SCHEDULE 14A
PROXY STATEMENT
PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by Registrant [X]
Filed by Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential for Use of the Commission Only as permitted by Rule 14a-6(e)(2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11c or Rule 14a-12
Flaherty & Crumrine Preferred Income Fund Incorporated
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(Name of Registrant as Specified in Its Charter)
__________________________________________
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies: __________
(2) Aggregate number of securities to which transaction applies: _____________
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11. (Set forth the amount on which the filing fee
is calculated and state how it was
determined):______________________________________________________________
(4) Proposed maximum aggregate value of transaction:__________________________
(5) Total fee paid:___________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:___________________________________________________
(2) Form, Schedule or Registration Statement No.:_____________________________
(3) Filing Party: ____________________________________________________________
(4) Date Filed: ______________________________________________________________
FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED (NYSE: PFD)
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED (NYSE: PFO)
301 E. Colorado Boulevard, Suite 720
Pasadena, California 91101
QUESTIONS AND ANSWERS
WHY DID THE BOARDS OF DIRECTORS CALL A SPECIAL MEETING?
The Funds currently use Preferred Stock leverage as a strategy to attempt to
enhance the dividends paid to Common Stock shareholders. The auction market that
sets the rates for this Preferred Stock has recently experienced severe
disruptions - consequently, the Funds are currently paying higher rates relative
to other short-term rates than they have historically. In light of this
turbulence, the Boards of Directors may determine to alter the leverage strategy
employed by the Funds. Potential alternatives could include modifying the terms
of the Preferred Stock, refinancing some or all of the Preferred Stock shares
with either a new preferred stock or refinancing some or all of the Preferred
Stock shares with debt financing. The Boards of Directors have not approved any
course of action and may decide to leave the current Preferred Stock outstanding
or redeem some or all of the shares of Preferred Stock.
As discussed in greater detail below and in the Joint Proxy Statement, the Funds
do not currently have the flexibility to pursue borrowing as a source of
financing - flexibility which is available to many other closed-end funds,
including the Funds' sister funds, Flaherty & Crumrine/Claymore Preferred
Securities Income Fund (FFC) and Flaherty & Crumrine/Claymore Total Return Fund
(FLC).
Your "Yes" vote on the Proposals will give the Funds greater flexibility to
respond to changing market conditions.
WHY ARE THE BOARDS OF DIRECTORS RECOMMENDING A CHANGE TO THE FUNDS' INVESTMENT
POLICIES?
As discussed above, the Boards of Directors may consider alternatives for
leveraging the returns to Common Stock shareholders. One path that the Boards of
Directors may select is debt financing - for example, by borrowing money from a
bank or other lender and then using the proceeds to redeem some or all of the
outstanding Preferred Stock.
When the Funds were designed over 15 years ago, it was contemplated that they
would always use Preferred Stock as leverage. Consequently, as discussed in
Proposal 1 of the attached Joint Proxy Statement, the Funds' investment policies
do not currently permit leveraging through borrowing, issuing debt securities or
using other debt financing strategies which are similar to borrowing.
These investment policies are more restrictive than legally required and more
restrictive than many other closed-end funds, such as the Funds' sister funds,
FFC and FLC.
After reviewing options available to the Funds, Fund management has recommended,
and the Boards of Directors have approved, modernizing each Fund's investment
policies to grant it the flexibility to use debt financing for leverage.
The Boards of Directors unanimously recommend that shareholders vote "Yes" on
Proposals 1-A, 1-B and 1-C.
WHY DID THE BOARDS OF DIRECTORS APPROVE A CHANGE TO THE INVESTMENT ADVISORY
AGREEMENTS FOR THE FUNDS?
Each Fund has an investment advisory agreement with Flaherty & Crumrine
Incorporated. In exchange for the investment advice to and management of the
Funds, Flaherty & Crumrine receives a monthly fee. This fee is currently
assessed against the "net assets" of each Fund, with "net assets" calculated as
the difference between a Fund's total assets (i.e., the value of its portfolio)
and the Fund's liabilities. The Preferred Stock is explicitly excluded as a
liability of each Fund when calculating this fee.
If a Fund were to use a form of leverage other than Preferred Stock, the assets
attributable to that leverage would be a liability for purposes of the "net
assets" calculation, and would not count when calculating the fee paid to
Flaherty & Crumrine. The Boards of Directors have previously concluded (most
recently this past January) that the fees being paid to Flaherty & Crumrine are
reasonable. They do not favor lowering the fees indirectly by changing the form
of the Fund's leverage from Preferred Stock to debt financing.
As discussed in Proposal 2 of the attached Joint Proxy Statement, the Boards of
Directors have approved the change to the investment advisory agreements to
clarify that financial leverage utilized by the Funds - whether in the form of
Preferred Stock or debt financing - does not constitute a liability for the
calculation of the investment advisory fee. Except for this change, the actual
fee calculation formula would not change (although the amount of the fee would
depend on the amount of leverage outstanding at any given time, whether in the
form of preferred stock or debt financing) - in other words, the Fund would
continue to pay the same percentage of net assets available to Common Stock
shareholders as it does currently.
The Boards of Directors recommends that shareholders vote "Yes" on Proposal 2.
FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED (NYSE: PFD)
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED (NYSE: PFO)
301 E. Colorado Boulevard, Suite 720
Pasadena, California 91101
NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS
To Be Held on May 21, 2008
To the Shareholders:
Notice is hereby given that Special Meetings of Shareholders of Flaherty &
Crumrine Preferred Income Fund Incorporated and Flaherty & Crumrine Preferred
Income Opportunity Fund Incorporated (each a "Fund" and collectively, the
"Funds"), each a Maryland corporation, will be held at the offices of the Funds
at 301 E. Colorado Boulevard, Suite 720, Pasadena, California 91101 at 9:00 a.m.
PT, on May 21, 2008, for the following purposes:
1. To approve changes to certain fundamental investment policies
(Proposal 1).
2. To approve an amended investment advisory agreement (Proposal 2).
3. To transact such other business as may properly come before the
Special Meetings or any adjournments thereof.
YOUR VOTE IS IMPORTANT!
The Board of Directors of each Fund has fixed the close of business on
March 31, 2008 as the record date for the determination of shareholders of
each Fund entitled to notice of and to vote at the Special Meetings.
By Order of the Boards of Directors,
[______ __], 2008 CHAD C. CONWELL
SECRETARY
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SEPARATE PROXY CARDS ARE ENCLOSED FOR EACH FUND IN WHICH YOU OWN SHARES.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETINGS ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD(S), OR VOTE BY TELEPHONE OR
INTERNET. THE PROXY CARD(S) SHOULD BE RETURNED IN THE ENCLOSED ENVELOPE, WHICH
NEEDS NO POSTAGE IF MAILED IN THE CONTINENTAL UNITED STATES. INSTRUCTIONS FOR
THE PROPER EXECUTION OF PROXIES ARE SET FORTH ON THE INSIDE COVER.
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INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance
to you and may minimize the time and expense to the Fund(s) involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card(s).
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to a name shown in the registration.
3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration. For
example:
REGISTRATION VALID SIGNATURE
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CORPORATE ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAN OR ESTATE ACCOUNTS
(1) John B. Smith, Cust., John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Executor, John B. Smith, Jr., Executor
estate of Jane Smith
FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED (NYSE: PFD)
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED (NYSE: PFO)
301 E. Colorado Boulevard, Suite 720
Pasadena, California 91101
SPECIAL MEETINGS OF SHAREHOLDERS
May 21, 2008
JOINT PROXY STATEMENT
This document is a joint proxy statement ("Joint Proxy Statement") for
Flaherty & Crumrine Preferred Income Fund Incorporated ("PREFERRED INCOME FUND"
OR "PFD") and Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
("PREFERRED INCOME OPPORTUNITY FUND" OR "PFO") (EACH A "FUND" AND COLLECTIVELY,
THE "FUNDS"). This Joint Proxy Statement is furnished in connection with the
solicitation of proxies by each Fund's Board of Directors (each a "Board" and
collectively, the "Boards") for use at a Special Meeting of Shareholders of each
Fund to be held on May 21, 2008, at 9:00 a.m. PT, at the offices of the Funds,
301 E. Colorado Boulevard, Suite 720, Pasadena, California 91101 and at any
adjournments thereof (each a "Meeting" and collectively, the "Meetings").
On or about February 19, 2008, a Joint Proxy Statement was sent to you so
that you may vote on the election of Directors at the Funds' annual meeting to
be held on April 18, 2008, and you may have received proxy solicitations by
mail, telephone, or personal interview relating to the election of Directors at
the annual meeting. This new proxy statement is for a special meeting of each
Fund's shareholders on May 21, 2008 and involves new proposals relating to the
operation of the Funds. You will also receive new proxy solicitations by mail,
telephone, or personal interview for the new proposals described in this proxy
statement. YOUR VOTE IS IMPORTANT. EVEN IF YOU HAVE ALREADY VOTED FOR THE
ELECTION OF DIRECTORS AT THE ANNUAL MEETING, PLEASE VOTE ON THE PROPOSALS
DESCRIBED HEREIN. EVEN IF YOU PLAN TO ATTEND AND VOTE IN PERSON AT THE MEETINGS,
PLEASE PROMPTLY FOLLOW THE ENCLOSED INSTRUCTIONS TO SUBMIT A PROXY BY
COMPLETING, SIGNING, AND DATING THE ENCLOSED PROXY CARDS, OR ALTERNATIVELY
PROVIDING A PROXY BY TELEPHONE OR INTERNET. THE PROXY CARD(S) SHOULD BE RETURNED
IN THE ENCLOSED ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE CONTINENTAL
UNITED STATES. INSTRUCTIONS FOR THE PROPER EXECUTION OF PROXIES ARE SET FORTH ON
[THE OPPOSITE PAGE].
