiness
of counterparties to OTC derivatives in the
54
same manner as it would review the credit quality of a security to be purchased
by the fund. OTC derivatives are less liquid than exchange-traded derivatives since the other party to
the transaction may be the only investor with sufficient understanding of the derivative to be interested
in bidding for it.
Forward Foreign Currency Exchange Contracts. The fund may enter
into forward foreign currency exchange contracts in order to protect against possible losses on foreign
investments resulting from adverse changes in the relationship between the U.S. dollar and foreign currencies.
A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (usually less than one year) from the date of
the contract agreed upon by the parties, at a price and for an amount set at the time of the contract.
These contracts are traded in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has a deposit requirement,
and no commissions are charged at any stage for trades. Generally, secondary markets do not exist for
forward contracts, with the result that closing transactions can be made for forward contracts only by
negotiating directly with the counterparty to the contract. As with other over-the-counter derivatives
transactions, forward contracts are subject to the credit risk of the counterparty. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference
(the spread) between the price at which they are buying and selling various currencies. However, forward
foreign currency exchange contracts may limit potential gains which could result from a positive change
in such currency relationships.
The federal income tax treatment of payments
in respect of certain derivatives contracts is unclear. Fund shareholders may receive distributions that
are attributable to derivatives contracts that are treated as ordinary income for federal income tax
purposes.
Rule 18f-4 under the Act, effective in August 2022, regulates the use of derivatives
by the fund. Pursuant to the rule, the fund is deemed to be a “limited” user of derivatives and is
required to limit its derivatives exposure so that the total notional value of derivatives does not exceed
10% of fund’s net assets. The fund also is subject to certain reporting requirements.
Foreign
Investment Risk. To the extent the fund invests in foreign securities, the fund’s performance
will be influenced by political, social and economic factors affecting investments in foreign issuers.
Special risks associated with investments in foreign issuers include exposure to currency fluctuations,
less liquidity, less developed or less efficient trading markets, lack of comprehensive company information,
political and economic instability and differing auditing and legal standards. Investments denominated
in foreign currencies are subject to the risk that such currencies will decline in value relative to
the U.S. dollar and affect the value of these investments held by the fund.
55
ADDITIONAL
INFORMATION (Unaudited) (continued)
Foreign Currency Risk. Investments in foreign currencies are
subject to the risk that those currencies will decline in value relative to the U.S. dollar or, in the
case of hedged positions, that the U.S. dollar will decline relative to the currency being hedged. Foreign
currencies, particularly the currencies of emerging market countries, are also subject to risks caused
by inflation, interest rates, budget deficits and low savings rates, political factors and government
intervention and controls.
Equity Securities Risk. To the extent the
fund invests directly in common stock of junk bond issuers or acquires equity
securities or warrants incidental to its investments in credit instruments, it will be subject to the
risks associated with those types of investments.
Common Stock Risk.
Stocks generally fluctuate more in value than bonds and may decline significantly over short time periods.
There is the chance that stock prices overall will decline because stock markets tend to move in cycles,
with periods of rising prices and falling prices. The market value of a stock may decline due to general
market conditions that are not related to the particular company, such as real or perceived adverse economic
conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates,
or adverse investor sentiment generally. A security’s market value also may decline because of factors
that affect a particular industry, such as labor shortages or increased production costs and competitive
conditions within an industry, or factors that affect a particular company, such as management performance,
financial leverage, and reduced demand for the company’s products or services.
Preferred
Stock Risk. There are special risks associated with investing in preferred stocks, including:
· Deferral
and Omission. Preferred stocks may include provisions that permit the issuer, at its discretion,
to defer or omit distributions for a stated period without any adverse consequences to the issuer. If
the fund owns a preferred stock that is deferring its distributions, the fund may be required to report
income for tax purposes although it has not yet received such income.
