MSP | Madison Strategic Sector Premium
Fund | December 31, 2012
Statement of Assets and Liabilities
ASSETS
|
|
|
|
|
Investments,
at value (Note 1 and 2)
|
|
|
|
|
Short
term investments
|
|
$
|
14,685,557
|
|
Investment
securities
|
|
|
63,660,290
|
|
|
|
|
|
Total
investments
(cost $79,307,162)
|
|
|
78,345,847
|
|
Cash
|
|
|
85,762
|
|
Receivables
|
|
|
|
|
Investment
securities sold
|
|
|
37,099
|
|
Dividends
and interest
|
|
|
50,880
|
|
|
|
|
|
Total
assets
|
|
|
78,519,588
|
|
LIABILITIES
|
|
|
|
|
Options written,
at value (premiums received of $2,555,680)
|
|
|
2,906,348
|
|
Payables
|
|
|
|
|
Investment
securities purchased
|
|
|
1,176,400
|
|
Auditor
fees
|
|
|
15,000
|
|
Independent
trustee fees
|
|
|
4,500
|
|
|
|
|
|
Total
liabilities
|
|
|
4,102,248
|
|
NET ASSETS
|
|
$
|
74,417,340
|
|
|
|
|
|
Net assets
consist of:
|
|
|
|
|
Paid
in capital
|
|
|
92,465,594
|
|
Accumulated
net realized loss on investments and options transactions
|
|
|
(16,736,271
|
)
|
Net
unrealized depreciation on investments and options transactions
|
|
|
(1,311,983
|
)
|
|
|
|
|
Net
Assets
|
|
$
|
74,417,340
|
|
|
|
|
|
CAPITAL
SHARES ISSUED AND OUTSTANDING
|
|
|
|
|
An unlimited
number of capital shares authorized, $.01 par value per share (Note 8)
|
|
|
5,798,291
|
|
|
|
|
|
|
NET ASSET
VALUE PER SHARE
|
|
$
|
12.83
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
11
MSP | Madison Strategic Sector Premium
Fund | December 31, 2012
Statement of Operations
INVESTMENT
INCOME
(Note 1)
|
|
|
|
|
Interest
income
|
|
$
|
6,259
|
|
Dividend
income
|
|
|
902,027
|
|
|
|
|
|
Total
investment income
|
|
|
908,286
|
|
EXPENSES
(Note 3)
|
|
|
|
|
Investment
advisory
|
|
|
605,228
|
|
Administration
|
|
|
18,913
|
|
Fund
accounting
|
|
|
19,745
|
|
Auditor
fees
|
|
|
20,000
|
|
Independent
trustee fees
|
|
|
18,000
|
|
Other
expenses
|
|
|
59,518
|
|
|
|
|
|
Total
expenses
|
|
|
741,404
|
|
|
|
|
|
|
NET INVESTMENT
INCOME
|
|
|
166,882
|
|
|
|
|
|
|
REALIZED
AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
|
|
|
|
|
Net
realized gain (loss) on:
|
|
|
|
|
Investments
|
|
|
(3,334,917
|
)
|
Options
|
|
|
3,367,269
|
|
Net
unrealized appreciation (depreciation) on:
|
|
|
|
|
Investments
|
|
|
7,985,926
|
|
Options
|
|
|
(949,695
|
)
|
|
|
|
|
NET GAIN
ON INVESTMENTS
|
|
|
7,068,583
|
|
|
|
|
|
NET INCREASE
IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
7,235,465
|
|
|
|
|
|
See accompanying
Notes to Financial Statements.
12
MSP | Madison Strategic Sector Premium
Fund
Statements of Changes in Net Assets
|
|
Year Ended December 31,
|
|
|
2012
|
|
2011
|
|
|
|
INCREASE
(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
166,882
|
|
|
$
|
8,232
|
|
Net
realized gain on investments and options transactions
|
|
|
32,352
|
|
|
|
5,223,827
|
|
Net
unrealized appreciation (depreciation) on investments and options transactions
|
|
|
7,036,231
|
|
|
|
(7,561,472
|
)
|
|
|
|
|
Total
increase (decrease) in net assets resulting from operations
|
|
|
7,235,465
|
|
|
|
(2,329,413
|
)
|
|
|
|
|
|
|
|
|
|
DISTRIBUTION
TO SHAREHOLDERS (Note 4)
|
|
|
|
|
|
|
|
|
From
net investment income
|
|
|
(166,882
|
)
|
|
|
(8,232
|
)
|
From
net capital gains
|
|
|
(23,748
|
)
|
|
|
(5,487,017
|
)
|
From
return of capital
|
|
|
(5,839,593
|
)
|
|
|
(534,974
|
)
|
|
|
|
|
Total
distributions
|
|
|
(6,030,223
|
)
|
|
|
(6,030,223
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL INCREASE
(DECREASE) IN NET ASSETS
|
|
|
1,205,242
|
|
|
|
(8,359,636
|
)
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
$
|
73,212,098
|
|
|
$
|
81,571,734
|
|
|
|
|
|
End
of period (including undistributed income of $0 and $0, respectively)
|
|
$
|
74,417,340
|
|
|
$
|
73,212,098
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
13
MSP | Madison Strategic Sector Premium
Fund
Financial Highlights
Per Share Operating Performance for
One Share Outstanding Throughout the Period
|
|
Year Ended December 31,
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
Net asset
value, beginning of period
|
|
$
|
12.63
|
|
|
$
|
14.07
|
|
|
$
|
13.83
|
|
|
$
|
10.75
|
|
|
$
|
17.52
|
|
Investment
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income (loss)
|
|
|
0.03
|
|
|
|
0.00
|
3
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
0.03
|
|
Net
realized and unrealized gain (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
options transactions
|
|
|
1.21
|
|
|
|
(0.40
|
)
|
|
|
1.31
|
|
|
|
4.26
|
|
|
|
(5.30
|
)
|
|
|
|
|
Total from
investment operations
|
|
|
1.24
|
|
|
|
(0.40
|
)
|
|
|
1.28
|
|
|
|
4.23
|
|
|
|
(5.27
|
)
|
Less
distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
net investment income
|
|
|
(0.03
|
)
|
|
|
(0.00
|
)
3
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
From
capital gains
|
|
|
(0.00
|
)
3
|
|
|
(0.94
|
)
|
|
|
|
|
|
|
(1.15
|
)
|
|
|
(1.47
|
)
|
Return
of capital
|
|
|
(1.01
|
)
|
|
|
(0.10
|
)
|
|
|
(1.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(1.04
|
)
|
|
|
(1.04
|
)
|
|
|
(1.04
|
)
|
|
|
(1.15
|
)
|
|
|
(1.50
|
)
|
Net asset
value, end of period
|
|
$
|
12.83
|
|
|
$
|
12.63
|
|
|
$
|
14.07
|
|
|
$
|
13.83
|
|
|
$
|
10.75
|
|
Market
value, end of period
|
|
$
|
11.09
|
|
|
$
|
10.64
|
|
|
$
|
12.82
|
|
|
$
|
12.23
|
|
|
$
|
8.75
|
|
Total investment
return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value (%)
|
|
|
9.92
|
|
|
|
(2.80
|
)
|
|
|
9.79
|
|
|
|
41.21
|
|
|
|
(31.94
|
)
|
Market
value (%)
|
|
|
13.97
|
|
|
|
(9.24
|
)
|
|
|
14.01
|
|
|
|
55.81
|
|
|
|
(36.18
|
)
|
Ratios
and supplemental data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets,
end of period
(thousands)
|
|
$
|
74,417
|
|
|
$
|
73,212
|
|
|
$
|
81,572
|
|
|
$
|
80,178
|
|
|
$
|
62,333
|
|
Ratios
to Average Net Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses, excluding interest expense (%)
|
|
|
0.98
|
|
|
|
0.98
|
|
|
|
0.98
|
|
|
|
1.04
|
|
|
|
1.07
|
|
Total
expenses, including interest expense (%)
|
|
|
0.98
|
|
|
|
0.98
|
|
|
|
0.98
|
|
|
|
1.23
|
|
|
|
1.50
|
|
Net
investment income, including interest expense (%)
|
|
|
0.22
|
|
|
|
0.01
|
|
|
|
(0.20
|
)
|
|
|
(0.27
|
)
|
|
|
0.19
|
|
Ratios
to Average Managed Assets:
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses, excluding interest expense (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.97
|
|
|
|
0.96
|
|
Total
expenses, including interest expense (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.13
|
|
|
|
1.35
|
|
Net
investment income, including interest expense (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.25
|
)
|
|
|
0.17
|
|
Portfolio
turnover (%)
|
|
|
53
|
|
|
|
83
|
|
|
|
61
|
|
|
|
25
|
|
|
|
41
|
|
Senior
Indebtedness
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
balance, end of period (thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Average
outstanding balance during the period (thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,671
|
|
|
|
9,706
|
|
Average
fund shares during the period (thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,798
|
|
|
|
5,798
|
|
Average
indebtedness per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.98
|
|
|
|
1.67
|
|
Asset
coverage per $1,000 of indebtedness
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,233
|
2
|
1
Managed assets
is equal to net assets plus average outstanding leverage for periods prior to July
2012.