A Notice of Special Meetings of Shareholders and proxy card for each Fund
of which you are a shareholder accompany this Joint Proxy Statement. Proxy
solicitations will be made beginning on or about [______ __], 2008, primarily by
mail, but proxy solicitations may also be made by telephone, telefax or personal
interviews conducted by officers of each Fund, Flaherty & Crumrine Incorporated
("Flaherty & Crumrine" or the "Adviser"), the investment adviser of each Fund,
and PFPC Inc. ("PFPC"), the transfer agent and administrator of each Fund and a
member of The PNC Financial Services Group, Inc. The Adviser, on behalf of the
Funds, has also retained [_____________________], a proxy solicitation firm, to
assist in the solicitation of proxies. If you need more information or have any
questions on how to cast your vote, please call [____________] at [_________].
The costs of proxy solicitation and expenses incurred in connection with the
preparation of this Joint Proxy Statement and its enclosures will be shared
proportionally by the Funds. Each Fund also will reimburse brokerage firms and
others for their expenses in forwarding solicitation material to the beneficial
owners of its shares. This proxy statement and the enclosed form of proxy are
first being sent to shareholders on or about April 4, 2008.
THE ANNUAL REPORT OF EACH FUND, INCLUDING AUDITED FINANCIAL STATEMENTS FOR
THE FISCAL YEAR ENDED NOVEMBER 30, 2007, IS AVAILABLE UPON REQUEST, WITHOUT
CHARGE, BY WRITING TO PFPC INC., P.O. BOX 43027, PROVIDENCE, RHODE ISLAND
02940-3027, OR CALLING 1-800-331-1710. EACH FUND'S ANNUAL REPORT IS ALSO
AVAILABLE ON THE FUNDS' WEBSITE - WWW.PREFERREDINCOME.COM - AND THE SECURITIES
AND EXCHANGE COMMISSION'S ("SEC") WEBSITE (WWW.SEC.GOV).
If the enclosed proxy card is properly executed and returned in time to be
voted at the relevant Meeting, the Shares (as defined below) represented thereby
will be voted in accordance with the instructions marked thereon. Unless
instructions to the contrary are marked thereon, a proxy will be voted "FOR"
Proposal 1 and Proposal 2. Any shareholder who has given a proxy has the right
to revoke it at any time prior to its exercise either by attending the relevant
Meeting and voting his or her Shares in person or by submitting a letter of
revocation or a later-dated proxy to the appropriate Fund delivered at the above
address prior to the date of the Meeting.
Under the Bylaws of each Fund, the presence in person or by proxy of the
holders of a majority of the outstanding shares of the Fund entitled to vote
shall be necessary and sufficient to constitute a quorum for the transaction of
business (a "Quorum") at that Fund's meeting. If a proposal is to be voted upon
by only one class of a Fund's shares, a Quorum of that class of shares must be
present at the Meeting in order for the proposal to be considered. In the event
that a Quorum is not present at a Meeting, or in the event that a Quorum is
present but sufficient votes to approve any of the proposals are not received,
the persons named as proxies may propose one or more adjournments of the Meeting
to permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those shares represented at the Meeting in
person or by proxy. If a Quorum is present, the persons named as proxies will
vote those proxies which they are entitled to vote "FOR" a proposal in favor of
such an adjournment with respect to that proposal and will vote those proxies
required to be voted "AGAINST" a proposal against any such adjournment with
respect to that proposal. A shareholder vote may be taken on a proposal in the
Joint Proxy Statement prior to any such adjournment if sufficient votes have
been received for approval of that proposal.
Each Fund has two classes of capital stock including common stock, par
value $0.01 per share (the "Common Stock") and preferred stock (the "Preferred
Stock" and together with the Common Stock, the "Shares"). Each Fund has one
series of Preferred Stock outstanding which is classified as Auction Preferred
Stock (formerly known as "Money Market Cumulative Preferred(TM) Stock"
(MMP(R))). Each Share is entitled to one vote at the Meeting with respect to
matters to be voted on by the class to which such Share belongs, with pro rata
voting rights for any fractional Shares. On the record date, March 31, 2008, the
following number of Shares of each Fund were issued and outstanding:
COMMON STOCK PREFERRED STOCK
NAME OF FUND OUTSTANDING OUTSTANDING
------------ ------------ ---------------
Preferred Income Fund (PFD) [__________] 800
Preferred Income Opportunity Fund (PFO) [__________] 700
To the knowledge of each Fund and its Board, the following shareholder(s)
or "group," as that term is defined in Section 13(d) of the Securities Exchange
Act of 1934, as amended (the "1934 Act"), is the beneficial owner or owner of
record of more than 5% of the relevant Fund's outstanding Shares as of March 31,
2008*:
NAME AND ADDRESS OF AMOUNT AND NATURE
BENEFICIAL/RECORD OWNER TITLE OF CLASS OF OWNERSHIP PERCENT OF CLASS
--------------------------- ----------------- ------------------ ----------------
Cede & Co.** Common Stock PFD - 10,060,836 95.36%
Depository Trust Company (record)
55 Water Street, 25th Floor PFO - 11,300,994 96.06%
New York, NY 10041 (record)
Preferred Stock PFD - 800 (record) 100%
PFO - 700 (record) 100%
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* As of [_______ __], 2008, the Directors and officers, as a group, owned
less than 1% of each class of Shares of each Fund.
** A nominee partnership of The Depository Trust Company.
This Joint Proxy Statement is being used in order to reduce the
preparation, printing, handling and postage expenses that would result from the
use of a separate proxy statement for each Fund. Shareholders of each Fund will
vote as a single class, except as described below, and will vote separately on
each proposal on which shareholders of that Fund are entitled to vote. Separate
proxy cards are enclosed for each Fund in which a shareholder is a record owner
of Shares. Thus, if a proposal is approved by shareholders of one Fund and not
approved by shareholders of the other Fund, the proposal will be implemented for
the Fund that approved the
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proposal and will not be implemented for the Fund that did not approve the
proposal. It is therefore essential that shareholders complete, date and sign
each enclosed proxy card. Shareholders of each Fund are entitled to vote on the
proposals pertaining to that Fund.
In order that your Shares may be represented at the Meetings, you are
requested to vote on the following matters:
SUMMARY OF VOTING RIGHTS ON PROXY PROPOSALS
PREFERRED INCOME FUND (PFD)
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PROPOSAL VOTING REQUIREMENTS
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1. Changes in Common Stock and Preferred Stock Shareholders, voting
Fundamental Investment together as a single class, and also separately the
Policies Preferred Stock Shareholders, voting as a separate
class.
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2. Amended Investment Common Stock and Preferred Stock Shareholders, voting
Advisory Agreement together as a single class.
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3. Other Business Common Stock and Preferred Stock Shareholders, voting
together as a single class
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PREFERRED INCOME OPPORTUNITY FUND (PFO)
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PROPOSAL VOTING REQUIREMENTS
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1. Changes in Common Stock and Preferred Stock Shareholders, voting
Fundamental Investment together as a single class, and also separately the
Policies Preferred Stock Shareholders, voting as a separate
class.
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2. Amended Investment Common Stock and Preferred Stock Shareholders, voting
Advisory Agreement together as a single class.
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3. Other Business Common Stock and Preferred Stock Shareholders, voting
together as a single class
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PROPOSAL 1: REVISION OF FUNDAMENTAL INVESTMENT POLICIES
The Funds, like all registered funds, are required by law to have policies
governing certain of their investment practices that may only be changed with
the prior approval of the holders of a majority of a Fund's outstanding voting
securities, voting as a single class, and approval of the holders of a majority
of a Fund's outstanding shares of Preferred Stock, voting as a separate class.
These policies are referred to as "fundamental."
When the Funds were organized, it was assumed that the Funds would only
leverage their portfolios through this issuance of preferred stock, and the
Funds' ability to leverage through debt financing was restricted. Each of PFD's
and PFO's Boards have reviewed the Fund's current fundamental policies on
borrowing, issuing senior securities and purchasing securities on margin and
have determined that each Fund has fundamental policies in these areas that are
more restrictive than the law requires. The Board of each Fund has concluded
that those policies should be revised to permit each Fund to leverage its
portfolio using debt financing in appropriate circumstances. At the Meetings,
shareholders of PFD and PFO will be asked to approve the revised policies.
The revised fundamental policies are expected to give the Funds the
flexibility to pursue debt financing as a means of leverage, in addition to the
use of preferred stock. The revised policies will not affect the investment
objectives of the Funds, which will remain unchanged. The Funds will continue to
be managed in accordance with the investment parameters described in their
prospectuses and in accordance with applicable law.
The revised fundamental policies maintain important shareholder
protections, while providing the Funds with greater flexibility to leverage the
Funds' assets than is currently available. Accordingly, the policies are written
and will be interpreted broadly. For example, the revised policies allow the
investment practice in question to be
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conducted to the extent permitted by the Investment Company Act of 1940, as
amended (the "1940 Act"). It is possible that, as the financial markets continue
to evolve over time, the 1940 Act and the related rules may be further amended
to address changed circumstances and new investment opportunities. It is also
possible that the 1940 Act and the related rules could change for other reasons.
