Investment Policies
Under normal circumstances and as a fundamental policy, the
Fund invests at least 80% of its Managed Assets in municipal securities and other related investments, the income from which is exempt from regular federal income tax and federal alternative minimum tax. Also, under normal circumstances and as a
fundamental policy, the Fund may invest up to 20% of its Managed Assets in AMT Bonds.
As a non-fundamental policy, the Fund seeks to achieve its investment objective by investing in a diversified portfolio of municipal securities at least 80% comprised of investment grade quality
securities, the income from which is exempt from regular federal income tax. Nuveen Asset Management seeks to identify and invest in municipal securities that it believes are underrated and undervalued, based on a bottom-up, research-driven
investment strategy. Nuveen Asset Management believes its value oriented strategy offers the opportunity to construct a well-diversified portfolio of municipal securities that has the potential to outperform major municipal market benchmarks over
the longer term. Underrated municipal securities are those whose credit ratings do not, in Nuveen Asset Managements opinion, reflect their true creditworthiness. Undervalued municipal securities are securities that, in Nuveen Asset
Managements opinion, are worth more than the value assigned to them in the marketplace. A municipal securitys market value generally will depend upon its form, maturity, call features and interest rate, as well as the issuers
credit quality or credit rating, all such factors examined in the context of the municipal securities market and interest rate levels and trends. Nuveen Asset Management may at times believe that securities associated with a particular municipal
market sector (for example, electric utilities), or issued by a particular municipal issuer, are undervalued. Nuveen Asset Management may purchase such a security for the Funds portfolio because it represents a market sector or issuer that
Nuveen Asset Management considers undervalued, even if the value of the particular security appears to be consistent with the value of similar securities. Municipal securities of particular types (
e.g.
, hospital bonds, industrial revenue
bonds or securities issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of municipal securities of the market sector for
reasons that do not apply to the particular municipal securities that are considered undervalued. A rating issued by an NRSRO is only the opinion of the entity issuing the rating, and is not a guarantee as to quality, or an assurance of the
performance, of the rated security. In addition, the manner in which NRSROs obtain and process information about a particular security may affect the NRSROs ability to timely react to changes in an issuers circumstances that could
influence a particular rating. The Funds investment in underrated or undervalued municipal securities will be based on Nuveen Asset Managements belief that their yield is higher than that available on securities bearing equivalent levels
of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise (relative to the market) to reflect their
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true value. The Fund attempts to increase its portfolio value relative to the municipal bond market by prudent selection of municipal securities regardless of the direction the market may move.
Any capital appreciation realized by the Fund will generally result in the distribution of taxable capital gains to Common Shareholders.
The Fund may invest in various municipal securities, including municipal bonds and notes, other securities issued to finance and refinance
public projects, and other related securities and derivative instruments creating exposure to municipal bonds, notes and securities that provide for the payment of interest income that is exempt from regular federal income tax. Municipal securities
are often issued by state and local governmental entities to finance or refinance public projects, such as roads, schools, and water supply systems. Municipal securities also may be issued on behalf of private entities or for private activities,
such as housing, medical and educational facility construction, or for privately owned transportation, electric utility or pollution control projects. Municipal securities may be issued on a long-term basis to provide long-term financing. The
repayment of such debt may be secured generally by a pledge of the full faith and credit taxing power of the issuer, a limited or special tax, or any other revenue source, including project revenues, which may include tolls, fees and other user
charges, lease payments, and mortgage payments. Municipal securities also may be issued to finance projects on a short-term interim basis, anticipating repayment with the proceeds of the later issuance of long-term debt. The Fund may purchase
municipal securities in the form of bonds, notes, leases or certificates of participation; structured as callable or non-callable; with payment forms that include fixed coupon, variable rate or zero coupon, including capital appreciation bonds,
floating rate securities, and inverse floating rate securities; or acquired through investments in pooled vehicles, partnerships, or other investment companies. The Fund may invest in these types of securities, including floating rate securities and
inverse floating rate securities, in order to more efficiently achieve its desired overall portfolio structure as well as enhance its ability to achieve its investment objective.
The Fund intends to use leverage to seek to enhance its
potential for current income exempt from regular federal income tax. The Fund intends to use leverage by investing in inverse floating rate securities that have the economic effect of leverage, as discussed further below. The Fund may leverage its
capital structure by issuing senior securities such as preferred shares or debt securities or by borrowing. The combined economic effect of the total leverage used by the Fund is referred to as effective leverage. The Fund currently uses
leverage by investing in inverse floating rate securities. If current market conditions change (for example, if there is a material decrease in the supply of inverse floating rate securities or if newly issued senior securities become a more
attractive financing option), the Fund may leverage itself by issuing senior securities such as preferred shares or debt securities, or by borrowing. Financial leverage is created as a result of the Funds investments in residual interest
certificates of tender option bond trusts, also called inverse floating rate securities, because the Funds investment exposure to the underlying bonds held by the trust have been effectively financed by the trusts issuance of floating
rate certificates. In addition, the Fund may borrow for temporary, emergency or other purposes as permitted by the 1940 Act. As of March 31, 2013, the Funds total effective leverage was approximately 1% of its Managed Assets.
There can be no assurance that the Funds leverage
strategy will be successful. The use of leverage creates special risks for Common Shareholders. See Use of Leverage, Risk FactorsLeverage Risk, and Risk FactorsInverse Floating Rate Securities Risk.
The Fund also may invest in derivative
instruments in pursuit of its investment objective, including inverse floating rate securities. Such also instruments include financial futures contracts, swap contracts (including interest rate and credit default swaps), options on financial
futures, options on swap contracts, or other derivative instruments. However, the Fund not enter into futures contracts or related options or forward contracts, if more than 30% of the Funds net assets would be represented by futures contracts
or more than 5% of the Funds net assets would be committed to initial margin deposits and premiums on futures contracts and related options. Nuveen Asset Management uses derivatives to seek to enhance return, to hedge some of the risks of its
investments in fixed income securities or as a substitute for a position in the underlying asset. These types of hedging strategies may generate taxable income. See The Funds Investments.
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As a fundamental policy, the Fund may invest up to 20% of its Managed Assets in AMT Bonds.
Any such investment by the Fund will not be counted towards meeting its 80% investment in municipal securities exempt from regular federal income tax and federal alternative minimum tax. Special federal alternative minimum tax rules apply to
corporate investors. For a discussion of how the federal alternative minimum tax may affect shareholders, see Tax Matters.
Under normal circumstances:
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As a non-fundamental policy, the Fund will invest at least 80% of its Managed Assets in municipal securities and other related investments that at the
time of investment are investment grade quality. A security is considered investment grade quality if it is rated within the four highest letter grades (BBB or Baa or better) by at least one of the NRSROs that rate such security (even if it is rated
lower by another), or if it is unrated by any NRSRO but judged to be of comparable quality by Nuveen Asset Management.
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As a non-fundamental policy, the Fund may invest up to 20% of its Managed Assets in municipal securities that at the time of investment are rated below
investment grade or are unrated by any NRSRO but judged to be of comparable quality by Nuveen Asset Management. Also as a non-fundamental policy, no more than 10% of the Funds Managed Assets may be invested in municipal securities rated below
B3/B- or that are unrated but judged to be of comparable quality by Nuveen Asset Management. Municipal securities of below investment grade quality are regarded as having predominately speculative characteristics with respect to capacity to pay
interest and repay principal, and are commonly referred to as junk bonds. See Risk FactorsCredit and Below Investment Grade Risk.
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The Fund will not invest more than 15% of its Managed Assets in municipal securities that, at the time of investment, are illiquid (
i.e.
,
securities that are not readily marketable). See Risk FactorsIlliquid Securities Risk.
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As of April 30, 2013, the weighted average maturity of the Funds portfolio was 18.25 years. The Fund will generally invest in municipal
securities with a weighted average maturity of at least 15 years, but it may be shortened or lengthened, depending on market conditions and on an assessment by the Funds portfolio manager of which segments of the municipal securities market
offer the most favorable relative investment values and opportunities for tax-exempt income and total return. In comparison to maturity (which is the date on which a debt instrument ceases and the issuer is obligated to repay the principal amount),
duration is a measure of the price volatility of a debt instrument as a result of changes in market rates of interest, based on the weighted average timing of the instruments expected principal and interest payments. Duration differs from
maturity in that it considers a securitys yield, coupon payments, principal payments and call features in addition to the amount of time until the security finally matures. As the value of a security changes over time, so will its duration.
Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate
changes than a portfolio with a shorter duration. For example, the price of a bond with an effective duration of two years will rise (fall) two percent for every one percent decrease (increase) in its yield, and the price of a five-year duration
bond will rise (fall) five percent for a one percent decrease (increase) in its yield. As of April 30, 2013, the average fund duration was 8.76 years.
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The Fund will not invest more than 25% of its Managed Assets in municipal securities in any one industry or in any one state of origin and no more than
5% of its Managed Assets in any one issuer.
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Any non-fundamental policy of the Fund may be changed by the Funds Board following the provision of 60 days prior written notice to Common Shareholders.
The foregoing credit quality policies apply only at the time
a security is purchased, and the Fund is not required to dispose of a security in the event that an NRSRO downgrades its assessment of the credit characteristics of a particular issuer or that valuation changes of various bonds cause the Funds
portfolio to fail to satisfy those policies. In determining whether to retain or sell such a security, Nuveen Asset Management may
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consider such factors as Nuveen Asset Managements assessment of the credit quality of the issuer of such security, the price at which such security could be sold and the rating, if any,
assigned to such security by other rating agencies. A general description of the ratings of municipal securities of S&P, Moodys and Fitch is set forth in Appendix A to the SAI.
The Fund may purchase municipal securities that are additionally secured by insurance, bank credit agreements
or escrow accounts. The credit quality of companies which provide such credit enhancements may affect the value of those securities. Although the insurance feature may reduce certain financial risks, the premiums for insurance and the higher market
price paid for insured obligations may reduce the Funds income. The Fund may use any insurer, regardless of its rating. A municipal security typically will be deemed to have the rating of its insurer. However, in the event an insurer has a
credit rating below the rating of an underlying municipal security or is perceived by the market to have such a lower rating, the municipal security rating would be the more relevant rating and the value of the municipal security would more closely,
if not entirely, reflect such rating. As a result, the value of insurance associated with a municipal security may decline and the insurance may not add any value. The insurance feature normally provides that it guarantees the full payment of
principal and interest when due of an insured obligation, but does not guarantee the market value of the insured obligation or the net asset value of the Common Shares represented by such insured obligation. See Risk FactorsInsurance
Risk.
During temporary defensive periods or
in order to keep the Funds cash fully invested, including during the period when the net proceeds of the offering of Common Shares are being invested, the Fund may deviate from its investment policies and objectives. During such periods, the
Fund may invest up to 100% of its Managed Assets in short-term investments, including high quality, short-term securities that may be either tax-exempt or taxable (or in securities of other open- or closed-end investment companies that invest
primarily in municipal securities of the types in which the Fund may invest directly). The Fund may not achieve its investment objective during such period. The Fund intends to invest in taxable short-term investments only in the event that suitable
tax-exempt short-term investments are not available at reasonable prices and yields. Investment in taxable short-term investments would result in a portion of your dividends being subject to regular federal income tax, and if the proportion of
taxable investments exceeded 50% of the Funds total assets as of the close of any quarter of the Funds taxable year, the Fund would not satisfy the general eligibility test that permits it to pay exempt-interest dividends. Such
transactions will be used solely to reduce risk. There can be no assurance that such strategies will be successful. For more information, see the SAI under Tax Matters.
The Funds investment objective and certain investment
policies specifically identified as such are considered fundamental and may not be changed without shareholder approval. See Investment Restrictions in the SAI. All of the Funds other investment policies are not considered to be
fundamental by the Fund and can be changed by the Funds Board of Trustees without a vote of the Common Shareholders. The Fund cannot change its investment objective or fundamental policies without the approval of the holders of a
majority of the outstanding Common Shares and preferred shares, if issued in the future, voting together as a single class, and of the holders of a majority of the outstanding preferred shares, if issued in the future, voting
as a separate class. When used with respect to particular shares of the Fund, a majority of the outstanding shares means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is less. See Description of SharesPreferred SharesVoting Rights for additional information with respect to the voting rights of holders of preferred
shares.
If you are, or as a result of investment
in the Fund would become, subject to the federal alternative minimum tax, the Fund may not be a suitable investment for you because the Fund may invest up to 20% of its Managed Assets in municipal securities that will pay interest that is taxable
under the federal alternative minimum tax. Special rules apply to corporate holders. In addition, distributions of net capital gain will be taxable as long-term capital gains. See Tax Matters.
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Municipal Securities
General.
The Fund may invest
in various municipal securities, including municipal bonds and notes, other securities issued to finance and refinance public projects, and other related securities and derivative instruments creating exposure to municipal bonds, notes and
securities that provide for the payment of interest income that is exempt from regular federal income tax. Municipal securities are often issued by state and local governmental entities to finance or refinance public projects such as roads, schools,
and water supply systems. Municipal securities may also be issued on behalf of private entities or for private activities, such as housing, medical and educational facility construction, or for privately owned transportation, electric utility and
pollution control projects. Municipal securities may be issued on a long term basis to provide permanent financing. The repayment of such debt may be secured generally by a pledge of the full faith and credit taxing power of the issuer, a limited or
special tax, or any other revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments and mortgage payments. Municipal securities may also be issued to finance projects on a short-term interim
basis, anticipating repayment with the proceeds of the later issuance of long-term debt. The Fund may purchase municipal securities in the form of bonds, notes, leases or certificates of participation; structured as callable or non-callable; with
payment forms including fixed coupon, variable rate, zero coupon, capital appreciation bonds, tender option bonds, and residual interest bonds or inverse floating rate securities; or acquired through investments in pooled vehicles, partnerships or
other investment companies. Inverse floating rate securities are securities that pay interest at rates that vary inversely with changes in prevailing short-term tax-exempt interest rates and represent a leveraged investment in an underlying
municipal security, which could have the economic effect of financial leverage.
Municipal securities are either general obligation or revenue bonds and typically are issued to finance public projects (such as roads or public buildings), to pay general operating expenses, or to
refinance outstanding debt.
Municipal securities
may also be issued on behalf of private entities or for private activities, such as housing, medical and educational facility construction, or for privately owned industrial development and pollution control projects. General obligation bonds are
backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from any revenue source; revenue bonds may be repaid only from the revenues of a specific facility or source. The Fund may also purchase municipal securities
that represent lease obligations, municipal notes, pre-refunded municipal securities, private activity bonds, tender option bonds and other related securities and derivative instruments that create exposure to municipal bonds, notes and securities
and that provide for the payment of interest income that is exempt from regular federal income tax.
The municipal securities in which the Fund will invest are generally issued by states, cities and local authorities and certain possessions and territories of the United States (such as Puerto Rico and
Guam), and pay interest that, in the opinion of bond counsel to the issuer (or on the basis of other authority believed by Nuveen Asset Management to be reliable), is exempt from regular federal income tax, although the interest may be subject to
the federal alternative minimum tax. The yields on municipal securities depend on a variety of factors, including prevailing interest rates and the condition of the general money market and the municipal bond market, the size of a particular
offering, the maturity of the obligation and the rating of the issue. The market value of municipal securities will vary with changes in interest rate levels and as a result of changing evaluations of the ability of their issuers to meet interest
and principal payments.
A municipal
securitys market value generally will depend upon its form, maturity, call features, and interest rate, as well as the credit quality of the issuer, all such factors examined in the context of the municipal securities market and interest rate
levels and trends.
Municipal Leases and
Certificates of Participation.
The Fund also may purchase municipal securities that represent lease obligations and certificates of participation in such leases. These carry special risks because the issuer of the
securities may not be obligated to appropriate money annually to make payments under the lease. A municipal lease is an obligation in the form of a lease or installment purchase which is issued by a state or local government to acquire equipment and
facilities. Income from such obligations is generally exempt from state and local taxes in the state of issuance. Leases and installment purchase or conditional sale contracts (which normally
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provide for title to the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion in many leases or contracts of non-appropriation clauses that relieve the
governmental issuer of any obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis. In addition, such leases or contracts
may be subject to the temporary abatement of payments in the event the issuer is prevented from maintaining occupancy of the leased premises or utilizing the leased equipment or facilities. Although the obligations may be secured by the leased
equipment or facilities, the disposition of the property in the event of non-appropriation or foreclosure might prove difficult, time consuming and costly, and result in a delay in recovering, or the failure to recover fully, the Funds
original investment. To the extent that the Fund invests in unrated municipal leases or participates in such leases, the credit quality rating and risk of cancellation of such unrated leases will be monitored on an ongoing basis. In order to reduce
this risk, the Fund will only purchase municipal securities representing lease obligations where Nuveen Asset Management believes the issuer has a strong incentive to continue making appropriations until maturity.
A certificate of participation represents an undivided
interest in an unmanaged pool of municipal leases, an installment purchase agreement or other instruments. The certificates are typically issued by a municipal agency, a trust or other entity that has received an assignment of the payments to be
made by the state or political subdivision under such leases or installment purchase agreements. Such certificates provide the Fund with the right to a pro rata undivided interest in the underlying municipal securities. In addition, such
participations generally provide the Fund with the right to demand payment, on not more than seven days notice, of all or any part of the Funds participation interest in the underlying municipal securities, plus accrued interest.
Municipal
Notes.
Municipal securities in the form of notes generally are used to provide for short-term capital needs, in anticipation of an issuers receipt of other revenues or financing, and typically have maturities of up
to three years. Such instruments may include tax anticipation notes, revenue anticipation notes, bond anticipation notes, tax and revenue anticipation notes and construction loan notes. Tax anticipation notes are issued to finance the working
capital needs of governments. Generally, they are issued in anticipation of various tax revenues, such as income, sales, property, use and business taxes, and are payable from these specific future taxes. Revenue anticipation notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues available under federal revenue sharing programs. Bond anticipation notes are issued to provide interim financing until long- term bond financing can be arranged. In most
cases, the long-term bonds then provide the funds needed for repayment of the bond anticipation notes. Tax and revenue anticipation notes combine the funding sources of both tax anticipation notes and revenue anticipation notes. Construction loan
notes are sold to provide construction financing. Mortgage notes insured by the Federal Housing Authority secure these notes; however, the proceeds from the insurance may be less than the economic equivalent of the payment of principal and interest
on the mortgage note if there has been a default. The anticipated revenues from taxes, grants or bond financing generally secure the obligations of an issuer of municipal notes. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be insufficient to satisfy the issuers payment obligations under the notes or that refinancing will be otherwise unavailable.
Pre-Refunded Municipal
Securities.
The principal of and interest on pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an escrow fund
consisting of U.S. government securities. The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding
technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities. However, except for a change in the revenue source from which principal and interest payments are made,
the pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer.
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Private Activity Bonds.
Private activity bonds, formerly
referred to as industrial development bonds, are issued by or on behalf of public authorities to obtain funds to provide privately operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or
hazardous waste treatment or disposal facilities and certain local facilities for water supply, gas or electricity. Other types of private activity bonds, the proceeds of which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute municipal securities, although the current federal tax laws place substantial limitations on the size of such issues. The Funds distributions of its interest income from
private activity bonds may subject certain investors to the federal alternative minimum tax.
Special Taxing Districts.
Special taxing districts are organized to plan and finance infrastructure developments to induce residential, commercial and industrial growth and
redevelopment. The bond financing methods such as tax increment finance, tax assessment, special services district and Mello-Roos bonds, are generally payable solely from taxes or other revenues attributable to the specific projects financed by the
bonds without recourse to the credit or taxing power of related or overlapping municipalities. They often are exposed to real estate development-related risks and can have more taxpayer concentration risk than general tax-supported bonds, such as
general obligation bonds. Further, the fees, special taxes, or tax allocations and other revenues that are established to secure such financings are generally limited as to the rate or amount that may be levied or assessed and are not subject to
increase pursuant to rate covenants or municipal or corporate guarantees. The bonds could default if development failed to progress as anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing
plans of the districts.
When-Issued and
Delayed Delivery Transactions.
The Fund may buy and sell municipal securities on a when-issued or delayed delivery basis, making payment or taking delivery at a later date, normally within 15 to 45 days of the trade date.
This type of transaction may involve an element of risk because no interest accrues on the bonds prior to settlement and, because bonds are subject to market fluctuations, the value of the bonds at time of delivery may be less (or more) than cost. A
separate account of the Fund will be established with its custodian consisting of cash, cash equivalents, or liquid securities having a market value at all times at least equal to the amount of the commitment.
Zero Coupon Bonds.
A zero
coupon bond is a bond that typically does not pay interest either for the entire life of the obligation or for an initial period after the issuance of the obligation. When held to its maturity, the holder receives the par value of the zero coupon
bond, which generates a return equal to the difference between the purchase price and its maturity value. A zero coupon bond is normally issued and traded at a deep discount from face value. This original issue discount (OID)
approximates the total amount of interest the security will accrue and compound prior to its maturity and reflects the payment deferral and credit risk associated with the instrument. Because zero coupon securities and other OID instruments do not
pay cash interest at regular intervals, the instruments ongoing accruals require ongoing judgments concerning the collectability of deferred payments and the value of any associated collateral. As a result, these securities may be subject to
greater value fluctuations and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash on a current basis. Because zero coupon bonds, and OID instruments generally, allow an issuer to avoid or delay
the need to generate cash to meet current interest payments, they may involve greater payment deferral and credit risk than coupon loans and bonds that pay interest currently or in cash. The Fund generally will be required to distribute dividends to
shareholders representing the income of these instruments as it accrues, even though the Fund will not receive all of the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when it may not be advisable
to do so, and use the cash proceeds to make income distributions to its shareholders. For accounting purposes, these cash distributions to shareholders will not be treated as a return of capital.
Further, NFALLC collects management fees on the value of a
zero coupon bond or OID instrument attributable to the ongoing non-cash accrual of interest over the life of the bond or other instrument. As a result, NFALLC receives non-refundable cash payments based on such non-cash accruals while investors
incur the risk that such non-cash accruals ultimately may not be realized.
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Inverse Floating Rate Securities
The Fund may invest up to 15% of its Managed Assets in
inverse floating rate securities. Inverse floating rate securities (sometimes referred to as inverse floaters) are securities whose interest rates bear an inverse relationship to the interest rate on another security or the value of an
index. Generally, inverse floating rate securities represent beneficial interests in a special purpose trust formed by a third party sponsor for the purpose of holding municipal bonds. The special purpose trust typically sells two classes of
beneficial interests or securities: floating rate securities (sometimes referred to as short-term floaters or tender option bonds) and inverse floating rate securities (sometimes referred to as inverse floaters or residual interest securities). Both
classes of beneficial interests are represented by certificates. The short-term floating rate securities have first priority on the cash flow from the municipal bonds held by the special purpose trust. Typically, a third party, such as a bank,
broker-dealer or other financial institution, grants the floating rate security holders the option, at periodic intervals, to tender their securities to the institution and receive the face value thereof. As consideration for providing the option,
the financial institution receives periodic fees. The holder of the short-term floater effectively holds a demand obligation that bears interest at the prevailing short-term, tax-exempt rate. However, the institution granting the tender option will
not be obligated to accept tendered short-term floaters in the event of certain defaults or a significant downgrade in the credit rating assigned to the bond issuer. For its inverse floating rate investment, the Fund receives the residual cash flow
from the special purpose trust. Because the holder of the short-term floater is generally assured liquidity at the face value of the security, the Fund as the holder of the inverse floater assumes the interest rate cash flow risk and the market
value risk associated with the municipal security deposited into the special purpose trust. The volatility of the interest cash flow and the residual market value will vary with the degree to which the trust is leveraged. This is expressed in the
ratio of the total face value of the short-term floaters in relation to the value of the residual inverse floaters that are issued by the special purpose trust. The Fund expects to make limited investments in inverse floaters, with leverage ratios
that may vary at inception between one and three times. In addition, all voting rights and decisions to be made with respect to any other rights relating to the municipal bonds held in the special purpose trust are passed through to the Fund, as the
holder of the residual inverse floating rate securities.
Because increases in the interest rate on the short-term floaters reduce the residual interest paid on inverse floaters, and because fluctuations in the value of the municipal bond deposited in the
special purpose trust affect the value of the inverse floater only, and not the value of the short-term floater issued by the trust, and because fluctuations in the value of the municipal bond deposited in the special purpose trust affect the value
of the inverse floater only, and not the value of the short-term floater issued by the trust, inverse floaters value is generally more volatile than that of fixed rate bonds. The market price of inverse floating rate securities is generally
more volatile than the underlying securities due to the leveraging effect of this ownership structure. These securities generally will underperform the market of fixed rate bonds in a rising interest rate environment (
i.e.
, when bond values
are falling), but tend to outperform the market of fixed rate bonds when interest rates decline or remain relatively stable. Although volatile, inverse floaters typically offer the potential for yields exceeding the yields available on fixed rate
bonds with comparable credit quality, coupon, call provisions and maturity. Inverse floaters have varying degrees of liquidity based upon the liquidity of the underlying securities deposited in a special purpose trust.