|
2
Calculated
by subtracting the funds total liabilities (not including borrowings) from
the funds total assets and dividing by the total borrowings at year-end.
|
3
Amount is
greater than 0, but less than one penny.
|
Net asset value figures are based on average daily shares outstanding during the
year.
|
See accompanying Notes to
Financial Statements.
14
MSP | Madison Strategic Sector Premium Fund | December 31, 2012
Notes to Financial Statements
Note 1
Organization.
Madison Strategic Sector Premium Fund (the Fund) was
organized as a Delaware statutory trust on February 4,
2005. The Fund is registered as a diversified, closed-end
management investment company under the Investment
Company Act of 1940, as amended, and the Securities Act
of 1933, as amended. The Fund commenced operations on
April 27, 2005. The Funds primary investment objective
is to provide a high level of current income and current
gains, with a secondary objective of long-term capital
appreciation.
The Fund will pursue its investment objectives by investing
in a portfolio consisting primarily of common stocks of
large and mid-capitalization issuers that are, in the view of
Madison Asset Management, LLC, the Funds investment
adviser (the Adviser), selling at a reasonable price in
relation to their long-term earnings growth rates. Under
normal market conditions, the Fund will seek to generate
current earnings from option premiums by writing
(selling) covered call options on a substantial portion of
its portfolio securities. There can be no assurance that the
Fund will achieve its investment objectives. The Funds
investment objectives are considered fundamental and
may not be changed without shareholder approval.
Note 2
Significant Accounting Policies.
(a) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States of America requires management to make estimates
and assumptions. Such estimates affect the reported
amounts of assets and liabilities and reported amounts
of increases and decreases in net assets from operations
during the reporting period. Actual results could differ
from those estimates.
(b) Portfolio Valuation
Securities traded on a national securities exchange are
valued at their closing sale price, except for securities
traded on NASDAQ which are valued at the NASDAQ official
closing price (NOCP) and options which are valued at the
mean between the best bid and best ask price across all
option exchanges. Securities having maturities of 60 days
or less are valued at amortized cost, which approximates
market value. Securities having longer maturities, for
which quotations are readily available, are valued at the
mean between their closing bid and ask prices. Mutual
funds are valued at their Net Asset Value. Securities for
which market quotations are not readily available are
valued at their fair value as determined in good faith under
procedures approved by the Board of Trustees.
The Fund has adopted Financial Accounting Standards
Board (FASB) applicable guidance on fair value
measurements. Fair value is defined as the price that
each fund would receive upon selling an investment
in a timely transaction to an independent buyer in the
principal or most advantageous market of the investment.
A three-tier hierarchy is used to maximize the use of
observable market data inputs and minimize the use of
unobservable inputs and to establish classification of fair
value measurements for disclosure purposes. Inputs refer
broadly to the assumptions that market participants would
use in pricing the asset or liability, including assumptions
about risk (for example, the risk inherent in a particular
valuation technique used to measure fair value including
such a pricing model and/or the risk inherent in the inputs
to the valuation technique). Inputs may be observable or
unobservable.
Observable inputs are inputs that reflect the assumptions
market participants would use in pricing the asset or
liability developed based on market data obtained from
sources independent of the reporting entity. Unobservable
inputs are inputs that reflect the reporting entitys own
assumptions about the assumptions market participants
would use in pricing the asset or liability developed based
on the best information available in the circumstances. The
three-tier hierarchy of inputs is summarized in the three
broad Levels listed below:
|
Level 1 quoted prices in active markets for identical
investments
|
|
|
Level 2 other significant observable inputs (including
quoted prices for similar investments, interest rate
volatilities, prepayment speeds, credit risk, benchmark
yields, transactions, bids, offers, new issues, spreads
|
15
MSP | Madison Strategic Sector Premium Fund | Notes to Financial Statements | continued
|
and other relationships observed in the markets among
comparable securities, underlying equity of the issuer;
and proprietary pricing models such as yield measures
calculated using factors such as cash flows, financial or
collateral performance and other reference data, etc.)
|
|
|
Level 3 significant unobservable inputs (including the
Funds own assumptions in determining the fair value of
investments)
|
The valuation techniques used by the Fund to measure fair
value for the period ended December 31, 2012 maximized
the use of observable inputs and minimized the use of
unobservable inputs.
The following table represents the Funds investments
carried on the Statement of Assets and Liabilities by
caption and by level within the fair value hierarchy as of
December 31, 2012:
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Value at 12/31/12
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks
|
|
$
|
63,196,015
|
|
$
|
|
|
$
|
|
|
$
|
63,196,015
|
|
Investment Companies
|
|
|
2,422,175
|
|
|
|
|
|
|
|
|
2,422,175
|
|
U.S. Government and Agency Obligations
|
|
|
|
|
|
12,727,657
|
|
|
|
|
|
12,727,657
|
|
|
|
|
|
Total
|
$
|
65,638,190
|
|
$
|
12,727,657
|
|
$
|
|
|
$
|
78,345,847
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written options
|
|
$
|
2,906,348
|
|
$
|
|
|
$
|
|
|
$
|
2,906,348
|
|
|
|
|
|
Total
|
$
|
2,906,348
|
|
$
|
|
|
$
|
|
|
$
|
2,906,348
|
|
|
|
|
|
Please see Portfolio of Investments for common stock sector breakdown and listing of all securities within each caption.