For flexibility, the revised policies will be interpreted to refer to the 1940
Act and the related rules as they are in effect from time to time. This will
allow the Funds to benefit from future changes in applicable law without seeking
additional costly and time-consuming shareholder approvals. To the extent the
Funds engage in new investment practices, the Funds may be subject to additional
risks. Before a material change is made in a Fund's investment practices in
response to the revised policies, the Fund's Board will consider and approve
such change and the Fund's shareholders will be notified, as appropriate.
Two of the revised fundamental policies also refer to interpretations or
modifications of, or relating to, the 1940 Act from the SEC or members of its
staff, as well as interpretations or modifications of other authorities having
jurisdiction over the Funds. These authorities could include courts. From time
to time the SEC and members of its staff issue formal or informal views on
various provisions of the 1940 Act and the related rules, including through
no-action letters and exemptive orders. The revised policies will be interpreted
to refer to these interpretations or modifications as they are given from time
to time. Again, this will allow the Funds the flexibility to benefit from future
changes in the positions taken by regulators and others without the expense and
delay of seeking further shareholder approvals.
When a revised policy provides that an investment practice may be
conducted as permitted by the 1940 Act, the policy will be interpreted to mean
either that the 1940 Act expressly permits the practice or that the 1940 Act
does not prohibit the practice.
If the revised policies are approved, subject to future Board approval,
the policies could permit the Funds to engage in borrowing or other forms of
debt leverage in order to potentially redeem Shares of Preferred Stock. As
discussed in a website posting dated February 14, 2008, the auction process for
the Funds' Preferred Stock began to fail and has continued to fail. This means
that there has not been sufficient interest from bidders in the auctions to
purchase all the Shares being offered for sale. In a "failed" auction, existing
Preferred Stock shareholders are able to sell some of their Shares to the extent
that there are buyers, but are not able to sell their remaining Shares. Rather,
they continue to hold their Shares and earn a "maximum rate" set according to a
pre-determined formula. A failed auction is not an event of default. A failed
auction does not require the redemption of Preferred Stock by the Funds.
Therefore, the Shares remain outstanding, and pay the maximum rate until "buy"
and "hold" orders again exceed "sell" orders in a future auction. The provisions
allowing for failed auctions are intended to provide fair compensation for
Preferred Stock shareholders during periods of disruptions, while also allowing
the Funds the necessary time to properly consider the situation and explore
potential alternatives. One potential alternative that would be permitted as a
result of the proposed changes in fundamental policies would be the redemption
of some or all of the Preferred Stock through the use of borrowing, issuing
senior debt securities or purchasing securities on margin. THE BOARDS HAVE NOT
DETERMINED TO REDEEM ANY PREFERRED STOCK AND THE PRESENTATION OF THIS PROPOSAL
SHOULD NOT BE INTERPRETED TO MEAN THAT EITHER PFD OR PFO HAS DETERMINED TO
REDEEM ANY SHARES OF PREFERRED STOCK.
THE FOLLOWING DESCRIBES RISKS ASSOCIATED WITH LEVERAGING THE FUNDS THROUGH
THE USE OF BORROWING, ISSUING SENIOR SECURITIES AND PURCHASING SECURITIES ON
MARGIN, WHICH DO NOT MATERIALLY DIFFER FROM THE RISKS THE FUNDS CURRENTLY FACE
THROUGH LEVERAGING USING PREFERRED STOCK.
Borrowing, issuing senior securities and purchasing securities on margin
are forms of leverage. Because this leverage would subject a Fund to additional
costs, the Fund would only engage in these transactions when the Adviser and the
Board of Directors believe that the cost of carrying the assets to be acquired
through leverage would be lower than the Fund's expected return on its
investment. Should this differential narrow, a Fund would realize less of a
positive return, with the additional risk that, during periods of adverse market
conditions, the market value of the Fund's entire portfolio holdings (including
those acquired through leverage) may decline far in excess of the incremental
returns the Fund may have achieved, resulting in a loss to the Fund. Indeed, any
such leveraging tends to magnify market exposure and can result in higher than
expected losses to a Fund.
Because the investment risk associated with investment assets purchased
with funds obtained through leveraging would be borne solely by a Fund's Common
Stock shareholders, adverse movements in the price of a
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Fund's portfolio holdings would have a more severe effect on a Fund's net asset
value than if a Fund were not leveraged. Leverage creates risks for a Fund's
Common Stock shareholders, including the likelihood of greater volatility of a
Fund's net asset value and the market price of its shares, and the risk that
fluctuations in interest rates on borrowings or in the dividend rates on any
Preferred Stock may affect the return to Common Stock shareholders. If the
income from the securities purchased with such funds is not sufficient to cover
the cost of leverage, the net income of a Fund would be less than if leverage
had not been used, and therefore the amount available for distribution to Common
Stock shareholders as dividends will be reduced. In such an event, a Fund may
nevertheless determine to maintain its leveraged position in order to avoid
capital losses on securities purchased with the leverage. Further, all expenses
associated with borrowing, such as interest expenses and transaction costs, will
be borne solely by a Fund's Common Stock shareholders.
Also, if the asset coverage for borrowing or other senior securities of a
Fund declines below the limits specified in the 1940 Act, the Fund may be
required to sell a portion of its investments when it may not be advantageous to
do so. In the extreme, sales of investments required to meet asset coverage
tests imposed by the 1940 Act could also cause a Fund to lose its status as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). If a Fund were unable to make adequate distributions to
shareholders because of asset coverage or other restrictions, it could fail to
qualify as a regulated investment company for federal income tax purposes and,
even if it did not fail to so qualify, it could become liable for income and
excise tax on the portion of its earnings which are not distributed on a timely
basis in accordance with applicable provisions of the Code. A Fund's willingness
to engage in leverage transactions, and the amount of such transactions, will
depend on many factors, the most important of which are investment outlook,
market conditions and interest rates. Successful use of a leveraging strategy
depends on the Adviser's ability to predict correctly interest rates and market
movements, and there is no assurance that a leveraging strategy will be employed
or will be successful during any period in which it is employed. If Proposal 2
is approved by shareholders and a Fund leverages using borrowing, senior debt
securities or margin purchases, the Adviser could be viewed as having an
economic incentive to utilize leverage because the use of leverage would
increase the Fund's "net assets" (as defined below) and hence the fee paid by
the Funds to the Adviser. However, the Funds were initially structured to be
leveraged with Preferred Stock, so that changing the form of leverage, in whole
or in part, should not enhance any such incentive. In fact, this consideration
would be mitigated because of the higher asset coverage requirements under the
1940 Act if the Funds, engaged in leverage through debt financing.
Flaherty & Crumrine has advised the Boards of PFD and PFO that, except as
described herein, the proposed revisions to the fundamental policies are not
expected to materially affect the manner in which each Fund is being managed at
this time. On this basis, the Boards of PFD and PFO recommend that shareholders
of PFD and PFO vote to revise the fundamental policies as discussed below.
PROPOSAL 1-A: REVISE THE FUNDAMENTAL POLICY RELATING TO BORROWING MONEY.
The Funds currently have a fundamental investment policy relating to
borrowing money. Each Fund may not:
BORROW MONEY, EXCEPT FOR TEMPORARY OR EMERGENCY PURPOSES, OR IN CONNECTION
WITH REPURCHASES OF ITS SHARES OR FOR CLEARANCE OF TRANSACTIONS, AND THEN
ONLY IN AMOUNTS NOT EXCEEDING 10% OF ITS TOTAL ASSETS (NOT INCLUDING THE
AMOUNT BORROWED) AND AS OTHERWISE DESCRIBED IN THIS PROSPECTUS. WHEN THE
FUND'S BORROWINGS EXCEED 5% OF THE VALUE OF ITS TOTAL ASSETS, THE FUND
WILL NOT MAKE ANY ADDITIONAL INVESTMENTS.
If shareholders of a Fund approve this proposal, the Fund's current
fundamental policy relating to the borrowing of money will be revised so that
the Fund may not:
BORROW MONEY, EXCEPT AS PERMITTED UNDER THE 1940 ACT, AS AMENDED, AND AS
INTERPRETED OR MODIFIED BY REGULATORY AUTHORITY HAVING JURISDICTION, FROM
TIME TO TIME.
DISCUSSION OF PROPOSED MODIFICATION. All registered funds are required to
have a fundamental policy about the borrowing of money. The 1940 Act generally
requires a registered fund to maintain asset coverage of 300% for so-called
"senior securities" that represent indebtedness. This means that, generally
speaking, for the registered
5
fund to borrow or otherwise issue debt (other than limited exceptions such as
temporary borrowing or a borrowing for emergency purposes up to 5% of the fund's
total assets), the fund must have total assets of at least twice the amount
borrowed. A registered fund that issues preferred stock must maintain asset
coverage of at least 200% with respect to the preferred stock. Asset coverage
means the ratio that the value of the fund's total assets, minus liabilities
other than borrowings, bears to the aggregate amount of all borrowings. Certain
widely used investment practices that involve a commitment by a fund to deliver
money or securities in the future are not considered by the SEC to be senior
securities. These include repurchase and reverse repurchase agreements, dollar
rolls, options, futures and forward contracts, provided that in each case a fund
segregates cash or liquid securities in an amount necessary to pay the
obligation or the fund holds an offsetting commitment from another party. The
revised policy will not affect the Funds' existing abilities to engage in these
practices. Similarly, the revised policy will be interpreted not to prevent
collateral arrangements with respect to swaps, options, forward or futures
contracts or other derivatives, or the posting of initial or variation margin.