The Fund may invest in inverse floating rate securities,
issued by special purpose trusts that have recourse to the Fund. In Nuveen Asset Managements discretion, the Fund may enter into a separate shortfall and forbearance agreement with the third party sponsor of a special purpose trust. The Fund
may enter into such recourse agreements (i) when the liquidity provider to the special purpose trust requires such an agreement because the level of leverage in the trust exceeds the level that the liquidity provider is willing support absent
such an agreement; and/or (ii) to seek to prevent the liquidity provider from collapsing the trust in the event that the municipal obligation held in the trust has declined in value. Such an agreement would require the Fund to reimburse the
third party sponsor of such inverse floater, upon termination of the trust issuing the inverse floater, the difference between the liquidation value of the bonds held in the trust and the principal amount due to the holders of floating rate
interests. Such agreements may expose the Fund to a risk of loss that exceeds its investment in the inverse floating rate securities. Absent a shortfall and forbearance agreement, the Fund would
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not be required to make such a reimbursement. If the Fund chooses not to enter into such an agreement, the special purpose trust could be liquidated and the Fund could incur a loss.
The Fund may invest in both inverse floating rate securities
and floating rate securities (as discussed below) issued by the same special purpose trust. The Fund will segregate or earmark liquid assets with its custodian in accordance with the 1940 Act to cover its obligations with respect to its investments
in special purpose trusts.
Investments in inverse
floating rate securities create effective leverage. The use of leverage creates special risks for Common Shareholders. See Risk FactorsInverse Floating Rate Securities Risk. The Fund will segregate or earmark liquid assets with its
custodian in accordance with the 1940 Act to cover its obligations with respect to its investments in special purpose trusts. See also Segregation of Assets in the SAI.
Floating Rate Securities.
The
Fund may also invest in floating rate securities issued by special purpose trusts. Floating rate securities may take the form of short-term floating rate securities or the option period may be substantially longer. Generally, the interest rate
earned will be based upon the market rates for municipal securities with maturities or remarketing provisions that are comparable in duration to the periodic interval of the tender option, which may vary from weekly, to monthly, to extended periods
of one year or multiple years. Since the option feature has a shorter term than the final maturity or first call date of the underlying bond deposited in the trust, the Fund as the holder of the floating rate security relies upon the terms of the
agreement with the financial institution furnishing the option as well as the credit strength of that institution. As further assurance of liquidity, the terms of the trust provide for a liquidation of the municipal security deposited in the trust
and the application of the proceeds to pay off the floating rate security. The trusts that are organized to issue both short-term floating rate securities and inverse floaters generally include liquidation triggers to protect the investor in the
floating rate security.
Tender Option
Bonds
. A tender option bond is a municipal security (generally held pursuant to a custodial arrangement) having a relatively long maturity and bearing interest at a fixed rate substantially higher than prevailing
short-term, tax-exempt rates. The bond is typically issued with the agreement of a third party, such as a bank, broker-dealer or other financial institution, which grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As consideration for providing the option, the financial institution receives periodic fees equal to the difference between the bonds fixed coupon rate and the rate, as
determined by a remarketing or similar agent at or near the commencement of such period, that would cause the securities, coupled with the tender option, to trade at par on the date of such determination. Thus, after payment of this fee, the
security holder effectively holds a demand obligation that bears interest at the prevailing short-term, tax-exempt rate. However, an institution will not be obligated to accept tendered bonds in the event of certain defaults or a significant
downgrade in the credit rating assigned to the issuer of the bond. The Fund intends to invest in tender option bonds the interest on which will, in the opinion of bond counsel, counsel for the issuer of interests therein or counsel selected by
Nuveen Asset Management, be exempt from regular federal income tax. However, because there can be no assurance that the Internal Revenue Service (the IRS) will agree with such counsels opinion in any particular case, there is a
risk that the Fund will not be considered the owner of such tender option bonds and thus will not be entitled to treat such interest as exempt from such tax. Additionally, the federal income tax treatment of certain other aspects of these
investments, including the proper tax treatment of tender option bonds and the associated fees in relation to various regulated investment company tax provisions, is unclear. The Fund intends to manage its portfolio in a manner designed to eliminate
or minimize any adverse impact from the tax rules applicable to these investments.
Structured Notes
The Fund may utilize structured notes and similar instruments for investment purposes and also for hedging purposes. Structured notes are privately negotiated debt obligations where the principal and/or
interest is determined by reference to the performance of a benchmark asset, market or interest rate (an embedded index), such as selected securities, an index of securities or specified interest rates, or the differential performance of
two assets or markets. The terms of such structured instruments normally provide that their principal and/or interest
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payments are to be adjusted upwards or downwards (but not ordinarily below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the
interest and/or principal payments that may be made on a structured product may vary widely, depending upon a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or
interest payments. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index or indices or other assets. Application of a multiplier involves leverage
that will serve to magnify the potential for gain and the risk of loss. These types of investments may generate taxable income.
Derivatives
The Fund may invest in certain derivative instruments in pursuit of its investment objective. Such instruments include financial futures
contracts, swap contracts (including interest rate and credit default swaps), options on financial futures, options on swap contracts or other derivative instruments. In particular, the Fund may use credit default swaps and interest rate swaps.
Credit default swaps may require initial premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of a reference obligation. If the Fund is a seller of a contract, the Fund would
be required to pay the par (or other agreed upon) value of a referenced debt obligation to the counterparty in the event of a default or other credit event by the reference issuer, such as a U.S. or foreign corporate issuer, with respect to such
debt obligations. In return, the Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Fund would keep the stream of payments
and would have no payment obligations. As the seller, the Fund would be subject to investment exposure on the notional amount of the swap. If the Fund is a buyer of a contract, the Fund would have the right to deliver a referenced debt obligation
and receive the par (or other agreed-upon) value of such debt obligation from the counterparty in the event of a default or other credit event (such as a credit downgrade) by the reference issuer, such as a U.S. or foreign corporation, with respect
to its debt obligations. In return, the Fund would pay the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the counterparty would keep the stream of
payments and would have no further obligations to the Fund. Interest rate swaps involve the exchange by the Fund with a counterparty of their respective commitments to pay or receive interest, such as an exchange of fixed-rate payments for floating
rate payments. The Fund will usually enter into interest rate swaps on a net basis; that is, the two payment streams will be netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. See Hedging Strategies and Other Uses of Derivatives and Segregation of Assets in the SAI.
Limitations on the Use of Futures, Options on Futures and
Swaps
. NFALLC has claimed, with respect to the Fund, the exclusion from the definition of commodity pool operator under the Commodity Exchange Act (CEA) provided by Commodity Futures Trading
Commission (CFTC) Regulation 4.5 and is therefore not currently subject to registration or regulation as such under the CEA with respect to the Fund. In addition, Nuveen Asset Management has claimed the exemption from registration as a
commodity trading advisor provided by CFTC Regulation 4.14(a)(8) and is therefore not currently subject to registration or regulation as such under the CEA with respect to the Fund. In February 2012, the CFTC announced substantial amendments to
certain exemptions, and to the conditions for reliance on those exemptions, from registration as a commodity pool operator. Under amendments to the exemption provided under CFTC Regulation 4.5, if the Fund uses futures, options on futures or swaps
other than for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums on these positions (after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by
which options that are in-the-money at the time of purchase are in-the-money) may not exceed 5% of the Funds net asset value, or alternatively, the aggregate net notional value of those positions may not exceed 100% of
the Funds net asset value (after taking into account unrealized profits and unrealized losses on any such positions). The CFTC amendments to Regulation 4.5 took effect on December 31, 2012, and the Fund intends to comply with amended
Regulation 4.5s requirements such that NFALLC will not be required to register as a commodity pool operator with the
37
CFTC with respect to the Fund. The Fund reserves the right to employ futures, options on futures and swaps to the extent allowed by CFTC regulations in effect from time to time and in accordance
with the Funds policies. The requirements for qualification as a regulated investment company may also limit the extent to which the Fund may employ futures, options on futures or swaps.
NFALLC and Nuveen Asset Management may use derivative instruments to seek to enhance return, to hedge some of
the risk of the Funds investments in municipal securities or as a substitute for a position in the underlying asset. These types of strategies may generate taxable income.
There is no assurance that these derivative strategies will
be available at any time or that, if used, that the strategies will be successful.
Other Investment Companies
As a non-fundamental policy, the Fund may invest up to 10% of its Managed Assets in securities of other open- or closed-end investment companies (including exchange-traded funds (ETFs)) that
invest primarily in municipal securities of the types in which the Fund may invest directly. In addition, the Fund may invest a portion of its Managed Assets in pooled investment vehicles (other than investment companies) that invest primarily in
municipal securities of the types in which the Fund may invest directly. The Fund may invest in investment companies that are advised by NFALLC, Nuveen Asset Management or their respective affiliates to the extent permitted by applicable law and/or
pursuant to exemptive relief from the SEC. The Fund has not applied for and currently does not intend to apply for such relief. As a stockholder in an investment company, the Fund will bear its ratable share of that investment companys
expenses, and would remain subject to payment of the Funds advisory and administrative fees with respect to assets so invested. Common shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other
investment companies.
Nuveen Asset Management
will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available municipal security investments. In addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As described in the section entitled Risk Factors, the net asset value and market value of leveraged shares will be more volatile and the yield to Common Shareholders
will tend to fluctuate more than the yield generated by unleveraged shares.
Portfolio Turnover
The Fund may buy and sell municipal securities to accomplish its investment objective in relation to actual and anticipated changes in interest rates. The Fund also may sell one municipal security and buy
another of comparable quality at about the same time to take advantage of what Nuveen Asset Management believes to be a temporary price disparity between the two bonds that may result from imbalanced supply and demand. The Fund also may engage in a
limited amount of short-term trading, consistent with its investment objective. The Fund may sell securities in anticipation of a market decline (a rise in interest rates) or buy securities in anticipation of a market rise (a decline in interest
rates) and later sell them, but the Fund will not engage in trading solely to recognize a gain. The Fund will attempt to achieve its investment objective by prudently selecting municipal securities with a view to holding them for investment.
Although the Fund cannot accurately predict its annual portfolio turnover rate, the Fund expects, though it cannot guarantee, that its annual portfolio turnover rate generally will not exceed 25% under normal circumstances. For the fiscal year ended
March 31, 2013, the Funds portfolio turnover rate was 24%. There are no limits on the rate of portfolio turnover, and investments may be sold without regard to length of time held when investment considerations warrant such action. A higher
portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. In addition, high portfolio turnover may result in the realization of net short term capital gains by the
Fund which, when distributed to shareholders, will be taxable as ordinary income. See Tax Matters.
38
USE OF LEVERAGE
The Fund intends to use leverage to seek to enhance its
potential for current income exempt from regular federal income tax. The Fund intends to use leverage by investing in inverse floating rate securities that have the economic effect of leverage, as discussed further below. The Fund may leverage its
capital structure by issuing senior securities such as preferred shares, investing in debt securities or by borrowing. The combined economic effect of the total leverage used by the Fund is referred to as effective leverage. The Fund
currently uses leverage by investing in inverse floating rate securities. If current market conditions change (for example, if there is a material decrease in the supply of inverse floating rate securities or if newly issued senior securities become
a more attractive financing option), the Fund may use other forms of leverage. Financial leverage is created as a result of the Funds investments in residual interest certificates of tender option bond trusts, also called inverse floating rate
securities, because the Funds investment exposure to the underlying bonds held by the trust have been effectively financed by the trusts issuance of floating rate certificates. As of March 31, 2013 the Funds total effective
leverage was approximately 1% of its Managed Assets.
The Fund does not currently have any preferred shares or debt securities outstanding or any borrowings. The Fund may issue preferred shares or debt securities or borrow in the future to increase the
Funds leverage. The timing and terms of any leverage transactions is determined by the Funds Board of Trustees. Borrowings and preferred shares, if any, will have seniority over the Common Shares.
Following an offering of additional Common Shares from time
to time, the Funds leverage ratio will decrease as a result of the increase in net assets attributable to Common Shares. The Funds leverage ratio may decline further to the extent that the net proceeds of an offering of Common Shares are
used to reduce the Funds financial leverage. A lower leverage ratio may result in lower (higher) returns to Common Shareholders over a period of time to the extent that net returns on the Funds investment portfolio exceed (fall below)
its cost of leverage over that period, which lower (higher) returns may impact the level of the Funds distributions. See Risk FactorsLeverage Risk and Inverse Floating Rate Securities. Portfolio leverage is created through
the Funds investments in inverse floating rate securities, because the Funds investment exposure to the underlying bonds held by the trust issuing the inverse floaters have been effectively financed by the trusts issuance of
floating rate certificates. See Risk FactorsInverse Floating Rate Securities Risk.
The Fund pays NFALLC a management fee based on a percentage of net assets. Net assets for this purpose includes the proceeds realized from
the Funds use of financial leverage. See Management of the FundInvestment Management and Investment Sub-Advisory Agreements. NFALLC will base its decision whether and how much to leverage the Fund based solely on its
assessment of whether such use of leverage will advance the Funds investment objective. NFALLC and Nuveen Asset Management will be responsible for using leverage to achieve the Funds investment objective. However, the fact that a
decision to increase the Funds leverage will have the effect of increasing net assets, and therefore NFALLCs management fee, means that NFALLC may have an incentive to increase the Funds use of leverage. NFALLC and Nuveen Asset
Management will seek to manage that incentive by only increasing the Funds use of leverage when they determine that such increase is consistent with the Funds investment objective, and by periodically reviewing the Funds
performance and use of leverage with the Funds Board of Trustees.
Leverage involves special risks. There is no assurance that the Funds leveraging strategy will be successful.
NET ASSET VALUE
The Funds net asset value per share is determined as of
the close of regular session trading (normally 4:00 p.m., Eastern Time) on each day the NYSE is open for business. Net asset value is calculated by taking the market value of the Funds total assets, including interest or dividends accrued
but not yet collected, less all liabilities, and dividing by the total number of shares outstanding. The result, rounded to the nearest cent, is the net asset value per share. All valuations are subject to review by the Funds Board of Trustees
or its delegate.
In determining net asset value,
expenses are accrued and applied daily and securities and other assets for which market quotations are available are valued at market value. The prices of municipal bonds are provided by a pricing service approved by the Funds Board of
Trustees. When market price quotes are not readily available (which is usually the case for municipal securities), the pricing service, or, in the absence of a pricing service for a particular security, the Board of Trustees of the Fund, or its
designee, may establish fair market value using a wide variety of market data including yields or prices of municipal bonds of comparable quality, type of issue, coupon, maturity and rating, market quotes or indications of value from securities
dealers, evaluations of anticipated cash flows or collateral, general market conditions and other information and analysis, including the obligors credit characteristics considered relevant by the pricing service or the Board of Trustees
designee. Exchange-listed securities are generally valued at the last sales price on the securities exchange on which such securities are primarily traded. Securities traded on a securities exchange for which there are no transactions on a given day
or securities not listed on a securities exchange are valued at the mean of the closing bid and asked prices. Securities traded on Nasdaq are valued at the Nasdaq Official Closing Price. Temporary investments in securities that have variable rate
and demand features qualifying them as short-term investments are valued at amortized cost, which approximates market value. See Net Asset Value in the SAI for more information.
DISTRIBUTIONS
The Fund pays regular monthly distributions to Common Shareholders at a level rate (stated in terms of a fixed
cents per Common Share dividend rate) that reflects the past and projected performance of the Fund. Distributions can only be made from net investment income after paying any accrued dividends to preferred shareholders, if any, or interest and
required principal payments on borrowings.
The
Funds ability to maintain a level dividend rate will depend on a number of factors. The net income of the Fund includes all interest income accrued on portfolio assets less all expenses of the Fund. Expenses of the Fund are accrued each day.
For each taxable year, all or substantially all of the net investment income of the Fund will be distributed. At least annually, the Fund also intends to distribute substantially all of its net capital gain (which is the excess of net long-term
capital gain over net short-term capital loss) and ordinary taxable income, if any, after paying any accrued dividends or making any liquidation payments to preferred shareholders, if any, and interest and required principal payments on borrowings.
Although it does not now intend to do so, the Board of Trustees may change the Funds dividend policy and the amount or timing of the distributions, based on a number of factors, including the amount of the Funds undistributed net
investment income and historical and projected investment income and the amount of the expenses and dividend rates on the outstanding preferred shares, if any, and expenses and interest on borrowings.
The Fund might not distribute all or a portion of any net
capital gain for a taxable year. If the Fund does not distribute all of its net capital gain for a taxable year, it will pay federal income tax on the retained gain. Each
52
Common Shareholder of record as of the end of the Funds taxable year (i) will include in income for federal income tax purposes, as long-term capital gain, his or her share of the retained
gain, (ii) will be deemed to have paid his or her proportionate share of tax paid by the Fund on such retained gain, and (iii) will be entitled to an income tax credit or refund for that share of the tax. The Fund will treat the retained capital
gains as a substitute for equivalent cash distributions. While not currently anticipated, if the Fund makes total distributions during a given calendar year in an amount that exceeds the Funds net investment income and net capital gain for
that calendar year, the excess would generally be treated by Common Shareholders as a return of capital for tax purposes. A return of capital reduces a shareholders tax basis, which could result in higher taxes when the shareholder sells his
or her shares. This may cause the shareholder to pay taxes even if he or she sells shares for less than the original price.
The Fund reserves the right to change its distribution policy and the basis for establishing the rate of its monthly distributions at any
time.
DIVIDEND
REINVESTMENT PLAN
If your Common Shares are
registered directly with the Fund or if you hold your Common Shares with a brokerage firm that participates in the Funds Dividend Reinvestment Plan (Plan), you may elect to have all dividends, including any capital gain dividends,
on your Common Shares automatically reinvested by the Plan Agent (defined below) in additional Common Shares under the Plan. You may elect to participate in the Plan by contacting Nuveen Investor Services at (800) 257-8787. If you do not
participate, you will receive all distributions in cash paid by check mailed directly to you or your brokerage firm by State Street Bank and Trust Company as dividend paying agent (Plan Agent).
If you decide to participate in the Plan, the number of
Common Shares you will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value at the time of valuation, the Fund will issue new shares at the then current market price;
(2) If Common Shares are trading below net asset value at the
time of valuation, the Plan Agent will receive the dividend or distribution in cash and will purchase Common Shares in the open market, on the NYSE or elsewhere, for the participants accounts. It is possible that the market price for the
Common Shares may increase before the Plan Agent has completed its purchases. Therefore, the average purchase price per share paid by the Plan Agent may exceed the market price at the time of valuation, resulting in the purchase of fewer shares than
if the dividend or distribution had been paid in Common Shares issued by the Fund. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market within 30 days of the valuation date. Interest
will not be paid on any uninvested cash payments; or
(3) If the Plan Agent begins purchasing Fund shares on the open market while shares are trading below net asset value, but the Funds shares subsequently trade at or above their net asset value
before the Plan Agent is able to complete its purchases, the Plan Agent may cease open-market purchases and may invest the uninvested portion of the distribution in newly-issued Fund shares at a price equal to the greater of the shares net
asset value or 95% of the shares market value.
You may withdraw from the Plan at any time by giving written notice to the Plan Agent. If you withdraw or the Plan is terminated, you will receive whole shares in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish, the Plan Agent will sell your shares and send you the proceeds, minus brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders accounts in
the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. Upon a repurchase of your
53
shares, the Fund (or its administrative agent) may be required to report to the Internal Revenue Service (IRS) and furnish to you cost basis and holding period information for Fund
shares that you purchased on or after January 1, 2012 (covered shares).
For shares of the Fund held in the Plan, you are permitted to elect from among several permitted cost basis methods. In the absence of an election, the Plan will use first-in first-out (FIFO)
methodology for tracking and reporting your cost basis on covered shares as its default cost basis method. The cost basis method you use may not be changed with respect to a repurchase of shares after the settlement date of the repurchase. You
should consult with your tax advisors to determine the best permitted cost basis method for your tax situation and to obtain more information about how the new cost basis reporting rules apply to you.
Common Shares in your account will be held by the Plan Agent
in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a
pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends
and distributions.
If you hold your Common Shares
with a brokerage firm that does not participate in the Plan, you will not be able to participate in the Plan and any dividend reinvestment may be effected on different terms than those described above. Consult your financial advisor for more
information.
The Fund reserves the right to amend
or terminate the Plan if in the judgment of the Board of Trustees the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by
the participants. Additional information about the Plan may be obtained by writing to State Street Bank and Trust Company, Attn: ComputerShare Nuveen Investments, P.O. Box 43071, Providence, Rhode Island 02940-3071 or by calling (800) 257-8787.
PLAN OF DISTRIBUTION
The Fund may sell the Common Shares offered
under this Prospectus through
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at-the-market transactions;
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underwriting syndicates; and
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privately negotiated transactions.
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The Fund will bear the expenses of the Offering, including but not limited to, the expenses of preparation of the Prospectus and SAI for
the Offering and the expense of counsel and of auditors in connection with the Offering.
Distribution Through At-the-Market Transactions
The Fund has entered into a distribution agreement with Nuveen Securities (the Distribution Agreement), 333 West Wacker Drive,
Chicago, Illinois 60606, which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The summary of the Distribution Agreement contained herein is qualified by reference to the Distribution Agreement. Subject
to the terms and conditions of the Distribution Agreement, the Fund may from time to time issue and sell its Common Shares through Nuveen Securities to certain broker-dealers which have entered into selected dealer agreements with Nuveen Securities.
Currently, Nuveen Securities has entered into a selected dealer agreement (the Selected Dealer Agreement) with UBS
54
pursuant to which UBS will be acting as Nuveen Securities sub-placement agent with respect to at-the-market offerings of Common Shares. The Selected Dealer Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The summary of the Selected Dealer Agreement contained herein is qualified by reference to the Selected Dealer Agreement.
Common Shares will only be sold on such days as shall be
agreed to by the Fund and Nuveen Securities. Common Shares will be sold at market prices, which shall be determined with reference to trades on the NYSE, subject to a minimum price to be established each day by the Fund. The minimum price on any day
will not be less than the current net asset value per Common Share plus the per share amount of the commission to be paid to Nuveen Securities. The Fund and Nuveen Securities will suspend the sale of Common Shares if the per share price of the
shares is less than the minimum price.
The Fund
will compensate Nuveen Securities with respect to sales of the Common Shares at a commission rate of up to 1% of the gross proceeds of the sale of Common Shares. Nuveen Securities will compensate broker-dealers participating in the offering at a
rate of up to 0.8% of the gross proceeds of the sale of Common Shares sold by that broker-dealer. Settlements of sales of Common Shares will occur on the third business day following the date on which any such sales are made.
In connection with the sale of the Common Shares on behalf of
the Fund, Nuveen Securities may be deemed to be an underwriter within the meaning of the 1933 Act, and the compensation of Nuveen Securities may be deemed to be underwriting commissions or discounts. Unless otherwise indicated in a further
Prospectus supplement, Nuveen Securities will act as underwriter on a reasonable efforts basis.
The offering of Common Shares pursuant to the Distribution Agreement will terminate upon the earlier of (i) the sale of all Common Shares subject thereto or (ii) termination of the Distribution
Agreement. The Fund and Nuveen Securities each have the right to terminate the Distribution Agreement in its discretion at any time.
The Fund currently intends to distribute the shares offered pursuant to this Prospectus primarily through at-the-market transactions,
although from time to time it may also distribute shares through an underwriting syndicate or a privately negotiated transaction. To the extent shares are distributed other than through at-the-market transactions, the Fund will file a supplement to
this Prospectus describing such transactions.
The
Funds closing price on the NYSE on May 31, 2013 was $13.86.
UBS, its affiliates and their respective employees hold or may hold in the future, directly or indirectly, investment interests in Nuveen Investments, Inc. and its funds. The interests held by employees
of UBS or its affiliates are not attributable to, and no investment discretion is held by, UBS or its affiliates.
Distribution Through Underwriting Syndicates
The Fund from time to time may issue additional Common Shares through a syndicated secondary offering. In order to limit the impact on the market price of the Funds Common Shares, underwriters will
market and price the offering on an expedited basis (
e.g.
, overnight or similarly abbreviated offering period). The Fund will launch a syndicated offering on a day, and upon terms, mutually agreed upon between the Fund, Nuveen Securities, one
of the Funds underwriters, and the underwriting syndicate.
The Fund will offer its shares at a price equal to a specified discount of up to 5% from the closing market price of the Funds Common Shares on the day prior to the offering date. The applicable
discount will be negotiated by the Fund and Nuveen Securities in consultation with the underwriting syndicate on a transaction-by-transaction basis. The Fund will compensate the underwriting syndicate out of the proceeds of the offering based upon a
sales load of up to 4% of the gross proceeds of the sale of Common Shares. The minimum net proceeds per share to the Fund will not be less than the greater of (i) the Funds latest net asset value per Common Share or (ii) 91% of the
closing market price of the Funds Common Shares on the day prior to the offering date.
55
Distribution Through Privately Negotiated Transactions
The Fund, through Nuveen Securities, from time to time may
sell directly to, and solicit offers from, institutional and other sophisticated investors
,
who may be deemed to be underwriters as defined in the 1933 Act for any resale of Common Shares.