There were no transfers between classification levels during the period ended December 31, 2012. As of and during the year
ended December 31, 2012, the Fund did not hold securities deemed as a Level 3.
The following table presents the types of derivatives in the Fund and their effect:
Statement of Asset & Liability Presentation of Fair Values of Derivative Instruments
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
|
|
Derivatives not accounted
for as hedging instruments
|
|
Statement of Assets and
Liabilities Location
|
|
Fair Value
|
|
Statement of Assets
and Liabilities Location
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity contracts
|
|
|
|
|
|
Options written
|
|
$2,906,348
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the effect of Derivative Instruments on the Statement of Operations for the year ended
December 31, 2012:
|
|
Realized Gain on Derivatives:
|
|
Change in Unrealized Depreciation on Derivatives
|
|
Derivatives not accounted
for as hedging instruments
|
|
|
|
|
|
|
|
|
|
Equity contracts options
|
|
$3,367,269
|
|
$(949,695)
|
|
|
|
In May 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) No.
2011-04, modifying Topic 820, Fair Value Measurements
and Disclosures. At the same time, the International
Accounting Standards Board (IASB) issued International
Financial Reporting Standard (IFRS) 13, Fair Value
Measurement. The objective by the FASB and IASB is
convergence of their guidance on fair value measurements
and disclosures. The effective date of the ASU is for
Interim and annual periods beginning after December 15,
2011. The Fund has adopted the disclosures required by
this update.
16
MSP | Madison Strategic Sector Premium Fund | Notes to Financial Statements | continued
In December 2011, the IASB and the FASB issued ASU
2011-11 Disclosures about Offsetting Assets And
Liabilities. These common disclosure requirements are
intended to help investors and other financial statement
users to better assess the effect or potential effect of
offsetting arrangements on a portfolios financial position.
They also intend to improve transparency in the reporting
of how companies mitigate credit risk, including disclosure
of related collateral pledged or received. In addition, ASU
2011-11 facilitates comparison between those entities
that prepare their financial statements on the basis of
U.S. GAAP and those entities that prepare their financial
statements on the basis of IFRS. ASU 2011-11 requires
entities to disclose both gross and net information about
both instruments and transactions eligible for offset
in the financial position; and disclose instruments and
transactions subject to an agreement similar to a master
netting agreement. ASU 2011-11 is effective for fiscal
years beginning on or after January 1, 2013, and interim
periods within those annual periods. Management is
currently evaluating the implications of ASU 2011-11 and
its impact on financial statements disclosures.
(c) Investment Transactions and Investment Income
Investment transactions are recorded on a trade date
basis. The cost of investments sold is determined on the
identified cost basis for financial statement and federal
income tax purposes. Dividend income is recorded on the
ex-dividend date and interest income is recorded on an
accrual basis.
(d) Clarification of Investment Strategy
Although the investment adviser believes that, under
normal conditions, at least 80% of the Fund will be
invested in equity securities, it believes that when options
are exercised and portfolio securities are called away in
exchange for cash, it may not be in the interest of the Fund
to immediately invest its cash. Additionally, during periods
when the investment adviser believes the stock markets in
general are overvalued or when there is perceived domestic
or global economic or political risk or when investments
in equity securities bear an above average risk of loss, the
investment adviser will delay investment of some or all of
the Funds cash until such periods have ended. Thus, in the
investment advisers discretion, the Funds cash may be held
for temporary defensive purposes, and might represent a
material percentage of the Funds portfolio. These periods
may last for a few weeks or even for a few months, until
more attractive market conditions exist.
Note 3 Investment Advisory Agreement and
Services Agreement.
Pursuant to an Investment Advisory Agreement between
the Fund and Madison Asset Management, LLC (the Adviser), the Adviser, under the supervision of the Funds
Board of Trustees, will provide a continuous investment
program for the Funds portfolio; provide investment
research and make and execute recommendations for
the purchase and sale of securities; and provide certain
facilities and personnel, including officers required for the
Funds administrative management and compensation of
all officers and trustees of the Fund who are its affiliates.
For these services, the Fund will pay the Adviser a fee,
payable monthly, in an amount equal to 0.80% of the
Funds average daily managed assets on the first $500
million of assets, and 0.60% of the Funds average daily
managed assets on assets in excess of $500 million.
Under a separate Services Agreement, Madison Investment
Advisors, LLC (MIA), an affiliate of the Adviser, provides
or arranges to provide all necessary operational and
support services, for a fee, provided to the Fund. Such
services include transfer agent, custodian, legal, and
other operational expenses. These fees are accrued daily
and are capped at 0.18% of the Funds average daily
net assets. MIA has assumed responsibility for payment
of all expenses greater than 0.18% of average daily net
assets other than investment expenses such as brokerage
commission costs or interest and fees on loans. This
expense cap will terminate in July 2013 unless renewed
at that time.
Note 4 Federal Income Taxes.
No provision is made for federal income taxes since it is
the intention of the Fund to comply with the provisions
of Subchapter M of the Internal Revenue Code available
to investment companies and to make the requisite
distribution to shareholders of taxable income which will
be sufficient to relieve it from all or substantially all federal
income taxes.
17
MSP | Madison Strategic Sector Premium Fund | Notes to Financial Statements | continued
The Regulated Investment Company (RIC) Modernization
Act of 2010 (the Modernization Act) modernizes several
of the federal income and excise tax provisions related
to RICs. The Modernization Act contains simplification
provisions effective for taxable years beginning after
December 22, 2010, which are aimed at preventing
disqualification of a RIC for inadvertent failures of the
asset diversification and/or qualifying income tests.
Additionally, the Modernization Act allows capital losses
to be carried forward indefinitely, and retain the character
of the original loss, exempts RICs from the preferential
dividend rule, and repealed the 60-day designation
requirement for certain types of pay-through income
and gains.
As of December 31, 2012, for federal income tax purposes,
the Fund utilized $23,748 of capital loss carryforward
(CLCF). The Fund had a remaining CLCF of $16,470,588
which can be used to offset future capital gains. These
CLCF will expire on December 31, 2018. Per the Regulated
Investment Company Modernization Act of 2010, CLCFs
generated in taxable years beginning after December
22, 2010 must be fully used before CLCFs generated in
taxable years prior to December 22, 2010; therefore, under
circumstances, CLCF available as of the report date may
expire unused.
Information on the tax components of investments,
excluding option contracts, as of December 31, 2012 is as
follows:
Aggregate Cost
|
|
$
|
79,572,846
|
|
|
|
Gross unrealized appreciation
|
|
|
4,259,754
|
Gross unrealized depreciation
|
|
|
(5,486,753)
|
|
|
|
Net unrealized depreciation
|
|
$
|
(1,226,999)
|
|
|
|
Net realized gains or losses may differ for financial
reporting and tax purposes primarily as a result of the
deferral of losses relating to wash sale transactions and
post-October transactions.
For the years ended December 31, 2012 and 2011, the
tax character of distributions paid to shareholders was
$190,630 ordinary income and $5,839,593 return of
capital for 2012 and $5,495,249 ordinary income and
$534,974 return of capital for 2011.