The revised policy will permit the Funds to borrow money, and to engage in
trading practices that may be considered to be borrowing, to the fullest extent
permitted by the 1940 Act and related interpretations, as in effect from time to
time. The revised policy will be interpreted to permit a Fund to engage in
trading practices and investments that may be considered to be borrowing, such
as reverse repurchase agreements, dollar rolls, options, futures, options on
futures and forward contracts. In addition, short-term credits necessary for the
settlement of securities transactions and arrangements with respect to
securities lending will not be considered to be borrowings under the revised
policy. Practices and investments that may involve leverage but are not
considered to be borrowings are not subject to the revised policy.
EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 1-A.
PROPOSAL 1-B: REVISE THE FUNDAMENTAL POLICY RELATING TO ISSUING SENIOR
SECURITIES.
The Funds currently have a fundamental investment policy relating to
senior securities. Each Fund may not:
ISSUE SENIOR SECURITIES OTHER THAN PREFERRED STOCK.
If shareholders of a Fund approve this proposal, the Fund's current
fundamental policy relating to issuing senior securities will be revised so that
the Fund may not:
ISSUE SENIOR SECURITIES TO THE EXTENT SUCH ISSUANCE WOULD VIOLATE
APPLICABLE LAW.
DISCUSSION OF PROPOSED POLICY. All registered funds are required to have a
fundamental policy about issuing "senior securities," which are defined as fund
obligations that have a priority over the fund's common shares with respect to
the payment of dividends or the distribution of fund assets. The 1940 Act
establishes limits on the ability of the Funds to engage in leverage through the
issuance of "senior securities." The revised policy will permit the Funds to
issue senior securities to the fullest extent permitted by the 1940 Act and
related interpretations, as in effect from time to time.
Certain widely used investment practices that involve a commitment by a
fund to deliver money or securities in the future are not considered by the SEC
to be senior securities. These include repurchase and reverse repurchase
agreements, dollar rolls, options, futures and forward contracts, provided that
in each case a fund segregates cash or liquid securities in an amount necessary
to pay the obligation or the fund holds an offsetting commitment from another
party. The revised policy will not affect the Funds' existing abilities to
engage in these practices. Similarly, the revised policy will be interpreted not
to prevent collateral arrangements with respect to swaps, options, forward or
futures contracts or other derivatives, or the posting of initial or variation
margin.
6
EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 1-B.
PROPOSAL 1-C: REVISE THE FUNDAMENTAL POLICY RELATING TO PURCHASING SECURITIES ON
MARGIN.
The Funds currently have a fundamental investment policy relating to the
purchase of securities on margin. Each Fund may not:
SELL SECURITIES SHORT OR PURCHASE SECURITIES ON MARGIN, EXCEPT FOR SUCH
SHORT-TERM CREDITS AS ARE NECESSARY FOR THE CLEARANCE OF TRANSACTIONS, BUT
THE FUND MAY MAKE MARGIN DEPOSITS IN CONNECTION WITH TRANSACTIONS IN
OPTIONS ON SECURITIES, FUTURES AND OPTIONS ON FUTURES, AND MAY MAKE SHORT
SALES OF SECURITIES "AGAINST THE BOX."
If shareholders of a Fund approve this proposal, the Fund's current
fundamental policy relating to the purchase of securities on margin will be
revised so that a Fund may not:
SELL SECURITIES SHORT OR PURCHASE SECURITIES ON MARGIN, EXCEPT AS
PERMITTED UNDER THE 1940 ACT, AS AMENDED, AND AS INTERPRETED OR MODIFIED
BY REGULATORY AUTHORITY HAVING JURISDICTION, FROM TIME TO TIME.
DISCUSSION OF PROPOSED POLICY. Section 12 of the 1940 Act authorizes the
SEC to regulate two trading practices that may result in leverage: margin
purchases and short sales. The SEC has not adopted any rules under Section 12,
but instead has regulated margin purchases and short sales under Section 18,
which limits the ability of the Funds to engage in leverage through the issuance
of "senior securities." The revised policy will permit the Funds to sell
securities short and purchase securities on margin to the fullest extent
permitted by the 1940 Act and related interpretations, as in effect from time to
time.
Certain widely used investment practices that involve a commitment by a
fund to deliver money or securities in the future are not considered by the SEC
to be senior securities. These include repurchase and reverse repurchase
agreements, dollar rolls, options, futures and forward contracts, provided that
in each case a fund segregates cash or liquid securities in an amount necessary
to pay the obligation or the fund holds an offsetting commitment from another
party. The revised policy will not affect the Funds' existing abilities to
engage in these practices. Similarly, the revised policy will be interpreted not
to prevent collateral arrangements with respect to swaps, options, forward or
futures contracts or other derivatives, or the posting of initial or variation
margin.
EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 1-C.
REQUIRED VOTE
Approval of the change in fundamental policies, with respect to each of
Proposals 1-A, 1-B and 1-C, will require the approval of the holders of a
majority of the Fund's outstanding voting securities, voting as a single class,
and approval of the holders of a majority of the Fund's outstanding shares of
Preferred Stock, voting as a separate class. A "majority of the Fund's
outstanding voting securities" for this purpose means the lesser of (1) 67% or
more of the Shares of Common Stock and Shares of Preferred Stock, present at a
meeting of shareholders, voting as a single class, if the holders of more than
50% of such Shares are present or represented by proxy at the meeting, or (2)
more than 50% of the outstanding Shares of Common Stock and outstanding Shares
of Preferred Stock, voting as a single class. A majority of the Fund's
outstanding Shares of Preferred Stock for this purpose is determined in a
similar manner, by applying the percentages in the previous sentence to
outstanding Shares of Preferred Stock.
PROPOSAL 2: APPROVAL OF AN AMENDED INVESTMENT ADVISORY AGREEMENT
At the Meetings, you will be asked to approve an amended and restated
investment advisory agreement (each, an "Amended Investment Advisory Agreement"
and collectively, the "Amended Investment Advisory Agreements") between your
Fund and the Adviser. The Adviser currently provides investment advisory
services to each Fund under investment advisory agreements currently in effect
(each, a "Current Investment Advisory Agreement" and collectively, the "Current
Investment Advisory Agreements"), and is responsible for each Fund's overall
investment strategy and its implementation. PFD's Current Investment Advisory
Agreement is dated as of
7
January 24, 1991 and was last approved by PFD shareholders on January 22, 1991,
in connection with the initial approval of the Agreement. PFO's Current
Investment Advisory Agreement is dated as of February 5, 1992 and was last
approved by PFO shareholders on February 3, 1992, in connection with the initial
approval of the Agreement. The Board of Directors of each Fund last approved for
continuance of an additional year the Current Investment Advisory Agreements on
January 29, 2008. The form of Amended Investment Advisory Agreement for the
Funds, marked to show changes from the Current Investment Advisory Agreement, is
attached hereto as EXHIBIT A, and the description of the Amended Investment
Advisory Agreements in this Joint Proxy Statement is qualified in its entirety
by reference to EXHIBIT A.
TERMS OF THE CURRENT INVESTMENT ADVISORY AGREEMENTS
Under the terms of the Current Investment Advisory Agreements, the Adviser
is responsible for making investment decisions and placing orders for the
purchase and sale of a Fund's investments directly with the issuers or with
brokers or dealers selected by the Adviser at its discretion. The Adviser also
furnishes to the Boards, which have overall responsibility for the business and
affairs of the Funds, periodic reports on the investment performance of the
Funds.
The Adviser is obligated to manage a Fund in accordance with applicable
laws and regulations. Consistent with the requirements of the 1940 Act, the
Current Investment Advisory Agreements provide that the Adviser generally is not
liable to a Fund for any error in judgment, mistake of law, or any act or
omission or any loss suffered by a Fund in connection with the Agreement, except
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under the Agreement.
The Current Investment Advisory Agreements may be terminated by a Fund
without penalty upon 60 days' written notice by the Boards of Directors or by a
vote of the holders of a majority of the Fund's outstanding Shares, or upon 60
days' written notice by the Adviser. The Current Investment Advisory Agreements
terminate automatically in the event of an "assignment" (as defined in the 1940
Act).
For the fiscal year ended November 30, 2007, PFD paid the Adviser
$1,312,364 in advisory fees, and PFO paid the Adviser $1,173,308 in advisory
fees.
COMPARISON OF AMENDED INVESTMENT ADVISORY AGREEMENTS AND CURRENT INVESTMENT
ADVISORY AGREEMENTS
The only change to the Current Investment Advisory Agreements is to amend
the description of the Adviser's fee to clarify that any debt representing
financial leverage will not be considered a liability. Section 6(a) of the
Current Investment Advisory Agreement of each Fund describes the fee to be paid
to the Adviser as follows:
IN CONSIDERATION OF THE SERVICES RENDERED PURSUANT TO THIS AGREEMENT, THE
[FUND] WILL PAY THE ADVISER AFTER THE END OF THE CALENDAR MONTH DURING
WHICH THE CLOSING DATE (AS DEFINED BELOW) OCCURS AND AFTER THE END OF EACH
CALENDAR MONTH THEREAFTER A FEE FOR THE PREVIOUS MONTH COMPUTED MONTHLY AT
THE ANNUAL RATE OF .625 OF 1.00% ON THE [FUND]'S AVERAGE MONTHLY NET
ASSETS UP TO $100 MILLION AND .50 OF 1.00% ON THE [FUND]'S AVERAGE MONTHLY
NET ASSETS OF $100 MILLION OR MORE.