· Subordination. Preferred stocks generally are subordinated
to loans and other debt instruments in a company’s capital structure in terms of having priority to
corporate income and liquidation payments, and therefore will be subject to greater credit risk than
loans and other debt instruments.
· Limited
Voting Rights. Generally, preferred stockholders (such as the fund) have no voting rights with
respect to the issuing company unless, among other things, preferred dividends have been in arrears for
a specified number of periods, at which time the preferred stockholders may elect a number of directors
to the issuer’s board. Generally, once all the arrearages have been paid, the preferred stockholders
no longer have
56
voting rights. In the case of trust preferred securities,
holders generally have no voting rights, except if (i) the issuer fails to pay dividends for a specified
period of time or (ii) a declaration of default occurs and is continuing.
· Special Redemption Rights. In certain varying
circumstances, an issuer of preferred stock may redeem the securities prior to a specified date. For
instance, for certain types of preferred stocks, a redemption may be triggered by certain changes in
U.S. federal income tax or securities laws. As with call provisions, a special redemption by the issuer
may negatively impact the return of the security held by the fund.
Convertible
Securities Risk. Convertible securities may be converted at either a stated price or stated rate
into underlying shares of common stock or another security. Convertible securities generally are subordinated
to other similar but non-convertible securities of the same issuer. Although to a lesser extent than
with fixed rate debt securities, the market value of convertible securities tends to decline as interest
rates increase. In addition, because of the conversion feature, the market value of convertible securities
tends to vary with fluctuations in the market value of the underlying common stock or other security.
Although convertible securities provide for a stable stream of income, they are subject to the risk that
their issuers may default on their obligations. Convertible securities also offer the potential for capital
appreciation through the conversion feature, although there can be no assurance of capital appreciation
because securities prices fluctuate. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality because of the potential for capital appreciation.
Synthetic convertible securities are subject to additional risks, including risks associated with derivatives.
Warrants and Rights Risk. If the price of the underlying stock
does not rise above the exercise price before the warrant expires, the warrant generally expires without
any value and the fund loses any amount it paid for the warrant. Thus, investments in warrants may involve
substantially more risk than investments in common stock. Warrants may trade in the same markets as their
underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying
stock. An investment in warrants would not entitle the fund to receive dividends or exercise voting rights.
U.S. Government Debt Securities Risk. U.S. government debt securities generally
do not involve the credit risks associated with investments in other types of debt securities, although,
as a result, the yields available from U.S. government debt securities are generally lower than the yields
available from other securities. However, in 2011 S&P downgraded its rating of U.S. government debt,
suggesting an increased credit risk. Further downgrades could have an adverse impact on the price and
volatility of U.S. government debt instruments. Like other debt securities, the values of U.S. government
securities change as interest rates fluctuate. Fluctuations in the value of portfolio securities will
not affect interest income on existing portfolio securities but will be reflected in the fund’s net
asset value. Since the magnitude of these fluctuations will
57
ADDITIONAL
INFORMATION (Unaudited) (continued)
generally be greater at times when the fund’s average maturity is longer, under
certain market conditions the fund may, for temporary defensive purposes, accept lower current income
from short-term investments rather than investing in higher yielding long-term securities.
Risk
of Market Price Discount from Net Asset Value. Shares of closed-end funds, such as the
fund, frequently trade at a discount from their net asset value. This characteristic is a risk separate
and distinct from the risk that net asset value could decrease as a result of investment activities.
The fund cannot predict whether its shares will trade at, above or below net asset value.