As of December 31, 2012, the components of distributable
earnings on a tax basis were as follows:
Accumulated net realized losses
|
|
$
|
(16,470,588)
|
Net unrealized depreciation on investments
|
|
|
(1,226,999)
|
|
|
|
|
|
$
|
(17,697,587)
|
|
|
|
As of and during the year ended December 31, 2012,
the Fund did not have any liability for unrecognized tax
benefits. The Fund recognizes interest and penalties, if any,
related to unrecognized tax benefits as income tax expense
in the statement of operations. During the period, the Fund
did not incur any interest or penalties.
Tax years open to examination by tax authorities under the
statute of limitations include 2009 through 2012.
Note 5 Investment Transactions.
During the year ended December 31, 2012, the cost
of purchases and proceeds from sales of investments,
excluding short-term investments, were $56,340,738 and
$47,570,806, respectively. No long term U.S. Government
securities were purchased or sold during the period.
Note 6 Covered Call and Put Options.
An option on a secuity is a contract that gives the holder of
the option, in return for a premium, the right to buy from
(in the case of a call) or sell to (in the case of a put) the
writer of the option the security underlying the option at
a specified exercise or strike price. The writer of an option
on a security has an obligation upon exercise of the option
to deliver the underlying security upon payment of the
exercise price (in the case of a call) or to pay the exercise
price upon delivery of the underlying security (in the case
of a put).
There are several risks associated with transactions in
options on securities. As the writer of a covered call option,
the fund forgoes, during the options life, the opportunity
to profit from increases in the market value of the security
covering the call option above the sum of the premium
and the strike price of the call but has retained the risk of
loss should the price of the underlying security decline. A
writer of a put option is exposed to the risk of loss if fair
value of the underlying securities declines, but profits only
to the extent of the premium received if the underlying
18
MSP | Madison Strategic Sector Premium Fund | Notes to Financial Statements | continued
security increases in value. The writer of an option has no
control over the time when it may be required to fill its
obligation as writer of the option. Once an option writer
has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation
under the option and must deliver the underlying security
at the exercise price.
The number of call options the Fund can write (sell) is
limited by the amount of equity securities the Fund holds
in its portfolio. The Fund will not write (sell) naked or
uncovered call options. The Fund seeks to produce a high
level of current income and gains generated from option
writing premiums and, to a lesser extent, from dividends.
When an option is written, the premium received
is recorded as an asset with an equal liability and is
subsequently marked to market to reflect the current
market value of the option written. These liabilities are
reflected as options written in the Statement of Assets and
Liabilities. Premiums received from writing options which
expire unexercised are recorded on the expiration date
as a realized gain. The difference between the premium
received and the amount paid on effecting a closing
purchase transaction, including brokerage commissions,
is also treated as a realized gain, or if the premium is
less than the amount paid for the closing purchase
transactions, as a realized loss. If a call option is exercised,
the premium is added to the proceeds from the sale of the
underlying security in determining whether there has been
a realized gain or loss.
Transactions in option contracts during the year ended
December 31, 2012 were as follows:
|
|
Number of
Contracts
|
|
|
Premiums
Received
|
|
|
|
Options outstanding
beginning of period
|
|
19,467
|
|
|
$
|
3,929,917
|
|
Options written during the period
|
|
24,764
|
|
|
|
5,220,842
|
|
Options expired during the period
|
|
(15,138
|
)
|
|
|
(3,013,310
|
)
|
Options closed during the period
|
|
(5,036
|
)
|
|
|
(999,543
|
)
|
Options assigned during the period
|
|
(11,785
|
)
|
|
|
(2,582,226
|
)
|
|
|
|
Options outstanding end of period
|
|
12,272
|
|
|
$
|
2,555,680
|
|
|
|
|
Note 7 Capital.
The Fund has an unlimited amount of common shares,
$0.01 par value, authorized and 5,798,291 shares issued
and outstanding as of December 31, 2012.
In connection with the Funds dividend reinvestment
plan, there were no shares reinvested for the year ended
December 31, 2012 and 2011, respectively.
Note 8 Indemnifications.
In the normal course of business, the Fund enters into
contracts that provide general indemnifications. The
Funds maximum exposure under these arrangements is
dependent upon claims that may be made against the
Fund in the future and, therefore cannot be estimated;
however, the risk of material loss from such claims is
considered remote.
Note 9 Discussion of Risks.
Please see the Funds original prospectus for a discussion
of risks associated with investing in the Fund. While
investments in stocks and bonds have been keystones in
wealth building and management for a hundred years,
at times theyve produced surprises for even the savviest
investors. Those who enjoyed growth and income of
their investments were rewarded for the risks they took
by investing in the markets. When calamity strikes, the
word security itself seems a misnomer. Although the
Adviser seeks to appropriately address and manage
the risks identified and disclosed to you in connection
with the management of the securities in the Fund, you
should understand that the very nature of the securities
markets includes the possibility that there are additional
risks that we did not contemplate for any number of
reasons. We seek to identify all applicable risks and then
appropriately address them, take appropriate action to
reasonably manage them and, of course, to make you
aware of them so you can determine if they exceed your
risk tolerance. Nevertheless, the often volatile nature of the
securities markets and the global economy in which we
work suggests that the risk of the unknown is something
you must consider in connection with your investments
in securities. Unforeseen events have the potential to
upset the best laid plans of man, and could, under certain
circumstances produce a material loss of the value of some
or all of the securities we manage for you in the Fund.
Note 10 Subsequent Events.
Management has evaluated all subsequent events through
the date the financial statements were available for issue.
No events have taken place that meet the definition of a
subsequent event that requires adjustment to, or disclosure
in, the financial statements.
19
MSP | Madison Strategic Sector Premium Fund | December 31, 2012
Report of Independent
Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Madison Strategic Sector Premium Fund
We have audited the accompanying statement of assets
and liabilities, including the portfolio of investments of
the Madison Strategic Sector Premium Fund (the Fund),
as of December 31, 2012 and the related statement of
operations for the year then ended and the statements
of changes in net assets for each of the two years in the
period then ended, and financial highlights for the five
years in the period then ended. These financial statements
and financial highlights are the responsibility of the Funds
management. Our responsibility is to express an opinion
on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about
whether the financial statements and financial highlights
are free of material misstatement. The Fund is not required
to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Funds
internal control over financial reporting. Accordingly we
express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation. Our procedures included
confirmation of securities owned as of December 31, 2012
by correspondence with the Funds custodian and brokers.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of the Fund as of December
31, 2012, and the results of its operations for the year then
ended and the changes in its net assets for each of the two
years in the period then ended, and financial highlights for
the five years in the period then ended, in conformity with
accounting principles generally accepted in the United
States of America.
Chicago, Illinois
February 26, 2013
20
MSP | Madison Strategic Sector Premium Fund
Other Information
Federal Income Tax Information. The Fund recognized
qualified dividend income of $902,027 during the fiscal year
ended December 31, 2012. The Fund intends to designate
the maximum amount of dividends that qualify for the
reduced tax rate pursuant to the Jobs and Growth Tax Relief
Reconciliation Act of 2003.
In January 2013, you will be advised on IRS Form 1099 DIV
or substitute 1099 DIV as to the federal tax status of the
distributions received by you in the calendar year 2012.