The terms of such privately negotiated transactions will be
subject to the discretion of the management of the Fund. In determining whether to sell Common Shares through a privately negotiated transaction, the Fund will consider relevant factors including, but not limited to, the attractiveness of obtaining
additional funds through the sale of Common Shares, the purchase price to apply to any such sale of Common Shares and the person seeking to purchase the Common Shares.
Common Shares issued by the Fund through privately negotiated
transactions will be issued at a price equal to the greater of (i) the net asset value per Common Share of the Funds Common Shares or (ii) at a discount ranging from 0% to 5% of the average daily closing market price of the
Funds Common Shares at the close of business on the two business days preceding the date upon which Common Shares are sold pursuant to the privately negotiated transaction. The applicable discount will be determined by the Fund on a
transaction-by-transaction basis.
The principal
business address of Nuveen Securities is 333 West Wacker Drive, Chicago, Illinois 60606.
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common Shares. The Common Shares being offered have a par value of $0.01 per share and, subject to the rights of holders of preferred
shares, if issued, and borrowings, if incurred, have equal rights to the payment of dividends and the distribution of assets upon liquidation. The Common Shares being offered will, when issued, be fully paid and, subject to matters discussed in
Certain Provisions in the Declaration of Trust, non-assessable, and will have no pre-emptive or conversion rights or rights to cumulative voting. Each whole Common Share has one vote with respect to matters upon which a shareholder vote
is required, and each fractional share shall be entitled to a proportional fractional vote consistent with the requirements of the 1940 Act and the rules promulgated thereunder, and will vote together as a single class. Whenever the Fund incurs
borrowings and/or preferred shares are outstanding, Common Shareholders will not be entitled to receive any cash distributions from the Fund unless all interest on such borrowings has been paid and all accrued dividends on preferred shares have been
paid, unless asset coverage (as defined in the 1940 Act) with respect to any borrowings would be at least 300% after giving effect to the distributions and asset coverage (as defined in the 1940 Act) with respect to preferred shares would be at
least 200% after giving effect to the distributions. See Preferred Shares below.
The Common Shares are listed on the NYSE and trade under the symbol NXP. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such listing. The Fund will not issue share certificates.
Unlike open-end funds, closed-end funds like the Fund do not provide daily redemptions. Rather, if a shareholder determines to buy
additional Common Shares or sell shares already held, the shareholder may conveniently do so by trading on the exchange through a broker or otherwise. Shares of closed-end investment companies may frequently trade on an exchange at prices lower than
net asset value. Shares of closed-end investment companies like the Fund have during some periods traded at prices higher than net asset value and have during other periods traded at prices lower than net asset value.
Because the market value of the Common Shares may be
influenced by such factors as distribution levels (which are in turn affected by expenses), call protection, dividend stability, portfolio credit quality, net asset
56
value, relative demand for and supply of such shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, the Fund cannot assure you that
Common Shares will trade at a price equal to or higher than net asset value in the future. The Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading
purposes. See Repurchase of Fund Shares; Conversion to Open-End Fund.
Borrowings
The Declaration authorizes the Fund, without approval of the Common Shareholders, to borrow money. In this connection, the Fund may issue notes or other evidence of indebtedness (including bank borrowings
or commercial paper) and may secure any such borrowings by mortgaging, pledging or otherwise subjecting as security the Funds assets. The Fund expects to borrow money at rates generally available to institutional investors. In connection with
such Borrowings, the Fund may be required to maintain minimum average balances with the lender or to pay a commitment or other fee to maintain a line of credit. Any such requirements will increase the cost of any such borrowings over the stated
interest rate. Under the requirements of the 1940 Act, the Fund, immediately after any such Borrowings, must have an asset coverage of at least 300%. With respect to any such borrowings, asset coverage means the ratio that the value of
the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of such borrowings represented by senior securities issued by the Fund. Certain
types of borrowings may result in the Fund being subject to covenants in credit agreements relating to asset coverages or portfolio coverages or otherwise. In addition, as with the issuance of preferred shares, certain types of borrowings may result
in the Fund being subject to certain restrictions imposed by guidelines of one or more rating agencies that may issue ratings for commercial paper or notes issued by the Fund. Such restrictions may be more stringent than those imposed by the 1940
Act.
The rights of lenders to the Fund to receive
interest on and repayment of principal of any such borrowings will be senior to those of the Common Shareholders, and the terms of any such borrowings may contain provisions which limit certain activities of the Fund, including the payment of
dividends to Common Shareholders in certain circumstances. Further, the 1940 Act does (in certain circumstances) grant to the lenders to the Fund certain voting rights in the event of default in the payment of interest on or repayment of principal.
In the event that such provisions would impair the Funds eligibility for treatment as a regulated investment company under the Internal Revenue Code of 1986, as amended (the Code), the Fund will attempt to repay or restructure the
borrowings to preserve that eligibility. Any borrowings will likely be ranked senior or equal to all other existing and future borrowings of the Fund. The Fund may also borrow up to an additional 5% of its total assets for temporary purposes. The
Fund may also borrow money for repurchase of its shares or as a temporary measure for extraordinary or emergency situations. See Investment Restrictions in the SAI.
Preferred Shares
The Declaration authorizes the issuance of an unlimited
number of preferred shares in one or more classes or series, with rights as determined by the Board of Trustees, by action of the Board of Trustees without the approval of the Common Shareholders. The Fund does not currently have any preferred
shares outstanding. The Fund may issue preferred shares in the future to increase the Funds leverage.
Limited Issuance of Preferred Shares.
Under the 1940 Act, the Fund could issue preferred shares with an
aggregate liquidation value of up to one-half of the value of the Funds total net assets, including any liabilities associated with borrowings, measured immediately after issuance of the preferred shares. Liquidation value means
the original purchase price of the shares being liquidated plus any accrued and unpaid dividends. In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless the liquidation value of the
preferred shares is less than one-half of the value of the Funds total net assets (determined after deducting the amount of such dividend or distribution) immediately after the distribution.
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Distribution Preference.
If issued in the future, the
preferred shares would have complete priority over the Common Shares as to distribution of assets.
Liquidation Preference.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Fund, holders of preferred shares, if issued
in the future, would be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus accumulated and unpaid dividends thereon, whether or not earned or declared) before any distribution of
assets is made to Common Shareholders.
Voting
Rights.
Preferred shares are required to be voting shares and to have equal voting rights with Common Shares. Except as otherwise indicated in this Prospectus or the SAI and except as otherwise required by applicable law,
holders of preferred shares, if issued in the future, would vote together with Common Shareholders as a single class.
Holders of preferred shares, if issued in the future, voting as a separate class, would be entitled to elect two of the Funds
trustees (following the establishment of the Fund by an initial trustee, the Declaration provides for a total of no less than two and no more than 15 trustees). The remaining trustees would be elected by Common Shareholders and holders of preferred
shares, if issued in the future, voting together as a single class. In the unlikely event that two full years of accrued dividends are unpaid on the preferred shares, if issued in the future, the holders of all outstanding preferred shares, if
issued in the future, voting as a separate class, would be entitled to elect a majority of the Funds trustees until all dividends in arrears have been paid or declared and set apart for payment. In order for the Fund to take certain actions or
enter into certain transactions, a separate class vote of holders of preferred shares, if issued in the future, would be required, in addition to the single class vote of the holders of preferred shares, if issued in the future, and Common Shares.
See Certain Provisions in the Declaration of Trust and the SAI under Description of SharesPreferred SharesVoting Rights.
Redemption, Purchase and Sale of Preferred Shares.
The terms of the preferred shares, if issued in the
future, would provide that they may be redeemed by the issuer at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends. Any redemption or purchase of preferred shares, if issued in the future, by the
Fund will reduce the leverage applicable to Common Shares, while any issuance of shares by the Fund would increase such leverage.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the
obligations of the Fund. However, the Declaration contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument
entered into or executed by the Fund or the trustees. The Declaration further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for the obligations of the Fund.
Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is
remote.
The Declaration includes provisions that
could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. Specifically, the Declaration requires a vote by holders of at least two-thirds of the Common Shares and preferred shares,
if issued in the future, voting together as a single class, except as described below, to authorize (1) a conversion of the Fund from a closed-end to an open-end investment company, (2) a merger or consolidation of the Fund, or a series or
class of the Fund, with any corporation, association, trust or other organization or a reorganization of the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all or substantially all of the Funds assets (other than
in the regular course of the Funds investment activities), (4) in certain circumstances, a termination of the Fund, or a series or class of the Fund, or (5) a removal of trustees by shareholders (except at the end of a trustees
term), and then only for
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cause
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unless, with respect to (1) through (4), such transaction has already been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-Laws, in which case the
affirmative vote of the holders of at least a majority of the Funds Common Shares and preferred shares, if issued in the future, outstanding at the time, voting together as a single class, is required; provided, however, that where only a
particular class or series is affected (or, in the case of removing a trustee, when the trustee has been elected by only one class), only the required vote by the applicable class or series will be required. Approval of shareholders is not required,
however, for any transaction, whether deemed a merger, consolidation, reorganization or otherwise whereby the Fund issues shares in connection with the acquisition of assets (including those subject to liabilities) from any other investment company
or similar entity. In the case of the conversion of the Fund to an open-end investment company, or in the case of any of the foregoing transactions constituting a plan of reorganization which adversely affects the holders of preferred shares, if
issued in the future, the action in question will also require the affirmative vote of the holders of at least two-thirds of the Funds preferred shares, if issued in the future, outstanding at the time, voting as a separate class, or, if such
action has been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-Laws, the affirmative vote of the holders of at least a majority of the Funds preferred shares,
if issued in the future, outstanding at the time, voting as a separate class. None of the foregoing provisions may be amended except by the vote of at least two-thirds of the Common Shares and preferred shares, if issued in the future, voting
together as a single class. The votes required to approve the conversion of the Fund from a closed-end to an open-end investment company or to approve transactions constituting a plan of reorganization which adversely affects the holders of
preferred shares, if issued in the future, are higher than those required by the 1940 Act. The Board of Trustees is divided into three classes, such a staggered board could delay for up to two years the replacement of a majority of the Board of
Trustees. The Board of Trustees believes that the provisions of the Declaration relating to such higher votes are in the best interest of the Fund and its shareholders. See the SAI under Certain Provisions in the Declaration of Trust.
The provisions of the Declaration described above
could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares by discouraging a third party from seeking to obtain control of the Fund in
a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring
persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Funds investment objective and policies. The Board of Trustees of the Fund has considered the foregoing
anti-takeover provisions and concluded that they are in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the SEC for the full text of these provisions.
REPURCHASE OF FUND SHARES;
CONVERSION TO OPEN-END FUND
The Fund is a
closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Common Shares will trade in the open market at a price that will be a function of several factors, including
dividend levels (which are in turn affected by expenses), net asset value, call protection, dividend stability, portfolio credit quality, relative demand for and supply of such shares in the market, general market and economic conditions and other
factors. Because shares of closed-end investment companies may frequently trade at prices lower than net asset value, the Funds Board of Trustees has currently determined that, at least annually, it will consider action that might be taken to
reduce or eliminate any material discount from net asset value in respect of Common Shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares at net asset
value, or the
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Vacancies caused by the death, resignation, retirement, removal or disqualification of a trustee may be filled in any manner that is consistent with the Declaration and
applicable law.
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conversion of the Fund to an open-end investment company. The Fund cannot assure you that its Board of Trustees will decide to take any of these actions, or that share repurchases or tender
offers will actually reduce market discount.
If
the Fund converted to an open-end investment company, it would be required to redeem all preferred shares then outstanding, if any (requiring in turn that it liquidate a portion of its investment portfolio), and the Common Shares would no longer be
listed on the NYSE. In contrast to a closed-end investment company, shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less any redemption charge that is in effect at the time of redemption. See the SAI under Certain Provisions in the Declaration of Trust for a discussion of the voting requirements applicable to the conversion of
the Fund to an open-end investment company.
Before deciding whether to take any action if the Common Shares trade below net asset value, the Board would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the Funds portfolio, the impact of any action that might be taken on the Fund or its shareholders, and market considerations. Based on these considerations, even if
the Funds shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken. See the SAI under Repurchase of Fund Shares; Conversion to Open-End
Fund for a further discussion of possible action to reduce or eliminate such discount to net asset value. On November 16, 2011, the Funds Board of Trustees approved an open market share repurchase program under which the Fund may
repurchase up to 10% of its Common Shares. To date, the Fund has not repurchased any Common Shares under the program.
TAX MATTERS
The following information is meant as a general summary for U.S. shareholders. Please see the SAI for additional information. Investors
should rely on their own tax adviser for advice about the particular federal, state and local tax consequences to them of investing in the Fund.
The Fund has elected and intends to qualify each year to be treated as a regulated investment company (RIC) under Subchapter M
of the Code. In order to qualify for treatment as a RIC, the Fund must satisfy certain requirements regarding the sources of its income, the diversification of its assets and the distribution of its income. As a RIC, the Fund is not expected to be
subject to federal income tax. The Fund primarily invests in municipal securities (as defined above) issued by states, cities and local authorities and certain possessions and territories of the United States (such as Puerto Rico or Guam) or
municipal securities whose income is otherwise exempt from regular federal income taxes. Substantially all of the Funds dividends paid to you are expected to qualify as exempt-interest dividends. A shareholder treats an
exempt-interest dividend as interest on state and local bonds exempt from regular federal income tax. Federal income tax law imposes an alternative minimum tax with respect to corporations, individuals, trust and estates. Interest on certain
municipal securities, such as certain private activity bonds, is included as an item of tax preference in determining the amount of a taxpayers alternative minimum taxable income. If the Fund receives income from such municipal securities, a
portion of the dividends paid by the Fund, although exempt from regular federal income tax, will be taxable to shareholders whose tax liabilities are determined under the federal alternative minimum tax. The Fund will annually provide a report
indicating the percentage of the Funds income attributable to municipal securities and the percentage includable in federal alternative minimum taxable income. Corporations are subject to special rules in calculating their federal alternative
minimum taxable income with respect to interest from municipal securities.
In addition to exempt-interest dividends, the Fund may also distribute to its shareholders amounts that are treated as long-term capital gain or ordinary income (which may include short-term capital
gains). These distributions are generally subject to regular federal income tax, whether or not reinvested in additional shares. Capital gain distributions are generally taxable at rates applicable to long-term capital gains regardless of how long a
shareholder has held its shares. Long-term capital gains are taxable to noncorporate shareholders at rates
60
of up to 20%. The Fund does not expect that any part of its distributions to shareholders from its investments will qualify for the dividends-received deduction available to corporate
shareholders or as qualified dividend income, which is taxable to noncorporate shareholders at reduced maximum U.S. federal income tax rates.
A 3.8% Medicare contribution tax generally applies to all or a portion of the net investment income of a shareholder who is an individual
and not a nonresident alien for federal income tax purposes and who has adjusted gross income (subject to certain adjustments) that exceeds a threshold amount ($250,000 if married filing jointly or if considered a surviving spouse for
federal income tax purposes, $125,000 if married filing separately, and $200,000 in other cases). This 3.8% tax also applies to all or a portion of the undistributed net investment income of certain shareholders that are estates and trusts. For
these purposes, interest, dividends and certain capital gains are generally taken into account in computing a shareholders net investment income, but exempt-interest dividends are not taken into account.
As a regulated investment company, the Fund will not be
subject to federal income tax in any taxable year provided that it meets certain distribution requirements. As described in Distributions above, the Fund might not distribute some (or all) of its net capital gain. If the Fund retains any
net capital gain or taxable net investment income, it will be subject to tax at regular corporate rates on the amount retained. If the Fund retains any net capital gain, it may designate the retained amount as undistributed capital gains in a notice
to its shareholders who, if subject to federal income tax on long-term capital gains, (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their shares of such undistributed amount;
(ii) will be deemed to have paid their proportionate shares of the tax paid by the Fund on such undistributed amount and will be entitled to credit that amount of tax against their federal income tax liabilities, if any; and (iii) will be
entitled to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by an amount equal to the difference between the amount of
undistributed capital gains included in the shareholders gross income and the tax deemed paid by the shareholder.
Dividends declared by the Fund in October, November or December, payable to shareholders of record in such a month, and paid during the
following January will be treated as having been received by shareholders in the year the distributions were declared.
Each shareholder will receive an annual statement summarizing the shareholders dividend and capital gains distributions.
The repurchase, sale or exchange of Common Shares normally
will result in capital gain or loss to holders of Common Shares who hold their shares as capital assets. Generally a shareholders gain or loss will be long-term capital gain or loss if the shares have been held for more than one year even
though the increase in value in such Common Shares may be at least partly attributable to tax-exempt interest income. Present law taxes both long-term and short-term capital gains of corporations at the rates applicable to ordinary income. For
noncorporate taxpayers, however, long-term capital gains are taxed at rates of up to 20%. Short-term capital gains and other ordinary income are taxed to noncorporate shareholders at ordinary income rates. If a shareholder sells or otherwise
disposes of Common Shares before holding them for six months, any loss on the sale or disposition will be treated as a long-term capital loss to the extent of any amounts treated as distributions to the Common Shareholder of long-term capital gain
(including any amount credited to the Common Shareholder as undistributed capital gain). Any loss realized on a sale or exchange of shares of the Fund will be disallowed to the extent those shares of the Fund are replaced by substantially identical
shares of the Fund (including shares acquired by reason of participation in the Plan) within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the original shares, or to the extent the shareholder
enters into a contract or option to repurchase shares within such period. In that event, the basis of the replacement shares of the Fund will be adjusted to reflect the disallowed loss.
Any interest on indebtedness incurred or continued to purchase or carry the Funds shares to which
exempt-interest dividends are allocated is not deductible. Under certain applicable rules, the purchase or ownership of
61
shares may be considered to have been made with borrowed funds even though such funds are not directly used for the purchase or ownership of the shares. In addition, if you receive social
security or certain railroad retirement benefits, you may be subject to U.S. federal income tax on a portion of such benefits as a result of receiving investment income, including exempt-interest dividends and other distributions paid by the Fund.
The Fund may be required to withhold (as
backup withholding) U.S. federal income tax from distributions (including exempt-interest dividends) and repurchase proceeds payable to a shareholder if the shareholder fails to provide the Fund with his or her correct taxpayer
identification number or to make required certifications, or if the shareholder has been notified by the IRS that he or she is subject to backup withholding. The backup withholding rate is 28%. Backup withholding is not an additional tax; rather, it
is a way in which the IRS ensures it will collect taxes otherwise due. Any amounts withheld may be credited against a shareholders U.S. federal income tax liability.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is
State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts 02110 (the Custodian). The Custodian performs custodial, fund accounting and portfolio accounting services. The Funds transfer, shareholder services and
dividend paying agent is also State Street Bank and Trust Company (the Transfer Agent). The Transfer Agent is located at 250 Royall Street, Canton, Massachusetts 02021.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst & Young LLP,
an independent registered public accounting firm, provides auditing services to the Fund. The principal business address of Ernst & Young LLP is 155 North Wacker Drive, Chicago, Illinois 60606.
LEGAL OPINION
Certain legal matters in connection with the Common Shares
will be passed upon for the Fund by Bingham McCutchen LLP, Washington, D.C.
STATEMENT OF ADDITIONAL INFORMATION
DATED June 19, 2013
Nuveen Select Tax-Free Income Portfolio (the Fund) is a diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940
Act). The Fund was organized under the laws of the Commonwealth of Massachusetts on January 29, 1992.
This
Statement of Additional Information (SAI) relating to common shares of the Fund (Common Shares) does not constitute a prospectus, but should be read in conjunction with the Funds Prospectus relating thereto dated June
19, 2013 (the Prospectus). This SAI does not include all information that a prospective investor should consider before purchasing Common Shares. Investors should obtain and read the Prospectus prior to purchasing such shares. In
addition, the Funds financial statements and the independent registered public accounting firms report therein included in the Funds annual report dated March 31, 2013, are incorporated herein by reference. A copy of the
Prospectus may be obtained without charge by calling (800) 257-8787. You may also obtain a copy of the Prospectus on the U.S. Securities and Exchange Commissions (the SEC) web site (http://www.sec.gov). Capitalized terms used
but not defined in this SAI have the meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
USE OF PROCEEDS
The net proceeds from the issuance of Common Shares hereunder will be used by the Fund to invest in various securities, including
municipal bonds and notes, other securities issued to finance and refinance public projects, and related securities and derivative instruments creating exposure to municipal bonds, notes and securities, that provide for the payment of interest
income that is exempt from regular federal income tax (municipal securities), in accordance with the Funds investment objective and policies as stated below. To the extent the Fund uses the net proceeds of any offering to invest in
municipal securities, it is presently anticipated that the Fund will be able to invest substantially all of such proceeds in securities that meet the Funds investment objective and policies within one month from the date on which the proceeds
from an offering are received by the Fund. Pending such investment, it is anticipated that the proceeds will be invested in short-term or long-term securities issued by the U.S. Government and its agencies or instrumentalities or in high quality,
short-term money market instruments. See Risk FactorsLeverage Risk and Use of Leverage in the Prospectus.
INVESTMENT RESTRICTIONS
Except as described
below, the Fund, as a fundamental policy, may not, without the approval of the holders of a majority of the outstanding shares:
(1) Issue senior securities, as defined in the 1940 Act, except as otherwise described in the Prospectus;
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(2) Borrow money, except as permitted by the 1940 Act and exemptive orders granted under the 1940 Act;
1,
2
(3) Act as underwriter of another issuers securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933, as amended (the
Securities Act), in connection with the purchase and sale of portfolio securities;
(4) Invest more than 25% of its total assets in securities of issuers in any one industry, provided, however, that such limitation shall not apply to municipal securities other than those municipal
securities backed only by the assets and revenues of non-governmental users;
3
(5) Purchase or sell real estate, but this shall not prevent the
Fund from investing in municipal securities secured by real estate or interests therein or foreclosing upon and selling such real estate;
(6) Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling options, futures
contracts or derivative instruments or from investing in securities or other instruments backed by physical commodities);
(7) Make loans, except as permitted by the 1940 Act and exemptive orders granted under the 1940 Act;
4
(8) With respect to 75% of the value of the Funds total assets, purchase any securities (other than obligations issued or guaranteed by the U.S. government or by its agencies or instrumentalities),
if as a
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Section 18(c) of the 1940 Act generally limits a registered closed-end investment company to issuing one class of senior securities representing
indebtedness and one class of senior securities representing stock, except that the class of indebtedness or stock may be issued in one or more series, and promissory notes or other evidences of indebtedness issued in consideration of any loan,
extension, or renewal thereof, made by a bank or other person and privately arranged, and not intended to be publicly distributed, are not deemed a separate class of senior securities.
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Section 18(a) of the 1940 Act generally prohibits a registered closed-end fund from incurring borrowings if, immediately thereafter, the aggregate
amount of its borrowings exceeds
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% of its total assets. The Fund has not applied for, and currently does not intend to apply for, any exemptive relief that would allow it to borrow outside of the limits of the 1940 Act.
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For purposes of this restriction, governments and their political subdivisions are not members of any industry.
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Section 21 of the 1940 Act makes it unlawful for a registered investment company, like the Fund, to lend money or other property if (i) the
investment companys policies set forth in its registration statement do not permit such a loan or (ii) the borrower controls or is under common control with the investment company. The Fund has not applied for, and currently does not
intend to apply for, such exemptive relief.
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result more than 5% of the Funds total assets would then be invested in securities of a single issuer or if as a result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer;
(9) Under normal circumstances, invest less than 80% of its Managed Assets in
municipal securities and other related investments, the income from which is exempt from regular federal income tax;
(10) Pledge, mortgage or hypothecate its assets, except that, to secure borrowings permitted by subparagraph (2) above, it may pledge securities having a market value at the time of pledge not
exceeding 20% of the value of the Funds total assets;
(11) Invest more than 10% of its total assets in
repurchase agreements maturing in more than seven days;
(12) Purchase or retain the securities of any issuer
other than the securities of the Fund if, to the Funds knowledge, those trustees of the Fund, or those officers and directors of the Funds investment adviser, who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such outstanding securities; and
(13)
Invest more than 20% of its Managed Assets in municipal securities that pay interest that is taxable under the federal alternative minimum tax applicable to individuals (AMT Bonds).
For the purpose of applying the limitation set forth in subparagraph (1) above, the Fund may not issue senior securities not permitted by the 1940
Act simply by describing such securities in the Prospectus.
For the purpose of applying the limitation set forth in paragraph
(4) above, such policy will apply to municipal securities if the payment of principal and interest for such securities is derived solely from a specific project, and in that situation the Fund will consider such municipal securities to be in an
industry associated with the project.
For the purpose of applying the limitation set forth in subparagraph (8) above, an
issuer shall be deemed the sole issuer of a security when its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly, in the case of a non-governmental issuer, such
as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a
security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other
entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of
such government, other entity or bank. When a municipal security is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal security will be determined in
accordance with the principles set forth above. The foregoing restrictions do not limit the percentage of the Funds assets that may be invested in municipal securities insured by any given insurer.