Cybersecurity Risk. The fund and its service providers are susceptible to operational
and information security risks due to cybersecurity incidents. In general, cybersecurity incidents can
result from deliberate attacks or unintentional events. Cybersecurity attacks include, but are not limited
to, gaining unauthorized access to digital systems (e.g., through “hacking”
or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting
data or causing operational disruption. Cyber attacks also may be carried out in a manner that does not
require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts
to make services unavailable to intended users). Cybersecurity incidents affecting the Adviser or other
service providers, as well as financial intermediaries, have the ability to cause disruptions and impact
business operations, potentially resulting in financial losses, including by interference with the fund’s
ability to calculate its net asset value; impediments to trading for the fund’s portfolio; the inability
of shareholders to transact business with the fund; violations of applicable privacy, data security or
other laws; regulatory fines and penalties; reputational damage; reimbursement or other compensation
or remediation costs; legal fees; or additional compliance costs. Similar adverse consequences could
result from cybersecurity incidents affecting issuers of securities in which the fund invests, counterparties
with which the fund engages in transactions, governmental and other regulatory authorities, exchange
and other financial market operators, banks, brokers, dealers, insurance companies and other financial
institutions and other parties. While information risk management systems and business continuity plans
have been developed which are designed to reduce the risks associated with cybersecurity, there are inherent
limitations in any cybersecurity risk management systems or business continuity plans, including the
possibility that certain risks have not been identified.
Given the risks described
above, an investment in the fund may not be appropriate for all investors. You should carefully consider
your ability to assume these risks before making an investment in the fund.
Recent Changes & Supplemental
Information
During the fiscal year ended March 31, 2023, there were (i)
no material changes to the fund’s investment objectives and policies that have not been approved by
shareholders, (ii) no changes in the fund’s trust instrument or by-laws that would delay or prevent
a change of control of the fund that have not been approved by shareholders, (iii) no
58
material changes to the principal risk factors associated with investment in the
fund, and (iv) no changes in the persons who are primarily responsible for the day-to-day management
of the fund’s portfolio.
59
IMPORTANT
TAX INFORMATION (Unaudited)
For federal tax purposes the fund reports the maximum amount allowable but not
less than 65.97% as interest-related dividends in accordance with Section 871(k)(1) and 881(e) of the
Internal Revenue Code.
60
INFORMATION ABOUT THE RENEWAL OF THE FUND’S INVESTMENT MANAGEMENT,
ADMINISTRATION AND SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited)
At
a meeting of the fund’s Board of Trustees held on March 6-7, 2023, the Board considered the renewal
of
the fund’s Investment Management and Administration Agreement, pursuant to which the Adviser provides
the fund with investment advisory and administrative services, and the Sub-Investment Advisory Agreement
(together with the Investment Management and Administration Agreement, the “Agreements”), pursuant
to which Alcentra NY, LLC (the “Sub-Adviser”) provides day-to-day management of the fund’s investments.
The Board members, none of whom are “interested persons” (as defined in the Investment Company Act
of 1940, as amended) of the fund, were assisted in their review by independent legal counsel and met
with counsel in executive session separate from representatives of the Adviser and the Sub-Adviser.
In considering the renewal of the Agreements, the Board considered several factors that it believed to
be relevant, including those discussed below. The Board did not identify any one factor as dispositive,
and each Board member may have attributed different weights to the factors considered.
Analysis of Nature,
Extent, and Quality of Services Provided to the Fund. The Board considered information provided
to it at the meeting and in previous presentations from representatives of the Adviser regarding the
nature, extent, and quality of the services provided to funds in the BNY Mellon fund complex, including
the fund. The Adviser noted that the fund is a closed-end fund without daily inflows and outflows of
capital and provided the fund’s asset size.
The Board also considered
research support available to, and portfolio management capabilities of, the fund’s portfolio management
personnel and that the Adviser also provides oversight of day-to-day fund operations, including fund
accounting and administration and assistance in meeting legal and regulatory requirements. The Board
also considered the Adviser’s extensive administrative, accounting and compliance infrastructures,
as well as the Adviser’s supervisory activities over the Sub-Adviser.