Results of Shareholder Vote. The Annual Meeting of
shareholders of the Fund was held on July 27, 2012. At the
meeting, shareholders voted on the election of one trustee,
Philip E. Blake. The votes cast in favor of election for Mr. Blake
were 4,854,848 with 395,230 shares withheld. The other
trustees of the Fund whose terms did not expire in 2012 are
Katherine L. Frank, James R. Imhoff, Jr., Frank E. Burgess and
Lorence D. Wheeler.
Additional Information. Notice is hereby given in
accordance with Section 23(c) of the Investment Company
Act of 1940 that from time to time, the Fund may
purchase shares of its common stock in the open market at
prevailing market prices.
This report is sent to shareholders of the Fund for their
information. It is not a prospectus, circular or representation
intended for use in the purchase or sale of shares of the Fund
or any securities mentioned in the report.
Forward-Looking Statement Disclosure. One of our
most important responsibilities as investment company
managers is to communicate with shareholders in an open
and direct manner. Some of our comments in our letters to
shareholders are based on current management expectations
and are considered forward-looking statements. Actual
future results, however, may prove to be different from our
expectations. You can identify forward-looking statements
by words such as estimate, may, will, expect, believe, plan
and other similar terms. We cannot promise future returns.
Our opinions are a reflection of our best judgment at the
time this report is compiled, and we disclaim any obligation
to update or alter forward-looking statements as a result of
new information, future events, or otherwise.
Proxy Voting Information. The Fund adopted policies
that provide guidance and set forth parameters for the voting
of proxies relating to securities held in the Funds portfolios.
Additionally, information regarding how the Fund voted
proxies related to portfolio securities, if applicable, during
the period ended June 30, 2012, is available upon request
and free of charge, by writing to Madison Strategic Sector
Premium Fund, 550 Science Drive, Madison, WI 53711 or
by calling toll-free at 1-800-368-3195. The Funds proxy
voting policies and voting information may also be obtained
by visiting the Securities and Exchange Commission
(SEC) web site at www.sec.gov. The Fund will respond to
shareholder requests for copies of our policies within two
business days of request by first-class mail or other means
designed to ensure prompt delivery.
N-Q Disclosure. The Fund files its complete schedule
of portfolio holdings with the SEC for the first and third
quarters of each fiscal year on Form N-Q. The Funds Forms
N-Q are available on the SECs website. The Funds Forms
N-Q may be reviewed and copied at the SECs Public
Reference Room in Washington, DC. Information about the
operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. Form N-Q and
other information about the Fund are available on the
EDGAR Database on the SECs Internet site at http://www.
sec.gov. Copies of this information may also be obtained,
upon payment of a duplicating fee, by electronic request
at the following email address: publicinfo@sec.gov, or by
writing the SECs Public Reference Section, Washington, DC
20549-0102. Finally, you may call the Fund at 800-368-3195 if
you would like a copy of Form N-Q and we will
mail one to you at no charge.
Discussion of Contract Renewal (Unaudited). The
Board reviewed a variety of matters in connection with
the renewal of the Funds investment advisory contract
with the Adviser. The following description of the Boards
considerations summarizes the process:
With regard to the
nature, extent and quality of the services
to be provided by the Adviser
, the Board reviewed the
biographies and tenure of the personnel involved in Fund
management and the experience of the Adviser and its
affiliates as investment manager to other investment
21
MSP | Madison Strategic Sector Premium Fund | Other Information | continued
companies with similar investment strategies or to
individual clients or institutions with similar investment
strategies. They recognized the wide array of investment
professionals employed by the respective firm or firms.
Representatives of the Adviser discussed the firms ongoing
investment philosophies and strategies intended to
provide performance consistent with the Fund investment
objectives under various market scenarios. The Trustees also
noted their familiarity with the Adviser and its affiliates due
to the Advisers history of providing advisory services to its
proprietary investment company clients.
The Board also discussed the quality of services provided
to the Fund by its transfer agent and custodian as well as
the various administrative services provided directly by the
Adviser. Such services included arranging for third party
service providers to provide all necessary administration to
the Fund.
With regard to the
investment performance of the Fund
and the investment adviser
, the Board reviewed current
performance information provided in the written
Board materials. They discussed the reasons for both
outperformance and underperformance compared with
peer groups and applicable indices and benchmarks.
They reviewed both long-term and short-term
performance. They also considered whether any relative
underperformance was appropriate to the Advisers
conservative investment philosophy.
A comprehensive discussion of Fund performance and
market conditions occurred during the course of the
Boards review. Representatives of the Adviser discussed
with the Board the methodology for arriving at peer
groups and indices used for performance comparisons.
With regard to the
costs of the services to be provided and the
profits to be realized by the investment adviser and its affiliates
from the relationship with the Fund, the Board reviewed
the expense ratios for a variety of other funds in the Funds
peer group with similar investment objectives.
The Board noted that the Adviser or its affiliates provided
investment management services to other investment
company and/or non-investment company clients and
considered the fees charged by the Adviser to such funds
and clients for purposes of determining whether the given
advisory fee was disproportionately large under the so-called
Gartenberg
standard
traditionally used by investment
company boards in connection with contract renewal
considerations. The Board took those fees into account and
considered the differences in services and time required by
the various types of funds and clients to which the Adviser
provided services. The Board recognized that significant
differences may exist between the services provided to
one type of fund or client and those provided to others.
The Board gave such comparisons the weight that they
merit in light of the similarities and differences between
the services that the various funds require and were wary
of inapt comparisons. They considered that, if the services
rendered by the Adviser to one type of fund or client
differed significantly from others, then the comparison
should not be used. In the case of non-investment
company clients for which the Adviser may act as either
investment adviser or subadviser, the Board noted that the
fee may be lower than the fee charged to the Fund. The
Board noted too the various administrative, operational,
compliance, legal and corporate communication services
required to be handled by the Adviser which are performed
for investment company clients but are not performed for
other institutional clients.
The Trustees reviewed the Funds fee structure based on
total Fund expense ratio as well as by comparing Fund
advisory fees to other fund advisory fees. The Board noted
the simple expense structure maintained by the Fund:
an advisory fee and a capped administrative services
expense. The Board noted the total expense ratios paid by
other funds with similar investment objectives, recognizing
that such a comparison, while not dispositive, was an
important consideration.
The Trustees sought to ensure that fees paid by the
Fund were appropriate. The Board reviewed materials
demonstrating that although the Adviser is compensated
for a variety of the administrative services it provides
or arranges to provide to the Fund pursuant to its
administrative services agreements with the Fund, such
compensation does not always cover all costs due to
the cap on administrative expenses. Administrative,
operational, regulatory and compliance fees and costs
in excess of the Services Agreement fees are paid by the
Adviser from the investment advisory fees earned. In
22
MSP | Madison Strategic Sector Premium Fund | Other Information | concluded
this regard, the Trustees noted that examination of the
Funds total expense ratio compared to those of other
investment companies was more meaningful than a
simple comparison of basic investment management
only fee schedules.
In reviewing costs and profits, the Board noted that the
salaries of all portfolio management personnel, trading
desk personnel, corporate accounting personnel and
employees of the Adviser who serve as Fund officers, as
well as facility costs (rent), could not be supported by
fees received from the Fund alone. However, the Board
recognized that the Fund, as part of a family of funds, is
profitable to the Adviser because such salaries and fixed
costs are already paid in whole or in part from revenue
generated by management of other client assets managed
by the Adviser. The Trustees noted that total assets
managed by the Adviser and its affiliates approximated
$16 billion at the time of the meeting. As a result,
although the fees paid by the Fund at its present size might
not be sufficient to profitably support a stand-alone fund,
the Fund is reasonably profitable to the Adviser as part
of its larger, diversified organization. In sum, the Trustees
recognized that the Fund is important to the Adviser and is
managed with the attention given to its other clients.