The Current Investment Advisory Agreements do not define the term "net
assets" but instead refer to the description as included in the Funds'
registration statements. The Funds' registration statements, dated as of January
24, 1991 for PFD and February 6, 1992 for PFO, each define "net assets" to mean,
for purposes of calculating the advisory fee, the average monthly value of the
Fund's total assets minus the sum of the Fund's liabilities, which liabilities
exclude the aggregate liquidation preference of the outstanding Preferred Stock,
and accumulated dividends, if any, on the Preferred Stock.
If approved by shareholders, the Amended Investment Advisory Agreement of
each Fund will describe the fee to be paid to the Adviser as follows:
8
IN CONSIDERATION OF THE SERVICES RENDERED PURSUANT TO THIS AGREEMENT, THE
[FUND] WILL PAY THE ADVISER AFTER THE END OF EACH CALENDAR MONTH A FEE FOR
THE PREVIOUS MONTH COMPUTED MONTHLY AT THE ANNUAL RATE OF .625 OF 1.00% ON
THE [FUND]'S AVERAGE MONTHLY TOTAL MANAGED ASSETS UP TO $100 MILLION AND
.50 OF 1.00% ON THE [FUND]'S AVERAGE MONTHLY TOTAL MANAGED ASSETS OF $100
MILLION OR MORE. FOR PURPOSES OF CALCULATING SUCH FEE, THE [FUND]'S TOTAL
MANAGED ASSETS MEANS THE TOTAL ASSETS OF THE [FUND] (INCLUDING ANY ASSETS
ATTRIBUTABLE TO ANY [FUND] AUCTION RATE PREFERRED STOCK THAT MAY BE
OUTSTANDING OR OTHERWISE ATTRIBUTABLE TO THE USE OF LEVERAGE) MINUS THE
SUM OF ACCRUED LIABILITIES (OTHER THAN DEBT, IF ANY, REPRESENTING
FINANCIAL LEVERAGE). FOR PURPOSES OF DETERMINING TOTAL MANAGED ASSETS, THE
LIQUIDATION PREFERENCE OF THE [FUND] PREFERRED STOCK IS NOT TREATED AS A
LIABILITY.
As described in the Funds' registration statements, the calculation of net
assets for purposes of calculating the advisory fees payable pursuant to the
Current Investment Advisory Agreements excludes the liquidation value of any
outstanding preferred stock, including the Preferred Stock, from the Funds'
liabilities. However, debt representing financial leverage is not similarly
excluded. Therefore, the amount of outstanding debt would reduce the amount of
Fund assets on which the Adviser's fee is paid. At the time the Funds were
launched it was not contemplated that the Funds would engage in any debt
financings and the Funds' fundamental investment policies in this area severely
limited the Funds' ability to do so. If the changes in the Funds' fundamental
investment policies on borrowing, issuing senior debt securities and purchasing
securities on margin as described in Proposal 1 are approved, however, the Funds
could borrow up to the limits permitted under applicable law. Any such amounts
borrowed or the proceeds of any debt issuance would, like the Preferred Stock,
form part of the total assets being actively managed by the Adviser. The Boards
of Directors are of the view that it is fair and appropriate for the Adviser to
be paid for doing so and that there is no reason to make a distinction based on
whether a Fund is leveraged with preferred stock or with debt. Therefore, the
Boards are proposing that the provision in the Current Investment Advisory
Agreements concerning the calculation of the advisory fee be amended to exclude
from liabilities, in addition to the liquidation value of preferred stock, debt
representing financial leverage, as is typical for closed-end funds such as the
Funds.
If the proposed change in the fee language of the Amended Investment
Advisory Agreements had been in effect during a Fund's most recently completed
fiscal year, there would have been no change in the fees paid by the Fund to the
Adviser because the Fund did not borrow during that time. There will be no
increase in the fees payable to the Adviser unless or until action is taken that
increases a Fund's assets under management through borrowing or other forms of
debt leverage in amounts greater than the amount of assets currently
attributable to a Fund's outstanding Preferred Stock. If the amount of a Fund's
assets under management increases through debt financing, this could result in
an increase in the amount of the fees payable by a Fund under the Amended
Investment Advisory Agreement. However, the net impact on fees would depend on
the net increase in Fund assets that would result from those activities, which
cannot be predicted.
BOARD CONSIDERATION OF THE AMENDED INVESTMENT ADVISORY AGREEMENTS
In connection with the decision of each Board of Directors to seek
shareholder approval of amendments of the Funds' fundamental investment policies
regarding borrowing, issuing senior securities and purchasing securities on
margin, it was determined that, as currently formulated, the language for
calculating the fees paid by the Funds to the Adviser was not written in a way
that permitted the calculation of net assets to exclude debt leverage as a
liability. The current fee formulation provides that fees shall be based on the
Funds' "net assets," and Fund liabilities did not exclude debt leverage in the
way that the liquidation value of Preferred Stock had been excluded. The Boards
considered this omission to be related to the Funds' initial structure, which
did not contemplate debt financing.
In considering this matter, each Board of Directors noted that the
proceeds of any borrowings used by the Funds could increase the amount of Fund
assets for which the Adviser would be expected to provide services to the Fund.
In addition to being attentive to the various technical concerns in dealing with
senior securities and borrowings, each Board noted that the Adviser would be
responsible for identifying additional investment opportunities for the proceeds
of these securities and borrowings and for managing the additional investments.
Each Board also determined that the original formulation of the fee language in
the Current Investment Advisory Agreement was designed to compensate the Adviser
on the basis of the amount of assets as to which it makes investment decisions.
Each Board noted that they had determined to seek shareholder approval to
broaden the
9
Funds' authority to borrow, issue senior securities and purchase securities on
margin. The Boards of Directors have determined those actions to be in the best
interests of the Funds and the Funds' shareholders (see Proposals 1-A, 1-B and
1-C). In the view of the Boards of Directors, it would be unfair to take actions
that increase assets which the Adviser is obliged by the Current Investment
Advisory Agreements to manage without compensating the Adviser for doing so. In
this regard, the Boards of Directors considered that many funds that engage in
leveraging activity provide for compensation of their investment adviser on the
basis of total managed assets, including Flaherty & Crumrine/Claymore Preferred
Securities Income Fund Incorporated and Flaherty & Crumrine/Claymore Total
Return Fund Incorporated, two other closed-end funds managed by the Adviser. In
considering this matter, the Independent Directors had the opportunity to
consult with counsel to the Directors who are not "interested persons" (as
defined in the 1940 Act) of the Funds or the Adviser ("Independent Directors")
regarding the proposed Amended Investment Advisory Agreements.
At a meeting held on March 13, 2008, the Board of Directors of each Fund,
including the Independent Directors present in-person at the meeting, voting
separately, unanimously determined to recommend that shareholders of each Fund
approve its Amended Investment Advisory Agreement.
In their review of the Amended Investment Advisory Agreement, the Board of
Directors of each Fund assessed the nature, extent and quality of the services
to be provided to the Fund by the Adviser. In their deliberations, the Boards of
Directors considered information received in connection with their most recent
approval of the continuation of the Current Investment Advisory Agreement, in
addition to information provided by the Adviser in connection with their
evaluation of the terms and conditions of the Amended Investment Advisory
Agreement. The Boards of Directors did not identify any particular information
that was all-important or controlling, and Directors may have attributed
different weights to the various factors. The Directors evaluated all
information available to them. The Directors, including a majority of the
Independent Directors, concluded that the terms of the Amended Investment
Advisory Agreements are appropriate, that the fees to be paid are reasonable in
light of the services to be provided to the Funds, and that the Amended
Investment Advisory Agreements should be approved and recommended to the Funds'
shareholders.
NATURE, EXTENT AND QUALITY OF THE SERVICES TO BE PROVIDED UNDER THE
AMENDED INVESTMENT ADVISORY AGREEMENTS. The Directors considered the nature,
extent and quality of management services proposed to be provided to the Funds
under the Amended Investment Advisory Agreements. The Directors took note that
the Adviser had advised the Boards that there is not expected to be any change
in the nature, extent and quality of services provided to the Funds and their
shareholders under the Amended Investment Advisory Agreements. The Boards'
evaluation of the services expected to be provided by the Adviser took into
account the Directors' knowledge and familiarity gained as Directors of funds in
the Flaherty & Crumrine Fund Family. The Boards recognized that they received
information at regular meetings throughout the year regarding the services
rendered by the Adviser, noting that these services included the management of
each Fund's investment program, as well as providing significant administrative
services beyond what the Current Investment Advisory Agreements provided. The
Directors also noted that they had engaged in an extensive review of the
services provided to the Funds by the Adviser at the Boards' last annual
contract renewal meeting.
The Boards concluded that, overall, it was satisfied with the nature,
extent and quality of services expected to be provided to the Funds under the
Amended Investment Advisory Agreements.
INVESTMENT PERFORMANCE. The Directors noted that they received information
throughout the year at periodic intervals with respect to each Fund's
performance, and had engaged in an extensive review of Fund performance at their
last annual contract renewal meeting. As the services to be provided under the
Amended Investment Advisory Agreements in comparison with the Current Investment
Advisory Agreements were not proposed to be changed in connection with the
approval of the Amended Investment Advisory Agreements, the Directors did not
specifically consider Fund performance in their consideration of the Amended
Investment Advisory Agreements.