Under the 1940 Act, the Fund may invest only up to 10% of its Managed Assets in the aggregate in shares of other investment companies and
only up to 5% of its Managed Assets in any one investment company, provided the investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. As a stockholder in any
investment company, the Fund will bear its ratable share of that investment companys expenses, and will remain subject to payment of the Funds management, advisory and administrative fees with respect to assets so invested. Holders of
common shares would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same
leverage risks described herein. As described in the Prospectus in the section entitled Risk Factors, the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate
more than the yield generated by unleveraged shares.
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In addition to the foregoing fundamental investment policies, the Fund is also subject to
the following non-fundamental restrictions and policies, which may be changed by the Board of Trustees. The Fund may not:
(1) Under normal circumstances, invest less than 80% of its Managed Assets in investment grade securities.
(2) Invest more than 20% of its net assets in municipal securities that at the time of investment are rated below investment grade or are unrated by any nationally recognized statistical rating
organization (NRSRO) but judged to be of comparable quality by Nuveen Asset Management, LLC (Nuveen Asset Management), the Funds sub-adviser.
(3) Invest more than 10% of its net assets in municipal securities rated below B-/B3 or that are unrated by any NRSRO but
judged to be of comparable quality by Nuveen Asset Management.
(4) Invest more than 10% of its Managed Assets
in securities of other open- or closed-end investment companies (including ETFs) that invest primarily in municipal securities of the types in which the Fund may invest directly.
(5) Invest in derivative instruments except in pursuit of its investment objective. Such instruments include financial
futures contracts, swap contracts (including interest rate and credit default swaps), options on financial futures, options on swap contracts, or other derivative instruments. Nuveen Asset Management uses derivatives to seek to enhance return, to
hedge some of the risks of its investments in fixed income securities or as a substitute for a position in the underlying asset.
(6) Sell securities short, unless the Fund owns or has the right to obtain securities equivalent in kind and amount to the securities sold at no added cost, and provided that transactions in options,
futures contracts, options on futures contracts, or other derivative instruments are not deemed to constitute selling securities short.
(7) Enter into futures contracts or related options or forward contracts, if more than 30% of the Funds net assets would be represented by futures contracts or more than 5% of the Funds net
assets would be committed to initial margin deposits and premiums on futures contracts and related options.
The restrictions
and other limitations set forth above will apply only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of an acquisition of securities.
Investment grade quality securities are those that are, at the time of investment, either (i) rated by one of the NRSROs
that rate such securities within the four highest letter grades (including BBB or Baa or better by Standard & Poors Corporation Ratings Group, a division of The McGraw-Hill Companies (S&P), Moodys Investors
Services, Inc. (Moodys) or Fitch Ratings, Inc. (Fitch)), or (ii) unrated by any NRSRO but judged to be of comparable quality by Nuveen Asset Management. Investment grade securities may include split-rated
securities.
The Fund may be subject to certain restrictions imposed by either guidelines of one or more NRSROs that may issue
ratings for preferred shares, if any, commercial paper or notes, or, if the Fund borrows from a lender, by the lender. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the
Fund by the 1940 Act. If these restrictions were to apply, it is not anticipated that these covenants or guidelines would impede Nuveen Asset Management from managing the Funds portfolio in accordance with the Funds investment objective
and policies.
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INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds investment objective, policies, and techniques that are described
in the Prospectus.
INVESTMENT OBJECTIVE
The Funds investment objective is to provide current income exempt from regular federal income tax, consistent with preservation of capital. The Fund cannot assure you that it will achieve its
investment objective. The Funds investment objective is a fundamental policy of the Fund.
INVESTMENT PHILOSOPHY AND PROCESS
INVESTMENT PHILOSOPHY. Nuveen Asset Management believes that the unique tax treatment of municipal securities and the
structural characteristics in the municipal securities market create attractive opportunities to enhance the after-tax total return and diversification of the investment portfolios of taxable investors. Nuveen Asset Management believes that these
unique characteristics also present unique risks that may be managed to realize the benefits of the asset class.
After-Tax
Income Potential.
The primary source of total return from municipal securities comes from the tax-exempt income derived therefrom. Nuveen Asset Management believes that, at acceptable levels of credit risk and maturity principal risk, the
municipal securities market offers the potential for higher after-tax income when compared with other fixed income markets.
Managing Multi-Faceted Risks.
Risk in the municipal securities market is derived from multiple sources, including credit risk
at the issuer and sector levels, structural risks such as call risk, yield curve risk, and legislative and tax-related risks. Nuveen Asset Management believes that managing these risks at both the individual security and Fund portfolio levels is an
important element of realizing the after-tax income and total return potential of the asset class.
Opportunities to
Identify Underrated and Undervalued Municipal Securities.
Within the state and national municipal securities markets, there are issuers with a wide array of financing purposes, security terms, offering structures and credit quality. Nuveen
Asset Management believes that the size, depth and other characteristics of the state and national municipal securities markets offer a broad opportunity set of individual issuers in securities that may be underrated and undervalued relative to the
general market.
Market Inefficiencies.
Nuveen Asset Management believes that the scale and intricacy of the
municipal securities market often results in pricing anomalies and other inefficiencies that can be identified and capitalized on through trading strategies.
INVESTMENT PROCESS. Nuveen Asset Management believes that a bottom-up, research-driven investment strategy that seeks to identify underrated and undervalued securities and sectors is positioned to
capture the opportunities inherent in the municipal securities market and potentially outperform the general municipal securities market over time. The primary elements of Nuveen Asset Managements investment process are:
Credit Analysis and Surveillance.
Nuveen Asset Management focuses on bottom-up, fundamental analysis of municipal securities
issuers. Analysts screen each sector for issuers that meet the fundamental tests of creditworthiness and favor those securities with demonstrable growth potential, solid coverage of debt service and a priority lien on hard assets, dedicated revenue
streams or tax resources. As part of Nuveen Asset Managements overall risk management process, analysts actively monitor the credit quality of portfolio holdings.
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Sector Analysis.
Organized by sector, analysts continually assess the key issues
and trends affecting each sector in order to maintain a sector outlook. Evaluating such factors as historical default rates and average credit spreads within each sector, analysts provide top-down analysis that supports decisions to overweight or
underweight a given sector in a portfolio.
Managing Risk.
Nuveen Asset Management seeks to manage portfolio
risks, including, principally, exposure to individual credits and sectors and exposure to calls, and to manage a portfolios interest rate sensitivity within tolerance bands relative to the relevant benchmark.
Trading Strategies.
Through its trading strategies, Nuveen Asset Management seeks to enhance portfolio value by trading to
take advantage of inefficiencies found in the municipal market. This may entail selling issues Nuveen Asset Management deems to be overvalued and purchasing issues Nuveen Asset Management considers to be undervalued.
Sell Discipline.
Nuveen Asset Management generally sells securities when it (i) determines a security has become
overvalued or over-rated, (ii) identifies credit deterioration, or (iii) modifies a portfolio strategy, such as sector allocation.
INVESTMENT POLICIES
Under normal circumstances and as a fundamental policy, the Fund will invest at least 80% of its Managed Assets in municipal securities
and other related investments, the income from which is exempt from regular federal income tax and federal alternative minimum tax. Also, under normal circumstances and as a fundamental policy, the Fund may invest up to 20% of its Managed Assets in
municipal securities that pay interest that is taxable under the federal alternative minimum tax applicable to individuals (AMT Bonds). As of March 31, 2013, the Fund has invested 7.77% of its Managed Assets in AMT Bonds.
As a non-fundamental policy, the Fund seeks to achieve its investment objective by investing in a diversified portfolio of municipal
securities at least 80% comprised of investment grade quality securities, the income from which is exempt from regular federal income tax. Nuveen Asset Management seeks to identify and invest in municipal securities that it believes are underrated
and undervalued. Nuveen Asset Management believes its value oriented strategy offers the opportunity to construct a well-diversified portfolio of municipal securities that has the potential to outperform major municipal market benchmarks over the
longer term. Underrated municipal securities are those whose ratings do not, in Nuveen Asset Managements opinion, reflect their true creditworthiness. Undervalued municipal securities are securities that, in Nuveen Asset Managements
opinion, are worth more than the value assigned to them in the marketplace. A municipal securitys market value generally will depend upon its form, maturity, call features, and interest rate, as well as the issuers credit quality or
credit rating, all such factors examined in the context of the municipal securities market and interest rate levels and trends. Nuveen Asset Management may at times believe that securities associated with a particular municipal market sector (for
example, electric utilities), or issued by a particular municipal issuer, are undervalued. Nuveen Asset Management may purchase such a security for the Funds portfolio because it represents a market sector or issuer that Nuveen Asset
Management considers undervalued, even if the value of the particular security appears to be consistent with the value of similar securities. Municipal securities of particular types (
e.g.
, hospital bonds, industrial revenue bonds or
securities issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of municipal securities of the market sector for reasons
that do not apply to the particular municipal securities that are considered undervalued. A rating issued by an NRSRO is only the opinion of the entity issuing the rating, and is not a guarantee as to quality, or an assurance of the performance, of
the rated security. In addition, the manner in which NRSROs obtain and process information about a particular security may affect the NRSROs ability to timely react to changes in an issuers circumstances that could influence a particular
rating. The Funds investment in underrated or undervalued municipal securities will be based on Nuveen Asset Managements belief that their yield is higher than that available on securities bearing equivalent levels of interest rate risk,
credit risk and other forms of risk, and that their prices will ultimately rise (relative to the market) to reflect their
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true value. The Fund attempts to increase its portfolio value relative to the municipal bond market by prudent selection of municipal securities regardless of the direction the market may move.
Any capital appreciation realized by the Fund will generally result in the distribution of taxable capital gains to Common Shareholders.
As of March 31, 2013, approximately 91% of the Funds Managed Assets were invested in securities rated investment grade by an NRSRO (including S&P, Moodys or Fitch). The relative
percentages of the value of the investments attributable to investment grade municipal securities and to below investment grade municipal securities could change over time as a result of rebalancing the Funds assets by Nuveen Asset Management,
market value fluctuations, issuance of additional shares and other events.
The Fund may invest in various municipal
securities, including municipal bonds and notes, other securities issued to finance and refinance public projects, and other related securities and derivative instruments creating exposure to municipal bonds, notes and securities that provide for
the payment of interest income that is exempt from regular federal income tax. Municipal securities are often issued by state and local governmental entities to finance or refinance public projects, such as roads, schools, and water supply systems.
Municipal securities also may be issued on behalf of private entities or for private activities, such as housing, medical and educational facility construction, or for privately owned transportation, electric utility or pollution control projects.
Municipal securities may be issued on a long-term basis to provide long-term financing. The repayment of such debt may be secured generally by a pledge of the full faith and credit taxing power of the issuer, a limited or special tax, or any other
revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments, and mortgage payments. Municipal securities also may be issued to finance projects on a short-term interim basis, anticipating
repayment with the proceeds of the later issuance of long-term debt. The Fund may purchase municipal securities in the form of bonds, notes, leases or certificates of participation; structured as callable or non-callable; with payment forms that
include fixed coupon, variable rate or zero coupon, including capital appreciation bonds, floating rate securities, and inverse floating rate securities. Such municipal securities may also be acquired through investments in pooled vehicles,
partnerships, or other investment companies. The Fund may invest in these types of securities, including floating rate securities and inverse floating rate securities, in order to more efficiently achieve its desired overall portfolio structure as
well as enhance its ability to achieve its investment objective.
The Fund intends to use leverage to seek to enhance its
potential for current income exempt from regular federal income tax. The Fund intends to use leverage by investing in inverse floating rate securities that have the economic effect of leverage, as discussed further below. The Fund may leverage its
capital structure by issuing senior securities such as preferred shares, investing in debt securities or by borrowing. The combined economic effect of the total leverage used by the Fund is referred to as effective leverage. The Fund
currently uses leverage by investing in inverse floating rate securities. If current market conditions change (for example, if there is a material decrease in the supply of inverse floating rate securities or if newly issued senior securities become
a more attractive financing option), the Fund may use other forms of leverage. Financial leverage is created as a result of the Funds investments in residual interest certificates of tender option bond trusts, also called inverse floating rate
securities, because the Funds investment exposure to the underlying bonds held by the trust have been effectively financed by the trusts issuance of floating rate certificates. As of March 31, 2013, the Funds total effective
leverage was approximately 1% of its Managed Assets.
There can be no assurance that the Funds leverage strategy will be
successful. The use of leverage creates special risks for Common Shareholders. See the Prospectus under Use of Leverage, Risk FactorsLeverage Risk and Risk FactorsInverse Floating Rate Securities
Risk.
The Fund also may invest in derivative instruments in pursuit of its investment objective, including inverse
floating rate securities. Such instruments also include financial futures contracts, swap contracts (including interest rate and credit default swaps), options on financial futures, options on swap contracts, or other derivative instruments.
However, the Fund not enter into futures contracts or related options or forward contracts, if more than 30% of the Funds net assets would be represented by futures contracts or more than 5% of the Funds net
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assets would be committed to initial margin deposits and premiums on futures contracts and related options. Nuveen Asset Management uses derivatives to seek to enhance return, to hedge some of
the risks of its investments in fixed income securities or as a substitute for a position in the underlying asset. These types of strategies may generate taxable income. See Hedging Strategies and Other Uses of Derivatives herein.
As a fundamental policy, the Fund may invest up to 20% of its Managed Assets in AMT Bonds. Any such investment by the Fund
will not be counted towards meeting its 80% investment in municipal securities exempt from regular federal income tax and federal alternative minimum tax. Special federal alternative minimum tax rules apply to corporate investors. For a discussion
of how the federal alternative minimum tax may affect shareholders, see Tax Matters.
Under normal circumstances:
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As a non-fundamental policy, the Fund will invest at least 80% of its Managed Assets in municipal securities and other related investments that at the
time of investment are investment grade quality. A municipal security is considered investment grade quality if it is rated within the four highest letter grades (BBB or Baa or better) by at least one of the NRSROs that rate such security (even if
it is rated lower by another), or if it is unrated by any NRSRO but judged to be of comparable quality by Nuveen Asset Management.
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As a non-fundamental policy, the Fund may invest up to 20% of its Managed Assets in municipal securities rated below investment grade or are unrated by
any NRSRO but judged to be of comparable quality by Nuveen Asset Management. Additionally, as a non-fundamental policy, no more than 10% of the Funds Managed Assets may be invested in municipal securities rated below B3/B- or that are unrated
but judged to be of comparable quality by Nuveen Asset Management. Municipal securities of below investment grade quality are regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal,
and are commonly referred to as junk bonds. See the Prospectus under Risk FactorsCredit and Below Investment Grade Risk.
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The Fund will not invest more than 15% of its Managed Assets in municipal securities that, at the time of investment, are illiquid (
i.e.,
securities that are not readily marketable). See the Prospectus under Risk FactorsIlliquid Securities Risk.
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As of April 30, 2013, the weighted average maturity of the Funds portfolio was 18.25 years. The Fund will generally invest in municipal
securities with a weighted average maturity of at least 15 years, but it may be shortened or lengthened, depending on market conditions and on an assessment by the Funds portfolio manager of which segments of the municipal securities market
offer the most favorable relative investment values and opportunities for tax-exempt income and total return. In comparison to maturity (which is the date on which a debt instrument ceases and the issuer is obligated to repay the principal amount),
duration is a measure of the price volatility of a debt instrument as a result of changes in market rates of interest, based on the weighted average timing of the instruments expected principal and interest payments. Duration differs from
maturity in that it considers a securitys yield, coupon payments, principal payments and call features in addition to the amount of time until the security finally matures. As the value of a security changes over time, so will its duration.
Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate
changes than a portfolio with a shorter duration. For example, the price of a bond with an effective duration of two years will rise (fall) two percent for every one percent decrease (increase) in its yield, and the price of a five-year duration
bond will rise (fall) five percent for a one percent decrease (increase) in its yield. As of April 30, 2013, the average fund duration was 8.76 years.
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The Fund will not invest more than 25% of its Managed Assets in municipal securities in any one industry or in any one state of origin and no more than
5% of its Managed Assets in any one issuer.
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Any non-fundamental policy of the Fund may be changed by the Funds Board following the
provision of 60 days prior written notice to Common Shareholders.
The credit quality policies noted above apply only at the
time a security is purchased, and the Fund is not required to dispose of a security in the event that a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell such a
security, Nuveen Asset Management may consider such factors as Nuveen Asset Managements assessment of the credit quality of the issuer of such security, the price at which such security could be sold and the rating, if any, assigned to such
security by other rating agencies. A general description of the ratings of S&P, Moodys and Fitch of municipal securities is set forth in Appendix A to this SAI.
Municipal securities are either general obligation or revenue bonds and typically are issued to finance public projects (such as roads or public buildings), to pay general operating expenses, or to
refinance outstanding debt.
Municipal securities may also be issued on behalf of or for private activities, such as housing,
medical and educational facility construction, or for privately owned industrial development and pollution control projects. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from
any revenue source; revenue bonds may be repaid only from the revenues of a specific facility or source. The Fund may also purchase municipal securities that represent lease obligations, municipal notes, pre-refunded municipal securities, private
activity bonds, tender option bonds and other related securities and derivative instruments that create exposure to municipal bonds, notes and securities and that provide for the payment of interest income that is exempt from regular federal income
tax.
Municipal securities of below investment grade quality (Ba/BB or below) are commonly referred to as junk bonds. Issuers
of securities rated Ba/BB or B are regarded as having current capacity to make principal and interest payments but are subject to business, financial or economic conditions which could adversely affect such payment capacity. Municipal securities
rated Baa or BBB are considered investment grade securities; municipal securities rated Baa are considered medium grade obligations which lack outstanding investment characteristics and have speculative characteristics, while municipal
securities rated BBB are regarded as having adequate capacity to pay principal and interest. Municipal securities rated Aaa or AAA in which the Fund may invest may have been so rated on the basis of the existence of insurance guaranteeing the timely
payment, when due, of all principal and interest. Municipal securities rated below investment grade quality are obligations of issuers that are considered predominately speculative with respect to the issuers capacity to pay interest and repay
principal according to the terms of the obligation and, therefore, carry greater investment risk, including the possibility of issuer default and bankruptcy and increased market price volatility. Municipal securities rated below investment grade
tend to be less marketable than higher-quality securities because the market for them is less broad. The market for unrated municipal securities is even narrower. During periods of thin trading in these markets, the spread between bid and asked
prices is likely to increase significantly and the Fund may have greater difficulty selling its portfolio securities. The Fund will be more dependent on Nuveen Asset Managements research and analysis when investing in these securities.
The Fund may invest in distressed securities, which are securities issued by companies that are involved in bankruptcy or
insolvency proceedings or are experiencing other financial difficulties at the time of acquisition by the Fund. The issuers of such securities may be in transition, out of favor, financially leveraged or troubled, or potentially troubled, and may be
or have recently been involved in major strategic actions, restructurings, bankruptcy, reorganization or liquidation. These characteristics of these companies can cause their securities to be particularly risky, although they also may offer the
potential for high returns. These companies securities may be considered speculative, and the ability of the companies to pay their debts on schedule could be affected by adverse interest rate movements, changes in the general economic
climate, economic factors affecting a particular industry or specific developments within the companies. Distressed securities frequently do not produce income while they are outstanding and may require the Fund to bear certain extraordinary
expenses in order to protect and recover its investment.
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Investments in lower rated or unrated securities may present special tax issues for the Fund
to the extent that the issuers of these securities default on their obligations pertaining thereto, and the federal income tax consequences to the Fund as a holder of such distressed securities may not be clear.
A general description of Moodys, S&Ps and Fitchs ratings of municipal securities is set forth in Appendix A
hereto. The ratings of Moodys, S&P and Fitch represent their opinions as to the quality of the municipal securities they rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may have different yields while obligations of the same maturity and coupon with different ratings may have the same yield.
A municipal securitys market value generally will depend upon its form, maturity, call features, and interest rate, as well as the
credit quality of the issuer, all such factors examined in the context of the municipal securities market and interest rate levels and trends.
The Fund will primarily invest in municipal securities with intermediate or long-term, but the weighted average maturity of obligations held by the Fund may be shorter, depending on market conditions. As
a result, the Funds portfolio at any given time may include both long-term and intermediate-term municipal securities. Moreover, during temporary defensive periods (
e.g.
, times when, in Nuveen Asset Managements opinion, temporary
imbalances of supply and demand or other temporary dislocations in the tax-exempt securities market adversely affect the price at which long-term or intermediate-term municipal securities are available), and in order to keep the Funds cash
fully invested, including the period during which the net proceeds of an offering are being invested, the Fund may invest any percentage of its net assets in short-term investments including high quality, short-term securities that may be either
tax-exempt or taxable and up to 10% of its Managed Assets in securities of other open or closed-end investment companies that invest primarily in municipal securities of the type in which the Fund may invest directly. The Fund intends to invest in
taxable short-term investments only in the event that suitable tax-exempt short-term investments are not available at reasonable prices and yields. Tax-exempt short-term investments include various obligations issued by state and local governmental
issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such municipal bonds maturing in three years or less from the date of issuance) and municipal commercial paper. The Fund will
invest only in taxable short-term investments which are U.S. government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or
floating rate of interest. See Appendix A for a general description of Moodys, S&Ps and Fitchs ratings of securities in such categories. Taxable short-term investments of the Fund may include certificates of deposit issued by
U.S. banks with assets of at least $1 billion, or commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See Investment Policies and Techniques. To the extent the
Fund invests in taxable investments, the Fund will not at such times be in a position to achieve its investment objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will apply only at the time of the purchase of a security, and the Fund will not be required to dispose of securities in the event that an
NRSRO downgrades its assessment of the credit characteristics of a particular issuer.
Obligations of issuers of municipal
securities are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may become subject to the laws
enacted in the future by Congress, state legislatures or referenda extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that, as a result of legislation or other conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its municipal securities may be materially affected.
Subject to rating agency guidelines, the Fund may invest a significant portion of its Managed Assets in broad segments of the municipal
securities market, such as revenue obligations of hospitals and other health care facilities, special taxing districts, securities issued to finance charter schools and other private educational
9
facilities, municipal utility securities, industrial development bonds and other private activity bonds. Subject to the availability of suitable investment opportunities, Nuveen Fund Advisors,
LLC (NFALLC), the Funds investment adviser, will attempt to minimize the sensitivity of the Funds portfolio to credit and other risks associated with a particular sector or industry. However, if the Fund invests a significant
portion of its Managed Assets in the segments noted above, the Fund will be more susceptible to economic, business, political, regulatory and other developments generally affecting issuers in such segments of the municipal securities market. To the
extent that the Fund focuses its Managed Assets in the hospital and healthcare facilities sector, the Fund will be subject to risks associated with such sector, including adverse government regulation and reduction in reimbursement rates, as well as
government approval of products and services and intense competition. Securities issued to finance charter schools and other private educational facilities will be subject to various risks, including the reversal of legislation authorizing or
funding charter schools, the failure to renew or secure a charter, the failure of a funding entity to appropriate necessary funds and competition from alternatives such as voucher programs. Issuers of municipal utility securities can be
significantly affected by government regulation, financing difficulties, supply and demand of services or fuel and natural resource conservation.
Upon NFALLCs recommendation, during temporary defensive periods and in order to keep the Funds cash fully invested, including the period during which the net proceeds of an offering of common
shares or preferred shares are being invested, the Fund may deviate from its investment objective and invest up to 100% of its Managed Assets in short-term investments including high quality, short-term securities that may be either tax-exempt or
taxable. To the extent the Fund invests in taxable short-term investments, the Fund will not at such times be in a position to achieve that portion of its investment objective of seeking current income exempt from regular federal income tax. For
further information, see Short-Term Investments below.
General.
The Fund may invest in various
municipal securities, including municipal bonds and notes, other securities issued to finance and refinance public projects, and other related securities and derivative instruments creating exposure to municipal bonds, notes and securities that
provide for the payment of interest income that is exempt from regular federal income tax. Municipal securities are often issued by state and local governmental entities to finance or refinance public projects such as roads, schools, and water
supply systems. Municipal securities may also be issued on behalf of private entities or for private activities, such as housing, medical and educational facility construction, or for privately owned transportation, electric utility and pollution
control projects. Municipal securities may be issued on a long term basis to provide permanent financing. The repayment of such debt may be secured generally by a pledge of the full faith and credit taxing power of the issuer, a limited or special
tax, or any other revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments and mortgage payments. Municipal securities may also be issued to finance projects on a short-term interim basis,
anticipating repayment with the proceeds of the later issuance of long-term debt. The Fund may purchase municipal securities in the form of bonds, notes, leases or certificates of participation; structured as callable or non-callable; with payment
forms including fixed coupon, variable rate, zero coupon, capital appreciation bonds, tender option bonds, and residual interest bonds or inverse floating rate securities; or acquired through investments in pooled vehicles, partnerships or other
investment companies. Inverse floating rate securities are securities that pay interest at rates that vary inversely with changes in prevailing short-term tax-exempt interest rates and represent a leveraged investment in an underlying municipal
security, which could have the economic effect of financial leverage.