In considering the renewal of contracts in connection
with the Fund, the Board recognized that the obligations,
responsibilities and management considerations involved
with being an investment adviser to a closed-end fund
differ significantly from serving as an investment adviser to
an open-end (mutual) fund. As such, the Board focused its
attention on the total expense ratios paid by certain other
closed-end funds with similar investment objectives. The
Board recognized that the Funds total expense ratio was
low based on such comparisons. In addition, with respect
to the various fund portfolios that follow a covered-call
equity strategy, the Board recognized that fees charged
to a closed-end fund for which the Adviser acts solely
as subadviser for another investment adviser could be
expected to be lower than the fee charged to funds for
which the Adviser acted as sole investment adviser.
This reflects the various administrative, operational,
compliance, legal and corporate communication services
required to be handled by the Adviser that are not
performed in a subadvisory capacity.
With regard to the extent to which
economies of scale
would be realized as the Fund grows, the Trustees
recognized that at its current size and in recognition
that the Fund is a closed-end fund that does not issue
new shares, it was premature to discuss any economies
of scale not already factored into existing advisory and
services agreements. The Trustees also recognized that,
for competitive purposes, the Adviser recommended that
the Board approve a reduction in the investment advisory
fee paid by the Fund to eliminate any fees being paid on
leveraged assets. Finally, they also recognized the fee caps
applicable to the Fund.
During the course of the review, counsel to the
Independent Trustees confirmed that the Funds
Independent Trustees met previously in executive session
and reviewed the written contract renewal materials
provided by the Adviser. He noted that the Independent
Trustees had considered such materials in light of the
aforementioned
Gartenberg
standards as well as criteria
either set forth or discussed in the recent Supreme Court
decision in
Jones v. Harris
regarding the investment
company contract renewal process under Section 15(c)
of the Investment Company Act of 1940, as amended.
The Independent Trustees made a variety of additional
inquiries regarding such written materials to the Adviser
and representatives of the Adviser discussed each matter
raised.
After further discussion, analysis and review of the totality
of the information presented, including the information set
forth above and the other information considered by the
Board of Trustees, the Trustees, including the Independent
Trustees, concluded that the Funds advisory fees are
fair and reasonable and that renewal of its Advisory and
Services Agreements are in the best interests of the Fund
and its shareholders.
Finally, the Board also reviewed the Funds applicable Code
of Ethics.
Based on the above, the Board renewed the Funds
contracts for another year.
23
MSP | Madison Strategic Sector Premium
Fund
Trustees and Officers
The address of each trustee and officer
of the Fund is 550 Science Drive, Madison, WI 53711, except that Mr. Masons
address is 8777 N. Gainey Center Drive, #220, Scottsdale, AZ, 85258.
Interested Trustees and Officers
|
|
|
Position(s)
|
|
|
|
|
Name and
|
|
and Length of
|
|
Principal Occupation(s)
|
|
Other Directorships/
|
Year of
Birth
|
|
Time Served
|
|
During
Past Five Years
|
|
Trusteeships
|
|
Katherine
L. Frank
1
1960
|
|
President,
2005 - Present, and Trustee, 2005 - Present
|
|
Madison Investment
Holdings, Inc. (MIH) (affiliated investment advisory firm of Madison),
Executive Director and Chief Operating Officer, 2010 - Present; Managing Director
and Vice President, 1986 - 2010; Madison Asset Management, LLC (MAM
or the Adviser), Executive Director and Chief Operating Officer, 2010
- Present; Vice President, 2004 - 2010; Madison Investment Advisors, LLC (Madison) (affiliated investment advisory firm of the Adviser), Executive Director
and Chief Operating Officer, 2010 - Present; President, 1996 - 2010; Madison Mosaic
Funds (12 mutual funds), President, 1996 - Present; Madison Covered Call and Equity
Strategy Fund (closed end fund), Vice President, 2013 - Present; Madison Funds (13)
and Ultra Series Fund (16) (mutual funds), President, 2009 - Present
|
|
Madison Mosaic
Funds (all but Equity Trust), 2001 - Present; Madison Funds(13) and Ultra Series
Fund (16), 2009 - Present
|
|
Frank E. Burgess
1
1942
|
|
Trustee and
Vice President, 2005 - Present
|
|
MIH, Chairman
of the Board, 2012 - Present; Former Executive Director and President, 2010 - 2012;
Managing Director and President, 1973 - 2010; MAM, Former Executive Director and
President, 2010 - 2012; President, 2004 - 2010; Madison, Former Executive Director
and President, 2010 - 2012; Madison Mosaic Funds (12 funds), Vice President, 1996
- Present; Madison Funds (13) and Ultra Series Fund (16), Vice President, 2009 - 2012
|
|
Madison Mosaic
Funds (12), 1996 - Present; Capitol Bank of Madison, WI, 1995 - Present; American
Riviera Bank of Santa Barbara, CA, 2006 - Present
|
|
1
Interested person as defined in the 1940 Act. Considered an interested
Trustee because of the position held with the investment adviser of the Fund.