Comparative Analysis
of the Fund’s Performance and Management Fee and Expense Ratio. The Board reviewed
reports prepared by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent provider
of investment company data based on classifications provided by Thomson Reuters Lipper, which included
information comparing (1) the fund’s performance with the performance of a group of leveraged closed-end
high yield funds selected by Broadridge as comparable to the fund (the “Performance Group”) and with
a broader group of funds consisting of all leveraged closed-end high yield funds (the “Performance
Universe”), all for various periods ended December 31, 2022, and (2) the fund’s actual and contractual
management fees and total expenses with those of the same group of funds in the Performance Group (the
“Expense Group”) and with a broader group of funds consisting of all leveraged closed-end high yield
funds, excluding outliers (the “Expense Universe”), the information for which was derived in part
from fund financial statements available to Broadridge as of the date of its analysis. The Adviser previously
had furnished the Board with a description of the methodology Broadridge used to select the Performance
Group and Performance Universe and the Expense Group and Expense Universe.
61
INFORMATION ABOUT THE RENEWAL OF THE FUND’S INVESTMENT MANAGEMENT,
ADMINISTRATION AND SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
Performance
Comparisons. Representatives of the Adviser stated that the usefulness of performance comparisons
may be affected by a number of factors, including different investment limitations and policies and the
extent and manner in which leverage is employed that may be applicable to the fund and comparison funds
and the end date selected. The Board also considered the fund’s performance in light of overall financial
market conditions. The Board discussed with representatives of the Adviser and the Sub-Adviser the results
of the comparisons and considered that the fund’s total return performance, on a net asset value basis,
was below the Performance Group and Performance Universe medians for all periods, except for the four-
and ten-year periods when it was above the Performance Group and Performance Universe medians. The Board
also considered that the fund’s total return performance, on a market price basis, was below the Performance
Group and Performance Universe medians for all periods. The Board also considered that the fund’s
yield performance, on a net asset value basis, was above the Performance Group and Performance Universe
medians for seven of the nine one-year periods ended December 31st
and, on a market price basis, was above the Performance Group and Performance Universe medians for seven
of the nine one-year periods ended December 31st. The Board
considered the relative proximity of the fund’s performance to the Performance Group and/or Performance
Universe medians in certain periods when performance was below median. The Adviser also provided
a comparison of the fund’s calendar year total returns, on a net asset value basis, to the returns
of the fund’s benchmark index.
Management Fee and Expense Ratio Comparisons. The Board reviewed
and considered the contractual management fee rate payable by the fund to the Adviser in light of the
nature, extent and quality of the management services and the sub-advisory services provided by the Adviser
and the Sub-Adviser, respectively. In addition, the Board reviewed and considered the actual management
fee rate paid by the fund over the fund’s last fiscal year. The Board also reviewed the range of actual
and contractual management fees and total expenses as a percentage of average net assets of the Expense
Group and Expense Universe funds and discussed the results of the comparisons.
The
Board considered that, based on common assets alone, the fund’s contractual management fee was lower
than the Expense Group median contractual management fee, the fund’s actual management fee was lower
than the Expense Group median and the same as the Expense Universe median actual management fee and the
fund’s total expenses were higher than the Expense Group and the Expense Universe median total expenses.
The Board also considered that, based on common assets and leveraged assets together, the fund’s actual
management fee was lower than the Expense Group median and the Expense Universe median actual management
fee and the fund’s total expenses were higher than the Expense Group median and the Expense Universe
median total expenses.
Representatives of the Adviser noted that there were no other
funds advised or administered by the Adviser that are in the same Lipper category as the fund or separate
accounts and/or other types of client portfolios advised by the Adviser or the Sub-
62
Adviser that are considered to have similar investment strategies and policies
as the fund.
The Board considered the fee payable to the Sub-Adviser in
relation to the fee payable to the Adviser by the fund and the respective services provided by the Sub-Adviser
and the Adviser. The Board also took into consideration that the Sub-Adviser’s fee is paid by the
Adviser, out of its fee from the fund, and not the fund.