Municipal Leases and Certificates of
Participation.
Also included within the general category of municipal securities described in the Prospectus are municipal leases, certificates of participation in such lease obligations or installment purchase contract obligations
(hereinafter collectively called Municipal Lease Obligations) of municipal authorities or entities. Although a Municipal Lease Obligation does not constitute a general obligation of the municipality for which the municipalitys
taxing power is pledged, a Municipal Lease Obligation is ordinarily backed by the municipalitys covenant to budget for, appropriate and make the payments due under the Municipal Lease Obligation. However, certain Municipal Lease Obligations
contain non-appropriation clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. In the case of a
non-appropriation lease,
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the Funds ability to recover under the lease in the event of non-appropriation or default will be limited solely to the repossession of the leased property, without recourse to the general
credit of the lessee, and disposition or releasing of the property might prove difficult. In order to reduce this risk, the Fund will only purchase Municipal Lease Obligations where Nuveen Asset Management believes the issuer has a strong incentive
to continue making appropriations until maturity.
Municipal Notes.
Municipal securities in the form of notes
generally are used to provide for short-term capital needs, in anticipation of an issuers receipt of other revenues or financing, and typically have maturities of up to three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue anticipation notes and construction loan notes. Tax anticipation notes are issued to finance the working capital needs of governments. Generally, they are issued in anticipation of various
tax revenues, such as income, sales, property, use and business taxes, and are payable from these specific future taxes. Revenue anticipation notes are issued in expectation of receipt of other kinds of revenue, such as federal revenues available
under federal revenue sharing programs. Bond anticipation notes are issued to provide interim financing until long-term bond financing can be arranged. In most cases, the long-term bonds then provide the funds needed for repayment of the bond
anticipation notes. Tax and revenue anticipation notes combine the funding sources of both tax anticipation notes and revenue anticipation notes. Construction loan notes are sold to provide construction financing. Mortgage notes insured by the
Federal Housing Authority secure these notes; however, the proceeds from the insurance may be less than the economic equivalent of the payment of principal and interest on the mortgage note if there has been a default. The anticipated revenues from
taxes, grants or bond financing generally secure the obligations of an issuer of municipal notes. An investment in such instruments, however, presents a risk that the anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuers payment obligations under the notes or that refinancing will be otherwise unavailable.
Pre-Refunded Municipal Securities.
The principal of and interest on pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the
source of such payments is typically an escrow fund consisting of U.S. government securities. The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers
of municipal securities use this advance refunding technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt
at lower market interest rates, restructure debt to improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities. However, except for a change in the revenue source
from which principal and interest payments are made, the pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer.
Private Activity Bonds.
Private activity bonds, formerly referred to as industrial development bonds, are issued by or on
behalf of public authorities to obtain funds to provide privately operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and certain local
facilities for water supply, gas or electricity. Other types of private activity bonds, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute
municipal securities, although the current federal tax laws place substantial limitations on the size of such issues. The Funds distributions of its interest income from private activity bonds may subject certain investors to the federal
alternative minimum tax.
Tender Option Bonds.
A tender option bond is a municipal security (generally held
pursuant to a custodial arrangement) having a relatively long maturity and bearing interest at a fixed rate substantially higher than prevailing short-term, tax-exempt rates. The bond is typically issued with the agreement of a third party, such as
a bank, broker-dealer or other financial institution, which grants the security holders the option, at periodic intervals, to tender their securities to the institution and receive the face value thereof. As consideration for providing the option,
the financial institution receives periodic fees equal to the difference between the bonds
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fixed coupon rate and the rate, as determined by a remarketing or similar agent at or near the commencement of such period, that would cause the securities, coupled with the tender option, to
trade at par on the date of such determination. Thus, after payment of this fee, the security holder effectively holds a demand obligation that bears interest at the prevailing short-term, tax-exempt rate. However, an institution will not be
obligated to accept tendered bonds in the event of certain defaults or a significant downgrade in the credit rating assigned to the issuer of the bond. The Fund intends to invest in tender option bonds the interest on which will, in the opinion of
bond counsel, counsel for the issuer of interests therein or counsel selected by Nuveen Asset Management, be exempt from regular federal income tax. However, because there can be no assurance that the Internal Revenue Service (the IRS)
will agree with such counsels opinion in any particular case, there is a risk that the Fund will not be considered the owner of such tender option bonds and thus will not be entitled to treat such interest as exempt from such tax.
Additionally, the federal income tax treatment of certain other aspects of these investments, including the proper tax treatment of tender option bonds and the associated fees in relation to various regulated investment company tax provisions, is
unclear. The Fund intends to manage its portfolio in a manner designed to eliminate or minimize any adverse impact from the tax rules applicable to these investments.
Special Taxing Districts.
Special taxing districts are organized to plan and finance infrastructure development to induce residential, commercial and industrial growth and redevelopment. The
bond financing methods such as tax increment finance, tax assessment, special services district and Mello-Roos bonds, are generally payable solely from taxes or other revenues attributable to the specific projects financed by the bonds without
recourse to the credit or taxing power of related or overlapping municipalities. They often are exposed to real estate development-related risks and can have more taxpayer concentration risk than general tax-supported bonds, such as general
obligation bonds. Further, the fees, special taxes, or tax allocations and other revenues that are established to secure such financings are generally limited as to the rate or amount that may be levied or assessed and are not subject to increase
pursuant to rate covenants or municipal or corporate guarantees. The bonds could default if development failed to progress as anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing plans of the
districts.
HEDGING STRATEGIES AND OTHER USES OF DERIVATIVES
The Fund may periodically engage in hedging transactions, and otherwise use various types of derivative instruments, described below, to reduce risk, to effectively gain particular market exposures, to
seek to enhance returns, and to reduce transaction costs, among other reasons.
Hedging is a term used for various
methods of seeking to preserve portfolio capital value by offsetting price changes in one investment through making another investment whose price should tend to move in the opposite direction.
A derivative is a financial contract whose value is based on (or derived from) a traditional security (such as a
stock or a bond), an asset (such as a commodity like gold), or a market index (such as the Lehman Municipal Bond Index). Some forms of derivatives may trade on exchanges, while non-standardized derivatives, which tend to be more specialized and
complex, trade in over-the-counter or a one-on-one basis. It may be desirable and possible in various market environments to partially hedge the portfolio against fluctuations in market value due to market interest rate or credit quality
fluctuations, or instead to gain a desired investment exposure, by entering into various types of derivative transactions, including financial futures and index futures as well as related put and call options on such instruments, structured notes,
or interest rate swaps on taxable or tax-exempt securities or indexes (which may be forward-starting), credit default swaps, and options on interest rate swaps, among others.
These transactions present certain risks. In particular, the imperfect correlation between price movements in the futures contract and
price movements in the securities being hedged creates the possibility that losses on the hedge by the Fund may be greater than gains in the value of the securities in the Funds portfolio. In addition, futures and options markets may not be
liquid in all circumstances. As a result, in volatile markets, the Fund may not be able to close out the transaction without incurring losses substantially greater than the initial deposit.
12
Finally, the potential deposit requirements in futures contracts create an ongoing greater potential financial risk than do options transactions, where the exposure is limited to the cost of the
initial premium. Losses due to hedging transactions will reduce yield. Net gains, if any, from hedging and other portfolio transactions will be distributed as taxable distributions to shareholders. The Fund will invest in these instruments only in
markets believed by Nuveen Asset Management to be active and sufficiently liquid. Successful implementation of most hedging strategies will generate taxable income.
Swap Transactions.
The Fund may enter into total return, interest rate and credit default swap agreements and interest rate caps, floors and collars. The Fund may also enter into options on the
foregoing types of swap agreements (swap options).
The Fund may enter into swap transactions for any purpose
consistent with its investment objective, such as for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases and/or sales of instruments in other markets, as
a duration management technique, to reduce risk arising from the ownership of a particular instrument, or to gain exposure to certain sectors or markets in the most economical way possible.
Swap agreements are two party contracts entered into primarily by institutional investors for a specified period of time. In a standard
swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on a particular predetermined asset, reference rate or index. The gross returns to be exchanged or swapped between the parties are
generally calculated with respect to a notional amount,
e.g.
, the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a basket of securities representing a particular index. The notional
amount of the swap agreement generally is only used as a basis upon which to calculate the obligations that the parties to the swap agreement have agreed to exchange. The Funds current obligations under a net swap agreement will be accrued
daily (offset against any amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by assets determined to be liquid by NFALLC and Nuveen Asset Management. The Fund maintains in a segregated
account with its custodian cash or liquid securities having a value at least equal to the Funds net payment obligations under any swap transaction, marked-to-market daily. The Fund will not enter into swap transactions having a notional amount
that exceeds the outstanding amount of the Funds leverage. See Use of Leverage and Risk FactorsLeverage Risk in the Prospectus and Segregation of Assets, below.
Some, but not all, swaps may be cleared, in which case a central clearing counterparty stands between each buyer and seller and
effectively guarantees performance of each contract, to the extent of its available resources for such purpose. Uncleared swaps have no such protection; each party bears the risk that its direct counterparty will default.
Interest Rate Swaps, Caps, Collars and Floors.
Interest rate swaps are bilateral contracts in which each party agrees to make periodic payments to
the other party based on different referenced interest rates (
e.g.
, a fixed rate and a floating rate) applied to a specified notional amount. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified
index rises above a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. Interest rate collars involve selling a cap and purchasing a floor or vice versa to
protect the Fund against interest rate movements exceeding given minimum or maximum levels.
Depending on the state of
interest rates in general, the Funds use of interest rate swaps could enhance or harm the overall performance of Common Shares. To the extent interest rates decline, the value of the interest rate swap could decline, and could result in a
decline in the net asset value of Common Shares. In addition, if the counterparty to an interest rate swap defaults, the Fund would not be able to use the anticipated net receipts under the swap to offset the interest payments on borrowings or the
dividend payments on any outstanding preferred shares. Depending on whether the Fund would be entitled to receive net payments from the counterparty on the
13
swap, which in turn would depend on the general state of short-term interest rates at that point in time, such a default could negatively impact the performance of Common Shares. In addition, at
the time an interest rate swap transaction reaches its scheduled termination date, there is a risk that the Fund would not be able to obtain a replacement transaction or that the terms of the replacement would not be as favorable as on the expiring
transaction. If this occurs, it could have a negative impact on the performance of Common Shares. The Fund could be required to prepay the principal amount of any borrowings. Such redemption or prepayment would likely result in the Fund seeking to
terminate early all or a portion of any swap transaction. Early termination of a swap could result in a termination payment by or to the Fund.
Total Return Swaps.
In a total return swap, one party agrees to pay the other the total return of a defined underlying asset during a
specified period, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets. A total return swap may be applied to any underlying asset but is most commonly used with equity indices,
single stocks, bonds and defined baskets of loans and mortgages. The Fund might enter into a total return swap involving an underlying index or basket of securities to create exposure to a potentially widely-diversified range of securities in a
single trade. An index total return swap can be used by NFALLC and Nuveen Asset Management to assume risk, without the complications of buying the component securities from what may not always be the most liquid of markets.
Credit Default Swaps.
A credit default swap is a bilateral contract that enables an investor to buy or sell protection against a defined-issuer
credit event. The Fund may enter into credit default swap agreements either as a buyer or a seller. The Fund may buy protection to attempt to mitigate the risk of default or credit quality deterioration in an individual security or a segment of the
fixed income securities market to which it has exposure, or to take a short position in individual bonds or market segments which it does not own. The Fund may sell protection in an attempt to gain exposure to the credit quality
characteristics of particular bonds or market segments without investing directly in those bonds or market segments.
As the
buyer of protection in a credit default swap, the Fund would pay a premium (by means of an upfront payment or a periodic stream of payments over the term of the agreement) in return for the right to deliver a referenced bond or group of bonds to the
protection seller and receive the full notional or par value (or other agreed upon value) upon a default (or similar event) by the issuer(s) of the underlying referenced obligation(s). If no default occurs, the protection seller would keep the
stream of payments and would have no further obligation to the Fund. Thus, the cost to the Fund would be the premium paid with respect to the agreement. If a credit event occurs, however, the Fund may elect to receive the full notional value of the
swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value. The Fund bears the risk that the protection seller may fail to satisfy its payment obligations.
If the Fund is a seller of protection in a credit default swap and no credit event occurs, the Fund would generally receive an up-front
payment or a periodic stream of payments over the term of the swap. If a credit event occurs, however, generally the Fund would have to pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations
of the reference entity that may have little or no value. As the protection seller, the Fund effectively adds economic leverage to its portfolio because, in addition to being subject to investment exposure on its total net assets, the Fund is
subject to investment exposure on the notional amount of the swap. Thus, the Fund bears the same risk as it would by buying the reference obligations directly, plus the additional risks related to obtaining investment exposure through a derivative
instrument discussed below under Risks Associated with Swap Transactions.
Swap Options.
A swap option is a contract
that gives a counterparty the right (but not the obligation), in return for payment of a premium, to enter into a new swap agreement or to shorten, extend, cancel, or otherwise modify an existing swap agreement at some designated future time on
specified terms. A cash-settled option on a swap gives the purchaser the right, in return for the premium paid, to receive an amount of cash equal to the value of the underlying swap as of the exercise date. The Fund may write (sell) and purchase
put and call swap options. Depending on the terms of the particular option agreement, the Fund generally would incur a greater degree of
14
risk when it writes a swap option than when it purchases a swap option. When the Fund purchases a swap option, it risks losing only the amount of the premium it has paid should it decide to let
the option expire unexercised. However, when the Fund writes a swap option, upon exercise of the option the Fund would become obligated according to the terms of the underlying agreement.
Risks Associated with Swap Transactions.
The use of swap transactions is a highly specialized activity which involves strategies and risks different from those associated with ordinary portfolio
security transactions. If NFALLC and Nuveen Asset Management are incorrect in their forecasts of default risks, market spreads or other applicable factors or events, the investment performance of the Fund would diminish compared with what it would
have been if these techniques were not used. As the protection seller in a credit default swap, the Fund effectively adds economic leverage to its portfolio because, in addition to being subject to investment exposure on its total net assets, the
Fund is subject to investment exposure on the notional amount of the swap. The Fund generally may only close out a swap, cap, floor, collar or other two-party contract with its particular counterparty, and generally may only transfer a position with
the consent of that counterparty. In addition, the price at which the Fund may close out such a two party contract may not correlate with the price change in the underlying reference asset. If the counterparty defaults, the Fund will have
contractual remedies, but there can be no assurance that the counterparty will be able to meet its contractual obligations or that the Fund will succeed in enforcing its rights. It also is possible that developments in the derivatives market,
including changes in government regulation, could adversely affect the Funds ability to terminate existing swap or other agreements or to realize amounts to be received under such agreements.
Futures and Options on Futures.
A futures contract is an agreement between two parties to buy and sell a security, index or interest rate (each a
financial instrument) for a set price on a future date. Certain futures contracts, such as futures contracts relating to individual securities, call for making or taking delivery of the underlying financial instrument. However, these
contracts generally are closed out before delivery by entering into an offsetting purchase or sale of a matching futures contract (same exchange, underlying financial instrument, and delivery month). Other futures contracts, such as futures
contracts on interest rates and indices, do not call for making or taking delivery of the underlying financial instrument, but rather are agreements pursuant to which two parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the financial instrument at the close of the last trading day of the contract and the price at which the contract was originally written. These contracts also may be settled by entering into an offsetting futures
contract.
Unlike when the Fund purchases or sells a security, no price is paid or received by the Fund upon the purchase or
sale of a futures contract. Initially, the Fund will be required to deposit with the futures broker, known as a futures commission merchant (FCM), an amount of cash or securities equal to a varying specified percentage of the contract
amount. This amount is known as initial margin. The margin deposit is intended to ensure completion of the contract. Minimum initial margin requirements are established by the futures exchanges and may be revised. In addition, FCMs may establish
margin deposit requirements that are higher than the exchange minimums. Cash held in the margin account generally is not income producing. However, couponbearing securities, such as Treasury securities, held in margin accounts generally will earn
income. Subsequent payments to and from the FCM, called variation margin, will be made on a daily basis as the price of the underlying financial instrument fluctuates, making the futures contract more or less valuable, a process known as marking the
contract to market. Changes in variation margin are recorded by the Fund as unrealized gains or losses. At any time prior to expiration of the futures contract, the Fund may elect to close the position by taking an opposite position that will
operate to terminate its position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid by or released to the Fund, and the Fund realizes a gain or loss. In the event of the
bankruptcy or insolvency of an FCM that holds margin on behalf of the Fund, the Fund may be entitled to the return of margin owed to it only in proportion to the amount received by the FCMs other customers, potentially resulting in losses to
the Fund. Futures transactions also involve brokerage costs and the Fund may have to segregate additional liquid assets in accordance with applicable SEC requirements. See Segregation of Assets below.
15
A futures option gives the purchaser of such option the right, in return for the premium
paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the purchaser acquires a long position in the futures
contract and the writer is assigned the opposite short position. Upon the exercise of a put option, the opposite is true.
Limitations on the Use of Futures, Options on Futures and Swaps
. NFALLC has claimed, with respect to the
Fund, the exclusion from the definition of commodity pool operator under the Commodity Exchange Act (CEA) provided by Commodity Futures Trading Commission (CFTC) Regulation 4.5 and is therefore not currently
subject to registration or regulation as such under the CEA with respect to the Fund. In addition, Nuveen Asset Management has claimed the exemption from registration as a commodity trading advisor provided by CFTC Regulation 4.14(a)(8) and is
therefore not currently subject to registration or regulation as such under the CEA with respect to the Fund. In February 2012, the CFTC announced substantial amendments to certain exemptions, and to the conditions for reliance on those exemptions,
from registration as a commodity pool operator. Under amendments to the exemption provided under CFTC Regulation 4.5, if the Fund uses futures, options on futures or swaps other than for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on these positions (after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are in-the-money at the time of purchase
are in-the-money) may not exceed 5% of the Funds net asset value, or alternatively, the aggregate net notional value of those positions may not exceed 100% of the Funds net asset value (after taking into account unrealized
profits and unrealized losses on any such positions). The CFTC amendments to Regulation 4.5 took effect on December 31, 2012, and the Fund intends to comply with amended Regulation 4.5s requirements such that NFALLC will not be required to
register as a commodity pool operator with the CFTC with respect to the Fund. The Fund reserves the right to employ futures, options on futures and swaps to the extent allowed by CFTC regulations in effect from time to time and in accordance with
the Funds policies. The requirements for qualification as a regulated investment company may also limit the extent to which the Fund may employ futures, options on futures or swaps.
NFALLC and Nuveen Asset Management may use derivative instruments to seek to enhance return, to hedge some of the risk of the Funds
investments in municipal securities or as a substitute for a position in the underlying asset. These types of strategies may generate taxable income.
There is no assurance that these derivative strategies will be available at any time or that, if used, that the strategies will be successful.
For further information regarding these investment strategies and risks presented thereby, see Appendix B to this SAI.
ILLIQUID SECURITIES
The
Fund will not invest more than 15% of its Managed Assets in municipal securities that, at the time of investment, are illiquid (
i.e.,
securities that are not readily marketable), including, but not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities laws), securities that may be resold only pursuant to Rule 144A under the Securities Act that are deemed to be illiquid, and certain repurchase agreements.
Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is required, the Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the
Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than that which prevailed when it decided to sell.
To the extent that the Board of Trustees or its delegatee determines that the price of any illiquid security provided by the pricing service is inappropriate, such security will be priced at a fair value as determined in good faith by the Board of
Trustees or its delegatee.
16
INVERSE FLOATING RATE SECURITIES AND FLOATING RATE SECURITIES
The Fund may invest up to approximately 15% of its Managed Assets in inverse floating rate securities. Inverse floating rate
securities (sometimes referred to as inverse floaters) are securities whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. Generally, inverse floating rate securities
represent beneficial interests in a special purpose trust formed by a third party sponsor for the purpose of holding municipal bonds. The special purpose trust typically sells two classes of beneficial interests or securities: floating rate
securities (sometimes referred to as short-term floaters or tender option bonds) and inverse floating rate securities (sometimes referred to as inverse floaters or residual interest securities). Both classes of beneficial interests are represented
by certificates. The short-term floating rate securities have first priority on the cash flow from the municipal bonds held by the special purpose trust. Typically, a third party, such as a bank, broker-dealer or other financial institution, grants
the floating rate security holders the option, at periodic intervals, to tender their securities to the institution and receive the face value thereof. As consideration for providing the option, the financial institution receives periodic fees. The
holder of the short-term floater effectively holds a demand obligation that bears interest at the prevailing short-term, tax-exempt rate. However, the institution granting the tender option will not be obligated to accept tendered short-term
floaters in the event of certain defaults or a significant downgrade in the credit rating assigned to the bond issuer. For its inverse floating rate investment, the Fund receives the residual cash flow from the special purpose trust. Because the
holder of the short-term floater is generally assured liquidity at the face value of the security, the Fund as the holder of the inverse floater assumes the interest rate cash flow risk and the market value risk associated with the municipal
security deposited into the special purpose trust. The volatility of the interest cash flow and the residual market value will vary with the degree to which the trust is leveraged. This is expressed in the ratio of the total face value of the
short-term floaters in relation to the value of the residual inverse floaters that are issued by the special purpose trust. The Fund expects to make limited investments in inverse floaters, with leverage ratios that may vary at inception between one
and three times. In addition, all voting rights and decisions to be made with respect to any other rights relating to the municipal bonds held in the special purpose trust are passed through to the Fund, as the holder of the residual inverse
floating rate securities.
Because increases in the interest rate on the short-term floaters reduce the residual interest paid
on inverse floaters, and because fluctuations in the value of the municipal bond deposited in the special purpose trust affect the value of the inverse floater only, and not the value of the short-term floater issued by the trust, inverse
floaters value is generally more volatile than that of fixed rate bonds. The market price of inverse floating rate securities is generally more volatile than the underlying securities due to the leveraging effect of this ownership structure.
These securities generally will underperform the market of fixed rate bonds in a rising interest rate environment (
i.e
., when bond values are falling), but tend to outperform the market of fixed rate bonds when interest rates decline or
remain relatively stable. Although volatile, inverse floaters typically offer the potential for yields exceeding the yields available on fixed rate bonds with comparable credit quality, coupon, call provisions and maturity. Inverse floaters have
varying degrees of liquidity based upon, among other things, the liquidity of the underlying securities deposited in a special purpose trust.
The Fund may invest in inverse floating rate securities, issued by special purpose trusts that have recourse to the Fund. In Nuveen Asset Managements discretion, the Fund may enter into a separate
shortfall and forbearance agreement with the third party sponsor of a special purpose trust. The Fund may enter into such recourse agreements (i) when the liquidity provider to the special purpose trust requires such an agreement because the
level of leverage in the trust exceeds the level that the liquidity provider is willing to support absent such an agreement; and/or (ii) to seek to prevent the liquidity provider from collapsing the trust in the event that the municipal
obligation held in the trust has declined in value. Such an agreement would require the Fund to reimburse the third party sponsor of such inverse floater, upon termination of the trust issuing the inverse floater, the difference between the
liquidation value of the bonds held in the trust and the principal amount due to the holders of floating rate interests. Such agreements may expose the Fund to a risk of loss that exceeds its investment in the inverse floating rate securities. The
Fund will segregate or earmark liquid assets with its custodian in accordance with the 1940 Act to cover its obligations with respect to its investments in special purpose trusts. Absent a shortfall and forbearance agreement, the Fund would not be
required to make such a
17
reimbursement. If the Fund chooses not to enter into such an agreement, the special purpose trust could be liquidated and the Fund could incur a loss. See also Segregation of Assets
in this SAI.
The Fund may invest in both inverse floating rate securities and floating rate securities (as discussed below)
issued by the same special purpose trust.
Investments in inverse floating rate securities have the economic effect of
leverage. The use of leverage creates special risks for Common Shareholders. See the Prospectus under Use of Leverage, Risk FactorsLeverage Risk, and Risk FactorsInverse Floating Rate Securities Risk.