ADVISER PROFITABILITY. Profitability of the Adviser in providing services
to each Fund under the Amended Investment Advisory Agreements was not a factor
considered by the Directors. The Directors noted that they expect to receive
cost, expense and profitability information at the next annual Board contract
renewal meeting and, thus, be in a position to evaluate at that time whether any
adjustments in Fund fees would be appropriate in connection
10
with a renewal of the Amended Investment Advisory Agreements. The Directors also
recognized that they had reviewed the profitability of the Adviser at its last
annual contract renewal meeting.
ECONOMIES OF SCALE. The Directors considered whether any changes in the
economies of scale realized (or potentially realized) by the Adviser and any
benefits the Funds may incur from such economies of scale were proposed to be
changed if the Amended Investment Advisory Agreements were approved. The
Directors noted that the Funds, as closed-end investment companies, were not
expected to increase materially in size; thus, the Adviser would not benefit
from economies of scale. The Directors considered whether economies of scale
could be realized because the Adviser advises other similar funds. Based on
their experience, the Directors accepted the Adviser's explanation that
significant economies of scale would not be realized because of the complexity
of managing preferred securities for separate funds and other portfolios.
Nonetheless, the Directors noted that the Funds' advisory fee schedule declines
as assets increase beyond a certain level (commonly known as a "breakpoint"),
and that breakpoints provide for a sharing with shareholders of benefits derived
as a result of economies of scale arising from increased assets. Accordingly,
the Directors determined that the existing advisory fee levels reflect possible
economies of scale.
FEES. The Directors considered the fees to be paid to the Adviser under
the Amended Investment Advisory Agreements. The Boards noted that although the
contractual investment advisory fee rate payable under each proposed Amended
Investment Advisory Agreement with the Adviser is the same as under the Current
Investment Advisory Agreement, the method for calculating the fee is different
because it would exclude from liabilities, in addition to the liquidation value
of Preferred Stock, debt representing financial leverage. The Directors noted
that the proceeds of any borrowings or other forms of leverage used by the Funds
would increase the amount of Fund assets for which the Adviser would be expected
to provide services to the Fund, and that the Adviser would be responsible for
managing such proceeds. The Boards noted that the original fee language in the
Current Investment Advisory Agreements was designed and intended to compensate
the Adviser on the basis of the amount of assets as to which it makes investment
decisions. The Boards of Directors reviewed pro forma fiscal 2007 fees that
would have been paid to the Adviser under the calculation methodology in the
Current Investment Advisory Agreements and under the Amended Investment Advisory
Agreements, based on whether the Funds used 100% Preferred Stocks as leverage,
50% Preferred Stock and 50% debt leverage, and 100% debt leverage. The Boards of
Directors noted that under both the Current Investment Advisory Agreements and
the Amended Investment Advisory Agreements, pro forma advisory fees would have
remained the same if the Funds used only Preferred Stock as leverage. However,
the Boards of Directors noted that, if the Funds only used debt leverage, the
pro forma fee paid to the Adviser would be greater under a Fund's Amended
Investment Advisory Agreement than it would be under its Current Investment
Advisory Agreement, but that total fees were less than those actually paid when
the Funds only used Preferred Stock as leverage. The Boards of Directors
concluded that, because the rates for advisory services were the same and that
the new calculation methodology was reasonable and fair, it was appropriate for
the Adviser to be compensated on the amount of borrowings, proceeds of debt
issuances and margin borrowings, as it would be responsible for managing assets
attributable to such amounts. The Directors, including a majority of the
Independent Directors, concluded that the fees to be paid are reasonable in
light of the services to be provided to the Funds. In this regard, the Boards
considered that many funds that engage in leveraging activity provide for
compensation of their investment adviser on the basis of total managed assets,
including Flaherty & Crumrine/Claymore Preferred Securities Income Fund
Incorporated and Flaherty & Crumrine/Claymore Total Return Fund Incorporated,
two other closed-end funds managed by the Adviser.
CONCLUSION. After the Independent Directors of the Funds deliberated in
executive session, the entire Board of Directors of each Fund, including the
Independent Directors, approved each Amended Investment Advisory Agreement,
concluding that the advisory fee rate was reasonable in relation to the services
provided and that each Amended Investment Advisory Agreement was in the best
interests of the shareholders.
INFORMATION ABOUT THE ADVISER
Flaherty & Crumrine serves as the investment adviser to each Fund, and its
business address is 301 E. Colorado Boulevard, Suite 720, Pasadena, California
91101. The Adviser, which was organized in 1983, specializes in the management
of portfolios of preferred securities, including related hedging activities, for
institutional investors and had aggregate assets under management, as of
December 31, 2007 (which include the total net assets of the Funds) of
approximately $3.67 billion. The Adviser is registered as an investment adviser
under the
11
Investment Advisers Act of 1940, as amended. The Adviser is owned by Donald F.
Crumrine, Robert M. Ettinger, R. Eric Chadwick, Bradford S. Stone, and Robert T.
Flaherty, each of whose address is 301 E. Colorado Boulevard, Suite 720,
Pasadena, California 91101.
For the most recently completed fiscal year ended November 30, 2007, the
Funds did not pay any brokerage commissions to any broker affiliated with the
Adviser. The Adviser has no affiliates that are engaged in brokerage.
The names of each Director and Principal Officer of the Adviser is set
forth below. The address of each Director and Principal Officer of the Adviser
is 301 E. Colorado Boulevard, Suite 720, Pasadena, California 91101.
NAME POSITION
------------------ ----------------------------------------------------
Donald F. Crumrine Director and Chairman of the Board
Robert M. Ettinger Director and President
R. Eric Chadwick Director and Vice President
Chad C. Conwell Chief Compliance Officer and Vice President
Bradford S. Stone Director and Vice President
Rick J. Seto Vice President
Laurie C. Lodolo Assistant Compliance Officer, Secretary, and Account
Administrator
OTHER FUNDS ADVISED BY THE ADVISER AND FEE SCHEDULES
The following table lists certain information regarding funds for which
the Adviser provides investment advisory services. All of the information below
is given as of the end of the last fiscal year of each fund.
TOTAL NET INVESTMENT ADVISORY FEE
ASSETS ($ (AS A PERCENTAGE OF AVERAGE DAILY
FUND MILLIONS) NET ASSETS) (%) (1)
------------------------------------------------- ---------- ------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities 1,363,177 0.525 of 1.00% on the first $200 million
Income Fund Incorporated of the fund average weekly total managed
assets, .45 of 1.00% on the next $300
million of the fund's average weekly total
managed assets and .40 of 1.00% on the
fund's average weekly total managed assets
above $500 million
Flaherty & Crumrine/Claymore Total Return Fund 321,237 0.575 of 1.00% on the first $200 million
Incorporated of the fund's average weekly total managed
assets, 0.50 of 1.00% on the next $300
million of the fund's average weekly total
managed assets and 0.45 of 1.00% on the
fund's average weekly total managed assets
above $500 million
(1) For purposes of calculating such fee, the fund's total managed assets
means the total assets of the fund (including any assets attributable to
any fund auction rate preferred stock that may be outstanding or otherwise
attributable to the use of leverage) minus the sum of accrued liabilities
(other than debt, if any, representing financial leverage). For purposes
of determining total managed assets, the liquidation preference of auction
rate preferred stock is not treated as a liability.
REQUIRED VOTE
To become effective for a Fund, the Amended Investment Advisory Agreement
must be approved by the holders of a majority of the Fund's outstanding voting
securities, voting as a single class. A "majority of the Fund's outstanding
voting securities" for this purpose means the lesser of (1) 67% or more of the
Shares of Common Stock
12
and Shares of Preferred Stock, present at a meeting of shareholders, voting as a
single class, if the holders of more than 50% of such Shares are present or
represented by proxy at the meeting, or (2) more than 50% of the outstanding
Shares of Common Stock and outstanding Shares of Preferred Stock, voting as a
single class.
EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 2.
ADDITIONAL INFORMATION
ADMINISTRATOR
PFPC acts as the administrator to each Fund and is located at 4400
Computer Drive, Westborough, Massachusetts 01581.
COMPLIANCE WITH THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the 1934 Act and Section 30(h) of the 1940 Act require
each Fund's Directors and officers, certain persons affiliated with Flaherty &
Crumrine and persons who beneficially own more than 10% of a registered class of
each Fund's securities, to file reports of ownership and changes of ownership
with the SEC, the NYSE and each Fund. Directors, officers and greater-than-10%
shareholders are required by SEC regulations to furnish each Fund with copies of
such forms they file. Based solely upon its review of the copies of such forms
received by it and written representations from certain of such persons, each
Fund believes that during 2007, all such filing requirements applicable to such
persons were met.
BROKER NON-VOTE AND ABSTENTIONS
A proxy which is properly executed and returned accompanied by
instructions to withhold authority to vote represents an abstention or a broker
"non-vote" (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or the persons
entitled to vote and (ii) the broker or nominee does not have discretionary
voting power on a particular matter). Proxies that reflect abstentions or broker
non-votes (collectively, "abstentions") will be counted as shares that are
present and entitled to vote at the meeting for purposes of determining the
presence of a Quorum. With respect to Proposals 1 and 2, abstentions do not
constitute a vote "for" the proposal and will instead count as a vote "against"
the proposal.