Analysis of Profitability and Economies
of Scale. Representatives of the Adviser reviewed the expenses allocated and profit received
by the Adviser and its affiliates and the resulting profitability percentage for managing the fund and
the aggregate profitability percentage to the Adviser and its affiliates for managing the funds in the
BNY Mellon fund complex, and the method used to determine the expenses and profit. The Board concluded
that the profitability results were not excessive, given the services rendered and service levels provided
by the Adviser and its affiliates. The Board also had been provided with information prepared by an
independent consulting firm regarding the Adviser’s approach to allocating costs to, and determining
the profitability of, individual funds and the entire BNY Mellon fund complex. The consulting firm also
had analyzed where any economies of scale might emerge in connection with the management of a fund.
The Board considered, on the advice of its counsel, the profitability analysis
(1) as part of its evaluation of whether the fees under the Agreements, considered in relation to the
mix of services provided by the Adviser and the Sub-Adviser, including the nature, extent and quality
of such services, supported the renewal of the Agreements and (2) in light of the relevant circumstances
for the fund and the extent to which economies of scale would be realized if the fund grows and whether
fee levels reflect these economies of scale for the benefit of fund shareholders. Since the Adviser,
and not the fund, pays the Sub-Adviser pursuant to the Sub-Investment Advisory Agreement, the Board did
not consider the Sub-Adviser’s profitability to be relevant to its deliberations. Representatives
of the Adviser stated that, because the fund is a closed-end fund without daily inflows and outflows
of capital, there were not significant economies of scale at this time to be realized by the Adviser
in managing the fund’s assets. Representatives of the Adviser also stated that, as a result of shared
and allocated costs among funds in the BNY Mellon fund complex, the extent of economies of scale could
depend substantially on the level of assets in the complex as a whole, so that increases and decreases
in complex-wide assets can affect potential economies of scale in a manner that is disproportionate to,
or even in the opposite direction from, changes in the fund’s asset level. The Board also considered
potential benefits to the Adviser and the Sub-Adviser from acting as investment adviser and sub-investment
adviser, respectively, and took into consideration that there were no soft dollar arrangements in effect
for trading the fund’s investments.
At the conclusion of these discussions,
the Board agreed that it had been furnished with sufficient information to make an informed business
decision with respect to the renewal of the Agreements. Based on the discussions and considerations
as described above, the Board concluded and determined as follows.
63
INFORMATION ABOUT THE RENEWAL OF THE FUND’S INVESTMENT MANAGEMENT,
ADMINISTRATION AND SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
· The
Board concluded that the nature, extent and quality of the services provided by the Adviser and the Sub-Adviser
are adequate and appropriate.
· The
Board generally was satisfied with the fund’s relative performance.
· The Board concluded that the fees paid to the Adviser and
the Sub-Adviser continued to be appropriate under the circumstances and in light of the factors and the
totality of the services provided as discussed above.
· The Board determined that the economies of scale which may
accrue to the Adviser and its affiliates in connection with the management of the fund had been adequately
considered by the Adviser in connection with the fee rate charged to the fund pursuant to the Investment
Management and Administration Agreement and that, to the extent in the future it were determined that
material economies of scale had not been shared with the fund, the Board would seek to have those economies
of scale shared with the fund.
In evaluating the Agreements, the Board
considered these conclusions and determinations and also relied on its previous knowledge, gained through
meetings and other interactions with the Adviser and its affiliates and the Sub-Adviser, of the Adviser
and the Sub-Adviser and the services provided to the fund by the Adviser and the Sub-Adviser. The Board
also relied on information received on a routine and regular basis throughout the year relating to the
operations of the fund and the investment management and other services provided under the Agreements,
including information on the investment performance of the fund in comparison to similar funds and benchmark
performance indices; general market outlook as applicable to the fund; and compliance reports. In addition,
the Board’s consideration of the contractual fee arrangements for the fund had the benefit of a number
of years of reviews of the Agreements for the fund, or substantially similar agreements for other BNY
Mellon funds that the Board oversees, during which lengthy discussions took place between the Board and
representatives of the Adviser. Certain aspects of the arrangements may receive greater scrutiny in
some years than in others, and the Board’s conclusions may be based, in part, on its consideration
of the fund’s arrangements, or substantially similar arrangements for other BNY Mellon funds that the
Board oversees, in prior years. The Board determined to renew the Agreements.