|
24
MSP | Madison Strategic Sector Premium
Fund | Trustees and Officers | continued
|
|
|
Position(s)
|
|
|
|
|
Name and
|
|
and Length of
|
|
Principal Occupation(s)
|
|
Other Directorships/
|
Year of
Birth
|
|
Time Served
|
|
During
Past Five Years
|
|
Trusteeships
|
|
Jay R. Sekelsky
1959
|
|
Vice President,
2005 - Present
|
|
MIH, Executive
Director and Chief Investment Officer, 2010 - Present; Managing Director and Vice
President, 1990 - 2010; MAM, Executive Director and Chief Investment Officer, 2010
- Present; Madison, Executive Director and Chief Investment Officer, 2010 - Present;
Vice President, 1996 - 2010; Madison Mosaic Funds (12 funds), Vice President, 1996
- Present; Madison Covered Call and Equity Strategy Fund, Vice President, 2013 - Present; Madison
Funds (13) and Ultra Series Fund (16), Vice President, 2009 - Present
|
|
N/A
|
|
Paul A. Lefurgey
1964
|
|
Vice President,
2010 - Present
|
|
MIH, Managing
Director and Head of Fixed Income Investments, 2005 - Present; MAM and Madison,
Managing Director and Head of Fixed Income Investments, 2010 - Present; MEMBERS
Capital Advisors, Inc. (MCA) (investment advisory firm), Madison, WI,
Vice President 2003 - 2005; Madison Mosaic Funds (12 funds), Vice President, 2009
- Present; Madison Funds (13) and Ultra Series Fund (16), Vice President, 2009 - Present; MCN, Vice
President, 2013 - Present
|
|
N/A
|
|
Greg D. Hoppe
1969
|
|
Treasurer,
2009 - Present; Chief Financial Officer, 2005 - 2009
|
|
MIH and Madison,
Vice President, 1999 - Present; MAM, Vice President, 2009 - Present; Madison Mosaic
Funds (12 funds), Treasurer, 2009 - Present; Chief Financial Officer, 1999 - 2009;
Madison Covered Call and Equity Strategy Fund, Vice President, 2008 - Present; Madison
Funds(13) and Ultra Series Fund (16), Treasurer, 2009 - Present; MCN, Treasurer,
2013 - Present
|
|
N/A
|
|
25
MSP | Madison Strategic Sector Premium
Fund | Trustees and Officers | continued
|
|
|
Position(s)
|
|
|
|
|
Name and
|
|
and Length of
|
|
Principal Occupation(s)
|
|
Other Directorships/
|
Year of
Birth
|
|
Time Served
|
|
During
Past Five Years
|
|
Trusteeships
|
|
Holly S. Baggot
1960
|
|
Secretary
and Assistant Treasurer, 2010 - Present
|
|
MIH and Madison,
Vice President, 2010 - Present; MAM, Vice President, 2009 - Present; Madison Mosaic
Funds (12 funds), Secretary and Assistant Treasurer, 2009 - Present; Madison Funds
(13) and Ultra Series Fund (16), Assistant Treasurer, 2009 - Present; Secretary,
1999 - Present; Treasurer, 2008 - 2009; Assistant Treasurer, 1997 - 2007; MFD Distributor,
LLC (MFD) (an affiliated brokerage firm of the Adviser), Vice President,
2012 - Present; MCA, Director-Mutual Funds, 2008 - 2009; Director-Mutual Fund Operations,
2006 - 2008; Operations Officer-Mutual Funds, 2005 - 2006; Senior Manager-Product
& Fund Operations, 2001 - 2005; MCN, Secretary and Asst. Treasurer, 2013 - Present
|
|
N/A
|
|
W. Richard
Mason 1960
|
|
Chief Compliance
Officer, 2005 - Present; Corporate Counsel and Assistant Secretary, 2009 - Present;
General Counsel and Secretary, 2005 - 2009
|
|
MIH, MAM,
Madison, and Madison Scottsdale, LC (an affiliated investment advisory firm of the
Adviser), Chief Compliance Officer and Corporate Counsel, 2009 - Present; General
Counsel and Chief Compliance Officer, 1996 - 2009; MFD, Principal, 1998 - Present;
Concord Asset Management, LLC (Concord) (an affiliated investment advisory
firm of the Adviser), General Counsel, 1996 - 2009; NorthRoad Capital Management
LLC (NorthRoad) (an affiliated investment advisory firm of the Adviser),
Chief Compliance Officer and Corporate Counsel, 2011 - Present; Madison Mosaic Funds
(12 funds), Chief Compliance Officer, Corporate Counsel, and Assistant Secretary,
2009 - Present; Secretary, General Counsel, Chief Compliance Officer, 1992 - 2009;
Madison Funds (13) and Ultra Series Fund (16), Chief Compliance Officer, Corporate
Counsel and Assistant Secretary, 2009 - Present; MCN, Chief Compliance Officer,
Corporate Counsel and Assistant Secretary; 2013 - Present
|
|
N/A
|
|
26
MSP | Madison Strategic Sector Premium
Fund | Trustees and Officers | continued
|
|
|
Position(s)
|
|
|
|
|
Name and
|
|
and Length of
|
|
Principal Occupation(s)
|
|
Other Directorships/
|
Year of
Birth
|
|
Time Served
|
|
During
Past Five Years
|
|
Trusteeships
|
|
Pamela M.
Krill 1966
|
|
General Counsel,
Chief Legal Officer and Assistant Secretary, 2010 - Present
|
|
MIH, MAM,
Madison, Madison Scottsdale, LC, MFD, and Concord, General Counsel and Chief Legal
Officer, 2009 - Present; NorthRoad, General Counsel & Chief Legal Officer,
2011 - Present; MCN, General Counsel, Chief Legal Officer and Assistant Secretary,
2013 - Present; Madison Mosaic Funds (12 funds), General Counsel, Chief Legal Officer
and Assistant Secretary, 2009 - Present; Madison Funds (13) and Ultra Series Fund
(16), General Counsel, Chief Legal Officer and Assistant Secretary, 2009 - Present;
CUNA Mutual Insurance Society (insurance company with affiliated investment advisory,
brokerage and mutual fund operations), Madison, WI, Managing Associate General Counsel-Securities
& Investments, 2007 - 2009; Godfrey & Kahn, S.C. (law firm), Madison and
Milwaukee, WI, Shareholder, Partner, Securities Practice Group, 1994-2007
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Independent Trustees
|
|
|
|
Position(s)
|
|
|
|
Portfolios
|
|
|
Name and
|
|
and Length
of
|
|
Principal
Occupation(s)
|
|
Overseen
in
|
|
|
Year of
Birth
|
|
Time Served
1
|
|
During
Past Five Years
|
|
Fund Complex
2
|
|
Other Directorships/Trusteeships
|
|
Philip E.
Blake 1943
|
|
Trustee, 2005
- Present
|
|
Retired investor;
Lee Enterprises, Inc (news and advertising publisher), Madison, WI, Vice President,
1998 - 2001; Madison Newspapers, Inc., Madison, WI, President and Chief Executive
Officer, 1993 - 2000
|
|
43
|
|
Edgewood College,
2003 - Present; Chairman of the Board, 2010 - 2012; Nerites Corporation (technology
company), 2004 - Present; MCN, 2012 - Present; Madison Mosaic Funds (12 funds),
2001 - Present; Madison Covered Call & Equity Strategy Fund, 2013 - Present;
Madison Funds (13) and Ultra Series Fund (16), 2009 - Present
|
|
James R Imhoff,
Jr. 1944
|
|
Trustee, 2005
- Present
|
|
First Weber
Group (real estate brokers), Madison, WI, Chief Executive Officer, 1996 - Present
|
|
43
|
|
Park Bank,
1978 - Present; Madison Mosaic Funds (12 funds), 1996 - Present; Madison Covered
Call & Equity Strategy Fund, 2005 - Present; Madison Funds (13) and Ultra Series
Fund (16), 2009 - Present
|
|
27
MSP | Madison Strategic Sector Premium
Fund | Trustees and Officers | concluded
|
|
|
Position(s)
|
|
|
|
Portfolios
|
|
|
Name and
|
|
and Length
of
|
|
Principal
Occupation(s)
|
|
Overseen
in
|
|
|
Year of
Birth
|
|
Time Served
1
|
|
During
Past Five Years
|
|
Fund Complex
2
|
|
Other Directorships/Trusteeships
|
|
Lorence D.