Floating Rate Securities
. The Fund may also invest in floating rate securities, as described above, issued by special
purpose trusts. Floating rate securities may take the form of short-term floating rate securities or the option period may be substantially longer. Generally, the interest rate earned will be based upon the market rates for municipal securities with
maturities or remarketing provisions that are comparable in duration to the periodic interval of the tender option, which may vary from weekly, to monthly, to extended periods of one year or multiple years. Since the option feature has a shorter
term than the final maturity or first call date of the underlying bond deposited in the trust, the Fund as the holder of the floating rate security relies upon the terms of the agreement with the financial institution furnishing the option as well
as the credit strength of that institution. As further assurance of liquidity, the terms of the trust provide for a liquidation of the municipal security deposited in the trust and the application of the proceeds to pay off the floating rate
security. The trusts that are organized to issue both short-term floating rate securities and inverse floaters generally include liquidation triggers to protect the investor in the floating rate security.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its Managed Assets in securities of other open or closed-end investment companies (including exchange-traded funds (ETFs)) that invest primarily in municipal
securities of the types in which the Fund may invest directly. In addition, the Fund may invest a portion of its Managed Assets in pooled investment vehicles (other than investment companies) that invest primarily in municipal securities of the
types in which the Fund may invest directly. The Fund generally expects that it may invest in other investment companies and/or other pooled investment vehicles either during periods when it has large amounts of uninvested cash, such as the period
shortly after the Fund receives the proceeds of an offering of its Common Shares or borrowing or during periods when there is a shortage of attractive, high-yielding municipal securities available in the market. The Fund may invest in investment
companies that are advised by NFALLC, Nuveen Asset Management or their respective affiliates to the extent permitted by applicable law and/or pursuant to exemptive relief from the SEC. The Fund has not applied for, nor does it intend to apply for,
any such relief. As a stockholder in an investment company, the Fund will bear its ratable share of that investment companys expenses and would remain subject to payment of the Funds management, advisory and administrative fees with
respect to assets so invested. Common Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. NFALLC will take expenses into account when evaluating the investment merits of an
investment in an investment company relative to available municipal security investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein. As
described in the Prospectus, the net asset value and market value of leveraged shares will be more volatile and the yield to Common Shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
PORTFOLIO TRADING AND TURNOVER RATE
The Fund may buy and sell municipal securities to accomplish its investment objective in relation to actual and anticipated changes in interest rates. The Fund also may sell one municipal security and buy
another of comparable quality at about the same time to take advantage of what Nuveen Asset Management believes to be a temporary price disparity between the two bonds that may result from imbalanced supply and demand. The Fund also may engage in a
limited amount of short-term trading, consistent with its investment objective. The Fund
18
may sell securities in anticipation of a market decline (a rise in interest rates) or buy securities in anticipation of a market rise (a decline in interest rates) and later sell them, but the
Fund will not engage in trading solely to recognize a gain. The Fund will attempt to achieve its investment objective by prudently selecting municipal securities with a view to holding them for investment. Although the Fund cannot accurately predict
its annual portfolio turnover rate, the Fund expects, though it cannot guarantee, that its annual portfolio turnover rate generally will not exceed 25% under normal circumstances. For the fiscal year ended March 31, 2013, the Funds portfolio
turnover rate was 24%. There are no limits on the rate of portfolio turnover, and investments may be sold without regard to length of time held when investment considerations warrant such action. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. In addition, high portfolio turnover may result in the realization of net short term capital gains by the Fund which, when distributed to
shareholders, will be taxable as ordinary income. See Tax Matters.
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the
seller of securities (U.S. government securities or municipal securities) agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the
Funds holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. Income generated from transactions in repurchase agreements will be taxable. See
Tax Matters for information relating to the allocation of taxable income between common shares and preferred shares, if any. The Fund will only enter into repurchase agreements with registered securities dealers or domestic banks that,
in the opinion of NFALLC, present minimal credit risk. The risk to the Fund is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time
the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the
Fund might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of
the security, realization upon the collateral by the Fund may be delayed or limited. Nuveen Asset Management will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the
repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, Nuveen Asset Management will demand additional
collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
SEGREGATION OF ASSETS
As a closed-end investment company registered with the SEC, the Fund is subject to the federal securities laws, including the 1940 Act,
the rules thereunder, and various interpretive provisions of the SEC and its staff. In accordance with these laws, rules and positions, the Fund must set aside (often referred to as asset segregation) liquid assets, or engage
in other SEC or staff-approved measures, to cover open positions with respect to certain kinds of derivatives instruments. In the case of forward currency contracts that are not contractually required to cash settle, for example, the
Fund must set aside liquid assets equal to such contracts full notional value while the positions are open. With respect to forward currency contracts that are contractually required to cash settle, however, the Fund is permitted to set aside
liquid assets in an amount equal to the Funds daily marked-to-market net obligations (
i.e.
, the Funds daily net liability) under the contracts, if any, rather than such contracts full notional value. The Fund reserves the
right to modify its asset segregation policies in the future to comply with any changes in the positions from time to time articulated by the SEC or its staff regarding asset segregation.
To the extent that the Fund uses its assets to cover its obligations as required by the 1940 Act, the rules thereunder, and applicable
positions of the SEC and its staff, such assets may not be used for other operational
19
purposes. NFALLC will monitor the Funds use of derivatives and will take action as necessary for the purpose of complying with the asset segregation policy stated above. Such actions may
include the sale of the Funds portfolio investments.
SHORT-TERM INVESTMENTS
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully invested, the Fund may invest up to 100% of its net assets in cash equivalents and short- term taxable fixed-income securities, although the
Fund intends to invest in taxable short-term investments only in the event that suitable tax-exempt short- term investments are not available at reasonable prices and yields. Short-term taxable fixed income investments are defined to include,
without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities. U.S. government agency securities include securities issued by (a) the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States;
(b) the Federal Home Loan Banks,
1
Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association,
1
whose securities are supported by the discretionary authority of the
U.S. government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. government provides financial support to such
U.S. government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. government, its agencies, and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of Deposit issued against funds
deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus
interest to the bearer of the certificate on the date specified thereon. Under current FDIC regulations, the maximum insurance payable as to any one certificate of deposit is $100,000; therefore, certificates of deposit purchased by the Fund may not
be fully insured.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the Fund purchases
securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield
for the Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Fund to invest temporarily available cash. The Fund may
enter into repurchase agreements only with respect to obligations of the U.S. government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which the Fund may invest. Repurchase agreements may be considered
loans to the seller, collateralized by the underlying securities. The risk to the Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the
Fund is entitled to sell the underlying collateral. If the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss of both principal and interest. Nuveen
Asset Management monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. Nuveen Asset Management does so in an effort to determine that the value of the collateral
always equals or exceeds the agreed-upon
1
|
These securities are not backed by the full faith and credit of the United States government.
|
20
repurchase price to be paid to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Fund to liquidate the collateral could be delayed or impaired
because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory
notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for such notes.
However, they are redeemable by the Fund at any time. Nuveen Asset Management will consider the financial condition of the corporation (
e.g.
, earning power, cash flow, and other liquidity measures) and will continuously monitor the
corporations ability to meet all of its financial obligations, because the Funds liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to
commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Short-Term Tax-Exempt Municipal Securities
Short-term tax-exempt municipal
securities are securities that are exempt from regular federal income tax and mature within three years or less from the date of issuance. Short-term tax-exempt municipal income securities are defined to include, without limitation, the following:
Bond Anticipation Notes (BANs) are usually general obligations of state and local governmental issuers which are
sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to
the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax
revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies, could adversely affect the issuers ability
to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or
governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as
anticipated revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are
issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration. Bank Notes are notes issued by local government bodies and agencies, such as those
described above to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to
the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (Municipal Paper) represents very short-term
unsecured, negotiable promissory notes issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities
of municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of Municipal Paper.
21
Certain municipal securities may carry variable or floating rates of interest whereby the
rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or a tax-exempt money market index.
While the various types of notes described above as a group represent the major portion of the short-term tax-exempt note market, other types of notes are available in the marketplace and the Fund may
invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell municipal securities on a when-issued or delayed delivery basis, making payment or taking delivery at a later date, normally within 15-45 days of the trade date. On such
transactions the payment obligation and the interest rate are fixed at the time the buyer enters into the commitment. Beginning on the date the Fund enters into a commitment to purchase securities on a when-issued or delayed delivery basis, the Fund
is required under rules of the Commission to maintain in a separate account liquid assets, consisting of cash, cash equivalents or liquid securities having a market value, at all times, of at least equal to the amount of the commitment. Income
generated by any such assets which provide taxable income for federal income tax purposes is includable in the taxable income of the Fund. The Fund may enter into contracts to purchase municipal securities on a forward basis (
i.e
., where
settlement will occur more than 60 days from the date of the transaction) only to the extent that the Fund specifically collateralizes such obligations with a security that is expected to be called or mature within sixty days before or after the
settlement date of the forward transaction. The commitment to purchase securities on a when-issued, delayed delivery or forward basis may involve an element of risk because no interest accrues on the bonds prior to settlement and at the time of
delivery the market value may be less than cost.
STRUCTURED NOTES
The Fund may utilize structured notes and similar instruments for investment purposes and also for hedging purposes. Structured notes are
privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an embedded index), such as selected securities, an index of
securities or specified interest rates, or the differential performance of two assets or markets. The terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted upwards or downwards (but
not ordinarily below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments that may be made on a structured product may vary widely, depending upon a
variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may be determined by applying a multiplier to the
performance or differential performance of the referenced index or indices or other assets. Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss. These types of investments may generate
taxable income.
ZERO COUPON BONDS
A zero coupon bond is a bond that typically does not pay interest either for the entire life of the obligation or for an initial period after the issuance of the obligation. When held to its maturity, the
holder receives the par value of the zero coupon bond, which generates a return equal to the difference between the purchase price and its maturity value. A zero coupon bond is normally issued and traded at a deep discount from face value. This
original issue discount (OID) approximates the total amount of interest the security will accrue and compound prior to its maturity and reflects the payment deferral and credit risk associated with the instrument. Because zero coupon
securities and other OID instruments do not pay cash interest at regular intervals, the instruments ongoing accruals require ongoing judgments concerning the collectability of deferred payments and the value of any associated collateral. As a
result, these securities may be subject to greater value fluctuations and less
22
liquidity in the event of adverse market conditions than comparably rated securities that pay cash on a current basis. Because zero coupon bonds, and OID instruments generally, allow an issuer to
avoid or delay the need to generate cash to meet current interest payments, they may involve greater payment deferral and credit risk than coupon loans and bonds that pay interest currently or in cash. The Fund generally will be required to
distribute dividends to shareholders representing the income of these instruments as it accrues, even though the Fund will not receive all of the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when
it may not be advisable to do so, and use the cash proceeds to make income distributions to its shareholders. For accounting purposes, these cash distributions to shareholders will not be treated as a return of capital.
Further, NFALLC collects management fees on the value of a zero coupon bond or OID instrument attributable to the ongoing non-cash
accrual of interest over the life of the bond or other instrument. As a result, NFALLC receives non-refundable cash payments based on such non-cash accruals while investors incur the risk that such non-cash accruals ultimately may not be realized.
23
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties performed for the Fund under the Investment Management Agreement
with NFALLC (as defined under Investment Adviser, Sub-Adviser and Portfolio ManagerInvestment Management Agreement and Related Fees), is the responsibility of the Board of Trustees of the Fund. The number of trustees of the Fund is
ten, one of whom is an interested person (as the term interested person is defined in the 1940 Act) and nine of whom are not interested persons (referred to herein as independent trustees). None of the independent
trustees has ever been a director, trustee or employee of, or consultant to, Nuveen Investments Inc. (Nuveen Investments), NFALLC, Nuveen Asset Management or their affiliates. The Board of Trustees is divided into three classes, Class I,
Class II and Class III, the Class I trustees serving until the 2013 annual meeting, the Class II trustees serving until the 2014 annual meeting and the Class III trustees serving until the 2015 annual meeting, in each case until their respective
successors are elected and qualified, as described below. Currently, William C. Hunter, Judith M. Stockdale, Carole E. Stone and Virginia L. Stringer are slated in Class I, John P. Amboian, David J. Kundert and Terence J. Toth are slated in Class II
and Robert P. Bremner, Jack B. Evans and William J. Schneider are slated in Class III. The officers of the Fund serve annual terms and are elected on an annual basis. The names, business addresses and birthdates of the trustees and
officers of the Fund, their principal occupations and other affiliations during the past five years, the number of portfolios each oversees and other trusteeships they hold are set forth below. The Trustees of the Fund are directors or trustees, as
the case may be, of 107 Nuveen-sponsored open-end funds (the Nuveen Mutual Funds) and 103 Nuveen-sponsored closed-end funds (collectively with the Nuveen Mutual Funds, the Nuveen Funds).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with Fund
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number Of
Portfolios
in Fund
Complex
Overseen By
Trustee
|
|
|
Other
Directorships
Held by
Trustee
During Past
5
Years
|
|
INDEPENDENT TRUSTEES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert P. Bremner
8/22/40
333 West Wacker Drive
Chicago, IL
60606
|
|
Chairman of
the Board
and Trustee
|
|
TermClass III
Length of Service
Since
1996
|
|
Private Investor and Management Consultant; Treasurer and Director, Humanities Council of Washington, D.C.; Board Member, Independent Directors Council affiliated with
the Investment Company Institute.
|
|
|
210
|
|
|
|
None
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number Of
Portfolios
in Fund
Complex
Overseen By
Trustee
|
|
Other
Directorships
Held by
Trustee
During Past
5
Years
|
Jack B. Evans
10/22/48
333 West Wacker Drive
Chicago, IL
60606
|
|
Trustee
|
|
TermClass III
Length
of
ServiceSince
1999
|
|
President, The Hall-Perrine Foundation, a private philanthropic corporation (since 1996); Director and Chairman, United Fire Group, a publicly held company; Director, Source Media
Group; Life Trustee of Coe College and the Iowa College Foundation; formerly, Director, Alliant Energy; formerly, Director, Federal Reserve Bank of Chicago; formerly, President and Chief Operating Officer, SCI Financial Group, Inc., a regional
financial services firm; formerly, President of the Board of Regents for the State of Iowa University System.
|
|
210
|
|
Director and
Vice Chairman,
United Fire
Group, a
publicly held
company;
formerly,
Director,
Alliant
Energy.
|
25
|
|
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number Of
Portfolios
in Fund
Complex
Overseen By
Trustee
|
|
Other
Directorships
Held by
Trustee
During Past
5
Years
|
William C. Hunter
3/6/48
333 West Wacker Drive
Chicago, IL
60606
|
|
Trustee
|
|
TermClass I
Length of
Service
Since
2004
|
|
Dean Emeritus (since June 30, 2012), formerly, Dean, Tippie College of Business, University of Iowa (2006-2012); Director (since 2004) of Xerox Corporation; Director (since 2005)
and President (since July 2012) of Beta Gamma Sigma, Inc., The International Honor Society; Director of Wellmark, Inc. (since 2009); formerly, Dean and Distinguished Professor of Finance, School of Business at the University of Connecticut
(2003-2006); previously, Senior Vice President and Director of Research at the Federal Reserve Bank of Chicago (1995-2003); formerly, Director (1997-2007), Credit Research Center at Georgetown University.
|
|
210
|
|
Director
(since 2004)
of Xerox
Corporation.
|
26
|
|
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number Of
Portfolios
in Fund
Complex
Overseen By
Trustee
|
|
Other
Directorships
Held by
Trustee
During Past
5
Years
|
David J. Kundert
10/28/42
333 West Wacker Drive
Chicago, IL
60606
|
|
Trustee
|
|
TermClass II
Length of
Service
Since
2005
|
|
Formerly, Director, Northwestern Mutual Wealth Management Company (2006-2013); retired (since 2004) as Chairman, JPMorgan Fleming Asset Management, President and CEO, Banc One
Investment Advisors Corporation, and President, One Group Mutual Funds; prior thereto, Executive Vice President, Banc One Corporation and Chairman and CEO, Banc One Investment Management Group; Regent Emeritus, Member of Investment Committee, Luther
College; member of the Wisconsin Bar Association; member of Board of Directors, Friends of Boerner Botanical Gardens; member of Board of Directors and Chair of Investment Committee, Greater Milwaukee Foundation; member of the Board of Directors
(Milwaukee), College Possible.
|
|
210
|
|
None
|
27
|
|
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with Fund
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number Of
Portfolios
in Fund
Complex
Overseen By
Trustee
|
|
Other
Directorships
Held by
Trustee
During Past
5
Years
|
William J. Schneider
9/24/44
333 West Wacker Drive
Chicago, IL
60606
|
|
Trustee
|
|
TermClass III
Length of Service
Since
1996
|
|
Chairman of Miller-Valentine Partners Ltd., a real estate investment company; formerly, Senior Partner and Chief Operating Officer (retired 2004) of Miller-Valentine Group;
Member of two Miller Valentine real estate LLC companies; member, University of Dayton Business School Advisory Council; member, Mid-America Health System Board; Board Member of Tech Town, Inc., a not-for-profit community development company; Board
Member of WDPR Public Radio; formerly, member and chair, Dayton Philharmonic Orchestra Association; formerly, member, Business Advisory Council, Cleveland Federal Reserve Bank.
|
|
210
|
|
None
|
|
|
|
|
|
|
Judith M. Stockdale
12/29/47
333 West Wacker Drive
Chicago, IL 60606
|
|
Trustee
|
|
TermClass I
Length of
ServiceSince
1997
|
|
Formerly, Executive Director (1994-2012), Gaylord and Dorothy Donnelley Foundation; prior thereto, Executive Director, Great Lakes Protection Fund (1990-1994).
|
|
210
|
|
None
|
28
|
|
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number Of
Portfolios
in Fund
Complex
Overseen By
Trustee
|
|
Other
Directorships
Held by
Trustee
During Past
5
Years
|
Carole E. Stone
6/28/47
333 West Wacker Drive
Chicago, IL
60606
|
|
Trustee
|
|
TermClass I
Length of
Service
Since
2007
|
|
Director, Chicago Board Options Exchange (since 2006); Director, C2 Options Exchange, Incorporated (since 2009); formerly, Commissioner, New York State Commission on Public
Authority Reform (2005-2010); formerly, Chair, New York Racing Association Oversight Board (2005-2007).
|
|
210
|
|
Director,
Chicago Board
Options
Exchange
(since 2006).
|
|
|
|
|
|
|
Virginia L. Stringer
8/16/44
333 West Wacker Drive
Chicago, IL 60606
|
|
Trustee
|
|
TermClass I
Length of
Service
Since 2011
|
|
Board Member, Mutual Fund Directors Forum; formerly governance consultant and non-profit board member; formerly, Owner and President, Strategic Management Resources, Inc., a
management consulting firm; formerly, Member, Governing Board, Investment Company Institutes Independent Directors Council; previously, held several executive positions in general management, marketing and human resources at IBM and The
Pillsbury Company; Independent Director, First American Fund Complex (1987-2010) and Chair (1997-2010).
|
|
210
|
|
Previously,
Independent
Director,
First American
Fund Complex
(1987-2010)
and
Chair
(1997-2010).
|
29
|
|
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number Of
Portfolios
in Fund
Complex
Overseen By
Trustee
|
|
Other
Directorships
Held by
Trustee
During Past
5
Years
|
Terrence J. Toth
9/29/59
333 West Wacker Drive
Chicago, IL
60606
|
|
Trustee
|
|
TermClass II
Length
of
ServiceSince
2008
|
|
Managing Partner, Promus Capital (since 2008); formerly, Director, Legal & General Investment Management America, Inc. (2008-2013); Director, Fulcrum IT Service LLC (since
2010), Quality Control Corporation (since 2012) and LogicMark LLC (since 2012); Formerly, CEO and President, Northern Trust Global Investments (2004-2007); Executive Vice President, Quantitative Management & Securities Lending (2000-2004); prior
thereto, various positions with Northern Trust Company (since 1994); member: Chicago Fellowship Board (since 2005), Catalyst Schools of Chicago Board (since 2008) and Mather Foundation Board (since 2012), and a member of its investment committee;
formerly, Member, Northern Trust Mutual Funds Board (2005-2007), Northern Trust Global Investments Board (2004-2007), Northern Trust Japan Board (2004-2007), Northern Trust Securities Inc. Board (2003-2007) and Northern Trust Hong Kong Board
(1997-2004).
|
|
210
|
|
None
|
30
|
|
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number Of
Portfolios
in Fund
Complex
Overseen By
Trustee
|
|
Other
Directorships
Held by
Trustee
During Past
5
Years
|
John P. Amboian
(1)
6/14/61
333 West Wacker Drive
Chicago, IL 60606
|
|
Trustee
|
|
TermClass II
Length
of
ServiceSince
2008
|
|
Chief Executive Officer and Chairman (since 2007) and Director (since 1999) of Nuveen Investments, Inc., formerly, President (1999-2007); Chief Executive Officer (since 2007) of
Nuveen Investments Advisers, Inc.; Director (since 1998) formerly, Chief Executive Officer (2007-2010) of Nuveen Fund Advisors, LLC.
|
|
210
|
|
None
|
(1)
|
Mr. Amboian is an interested person of the Fund, as defined in the 1940 Act, by reason of is positions with Nuveen Investments and certain of its
subsidiaries.
|
31
OFFICER INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupations Including
Other Directorships During
Past Five Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen By
Officer
|
|
Gifford R. Zimmerman
9/9/56
333 West Wacker Drive
Chicago, IL
60606
|
|
Chief
Administrative
Officer
|
|
TermUntil
August 2013
Length
of
ServiceSince
Inception
|
|
Managing Director (since 2002) and Assistant Secretary of Nuveen Securities, LLC; Managing Director (since 2004) and Assistant Secretary (since 1994) of Nuveen Investments, Inc.;
Managing Director (since 2002), Assistant Secretary (since 1997) and Co-General Counsel (since 2011) of Nuveen Fund Advisors, LLC; Managing Director, Assistant Secretary and Associate General Counsel of Nuveen Asset Management, LLC (since 2011);
Managing Director, Associate General Counsel and Assistant Secretary of Symphony Asset Management LLC (since 2003); Vice President and Assistant Secretary of NWQ Investment Management Company, LLC (since 2002), Nuveen Investments Advisers Inc.