64
BOARD
MEMBERS INFORMATION (Unaudited)
Independent
Board Members
Joseph S. DiMartino (79)
Chairman
of the Board (1998)
Current term expires in 2023
Principal
Occupation During Past 5 Years:
· Director
or Trustee of funds in the BNY Mellon Family of Funds and certain other entities (1995-Present)
Other Public Company Board Memberships During Past 5 Years:
· CBIZ, Inc., a public company providing professional business
services, products and solutions, Director (1997-2023)
No. of Portfolios for
which Board Member Serves: 88
———————
Francine J. Bovich (71)
Board Member (2011)
Current term expires in 2024
Principal Occupation
During Past 5 Years:
· The
Bradley Trusts, private trust funds, Trustee (2011-Present)
Other
Public Company Board Memberships During Past 5 Years:
· Annaly Capital Management, Inc., a real estate investment
trust, Director (2014-Present)
No. of Portfolios for which Board Member
Serves: 49
———————
Andrew
J. Donohue (72)
Board Member (2019)
Current term expires in
2023
Principal Occupation During Past 5 Years:
· Attorney, Solo Law Practice (2019-Present)
· Shearman
& Sterling LLP, a law firm, Of Counsel (2017-2019)
· Chief of Staff to the Chair of the SEC (2015-2017)
Other Public Company Board Memberships During Past 5 Years:
· Oppenheimer Funds (58 funds), Director
(2017-2019)
No. of Portfolios for which Board Member Serves: 42
———————
65
BOARD
MEMBERS INFORMATION (Unaudited) (continued)
Kenneth A. Himmel (76)
Board Member (1998)
Current term expires in 2023
Principal Occupation
During Past 5 Years:
· Gulf
Related, an international real estate development company, Managing Partner (2010-Present)
· Related
Urban Development, a real estate development company, President and Chief Executive Officer
(1996-Present)
· American
Food Management, a restaurant company, Chief Executive Officer (1983-Present)
· Himmel
& Company, a real estate development company, President and Chief Executive Officer
(1980-Present)
No. of Portfolios for which Board Member Serves: 20
———————
Bradley
Skapyak (64)
Board Member (2021)
Current term expires in
2024
Principal Occupation During Past 5 Years:
· Chief Operating Officer and Director of The Dreyfus Corporation
(2009-2019)
· Chief
Executive Officer and Director of The MBSC Securities Corporation (2016-2019)
· Chairman and Director of The Dreyfus Transfer Agent, Inc.
(2011-2019)
· Senior
Vice President of The Bank of New York Mellon (2007-2019)
No. of Portfolios for which Board Member
Serves: 20
———————
Roslyn M.
Watson (73)
Board Member (1998)
Current term expires in
2025
Principal Occupation During Past 5 Years:
· Watson Ventures, Inc., a real estate investment company, Principal
(1993-Present)
Other Public Company Board Memberships During Past 5 Years:
· American
Express Bank, FSB, Director (1993-2018)
No. of Portfolios for which Board Member
Serves: 42
———————
66
Benaree Pratt Wiley (76)
Board Member (1998)
Current term expires in 2025
Principal Occupation
During Past 5 Years:
· The
Wiley Group, a firm specializing in strategy and business development, Principal
(2005-Present)
Other Public Company Board Memberships During Past 5 Years:
· CBIZ,
Inc., a public company providing professional business services, products and solutions, Director
(2008-Present)
· Blue
Cross-Blue Shield of Massachusetts, Director (2004-2020)
No. of Portfolios for
which Board Member Serves: 59
———————
The address of the Board Members and Officers is c/o BNY Mellon Investment Adviser,
Inc., 240 Greenwich Street, New York, New York 10286.