OTHER MATTERS TO COME BEFORE THE MEETING
Each Fund does not intend to present any other business at the relevant
Meeting, nor is any Fund aware that any shareholder intends to do so. If,
however, any other matters are properly brought before the Meeting, the persons
named in the accompanying form of proxy will vote thereon in accordance with
their judgment.
EXPENSES OF PROXY SOLICITATION
The total expenses of the Meetings, including the solicitation of proxies
and the expenses incurred in connection with the preparation of this Joint Proxy
Statement, are approximately $[______]. The Adviser, on behalf of the Funds, has
retained [_____________________], a proxy solicitation firm, to assist in the
solicitation of proxies. It is anticipated that [_________] will be paid
approximately $[______] for such solicitation services (plus reimbursements of
out-of-pocket expenses), to be borne by the Funds. [____________] may solicit
proxies personally and by telephone.
VOTING RESULTS
Each Fund will advise its shareholders of the voting results of the
matters voted upon at its Meeting in its next Semi-Annual Report to
Shareholders.
13
NOTICE TO BANKS, BROKER/DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise the Funds whether other persons are the beneficial owners of
the Funds' Shares for which proxies are being solicited from you, and, if so,
the number of copies of the Joint Proxy Statement and other soliciting material
you wish to receive in order to supply copies to the beneficial owners of the
Funds' Shares.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE MEETINGS ARE THEREFORE URGED TO COMPLETE, SIGN, DATE AND
RETURN ALL PROXY CARDS AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
SEPARATE PROXY CARDS ARE ENCLOSED FOR EACH FUND IN WHICH YOU OWN SHARES.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETINGS ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD(S), OR VOTE BY TELEPHONE OR
INTERNET. The proxy card(s) should be returned in the enclosed envelope, which
needs no postage if mailed in the continental United States. Instructions for
the proper execution of proxies are set forth on the inside cover.
14
This Page Left Blank Intentionally.
EXHIBIT A
FORM OF
AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT
[______ __, ____]
As amended and restated [_____, __], 2008
Flaherty & Crumrine Incorporated
301 E. Colorado Boulevard
Suite 720
Pasadena, California 91101
Ladies and Gentlemen:
[Fund] (the "Company"), a corporation organized under the laws of
the State of Maryland, herewith confirms its agreement with Flaherty & Crumrine
Incorporated (the "Adviser"), a corporation organized under the laws of the
State of California, as follows:
1. INVESTMENT DESCRIPTION; APPOINTMENT
The Company desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Articles of Incorporation, as the same may from time to time be
amended, and in its Registration Statement as from time to time in effect, and
in such manner and to such extent as may from time to time be approved by the
Board of Directors of the Company. Copies of the Company's Registration
Statement and Articles of Incorporation, as amended, have been or will be
submitted to the Adviser. The Company agrees to provide copies of all amendments
to the Company's Registration Statement and Articles of Incorporation to the
Adviser on an on-going basis. The Company desires to employ and hereby appoints
the Adviser to act as investment adviser to the Company. The Adviser accepts the
appointment and agrees to furnish the services described herein for the
compensation set forth below.
2. SERVICES AS INVESTMENT ADVISER
Subject to the supervision and direction of the Board of Directors
of the Company, the Adviser will (a) act in accordance with the Company's
Articles of Incorporation, the Investment Company Act of 1940, and the
Investment Advisers Act of 1940, as the same may from time to time be amended,
(b) manage the Company's portfolio on a discretionary basis in accordance with
its investment objective and policies as stated in the Company's Registration
Statement as from time to time in effect, (c) make investment decisions and
exercise voting rights in respect of portfolio securities for the Company, (d)
place purchase and sale orders on behalf of the Company and (e) employ
professional portfolio managers and securities analysts to provide research
services to the Company. The Adviser is authorized to retain the services of an
economic consultant at the expense of the Fund to provide such services with
respect to the Company as the parties to any agreement may agree upon. In
providing these services, the Adviser will provide investment research and
supervision of the Company's evaluation and, if appropriate, sale and
reinvestment of the Company's assets. In addition, the Adviser will furnish the
Company with whatever statistical information the Company may reasonably request
with respect to the securities that the Company may hold or contemplate
purchasing.
3. BROKERAGE
In executing transactions for the Company and selecting brokers or
dealers, the Adviser will use its best efforts to seek the best overall terms
available. In assessing the best overall terms available for any Company
transaction, the Adviser will consider all factors it deems relevant including,
but not limited to, breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer and the reasonableness of any commission for the specific transaction and
on a continuing basis. In selecting brokers or dealers to execute any
transaction and in evaluating the best overall terms available, the Adviser may
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities and Exchange Act of 1934) provided to the
Company and/or other accounts over which the Adviser or an affiliate exercises
investment discretion.
4. INFORMATION PROVIDED TO THE COMPANY
The Adviser will use its best efforts to keep the Company informed
of developments materially affecting the Company, and will, on its own
initiative, furnish the Company from time to time with whatever information the
Adviser believes is appropriate for this purpose.
5. STANDARD OF CARE
The Adviser shall exercise its best judgment in rendering the
services described in paragraphs 2, 3, and 4 above. The Adviser shall not be
liable for any error of judgment or mistake of law or for any act or omission or
any loss suffered by the Company in connection with the matters to which this
Agreement relates, provided that nothing herein shall be deemed to protect or
purport to protect the Adviser against any liability to the Company or its
shareholders to which the Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement ("disabling conduct"). The Company will
indemnify the Adviser against, and hold it harmless from, any and all losses,
claims, damages, liabilities or expenses (including reasonable counsel fees and
expenses), including any amounts paid in satisfaction of judgments, in
compromise or as fines or penalties, not resulting from disabling conduct by the
Adviser. Indemnification shall be made only following: (i) a final decision on
the merits by a court or other body before whom the proceeding was brought that
the Adviser was not liable by reason of disabling conduct or (ii) in the absence
of such a decision, a reasonable determination, based upon a review of the
facts, that the Adviser was not liable by reason of disabling conduct by (a) the
vote of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors") or (b) an independent legal counsel in a
written opinion. The Adviser shall be entitled to advances from the Company for
payment of the reasonable expenses incurred by it in connection with the matter
as to which it is seeking indemnification in the manner and to the fullest
extent permissible under the Maryland General Corporation law. The Adviser shall
provide to the Company a written affirmation of its good faith belief that the
standard of conduct necessary for indemnification by the Company has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at least
one of the following additional conditions shall be met: (a) the Adviser shall
provide a security in form and amount acceptable to the Company for its
undertaking; (b) the Company is insured against losses arising by reason of the
advance; or (c) a majority of a quorum of disinterested non-party directors, or
independent legal counsel, in a written opinion, shall have determined, based on
a review of facts readily available to the Company at the time the advance is
proposed to be made, that there is reason to believe that the Adviser will
ultimately be found to be entitled to indemnification.
6. COMPENSATION
(a) In consideration of the services rendered pursuant to this
Agreement, the Company will pay the Adviser after the end of each calendar month
a fee for the previous month computed monthly at the annual rate of .625 of
1.00% on the Company's average monthly total managed assets up to $100 million
and .50 of 1.00% on the Company's average monthly total managed assets of $100
million or more.
17
For purposes of calculating such fee, the Company's total managed assets means
the total assets of the Company (including any assets attributable to any
Company auction rate preferred stock that may be outstanding or otherwise
attributable to the use of leverage) minus the sum of accrued liabilities (other
than debt, if any, representing financial leverage). For purposes of determining
total managed assets, the liquidation preference of the Company preferred stock
is not treated as a liability.
(b) Upon any termination of the Agreement before the end of a month,
the fee for such part of that month shall be prorated according to the
proportion that such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. For the purpose of
determining fees payable to the Adviser, the value of the Company's average
monthly net assets shall be computed at the times and in the manner specified in
the Company's Registration Statement as from time to time in effect.
7. EXPENSES
The Adviser will bear all expenses in connection with the
performance of its services under this Agreement, including compensation of an
office space for its officers and employees connected with investment and
economic research, trading and investment management and administration of the
Company, as well as the fees of all directors of the Company who are affiliated
with the Adviser or any of its affiliates; provided that the Company shall
reimburse the Adviser for the travel and out-of-pocket expenses or an
appropriate portion thereof of directors, officers and employees of the Adviser
in connection with attendance at meetings of the Board of Directors of the Fund
of any committee thereof. The Company will bear all other expenses to be
incurred in its operation other than those that other parties have agreed to
bear, including: organizational expenses; taxes, interest, brokerage costs and
commissions and stock exchange fees; fees of directors of the Company who are
not officers, directors or employees of the Adviser; Securities and Exchange
Commission fees; state Blue Sky qualification fees; charges of the custodian,
any subcustodians and transfer and dividend-paying agent; expenses in connection
with the Company's Dividend Reinvestment and Cash Purchase Plan; insurance
premiums; outside auditing and legal expenses; costs of maintenance of the
Company's existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of printing stock
certificates; costs of shareholders' reports and meetings of the shareholders of
the Company and of the officers or Board of Directors of the Company; membership
fees in trade associations; stock exchange listing fees and expenses; expenses
in connection with auctions of shares of auction rate preferred stock proposed
to be issued by the Company; litigation and other extraordinary or non-recurring
expenses.