(since 2002), Santa Barbara Asset Management, LLC (since 2006), and Winslow Capital Management, LLC (since 2010); Vice President and Assistant Secretary (since 2013); formerly, Chief Administrative Officer and Chief Compliance Officer (2006-2013) of
Nuveen Commodities Asset Management, LLC; Chartered Financial Analyst.
|
|
|
210
|
|
|
|
|
|
|
William Adams IV
6/9/55
333 West Wacker Drive
Chicago, IL 60606
|
|
Vice President
|
|
TermUntil
August 2013
Length
of
ServiceSince
2007
|
|
Senior Executive Vice President, Global Structured Products (since 2010), formerly, Executive Vice President (1999-2010) of Nuveen Securities, LLC; Co-President of Nuveen Fund
Advisors, LLC (since 2011); President (since 2011), formerly, Managing Director (2010-2011) of Nuveen Commodities Asset Management, LLC.
|
|
|
103
|
|
32
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupations Including
Other Directorships During
Past Five Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen By
Officer
|
Cedric H. Antosiewicz
1/11/62
333 West Wacker Drive
Chicago, IL 60606
|
|
Vice
President
|
|
TermUntil
August 2013
Length of Service
Since
2007
|
|
Managing Director of Nuveen Securities, LLC.
|
|
103
|
|
|
|
|
|
Margo L. Cook
4/11/64
333 West Wacker Drive
Chicago, IL
60606
|
|
Vice
President
|
|
TermUntil
August 2013
Length of Service
Since
2009
|
|
Executive Vice President (since 2008) of Nuveen Investments, Inc. and of Nuveen Fund Advisors, LLC (since 2011); Managing DirectorInvestment Services of Nuveen Commodities
Asset Management, LLC (since August 2011); previously, Head of Institutional Asset Management (2007-2008) of Bear Stearns Asset Management; Head of Institutional Asset Management (1986-2007) of Bank of NY Mellon; Chartered Financial
Analyst.
|
|
210
|
|
|
|
|
|
Lorna C. Ferguson
10/24/45
333 West Wacker Drive
Chicago, IL 60606
|
|
Vice
President
|
|
TermUntil
August 2013
Length of Service
Since
1998
|
|
Managing Director (since 2005) of Nuveen Fund Advisors, LLC and Nuveen Securities, LLC (since 2004).
|
|
210
|
|
|
|
|
|
Stephen D. Foy
5/31/54
333 West Wacker Drive
Chicago, IL 60606
|
|
Vice
President
and
Controller
|
|
TermUntil
August 2013
Length of Service
Since
1998
|
|
Senior Vice President (since 2010), formerly, Vice President (2005-2010) and Funds Controller of Nuveen Securities, LLC; Vice President of Nuveen Fund Advisors, LLC; Chief Financial
Officer of Nuveen Commodities Asset Management, LLC (since 2010); Certified Public Accountant.
|
|
210
|
33
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupations Including
Other Directorships During
Past Five Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen By
Officer
|
Scott S. Grace
8/20/70
333 West Wacker Drive
Chicago, IL
60606
|
|
Vice
President
and Treasurer
|
|
TermUntil
August 2013
Length
of
ServiceSince
2009
|
|
Managing Director, Corporate Finance & Development, Treasurer (since 2009) of Nuveen Securities, LLC; Managing Director and Treasurer (since 2009) of Nuveen Fund Advisors, LLC,
Nuveen Investments Advisers, Inc., Nuveen Investments Holdings Inc. and (since 2011) Nuveen Asset Management, LLC; Vice President and Treasurer of NWQ Investment Management Company, LLC, Tradewinds Global Investors, LLC, Symphony Asset Management
LLC and Winslow Capital Management, LLC.; Vice President of Santa Barbara Asset Management, LLC; formerly, Treasurer (2006-2009), Senior Vice President (2008-2009), previously, Vice President (2006-2008) of Janus Capital Group, Inc.; formerly,
Senior Associate in Morgan Stanleys Global Financial Services Group (2000-2003); Chartered Accountant Designation.
|
|
210
|
|
|
|
|
|
Walter M. Kelly
2/24/70
333 West Wacker Drive
Chicago, IL 60606
|
|
Vice
President and
Chief
Compliance
Officer
|
|
TermUntil
August 2013
Length
of
ServiceSince
2003
|
|
Senior Vice President (since 2008) and Assistant Secretary (since 2003) of Nuveen Fund Advisors, LLC; Senior Vice President (since 2008) of Nuveen Investment Holdings, Inc.;
formerly, Senior Vice President (2008-2011) of Nuveen Securities, LLC.
|
|
210
|
|
|
|
|
|
Tina M. Lazar
8/27/61
333 West Wacker Drive
Chicago, IL 60606
|
|
Vice
President
|
|
TermUntil
August 2013
Length
of
ServiceSince
2002
|
|
Senior Vice President (since 2010), formerly, Vice President (2005-2010) of Nuveen Fund Advisors, LLC.
|
|
210
|
34
|
|
|
|
|
|
|
|
|
Name, Business Address
and Birthdate
|
|
Position(s)
Held with
Fund
|
|
Term of Office
and Length of Time
Served with
Fund
|
|
Principal Occupations Including
Other Directorships During
Past Five Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen By
Officer
|
Kevin J. McCarthy
3/26/66
333 West Wacker Drive
Chicago, IL 60606
|
|
Vice
President
and Secretary
|
|
TermUntil
August 2013
Length
of
ServiceSince
2007
|
|
Managing Director and Assistant Secretary (since 2008) of Nuveen Securities, LLC; Managing Director (since 2008), Assistant Secretary (since 2007) and Co-General Counsel (since
2011) of Nuveen Fund Advisors, LLC; Managing Director, Assistant Secretary and Associate General Counsel (since 2011) of Nuveen Asset Management, LLC; Managing Director (since 2008) and Assistant Secretary of Nuveen Investment Holdings, Inc.; Vice
President (since 2007) and Assistant Secretary of Nuveen Investments Advisers Inc., NWQ Investment Management Company, LLC, NWQ Holdings, LLC, Symphony Asset Management LLC, Santa Barbara Asset Management, LLC, and Winslow Capital Management, LLC
(since 2010); Vice President and Secretary (since 2010) of Nuveen Commodities Asset Management, LLC; prior thereto, Partner, Bell, Boyd & Lloyd LLP (1997-2007).
|
|
210
|
|
|
|
|
|
Kathleen L. Prudhomme
3/30/53
333 West Wacker Drive
Chicago, IL 60606
|
|
Vice
President and
Assistant
Secretary
|
|
TermUntil
August 2013
Length
of
ServiceSince
2011
|
|
Managing Director, Assistant Secretary and Co-General Counsel (since 2011) of Nuveen Fund Advisors, LLC; Managing Director, Assistant Secretary and Associate General Counsel (since
2011) of Nuveen Asset Management, LLC; Managing Director and Assistant Secretary (since 2011) of Nuveen Securities, LLC; formerly, Deputy General Counsel, FAF Advisors, Inc. (2004-2010).
|
|
210
|
35
Board Leadership Structure and Risk Oversight
The Board of Directors or the Board of Trustees (as the case may be, each is referred to hereafter as the Board and the
directors or trustees of the Nuveen Funds, as applicable, are each referred to herein as Trustees) oversees the operations and management of the Nuveen Funds, including the duties performed for the Nuveen Funds by NFALLC and each
funds sub-adviser, as applicable. The Board has adopted a unitary board structure. A unitary board consists of one group of trustees who serve on the board of every fund in the complex. In adopting a unitary board structure, the Trustees seek
to provide effective governance through establishing a board, the overall composition of which, will, as a body, possess the appropriate skills, independence and experience to oversee the Nuveen Funds business. With this overall framework in
mind, when the Board, through its Nominating and Governance Committee discussed below, seeks nominees for the Board, the Trustees consider, not only the candidates particular background, skills and experience, among other things, but also
whether such background, skills and experience enhance the Boards diversity and at the same time complement the Board given its current composition and the mix of skills and experiences of the incumbent Trustees.
The Board believes the unitary board structure enhances good and effective governance, particularly given the nature of the structure of
the investment company complex. Funds in the same complex generally are served by the same service providers and personnel and are governed by the same regulatory scheme which raises common issues that must be addressed by the trustees across the
fund complex (such as compliance, valuation, liquidity, brokerage, trade allocation or risk management). The Board believes it is more efficient to have a single board review and oversee common policies and procedures which increases the
Boards knowledge and expertise with respect to the many aspects of fund operations that are complex-wide in nature. The unitary structure also enhances the Boards influence and oversight over NFALLC, the sub-adviser and other service
providers.
In an effort to enhance the independence of the Board, the Board also has a Chairman that is an independent
Trustee. The Board recognizes that a chairman can perform an important role in setting the agenda for the Board, establishing the boardroom culture, establishing a point person on behalf of the Board for fund management, and reinforcing the
Boards focus on the long-term interests of shareholders. The Board recognizes that a chairman may be able to better perform these functions without any conflicts of interests arising from a position with fund management. Accordingly, the
Trustees have elected Robert P. Bremner as the independent Chairman of the Board through June 30, 2013 and William J. Schneider to serve as the independent chairman of the Board effective July 1, 2013. Specific responsibilities of the Chairman
include: (i) presiding at all meetings of the Board and of the shareholders; (ii) seeing that all orders and resolutions of the Trustees are carried into effect; and (iii) maintaining records of and, whenever necessary, certifying all
proceedings of the Trustees and the shareholders.
Although the Board has direct responsibility over various matters (such as
advisory contracts, underwriting contracts and fund performance), the Board also exercises certain of its oversight responsibilities through several committees that it has established and which report back to the full Board. The Board believes that
a committee structure is an effective means to permit the Trustees to focus on particular operations or issues affecting the Nuveen Funds, including risk oversight. More specifically, with respect to risk oversight, the Board has delegated matters
relating to valuation and compliance to certain committees (as summarized below) as well as certain aspects of investment risk. In addition, the Board believes that the periodic rotation of Trustees among the different committees allows the Trustees
to gain additional and different perspectives of the Funds operations. The Board has established seven standing committees: the Executive Committee, the Dividend Committee, the Audit Committee, the Compliance, Risk Management and Regulatory
Oversight Committee, the Nominating and Governance Committee, the Open-End Funds Committee and the Closed-End Funds Committee. The Board may also from time to time create ad hoc committees to focus on particular issues as the need arises. The
membership and functions of the standing committees are summarized below.
36
The Executive Committee, which meets between regular meetings of the Board, is authorized to
exercise all of the powers of the Board. Robert P. Bremner, Chair, Judith M. Stockdale and John P. Amboian serve as the current members of the Executive Committee of the Board. During the fiscal year ended March 31, 2013, the Executive
Committee did not meet.
The Dividend Committee is authorized to declare distributions on the Funds shares including,
but not limited to, regular and special dividends, capital gains and ordinary income distributions. The members of the Dividend Committee are Jack B. Evans, Chair, Judith M. Stockdale and Terence J. Toth. During the fiscal year ended March 31,
2013 the Dividend Committee met four times.
The Compliance, Risk Management and Regulatory Oversight Committee (the
Compliance Committee) is responsible for the oversight of compliance issues, risk management and other regulatory matters affecting the Nuveen Funds that are not otherwise the jurisdiction of the other committees. The Board has adopted
and periodically reviews policies and procedures designed to address the Nuveen Funds compliance and risk matters. As part of its duties, the Compliance Committee reviews the policies and procedures relating to compliance matters and
recommends modifications thereto as necessary or appropriate to the full Board; develops new policies and procedures as new regulatory matters affecting the Nuveen Funds arise from time to time; evaluates or considers any comments or reports from
examinations from regulatory authorities and responses thereto; and performs any special reviews, investigations or other oversight responsibilities relating to risk management, compliance and/or regulatory matters as requested by the Board.
In addition, the Compliance Committee is responsible for risk oversight, including, but not limited to, the oversight of
risks related to investments and operations. Such risks include, among other things, exposures to particular issuers, market sectors, or types of securities; risks related to product structure elements, such as leverage; and techniques that may be
used to address those risks, such as hedging and swaps. In assessing issues brought to the committees attention or in reviewing a particular policy, procedure, investment technique or strategy, the Compliance Committee evaluates the risks to
the Nuveen Funds in adopting a particular approach or resolution compared to the anticipated benefits to the Nuveen Funds and their shareholders. In fulfilling its obligations, the Compliance Committee meets on a quarterly basis, and at least once a
year in person. The Compliance Committee receives written and oral reports from the Nuveen Funds Chief Compliance Officer (CCO) and meets privately with the CCO at each of its quarterly meetings. The CCO also provides an annual
report to the full Board regarding the operations of the Nuveen Funds and other service providers compliance programs as well as any recommendations for modifications thereto. The Compliance Committee also receives reports from the
investment services group of Nuveen regarding various investment risks. Notwithstanding the foregoing, the full Board also participates in discussions with management regarding certain matters relating to investment risk, such as the use of leverage
and hedging. The investment services group therefore also reports to the full Board at its quarterly meetings regarding, among other things, Fund performance and the various drivers of such performance. Accordingly, the Board directly and/or in
conjunction with the Compliance Committee oversees matters relating to investment risks. Matters not addressed at the committee level are addressed directly by the full Board. The committee operates under a written charter adopted and approved by
the Board of Trustees. The members of the Compliance Committee are Jack B. Evans, William C. Hunter, William J. Schneider, Virginia L. Stringer and Judith M. Stockdale, Chair. During the fiscal year ended March 31, 2013, the
Compliance Committee met five times.
The Audit Committee assists the Board in the oversight and monitoring of the accounting
and reporting policies, processes and practices of the Nuveen Funds, and the audits of the financial statements of the Nuveen Funds; the quality and integrity of the financial statements of the Nuveen Funds; the Nuveen Funds compliance with
legal and regulatory requirements relating to the Nuveen Funds financial statements; the independent auditors qualifications, performance and independence; and the pricing procedures of the Nuveen Funds and the internal valuation group
of Nuveen. It is the responsibility of the Audit Committee to select, evaluate and replace any independent auditors (subject only to Board and, if applicable, shareholder ratification) and to determine their compensation. The Audit Committee is also
responsible for, among other things, overseeing the valuation of
37
securities comprising the Nuveen Funds portfolios. Subject to the Boards general supervision of such actions, the Audit Committee addresses any valuation issues, oversees the Nuveen
Funds pricing procedures and actions taken by Nuveens internal valuation group which provides regular reports to the committee, reviews any issues relating to the valuation of the Trustees Funds securities brought to its attention
and considers the risks to the Funds in assessing the possible resolutions to these matters. The Audit Committee may also consider any financial risk exposures for the Trustees Funds in conjunction with performing its functions.
To fulfill its oversight duties, the Audit Committee receives annual and semi-annual reports and has regular meetings with the external
auditors for the Nuveen Funds and the internal audit group at Nuveen Investments. The Audit Committee also may review in a general manner the processes the Board or other Board committees have in place with respect to risk assessment and risk
management as well as compliance with legal and regulatory matters relating to the Nuveen Funds financial statements. The committee operates under a written charter adopted and approved by the Board. Members of the Audit Committee shall be
independent (as set forth in the charter) and free of any relationship that, in the opinion of the Trustees, would interfere with their exercise of independent judgment as an Audit Committee member. The members of the Audit Committee are
Robert P. Bremner, David J. Kundert, Chair, William J. Schneider, Carole E. Stone and Terence J. Toth, each of whom is an independent Trustee of the Nuveen Funds. During the fiscal year ended March 31, 2013, the Audit Committee met
four times.
The Nominating and Governance Committee is responsible for seeking, identifying and recommending to the Board
qualified candidates for election or appointment to the Board. In addition, the Nominating and Governance Committee oversees matters of corporate governance, including the evaluation of Board performance and processes, the assignment and rotation of
committee members, and the establishment of corporate governance guidelines and procedures, to the extent necessary or desirable, and matters related thereto. Although the unitary and committee structure has been developed over the years and the
Nominating and Governance Committee believes the structure has provided efficient and effective governance, the committee recognizes that as demands on the Board evolve over time (such as through an increase in the number of funds overseen or an
increase in the complexity of the issues raised), the committee must continue to evaluate the Board and committee structures and their processes and modify the foregoing as may be necessary or appropriate to continue to provide effective governance.
Accordingly, the Nominating and Governance Committee has a separate meeting each year to, among other things, review the Board and committee structures, their performance and functions, and recommend any modifications thereto or alternative
structures or processes that would enhance the Boards governance over the Nuveen Funds business.
In addition, the
Nominating and Governance Committee, among other things, makes recommendations concerning the continuing education of Trustees; monitors performance of legal counsel and other service providers; establishes and monitors a process by which security
holders are able to communicate in writing with members of the Board; and periodically reviews and makes recommendations about any appropriate changes to Trustee compensation. In the event of a vacancy on the Board, the Nominating and Governance
Committee receives suggestions from various sources, including shareholders, as to suitable candidates. Suggestions should be sent in writing to Lorna Ferguson, Manager of Fund Board Relations, Nuveen Investments, 333 West Wacker Drive, Chicago, IL
60606. The Nominating and Governance Committee sets appropriate standards and requirements for nominations for new Trustees and reserves the right to interview any and all candidates and to make the final selection of any new Trustees. In
considering a candidates qualifications, each candidate must meet certain basic requirements, including relevant skills and experience, time availability (including the time requirements for due diligence site visits to internal and external
sub-advisers and service providers) and, if qualifying as an Independent Trustee candidate, independence from the Adviser, sub-advisers, underwriters or other service providers, including any affiliates of these entities. These skill and experience
requirements may vary depending on the current composition of the Board, since the goal is to ensure an appropriate range of skills, diversity and experience, in the aggregate. Accordingly, the particular factors considered and weight given to these
factors will depend on the composition of the Board and the skills and backgrounds of the incumbent Trustees at the time of consideration of the nominees. All candidates, however, must meet high expectations of
38
personal integrity, independence, governance experience and professional competence. All candidates must be willing to be critical within the Board and with management and yet maintain a
collegial and collaborative manner toward other Board members. The committee operates under a written charter adopted and approved by the Board. This committee is composed of the independent Trustees of the Nuveen Funds. Accordingly, the members of
the Nominating and Governance Committee are Robert P. Bremner, Chair, Jack B. Evans, William C. Hunter, David J. Kundert, William J. Schneider, Judith M. Stockdale, Carole E. Stone and Terence J. Toth. During the fiscal year ended March 31,
2013, the Nominating and Governance Committee met six times.
The Open-End Funds Committee is responsible for assisting the
Board in the oversight and monitoring of the Nuveen Funds that are registered as open-end management investment companies (Open-End Funds). The committee may review and evaluate matters related to the formation and the initial
presentation to the Board of any new Open-End Fund and may review and evaluate any matters relating to any existing Open-End Fund. The committee operates under a written charter adopted and approved by the Board. The members of the Open-End Funds
Committee are Robert P. Bremner, David J. Kundert, Judith M. Stockdale, Virginia L. Stringer and Terence J. Toth, Chair. During the fiscal year ended March 31, 2013, the Open-End Funds Committee did not meet.
The Closed-End Funds Committee is responsible for assisting the Board in the oversight and monitoring of the Nuveen Funds that are
registered as closed-end investment companies (Closed-End Funds). The committee may review and evaluate matters related to the formation and the initial presentation to the Board of any new Closed-End Fund and may review and evaluate any
matters relating to any existing Closed-End Fund. The committee operates under a written charter adopted and approved by the Board. The members of the Closed-End Funds Committee are Robert P. Bremner, Jack B. Evans, William C. Hunter, William J.
Schneider, Chair, and Carole E. Stone. During the fiscal year ended March 31, 2013, the Closed-End Funds Committee met four times.
Board Diversification and Trustee Qualifications
In determining that a particular Board Member was qualified to serve as a Board Member, the Board has considered each Board Members background, skills, experience and other attributes in light of
the composition of the Board with no particular factor controlling. The Board believes that Board Members need to have the ability to critically review, evaluate, question and discuss information provided to them, and to interact effectively with
Fund management, service providers and counsel, in order to exercise effective business judgment in the performance of their duties and the Board believes each Board Member satisfies this standard. An effective Board Member may achieve this ability
through his or her educational background; business, professional training or practice; public service or academic positions; experience from service as a board member (including the Boards of the Nuveen Funds), or as an executive of investment
funds, public companies or significant private or not-for-profit entities or other organizations; and or/other life experiences. Accordingly, set forth below is a summary of the experiences, qualifications, attributes, and skills that led to the
conclusion, as of the date of this document, that each Board Member should continue to serve in that capacity. References to the experiences, qualifications, attributes and skills of Board Members are pursuant to requirements of the SEC, do not
constitute holding out of the Board or any Board Member as having any special expertise or experience and shall not impose any greater responsibility or liability on any such person or on the Board by reason thereof.
John P. Amboian
Mr. Amboian, an interested Trustee of the Nuveen Funds, joined Nuveen Investments in June 1995 and became Chief Executive Officer in
July 2007 and Chairman in November 2007. Prior to this, since 1999, he served as President with responsibility for the firms product, marketing, sales, operations and administrative activities. Mr. Amboian initially served Nuveen as
Executive Vice President and Chief Financial Officer. Prior to joining Nuveen, Mr. Amboian held key management positions with two consumer product firms affiliated with the Phillip Morris Companies. He served as Senior Vice President of
Finance, Strategy and Systems at Miller Brewing Company. Mr. Amboian began his career in corporate and international finance at Kraft Foods, Inc.,
39
where he eventually served as Treasurer. He received a Bachelors degree in economics and a Masters of Business Administration (MBA) from the University of Chicago.
Mr. Amboian serves on the Board of Trustees of Nuveen and is a Board Member or Trustee of the Investment Company Institute Board of Governors, Boys and Girls Clubs of Chicago, Childrens Memorial Hospital and Foundation, the Council on the
Graduate School of Business (University of Chicago), and the North Shore Country Day School Foundation. He is also a member of the Civic Committee of the Commercial Club of Chicago and the Economic Club of Chicago.
Robert P. Bremner
Mr. Bremner, the Nuveen Funds Independent Chairman, is a private investor and management consultant in Washington, D.C. His
biography of William McChesney Martin, Jr., a former chairman of the Federal Reserve Board, was published by Yale University Press in November 2004. From 1994 to 1997, he was a Senior Vice President at Samuels International Associates, an
international consulting firm specializing in governmental policies, where he served in a part-time capacity. Previously, Mr. Bremner was a partner in the LBK Investors Partnership and was chairman and majority stockholder with ITC Investors
Inc., both private investment firms. He currently serves on the Board and as Treasurer of the Humanities Council of Washington D.C. and is a Board Member of the Independent Directors Council affiliated with the Investment Company Institute. From
1984 to 1996, Mr. Bremner was an independent Trustee of the Flagship Funds, a group of municipal open-end funds. He began his career at the World Bank in Washington D.C. He graduated with a Bachelor of Science degree from Yale University and
received his MBA from Harvard University.
Jack B. Evans
Mr. Evans has served as President of the Hall-Perrine Foundation, a private philanthropic corporation, since 1996. Mr. Evans was formerly President and Chief Operating Officer of the SCI Financial
Group, Inc., a regional financial services firm headquartered in Cedar Rapids, Iowa. Formerly, he was a member of the Board of the Federal Reserve Bank of Chicago, a Director of Alliant Energy and President of the Board of Regents for the State of
Iowa University System. Mr. Evans is Chairman of the Board of United Fire Group, sits on the Board of the Source Media Group, and is a Life Trustee of Coe College. He has a Bachelor of Arts degree from Coe College and an MBA from the University
of Iowa.
William C. Hunter
Mr. Hunter became Dean Emeritus of the Henry B. Tippie College of Business at the University of lowa on June 30, 2012. He was appointed Dean of the College on July 1, 2006. He had been Dean
and Distinguished Professor of Finance at the University of Connecticut School of Business from June 2003 to 2007. From 1995 to 2003, he was the Senior Vice President and Director of Research at the Federal Reserve Bank of Chicago. While there he
served as the Banks Chief Economist and was an Associate Economist on the Federal Reserve Systems Federal Open Market Committee (FOMC). In addition to serving as a Vice President in charge of financial markets and basic research at the
Federal Reserve Bank in Atlanta, he held faculty positions at Emory University, Atlanta University, the University of Georgia and Northwestern University. A past Director of the Credit Research Center at Georgetown University, SS&C Technologies,
Inc. (2005) and past President of the Financial Management Association International, he has consulted with numerous foreign central banks and official agencies in Western Europe, Central and Eastern Europe, Asia, Central America and South
America. From 1990 to 1995, he was a U.S. Treasury Advisor to Central and Eastern Europe. He has been a Director of the Xerox Corporation since 2004 and Wellmark, Inc. since 2009. He is a Director and President of Beta Gamma Sigma, Inc., The
International Business Honor Society.
David J. Kundert
Mr. Kundert retired in 2004 as Chairman of JPMorgan Fleming Asset Management, and as President and CEO of Banc One Investment Advisors Corporation, and as President of One Group Mutual Funds. Prior
to the merger between Banc One Corporation and JPMorgan Chase and Co., he was Executive Vice President, Banc One Corporation and, since 1995, the Chairman and CEO, Banc One Investment Management Group. From 1988
40
to 1992, he was President and CEO of Bank One Wisconsin Trust Company. Mr. Kundert recently retired as a Director of the Northwestern Mutual Wealth Management Company where he served from
2006 to 2013. He started his career as an attorney for Northwestern Mutual Life Insurance Company. Mr. Kundert has served on the Board of Governors of the Investment Company Institute and he is currently a member of the Wisconsin Bar
Association. He is on the Board of the Greater Milwaukee Foundation and chairs its Investment Committee. He is Regent Emeritus of Luther College and is a member of its Investment Committee. Mr. Kundert is also a member of the Board of Directors
(Milwaukee) for College Possible. He received his Bachelor of Arts degree from Luther College, and his Juris Doctor from Valparaiso University.
William J. Schneider
Mr. Schneider is currently Chairman, formerly Senior Partner and Chief Operating Officer (retired, December 2004) of Miller-Valentine
Partners Ltd., a real estate investment company and is a member of two Miller-Valentine real estate LLC companies. He is a Director and Past Chair of the Dayton Development Coalition. He was formerly a member of the Community Advisory Board of the
National City Bank in Dayton as well as a former member of the Business Advisory Council of the Cleveland Federal Reserve Bank. Mr. Schneider is a member of the Business Advisory Council for the University of Dayton College of Business, Board
member of Tech Town, Inc., a not-for-profit community development company, and a Board member of WDPR Public Radio. Mr. Schneider was an independent Trustee of the Flagship Funds, a group of municipal open-end funds. He also served as Chair of
the Miami Valley Hospital and as Chair of the Finance Committee of its parent holding company. Mr. Schneider has a Bachelor of Science in Community Planning from the University of Cincinnati and a Masters of Public Administration from the
University of Dayton.
Judith M. Stockdale
At the end of 2012, Ms. Stockdale retired as Executive Director of the Gaylord and Dorothy Donnelley Foundation, a private foundation working in land conservation and artistic vitality in the Chicago
region and the Lowcountry of South Carolina. Her previous positions include Executive Director of the Great Lakes Protection Fund, Executive Director of Openlands, and Senior Staff Associate at the Chicago Community Trust. She has served on the
Boards of the Land Trust Alliance, the National Zoological Park, the Governors Science Advisory Council (Illinois), the Nancy Ryerson Ranney Leadership Grants Program, Friends of Ryerson Woods and the Donors Forum. Ms. Stockdale, a native
of the United Kingdom, has a Bachelor of Science degree in geography from the University of Durham (UK) and a Master of Forest Science degree from Yale University.
Carole E. Stone
Ms. Stone retired from the New York State Division of
the Budget in 2004, having served as its Director for nearly five years and as Deputy Director from 1995 through 1999. Ms. Stone is currently on the Board of Directors of the Chicago Board Options Exchange, CBOE Holdings, Inc. and C2 Options
Exchange, Incorporated and was formerly a Commissioner on the New York State Commission on Public Authority Reform. She has also served as the Chair of the New York Racing Association Oversight Board, as Chair of the Public Authorities Control Board
and as a member of the Boards of Directors of several New York State public authorities. Ms. Stone has a Bachelor of Arts from Skidmore College in Business Administration.