67
OFFICERS
OF THE FUND (Unaudited)
DAVID
DIPETRILLO, President since January 2021.
Vice President and Director
of the Adviser since February 2021; Head of North America Product, BNY Mellon Investment Management since
January 2018; and Director of Product Strategy, BNY Mellon Investment Management from January 2016 to
December 2017. He is an officer of 53 investment companies (comprised of 103 portfolios) managed by the
Adviser or an affiliate of the Adviser. He is 45 years old and has been an employee of BNY Mellon since
2005.
JAMES
WINDELS, Treasurer since November 2001.
Director of the Adviser
since February 2023; Vice President of the Adviser since September 2020; and Director–BNY Mellon Fund
Administration. He is an officer of 54 investment companies (comprised of 123 portfolios) managed by
the Adviser or an affiliate of the Adviser. He is 64 years old and has been an employee of the Adviser
since April 1985.
PETER M. SULLIVAN, Chief Legal Officer since July 2021 and Vice President and
Assistant Secretary since March 2019.
Chief Legal Officer of the Adviser and
Associate General Counsel of BNY Mellon since July 2021; Senior Managing Counsel of BNY Mellon from
December 2020 to July 2021; and Managing Counsel of BNY Mellon from March 2009 to December 2020. He is
an officer of 54 investment companies (comprised of 123 portfolios) managed by the Adviser or an affiliate
of the Adviser. He is 55 years old and has been an employee of BNY Mellon since April 2004.
JAMES
BITETTO, Vice President since August 2005 and Secretary since February 2018.
Senior
Managing Counsel of BNY Mellon since December 2019; Managing Counsel of BNY Mellon from April 2014 to
December 2019; and Secretary of the Adviser. He is an officer of 54 investment companies (comprised of
123 portfolios) managed by the Adviser or an affiliate of the Adviser. He is 56 years old and has been
an employee of the Adviser since December 1996.
DEIRDRE CUNNANE, Vice President and Assistant
Secretary since March 2019.
Managing Counsel of BNY Mellon since December
2021, Counsel of BNY Mellon from August 2018 to December 2021; and Senior Regulatory Specialist at BNY
Mellon Investment Management Services from February 2016 to August 2018. She is an officer of 54 investment
companies (comprised of 123 portfolios) managed by the Adviser or an affiliate of the Adviser. She is
32 years old and has been an employee of the Adviser since August 2018.
SARAH S. KELLEHER, Vice
President and Assistant Secretary since April 2014.
Vice
President of BNY Mellon ETF Investment Adviser; LLC since February 2020; Senior Managing Counsel of BNY
Mellon since September 2021; Managing Counsel of BNY Mellon from December 2017 to September 2021; and
Senior Counsel of BNY Mellon from March 2013 to December 2017. She is an officer of 54 investment companies
(comprised of 123 portfolios) managed by the Adviser or an affiliate of the Adviser. She is 47 years
old and has been an employee of the Adviser since March 2013.
JEFF PRUSNOFSKY, Vice President and Assistant
Secretary since August 2005.
Senior Managing Counsel of BNY Mellon.
He is an officer of 54 investment companies (comprised of 123 portfolios) managed by the Adviser or an
affiliate of the Adviser. He is 57 years old and has been an employee of the Adviser since October 1990.
AMANDA
QUINN, Vice President and Assistant Secretary since March 2020.
Counsel
of BNY Mellon since June 2019; Regulatory Administration Manager at BNY Mellon Investment Management
Services from September 2018 to May 2019; and Senior Regulatory Specialist at BNY Mellon Investment Management
Services from April 2015 to August 2018. She is an officer of 54 investment companies (comprised of 123
portfolios) managed by the Adviser or an affiliate of the Adviser. She is 37 years old and has been
an employee of the Adviser since June 2019.