8. SERVICES TO OTHER COMPANIES OR ACCOUNTS
The Company understands that the Adviser now acts, will continue to
act or may in the future act, as investment adviser to fiduciary and other
managed accounts or as investment adviser to one or more other investment
companies, and the Company has no objection to the Adviser so acting, provided
that whenever the Company and one or more other accounts or investment companies
advised by the Adviser have available funds for investment, investments suitable
and appropriate for each will be allocated in accordance with procedures
believed by the Adviser to be equitable to each entity. Similarly, opportunities
to sell securities will be allocated in an equitable manner. The Company
recognizes that in some cases this procedure may adversely affect the size of
the position obtained for or disposed of by the Company. In addition, the
Company understands that the persons employed by the Adviser to assist in the
performance of the Adviser's duties hereunder will not devote their full time to
such service and nothing contained herein shall be deemed to limit or restrict
the right of the Adviser or any affiliate of the Adviser to engage in and devote
time and attention to other business or to render services or whatever kind or
nature.
9. TERM OF AGREEMENT
This Agreement shall become effective as of the date the Company's
Registration Statement is declared effective by the Securities and Exchange
Commission and shall continue for an initial two-year term and shall continue
thereafter so long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company or (ii) a vote of a
"majority" (as defined in the Investment Company Act of 1940, as amended) of the
Company's outstanding voting securities, provided that in either event the
continuance is also approved by a majority of the Board of Directors who are not
"interested persons" (as defined in said Act) of any
18
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of Directors of the Company or
by vote of holders of a majority of the Company's shares, or upon 60 days'
written notice, by the Adviser. This Agreement will also terminate automatically
in the event of its assignment (as defined in said 1940 Act).
10. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties
hereto.
11. GOVERNING LAW
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
conflicts of laws principles thereof.
If the foregoing accurately sets forth our agreement, kindly
indicate your acceptance hereof by signing and returning the enclosed copy
hereof.
Very truly yours.
[Fund]
By: _________________
Title:
Accepted:
FLAHERTY & CRUMRINE INCORPORATED
By: _______________
Title:
19
o PLEASE FOLD ALONG THE PERFORATION, DETACH AND
RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
--------------------------------------------------------------------------------
FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED
--------------------------------------------------------------------------------
PROXY -- FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED
--------------------------------------------------------------------------------
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned holder of shares of Common Stock of Flaherty & Crumrine
Preferred Income Fund Incorporated, a Maryland corporation (the "Fund"), hereby
appoints Donald F. Crumrine, Robert M. Ettinger, Teresa M.R. Hamlin and Emily H.
Harris, attorneys and proxies for the undersigned, each with full powers of
substitution and revocation, to represent the undersigned and to vote on behalf
of the undersigned all shares of Common Stock which the undersigned is entitled
to vote at the Special Meeting of Shareholders of the Fund to be held at the
offices of Flaherty & Crumrine Incorporated, 301 E. Colorado Boulevard, Suite
720, Pasadena, California 91101, at 9:00 a.m. PT, on May 21, 2008, and any
adjournments or postponements thereof. The undersigned hereby acknowledges
receipt of the Notice of Special Meeting and Proxy Statement and hereby
instructs said attorneys and proxies to vote said shares as indicated hereon. In
their discretion, the proxies are authorized to vote upon such other business as
mayproperly come before the Meeting. A majority of the proxies present and
acting at the Meeting in person or by substitute (or, if only one shall be so
present, then that one) shall have and may exercise all of the power and
authority of said proxies hereunder. The undersigned hereby revokes any proxy
previously given.
----------- -----------
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
----------- -----------
[BAR CODE]
FLAHERTY & CRUMRINE PREFERRED
INCOME FUND INCORPORATED
[BAR CODE] C123456789
000004 000000000.000000 ext 000000000.000000 ext
000000000.000000 ext 000000000.000000 ext
[BAR CODE] MR A SAMPLE 000000000.000000 ext 000000000.000000 ext
DESIGNATION (IF ANY)
ADD 1
ADD 2
ADD 3
ADD 4
ADD 5
ADD 6
[IMAGE]
Using a BLACK INK pen, mark your votes with an X
as shown in this example. Please do not write outside
the designated areas. [X]
------------------------------------------------------------------------------------------------------------------------------------
SPECIAL MEETING PROXY CARD
------------------------------------------------------------------------------------------------------------------------------------
o PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
------------------------------------------------------------------------------------------------------------------------------------
1-A Revise the Fundamental Policy Relating to Borrowing Money
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
1-B Approval of Revised Fundamental Policy on Issuing Senior Securities
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
1-C Approval of Revised Fundamental Policy on Purchasing Securities on Margin
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
2 Approve an Amended Investment Advisory Agreement
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. THIS PROXY, IF
PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR THE PROPOSALS.
PLEASE REFER TO THE PROXY STATEMENT FOR A DISCUSSION OF THE PROPOSALS.
NON-VOTING ITEMS
CHANGE OF ADDRESS -- Please print new address below.
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
AUTHORIZED SIGNATURES -- THIS SECTION MUST BE COMPLETED FOR YOUR VOTE TO BE COUNTED. -- DATE AND SIGN BELOW
Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator,
corporate officer, trustee, guardian, or custodian, please give full title.
Date (mm/dd/yyyy) -- Please print Signature 1 -- Please keep signature Signature 2 -- Please keep signature
date below. within the box. within the box.
----------------------------------- -------------------------------------- -----------------------------------------------------
/ /
----------------------------------- -------------------------------------- -----------------------------------------------------
C 1234567890 J N T MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE
140 CHARACTERS) MR A SAMPLE AND MR A SAMPLE AND
MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND
[IMAGE] [BAR CODE] 1 0 A V 0 1 6 3 8 4 1 MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND +
(STOCK#) 00U5AC
o PLEASE FOLD ALONG THE PERFORATION, DETACH AND
RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
--------------------------------------------------------------------------------
FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED
--------------------------------------------------------------------------------
PROXY -- FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED
--------------------------------------------------------------------------------
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned holder of shares of Preferred Stock of Flaherty & Crumrine
Preferred Income Fund Incorporated, a Maryland corporation (the "Fund"), hereby
appoints Donald F. Crumrine, Robert M. Ettinger, Teresa M. R. Hamlin and Emily
H. Harris, attorneys and proxies for the undersigned, each with full powers of
substitution and revocation, to represent the undersigned and to vote on behalf
of the undersigned all shares of Preferred Stock which the undersigned is
entitled to vote at the Special Meeting of Shareholders of the Fund to be held
at the offices of Flaherty & Crumrine Incorporated, 301 E. Colorado Boulevard,
Suite 720, Pasadena, California 91101, at 9:00 a.m. PT, on May 21, 2008, and any
adjournments or postponements thereof. The undersigned hereby acknowledges
receipt of the Notice of Special Meeting and Proxy Statement and hereby
instructs said attorneys and proxies to vote said shares as indicated hereon. In
their discretion, the proxies are authorized to vote upon such other business as
may properly come before the Meeting. A majority of the proxies present and
acting at the Meeting in person or by substitute (or, if only one shall be so
present, then that one) shall have and may exercise all of the power and
authority of said proxies hereunder. The undersigned hereby revokes any proxy
previously given.
----------- -----------
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
----------- -----------
[BAR CODE]
FLAHERTY & CRUMRINE PREFERRED
INCOME FUND INCORPORATED
[BAR CODE] C123456789
000004 000000000.000000 ext 000000000.000000 ext
000000000.000000 ext 000000000.000000 ext
[BAR CODE] MR A SAMPLE 000000000.000000 ext 000000000.000000 ext
DESIGNATION (IF ANY)
ADD 1
ADD 2
ADD 3
ADD 4
ADD 5
ADD 6
[IMAGE]
Using a BLACK INK pen, mark your votes with an X
as shown in this example. Please do not write outside
the designated areas. [X]
------------------------------------------------------------------------------------------------------------------------------------
SPECIAL MEETING PROXY CARD
------------------------------------------------------------------------------------------------------------------------------------
o PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
------------------------------------------------------------------------------------------------------------------------------------
1-A Revise the Fundamental Policy Relating to Borrowing Money
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
1-B Approval of Revised Fundamental Policy on Issuing Senior Securities
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
1-C Approval of Revised Fundamental Policy on Purchasing Securities on Margin
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
2 Approve an Amended Investment Advisory Agreement
FOR WITHHOLD ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. THIS PROXY, IF
PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR THE PROPOSALS.
PLEASE REFER TO THE PROXY STATEMENT FOR A DISCUSSION OF THE PROPOSALS.
NON-VOTING ITEMS
CHANGE OF ADDRESS -- Please print new address below.
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
AUTHORIZED SIGNATURES -- THIS SECTION MUST BE COMPLETED FOR YOUR VOTE TO BE COUNTED. -- DATE AND SIGN BELOW
Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator,
corporate officer, trustee, guardian, or custodian, please give full title.
Date (mm/dd/yyyy) -- Please print Signature 1 -- Please keep signature Signature 2 -- Please keep signature
date below. within the box. within the box.
----------------------------------- -------------------------------------- -----------------------------------------------------
/ /
----------------------------------- -------------------------------------- -----------------------------------------------------
C 1234567890 J N T MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE
140 CHARACTERS) MR A SAMPLE AND MR A SAMPLE AND
MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND
[IMAGE] [BAR CODE] 1 0 A V 0 1 6 3 8 4 2 MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND +
(STOCK#) 00U5BD