Wheeler 1938
|
|
Trustee, 2005
- Present
|
|
Retired investor;
Credit Union Benefits Services, Inc. (a provider of retirement plans and related
services for credit union employees nationwide), Madison, WI, President, 1986 - 1997
|
|
43
|
|
Grand Mountain
Bank FSB and Grand Mountain Bancshares, Inc. 2003 - Present; Madison Mosaic Funds
(12 funds), 1996 - Present; Madison Covered Call & Equity Strategy Fund, 2005
- Present; Madison Funds (13) and Ultra Series Fund (16), 2009 - Present
|
|
1
Independent Trustees serve in such capacity until the Trustee reaches the age of
76, unless retirement is waived by unanimous vote of the remaining Trustees on an
annual basis.
|
|
2
As of the date of this report, the fund complex consists of the Fund, the Madison
Funds (f/k/a MEMBERS Mutual Funds) with 13 portfolios, the Ultra Series Fund with
16 portfolios, and the Madison Mosaic Equity, Income, Tax-Free and Government Money
Market Trusts, which together have 12 portfolios, the Madison Covered Call &
Equity Strategy Fund (a closed-end fund) for a grand total of 43 separate portfolios
in the fund complex. Not every Trustee is a member of the Board of Trustees of every
fund in the fund complex, as noted above.
|
28
MSP | Madison Strategic Sector Premium
Fund | December 31, 2012
Dividend Reinvestment Plan
Unless the registered owner of common shares
elects to receive cash by contacting Computershare Trust Company, Inc. (the Plan
Administrator), all dividends declared on common shares of the Fund will be
automatically reinvested by the Plan Administrator in the Funds Dividend Reinvestment
Plan (the Plan) in additional common shares of the Fund. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by notice if received and processed by the Plan Administrator prior
to the dividend record date; otherwise such termination or resumption will be effective
with respect to any subsequently declared dividend or other distribution. Some brokers
may automatically elect to receive cash on your behalf and may re-invest that cash
in additional common shares of the Fund for you. If you wish for all dividends declared
on your common shares of the Fund to be automatically reinvested pursuant to the
Plan, please contact your broker.
The Plan Administrator will open an account
for each common shareholder under the Plan in the same name in which such common
shareholders common shares are registered. Whenever the Fund declares a dividend
or other distribution (together, a Dividend) payable in cash, non-participants
in the Plan will receive cash and participants in the Plan will receive the equivalent
in common shares. The common shares will be acquired by the Plan Administrator for
the participants accounts, depending upon the circumstances described below,
either (i) through receipt of additional unissued but authorized common shares from
the Fund (Newly Issued Common Shares) or (ii) by purchase of outstanding
common shares on the open market (Open-Market Purchases) on the New
York Stock Exchange or elsewhere. If, on the payment date for any Dividend, the
closing market price plus estimated brokerage commission per common share is equal
to or greater than the net asset value per common share, the Plan Administrator
will invest the Dividend amount in Newly Issued Common Shares on behalf of the participants.
The number of Newly Issued Common Shares to be credited to each participants
account will be determined by dividing the dollar amount of the Dividend by the
net asset value per common share on the payment date; provided that, if the net
asset value is less than or equal to 95% of the closing market value on the payment date, the dollar amount of the Dividend
will be divided by 95% of the closing market price per common share on the payment
date. If, on the payment date for any Dividend, the net asset value per common share
is greater than the closing market value plus estimated brokerage commission, the
Plan Administrator will invest the Dividend amount in common shares acquired on
behalf of the participants in Open-Market Purchases.
If, before the Plan Administrator
has completed its Open-Market Purchases, the market price per common share exceeds
the net asset value per common share, the average per common share purchase price
paid by the Plan Administrator may exceed the net asset value of the common shares,
resulting in the acquisition of fewer common shares than if the Dividend had been
paid in Newly Issued Common Shares on the Dividend payment date. Because of the
foregoing difficulty with respect to Open-Market Purchases, the Plan provides that
if the Plan Administrator is unable to invest the full Dividend amount in Open-Market
Purchases during the purchase period or if the market discount shifts to a market
premium during the purchase period, the Plan Administrator may cease making Open-Market
Purchases and may invest the uninvested portion of the Dividend amount in Newly
Issued Common Shares at net asset value per common share at the close of business
on the Last Purchase Date provided that, if the net asset value is less than or
equal to 95% of the then current market price per common share; the dollar amount
of the Dividend will be divided by 95% of the market price on the payment date.
The Plan Administrator maintains all shareholders accounts in the Plan and furnishes written confirmation of all transactions
in the accounts, including information needed by shareholders for tax records. Common
shares in the account of each Plan participant will be held by the Plan Administrator
on behalf of the Plan participant, and each shareholder proxy will include those
shares purchased or received pursuant to the Plan. The Plan Administrator will forward
all proxy solicitation materials to participants and vote proxies for shares held
under the Plan in accordance with the instruction of the participants.
29
MSP | Madison Strategic Sector Premium
Fund | Dividend Reinvestment Plan | concluded
There will be no brokerage charges with
respect to common shares issued directly by the Fund. However, each participant
will pay a pro rata share of brokerage commission incurred in connection with Open-Market
Purchases. The automatic reinvestment of Dividends will not relieve participants
of any Federal, state or local income tax that may be payable (or required to be
withheld) on such Dividends.
The Fund reserves the right to amend or terminate
the Plan. There is no direct service charge to participants with regard to purchases in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence or questions concerning the Plan should be directed
to the Plan Administrator, Computershare Trust Company, N.A., 250 Royall St., Canton,
MA 02021, Phone Number: 1-877-373-6374.
30
Board of
Trustees
|
Officers
|
Investment
Adviser
|
Philip E.
Blake
|
Katherine
L. Frank
|
Madison Asset
Management, LLC
|
Frank Burgess
|
President
|
550 Science
Drive
|
Katherine
L. Frank
|
Frank Burgess
|
Madison, WI
53711
|
James Imhoff,
Jr.
|
Vice President
|
|
Lorence Wheeler
|
Jay Sekelsky
|
Custodian
|
|
Vice President
|
State Street
Bank
|
|
Paul Lefurgey
|
Kansas City,
Missouri
|
|
Vice President
|
|
|
W. Richard
Mason
|
Transfer
Agent
|
|
Chief Compliance
Officer
|
Computershare
Investor Services, LLC
|
|
&
Asst. Secretary
|
Canton, Massachusetts
|
|
Greg Hoppe
|
|
|
Treasurer
|
Independent
Registered
|
|
Holly S. Baggot
|
Public
Accounting Firm
|
|
Secretary
& Assistant Treasurer
|
Grant Thornton LLP*
|
|
Pam Krill
|
Chicago, Illinois
|
|
General
Counsel, CLO &
;
|
|
|
Asst. Secretary
|
|
*Grant Thornton
LLP audited the Funds 2012 financial statements; however, beginning January
1, 2013, Deloitte & Touche LLP has been appointed as the Funds independent
registered public accounting firm.
|
Question
concerning your shares of Madison Strategic Sector Premium Fund?
|
|
|
|
|
|
If your shares
are held in a Brokerage Account, contact your Broker
|
|
|
If you have
physical possession of your shares in certificate form, contact the Funds
Transfer Agent:
Computershare Trust Company, N.A., 250 Royall Street, Mail Stop
1A Canton, MA 02021
|
|
|
|
This report is sent to shareholders of Madison
Strategic Sector Premium Fund for their information. It is not a Prospectus, circular
or representation intended for use in the purchase or sale of shares of the Fund
or of any securities mentioned in this report.
In July 2012, the Fund submitted a CEO
annual certification to the NYSE in which the Funds principle executive officer
certified that she was not aware, as of the date of the certification, of any violation
by the Fund of the NYSEs Corporate Governance listing standards. In addition,
as required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules,
the Funds principle executive and principle financial officer have made quarterly
certifications, including in filings with the SEC on forms N-CSR and N-Q, relating
to, among other things, the Funds disclosure controls and procedures and internal
control over financial reporting.
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