68
JOANNE
SKERRETT, Vice President and Assistant Secretary since March 2023.
Counsel
of BNY Mellon since June 2022; Senior Counsel with the Mutual Fund Directors Forum, a leading funds industry
organization, from 2016 to June 2022. She is an officer of 54 investment companies (comprised of 123
portfolios) managed by the Adviser or an affiliate of the Adviser. She is 51 years old and has been
an employee of the Adviser since June 2022.
NATALYA ZELENSKY, Vice President
and Assistant Secretary since March 2017.
Chief Compliance Officer
since August 2021 and Vice President since February 2020 of BNY Mellon ETF Investment Adviser, LLC; Chief
Compliance Officer since August 2021 and Vice President and Assistant Secretary since February 2020 of
BNY Mellon ETF Trust; Managing Counsel of BNY Mellon from December 2019 to August 2021; Counsel of BNY
Mellon from May 2016 to December 2019; and Assistant Secretary of the Adviser from April 2018 to August
2021. She is an officer of 54 investment companies (comprised of 123 portfolios) managed by the Adviser or
an affiliate of the Adviser. She is 37 years old and has been an employee of BNY Mellon since May 2016.
DANIEL GOLDSTEIN, Vice President since
March 2022.
Vice President and Head of Product Development
of North America Product, BNY Mellon Investment Management since January 2018; Co-Head of Product Management,
Development & Oversight of North America Product, BNY Mellon Investment Management from January 2010
to January 2018; and Senior Vice President, Development & Oversight of North America Product, BNY
Mellon Investment Management since 2010. He is an officer of 53 investment companies (comprised of 103
portfolios) managed by the Adviser or an affiliate of the Adviser. He is 53 years old and has been an
employee of the Distributor since 1991.
JOSEPH
MARTELLA, Vice President since March 2022.
Vice
President of the Adviser since December 2022, Head of Product Management of North America Product, BNY
Mellon Investment Management since January 2018; Director of Product Research and Analytics of North
America Product, BNY Mellon Investment Management from January 2010 to January 2018; and Senior Vice
President of North America Product, BNY Mellon Investment Management since 2010. He is an officer of
53 investment companies (comprised of 103 portfolios) managed by the Adviser or an affiliate of the Adviser.
He is 46 years old and has been an employee of the Distributor since 1999.
GAVIN C. REILLY, Assistant
Treasurer since December 2005.
Tax Manager–BNY Mellon Fund Administration.
He is an officer of 54 investment companies (comprised of 123 portfolios) managed by the Adviser or an
affiliate of the Adviser. He is 54 years old and has been an employee of the Adviser since April 1991.
ROBERT
SALVIOLO, Assistant Treasurer since May 2007.
Senior Accounting Manager–BNY
Mellon Fund Administration. He is an officer of 54 investment companies (comprised of 123 portfolios)
managed by the Adviser or an affiliate of the Adviser. He is 55 years old and has been an employee of
the Adviser since June 1989.
ROBERT SVAGNA, Assistant Treasurer since August 2005.
Senior
Accounting Manager–BNY Mellon Fund Administration. He is an officer of 54 investment companies (comprised
of 123 portfolios) managed by the Adviser or an affiliate of the Adviser. He is 56 years old and has
been an employee of the Adviser since November 1990.
JOSEPH W. CONNOLLY, Chief Compliance Officer
since October 2004.
Chief Compliance Officer of the BNY Mellon
Family of Funds and BNY Mellon Funds Trust since 2004; and Chief Compliance Officer of the Adviser from
2004 until June 2021. He is the Chief Compliance Officer of 53 investment companies (comprised of 108
portfolios) managed by the Adviser. He is 65 years old.
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