Virginia L. Stringer
Ms. Stringer served as the independent chair of
the Board of the First American Fund Complex from 1997 to 2010, having joined such Board in 1987. Ms. Stringer serves on the Board of the Mutual Fund Directors Forum. She is a recipient of the Outstanding Corporate Director award from Twin
Cities Business Monthly and the Minnesota Chapter of the National Association of Corporate Directors. Ms. Stringer is the past board chair of the Oak Leaf Trust, emeritus director and former chair of the Saint Paul Riverfront Corporation and
also served as President of the Minneapolis Clubs Governing Board. She is a director and former board chair of the Minnesota Opera and a Life Trustee and former board member of the Voyageur Outward Bound School. She also served as a trustee of
Outward Bound USA. She was appointed by the Governor of Minnesota to the Board on
41
Judicial Standards and also served on a Minnesota Supreme Court Judicial Advisory Committee to reform the states judicial disciplinary process. She is a member of the International
Womens Forum and attended the London Business School as an International Business Fellow. Ms. Stringer also served as board chair of the Human Resource Planning Society, the Minnesota Womens Campaign Fund and the Minnesota
Womens Economic Roundtable. Ms. Stringer is the retired founder of Strategic Management Resources, a consulting practice focused on corporate governance, strategy and leadership. She has twenty five years of corporate experience having
held executive positions in general management, marketing and human resources with IBM and the Pillsbury Company.
Terence J. Toth
Mr. Toth is a Managing Partner of Promus Capital (since 2008) and is Director of Fulcrum IT Service LLC (since 2010),
Quality Control Corporation (since 2012) and LogicMark LLC (since 2012). He was formerly a Director of Legal & General Investment Management America, Inc. from 2008 to 2013. From 2004 to 2007, he was Chief Executive Officer and President of
Northern Trust Global Investments, and Executive Vice President of Quantitative Management & Securities Lending from 2000 to 2004. He also formerly served on the Board of the Northern Trust Mutual Funds. He joined Northern Trust in 1994
after serving as Managing Director and Head of Global Securities Lending at Bankers Trust (1986 to 1994) and Head of Government Trading and Cash Collateral Investment at Northern Trust from 1982 to 1986. He currently serves on the Board of the
Chicago Fellowship and is Chairman of the Board of Catalyst Schools of Chicago. He is on the Mather Foundation Board (since 2012) and is a member of its Investment Committee. Mr. Toth graduated with a Bachelor of Science degree from the
University of Illinois, and received his MBA from New York University. In 2005, he graduated from the CEO Perspectives Program at Northwestern University.
SHARE OWNERSHIP
The following table sets forth the dollar range of equity
securities beneficially owned by each trustee as of December 31, 2012:
|
|
|
|
|
|
|
Name of Trustee
|
|
Dollar Range
of Equity Securities
in the Fund
|
|
Aggregate Dollar Range
of Equity Securities in
All
Registered
Investment Companies
Overseen by Trustee in
Family of Investment
Companies
|
|
John M. Amboian
|
|
None
|
|
Over $
|
100,000
|
|
Robert P. Bremner
|
|
None
|
|
Over $
|
100,000
|
|
Jack B. Evans
|
|
None
|
|
Over $
|
100,000
|
|
William C. Hunter
|
|
None
|
|
Over $
|
100,000
|
|
David J. Kundert
|
|
None
|
|
Over $
|
100,000
|
|
William S. Schneider
|
|
None
|
|
Over $
|
100,000
|
|
Judith M. Stockdale
|
|
None
|
|
Over $
|
100,000
|
|
Carole E. Stone .
|
|
None
|
|
Over $
|
100,000
|
|
Virginia L. Stringer
|
|
None
|
|
Over $
|
100,000
|
|
Terence J. Toth
|
|
None
|
|
Over $
|
100,000
|
|
No Trustee who is not an interested person of the Fund or his immediate family member owns beneficially
or of record, any security of NFALLC, Nuveen Asset Management, Nuveen Investments or any person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with NFALLC, or Nuveen
Investments.
As of May 31, 2013, the officers and Trustees as a group beneficially owned less than 1% of any class of the
Funds outstanding securities. Additionally, no disinterested trustee owned shares of NFALLC, Nuveen Asset Management or Nuveen Investments (or any entity controlled by or under common control with NFALLC, Nuveen Asset Management or Nuveen
Investments).
42
5% Shareholders
The following table sets forth the percentage ownership of each person who, as of May 31, 2013, owned of record, or is known by the Fund to own of record beneficially, 5% or more of any class of the
Funds equity securities:*
|
|
|
|
|
Name of Equity Security
|
|
Name and Address of Owner
|
|
% of Record Ownership
(a)
|
Common Shares
|
|
First Trust Portfolios L.P.
(a)
|
|
5.40%
|
|
|
First Trust Advisors L.P.
(a)
|
|
|
|
|
The Charger Corporation
(a)
120 East
Liberty Drive, Suite 400
Wheaton, Illinois 60187
|
|
|
*
|
The information contained in this table is based on a Schedule 13G filing made January 28, 2013.
|
(a)
|
Filed their Schedule 13G jointly and did not differentiate holdings as to each entity.
|
COMPENSATION
The
following table shows, for each independent trustee, (1) the aggregate compensation paid by the Fund for the fiscal year ended March 31, 2013, (2) the amount of total compensation paid by the Fund that has been deferred and
(3) the total compensation paid to each trustee by the Nuveen Funds during the calendar year ended December 31, 2012. The Fund does not have a retirement or pension plan. The officers and trustees affiliated with Nuveen Investments serve
without any compensation from the Fund. Certain of the Nuveen Funds have a deferred compensation plan (the Compensation Plan) that permits any trustee who is not an interested person of certain funds to elect to defer receipt
of all or a portion of his or her compensation as a trustee. The deferred compensation of a participating trustee is credited to the book reserve account of a fund when the compensation would otherwise have been paid to the trustee. The value of the
trustees deferral account at any time is equal to the value that the account would have had if contributions to the account had been invested and reinvested in shares of one or more of the eligible Nuveen Funds. At the time for commencing
distributions from a trustees deferral account, the trustee may elect to receive distributions in a lump sum or over a period of five years. The Fund will not be liable for any other funds obligations to make distributions under the
Compensation Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Compensation from Fund
(1)
|
|
|
Amount of
Total Compensation
From the Fund
That Has
Been
Deferred
(2)
|
|
|
Total Compensation from
Fund and Fund Complex
(3)
|
|
Robert P. Bremner
|
|
$
|
880
|
|
|
$
|
136
|
|
|
$
|
343,204
|
|
Jack B. Evans
|
|
|
677
|
|
|
|
178
|
|
|
|
262,670
|
|
William C. Hunter
|
|
|
615
|
|
|
|
|
|
|
|
240,509
|
|
David J. Kundert
|
|
|
724
|
|
|
|
724
|
|
|
|
267,712
|
|
William J. Schneider
|
|
|
784
|
|
|
|
784
|
|
|
|
284,299
|
|
Judith M. Stockdale
|
|
|
695
|
|
|
|
463
|
|
|
|
261,411
|
|
Carole E. Stone
|
|
|
678
|
|
|
|
|
|
|
|
263,100
|
|
Virginia L. Stringer
|
|
|
615
|
|
|
|
|
|
|
|
248,600
|
|
Terence J. Toth
|
|
|
728
|
|
|
|
|
|
|
|
298,475
|
|
(1)
|
The compensation paid, including deferred amounts, to the independent trustees for the fiscal year ended March 31, 2013 for services to the Fund.
|
(2)
|
Pursuant to a deferred compensation agreement with certain of the Nuveen Funds, deferred amounts are treated as though an equivalent dollar amount has
been invested in shares of one or more eligible Nuveen Funds. Total deferred fees for the Fund (including the return from the assumed investment in the eligible Nuveen Funds) payable are stated above.
|
43
(3)
|
Based on the compensation paid (including any amounts deferred) for the calendar year ended December 31, 2012 for services to the Nuveen open-end
and closed-end funds. Because the funds in the Fund Complex have different fiscal year ends, the amounts shown in this column are presented on a calendar year basis.
|
Prior to January 1, 2012, independent trustees received a $120,000 annual retainer plus (a) a fee of $4,500 per day for
attendance in person or by telephone at regularly scheduled meetings of the Board; (b) a fee of $3,000 per meeting for attendance in person or by telephone at special, non-regularly scheduled Board meetings where in-person attendance was
required and $2,000 per meeting for attendance by telephone or in person at such meetings where in-person attendance was not required; (c) a fee of $2,500 per meeting for attendance in person or by telephone at Audit Committee meetings where
in-person attendance was required and $2,000 per meeting for attendance by telephone or in person at such meetings where in-person attendance was not required; (d) a fee of $2,500 per meeting for attendance in person or by telephone at
Compliance, Risk Management and Regulatory Oversight Committee meetings where in-person attendance was required and $2,000 per meeting for attendance by telephone or in person at such meetings where in-person attendance was not required; (e) a
fee of $1,000 per meeting for attendance in person or by telephone at Dividend Committee meetings; and (f) a fee of $500 per meeting for attendance in person or by telephone at all other committee meetings ($1,000 for shareholder meetings)
where in-person attendance was required and $250 per meeting for attendance by telephone or in person at such committee meetings (excluding shareholder meetings) where in-person attendance was not required, and $100 per meeting when the Executive
Committee acts as pricing committee for IPOs, plus, in each case, expenses incurred in attending such meetings, provided that no fees were received for meetings held on days on which regularly scheduled Board meetings were held. In addition to the
payments described above, the Chairman of the Board received $75,000, the chairpersons of the Audit Committee, the Dividend Committee and the Compliance, Risk Management and Regulatory Oversight Committee received $10,000 each and the chairperson of
the Nominating and Governance Committee received $5,000 as additional retainers. Independent trustees also received a fee of $3,000 per day for site visits to entities that provided services to the Nuveen Funds on days on which no Board meeting was
held. When ad hoc committees were organized, the Nominating and Governance Committee will at the time of formation determined compensation to be paid to the members of such committee; however, in general, such fees were $1,000 per meeting for
attendance in person or by telephone at ad hoc committee meetings where in-person attendance was required and $500 per meeting for attendance by telephone or in person at such meetings where in-person attendance was not required. The annual
retainer, fees and expenses were allocated among the Nuveen Funds on the basis of relative net assets, although management might have, in its discretion, established a minimum amount to be allocated to each fund.
Effective January 1, 2012, independent trustees receive a $130,000 ($140,000 as of January 1, 2013) annual retainer plus (a) a
fee of $4,500 per day for attendance in person or by telephone at regularly scheduled meetings of the Board; (b) a fee of $3,000 per meeting for attendance in person or by telephone at special, nonregularly scheduled Board meetings where
in-person attendance is required and $2,000 per meeting for attendance by telephone or in person at such meetings where in-person attendance is not required; (c) a fee of $2,500 per meeting for attendance in person or by telephone at Audit
Committee meetings where in-person attendance is required and $2,000 per meeting for attendance by telephone or in person at such meetings where in-person attendance is not required; (d) a fee of $2,500 per meeting for attendance in person or
by telephone at Compliance, Risk Management and Regulatory Oversight Committee meetings where in-person attendance is required and $2,000 per meeting for attendance by telephone or in person at such meetings where in-person attendance is not
required; (e) a fee of $1,000 per meeting for attendance in person or by telephone at Dividend Committee meetings; (f) a fee of $500 per meeting for attendance in person or by telephone at all other committee meetings ($1,000 for
shareholder meetings) where in-person attendance is required and $250 per meeting for attendance by telephone or in person at such committee meetings (excluding shareholder meetings) where in-person attendance is not required, and $100 per meeting
when the Executive Committee acts as pricing committee for IPOs, plus, in each case, expenses incurred in attending such meetings, provided that no fees are received for meetings held on days on which regularly scheduled Board meetings are held; and
(g) a fee of $2,500 per meeting for attendance in person or by telephone at Open-End Funds Committee meetings where
44
in-person attendance is required and $2,000 per meeting for attendance by telephone or in person at such meetings where in-person attendance is not required; provided that no fees are received
for meetings held on days on which regularly scheduled Board meetings are held. In addition to the payments described above, the Chairman of the Board receives $75,000, the chairpersons of the Audit Committee, the Dividend Committee, the Compliance,
Risk Management and Regulatory Oversight Committee and the Open-End Funds Committee receive $12,500 each and the chairperson of the Nominating and Governance Committee receives $5,000 as additional retainers. Independent trustees also receive a fee
of $3,000 per day for site visits to entities that provide services to the Nuveen Funds on days on which no Board meeting is held. When ad hoc committees are organized, the Nominating and Governance Committee will at the time of formation determine
compensation to be paid to the members of such committee; however, in general, such fees will be $1,000 per meeting for attendance in person or by telephone at ad hoc committee meetings where in-person attendance is required and $500 per meeting for
attendance by telephone or in person at such meetings where in-person attendance is not required. The annual retainer, fees and expenses are allocated among the Nuveen Funds on the basis of relative net assets, although management may, in its
discretion, establish a minimum amount to be allocated to each fund.
As noted above, effective January 1, 2013, the annual
retainer paid to each independent trustee is $140,000. All other compensation discussed above remains the same.
The Fund has
no employees. Its officers are compensated by Nuveen Investments or its affiliates.
INVESTMENT
ADVISER, SUB-ADVISER AND PORTFOLIO MANAGER
Investment Adviser.
Nuveen Fund Advisors, LLC, a registered
investment adviser, is responsible for the Funds overall investment strategy and its implementation. NFALLC also is responsible for managing the Funds business affairs and providing certain clerical, bookkeeping and other administrative
services.
NFALLC, 333 West Wacker Drive, Chicago, Illinois 60606, a registered investment adviser, is a wholly owned
subsidiary of Nuveen Investments. Founded in 1898, Nuveen Investments and its affiliates had approximately $219 billion of assets under management as of December 31, 2012.
Investment Management Agreement and Related Fees.
Pursuant to an investment management agreement between NFALLC and the Fund (the Investment Management Agreement), the Fund
has agreed to pay an annual management fee for the overall advisory and administrative services and general office facilities provided by NFALLC. The Funds management fee is separated into two componentsa complex-level component, based
on the aggregate amount of all fund assets managed by NFALLC, and a specific fund-level component, based only on the amount of assets within the Fund. This pricing structure enables Nuveen fund shareholders to benefit from growth in the assets
within each individual fund as well as from growth in the amount of complex-wide assets managed by NFALLC.
Fund-Level
Fee.
The annual fund-level fee for the Fund, payable monthly, is calculated according to the following schedule:
|
|
|
|
|
Average Daily Managed
Assets
(1)
|
|
Fund-Level Fee Rate
|
|
For the first $125 million
|
|
|
0.0500
|
%
|
For the next $125 million
|
|
|
0.0375
|
%
|
For the next $250 million
|
|
|
0.0250
|
%
|
For the next $500 million
|
|
|
0.0125
|
%
|
45
Complex-Level Fee.
The annual complex-level fee for the Fund, payable monthly,
is calculated according to the following schedule:
|
|
|
|
|
Complex-Level Managed Asset Breakpoint
Level
(2)
|
|
Effective Rate at
Breakpoint Level
|
|
$55 billion
|
|
|
0.2000
|
%
|
$56 billion
|
|
|
0.1996
|
%
|
$57 billion
|
|
|
0.1989
|
%
|
$60 billion
|
|
|
0.1961
|
%
|
$63 billion
|
|
|
0.1931
|
%
|
$66 billion
|
|
|
0.1900
|
%
|
$71 billion
|
|
|
0.1851
|
%
|
$76 billion
|
|
|
0.1806
|
%
|
$80 billion
|
|
|
0.1773
|
%
|
$91 billion
|
|
|
0.1691
|
%
|
$125 billion
|
|
|
0.1599
|
%
|
$200 billion
|
|
|
0.1505
|
%
|
$250 billion
|
|
|
0.1469
|
%
|
$300 billion
|
|
|
0.1445
|
%
|
(1)
|
For the Fund, Managed Assets means the total assets of the Fund, minus the sum of its accrued liabilities (other than Fund liabilities incurred for the
express purpose of creating leverage). Total assets for this purpose shall include assets attributable to the Funds use of effective leverage (whether or not those assets are reflected in the Funds financial statements for purposes of
generally accepted accounting principles), such as, but not limited to, the portion of assets in special purpose trusts of which the Fund owns the inverse floater certificates that has been effectively financed by the trusts issuance of
floating rate certificates.
|
(2)
|
Eligible assets do not include assets attributable to investments in other Nuveen Funds or assets in excess of a determined amount (originally $2 billion) added to the
Nuveen fund complex in connection with NFALLCs assumption of the management of the former First American Funds effective January 1, 2011. With respect to closed-end funds, eligible assets include assets managed by NFALLC that are attributable
to financial leverage. For these purposes, financial leverage includes the use of preferred stock and borrowings and certain investments in the residual interest certificates in tender option bond (TOB) trusts, including the portion of assets held
by a TOB trust that has been effectively financed by issuance of floating rate securities, subject to an agreement by NFALLC as to certain funds to limit the amount of such assets for determining eligible assets in certain circumstances. As of March
31, 2013, the complex-level fee rate for the Fund was 0.1668%.
|
The following table sets forth the management
fee paid by the Fund for the last three fiscal years.
|
|
|
|
|
|
|
|
|
|
|
Management Fee Net of Expense
Reimbursement
for
the Fiscal Year Ended
|
|
|
Expense
Reimbursement
for the Fiscal Year
Ended
|
|
Fiscal year ended March 31, 2011
|
|
$
|
526,583
|
|
|
$
|
|
|
Fiscal year ended March 31, 2012
|
|
$
|
513,904
|
|
|
$
|
|
|
Fiscal year ended March 31, 2013
|
|
$
|
529,197
|
|
|
$
|
|
|
In addition to the fee of NFALLC, the Fund pays all other costs and expenses of its operations, including
compensation of its directors (other than those affiliated with NFALLC and Nuveen Asset Management), custodian, transfer agency and dividend disbursing expenses, legal fees, expenses of independent auditors, expenses of repurchasing shares, expenses
of issuing preferred shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies and taxes, if any. All fees and expenses are accrued daily and deducted before payment
of dividends to investors.
46
A discussion regarding the basis for the Board of Trustees decision to renew the
Investment Management Agreement for the Fund is available in the Funds semi-annual report to shareholders dated September 30 of each year.
Sub-Adviser.
Nuveen Asset Management, LLC, 333 West Wacker Drive, Chicago, Illinois 60606, serves as the Funds sub-adviser, pursuant to a sub-advisory agreement between NFALLC and
Nuveen Asset Management (the Sub-Advisory Agreement). Nuveen Asset Management is a registered investment adviser, and a wholly-owned subsidiary of NFALLC. Nuveen Asset Management oversees day-to-day investment operations and provides
portfolio management services to the Fund. Pursuant to the sub-advisory agreement, Nuveen Asset Management will be compensated for the services it provides to the fund with a portion of the management fee NFALLC receives from the Fund. NFALLC and
Nuveen Asset Management retain the right to reallocate investment advisory responsibilities and fees between themselves in the future.
Sub-Advisory Agreement and Related Fees.
Pursuant to the Sub-Advisory Agreement, Nuveen Asset Management will receive from NFALLC a management fee equal to 60.000% of NFALLCs net
management fee from the Fund. NFALLC and Nuveen Asset Management retain the right to reallocate investment advisory responsibilities and fees between themselves in the future.
A discussion regarding the basis for the Board of Trustees decision to renew the Sub-Advisory Agreement for the Fund is available in the Funds semi-annual report to shareholders dated
September 30 of each year.
The following table sets forth the management fee paid by NFALLC to Nuveen Asset Management
for the specific periods:
|
|
|
|
|
|
|
Sub-Advisory Fee
Paid by NFALLC to
Nuveen Asset
Management
|
|
Fiscal period January 1, 2011 through March 31, 2011
|
|
$
|
49,027
|
|
Fiscal year ended March 31, 2012
|
|
$
|
308,342
|
|
Fiscal year ended March 31, 2013
|
|
$
|
317,518
|
|
PORTFOLIO MANAGER
Portfolio Management.
Unless otherwise indicated, the information below is provided as of the date of this SAI.
Portfolio Manager.
Thomas Spalding, CFA (the Portfolio Manager), is Vice President and Senior Investment Officer of Nuveen Investments and has been the portfolio manager of the Fund
since 1999. He has direct investment responsibility for National Long Term funds. He joined Nuveen in 1976 as assistant portfolio manager and has been the portfolio manager of the Nuveen Municipal Value Fund, Nuveens first closed-end exchange
traded fund, since its inception in 1987. Currently, he manages investments for 21 Nuveen-sponsored investment companies.
Other Accounts.
The Portfolio Manager also has responsibility for the day-to-day management of accounts other than the Fund.
Information regarding these other accounts is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed and Assets by
Account Type as of
March 31, 2013
|
|
Portfolio Manager
|
|
Type of
Account Managed
|
|
Number
of Accounts
|
|
|
Total
Assets*
|
|
Thomas Spalding
|
|
Registered
Investment
Companies
|
|
|
15
|
|
|
|
$9.042 billion
|
|
|
|
Other Pooled
Investment Vehicles
|
|
|
0
|
|
|
|
$0
|
|
|
|
Other Accounts
|
|
|
5
|
|
|
|
$20.345 million
|
|
*
|
None of the assets in these accounts are subject to an advisory fee based on performance.
|
47
The Portfolio Manager is responsible for managing the Fund and other accounts, including
separate accounts and unregistered funds.
As shown in the above table, the Portfolio Manager may manage accounts in addition
to the Fund. The potential for conflicts of interest exists when a portfolio manager manages other accounts with similar investment objectives and strategies to the Fund (Similar Accounts). Potential conflicts may include, for example,
conflicts between investment strategies and conflicts in the allocation of investment opportunities.
Responsibility for
managing NFALLCs clients portfolios is organized according to investment strategies. Generally, client portfolios with similar strategies are managed using the same objectives, approach and philosophy. Therefore, portfolio holdings,
relative position sizes and sector exposures tend to be similar across similar portfolios which minimizes the potential for conflicts of interest.
NFALLC may receive more compensation with respect to certain Similar Accounts than that received with respect to the Fund or may receive compensation based in part on the performance of certain Similar
Accounts. This may create a potential conflict of interest for the Portfolio Manager by providing an incentive to favor these Similar Accounts when, for example, placing securities transactions. Potential conflicts of interest may arise with both
the aggregation and allocation of securities transactions and allocation of limited investment opportunities. Allocations of aggregated trades, particularly trade orders that were only partially completed due to limited availability, and allocation
of investment opportunities generally, could raise a potential conflict of interest.
Nuveen Asset Management has policies and
procedures designed to manage these conflicts described above such as allocation of investment opportunities to achieve fair and equitable allocation of investment opportunities among its clients over time. For example, orders for the same equity
security are aggregated on a continual basis throughout each trading day consistent with Nuveen Asset Managements duty of best execution for its clients. If aggregated trades are fully executed, accounts participating in the trade will be
allocated their pro rata share on an average price basis. Partially completed orders will be allocated among the participating accounts on a pro-rata average price basis as well.
Compensation
. The Portfolio Managers compensation consists primarily of base pay, an annual cash bonus and long-term
incentive payments.
Base pay.
Base pay is determined based upon an analysis of the Portfolio Managers general
performance, experience, and market levels of base pay for such position.
Annual cash bonus.
The Portfolio Manager is
eligible for an annual cash bonus based on investment performance, qualitative evaluation and financial performance of Nuveen Asset Management.
A portion of the Portfolio Managers annual cash bonus is based on the Funds investment performance, generally measured over the past one- and three or five-year periods unless the Portfolio
Managers tenure is shorter. Investment performance for the Fund generally is determined by evaluating the Funds performance relative to its benchmark(s) and/or Lipper industry peer group.
A portion of the cash bonus is based on a qualitative evaluation made by the Portfolio Managers supervisor taking into
consideration a number of factors, including the portfolio managers team collaboration, expense management, support of personnel responsible for asset growth, and his or her compliance with Nuveen Asset Managements policies and
procedures.
The final factor influencing the Portfolio Managers cash bonus is the financial performance of Nuveen Asset
Management based on its operating earnings.
48
Long-term incentive compensation
. Certain key employees of Nuveen Investments and its
affiliates, including certain portfolio managers, have received equity interests in the parent company of Nuveen Investments. In addition, certain key employees of Nuveen Asset Management, including certain portfolio managers, have received profits
interests in Nuveen Asset Management which entitle their holders to participate in the firms growth over time.
Material Conflicts of Interest
. Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day
management responsibilities with respect to more than one account. More specifically, portfolio managers who manage multiple accounts are presented a number of potential conflicts, including, among others, those discussed below.
The management of multiple accounts may result in a portfolio manager devoting unequal time and attention to the management of each
account. Nuveen Asset Management seeks to manage such competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline. Most accounts managed by a portfolio manager in a
particular investment strategy are managed using the same investment models.
If a portfolio manager identifies a limited
investment opportunity which may be suitable for more than one account, an account may not be able to take full advantage of that opportunity due to an allocation of filled purchase or sale orders across all eligible accounts. To deal with these
situations, Nuveen Asset Management has adopted procedures for allocating limited opportunities across multiple accounts.
With respect to many of its clients accounts, Nuveen Asset Management determines which broker to use to execute transaction orders,
consistent with its duty to seek best execution of the transaction. However, with respect to certain other accounts, Nuveen Asset Management may be limited by the client with respect to the selection of brokers or may be instructed to direct trades
through a particular broker. In these cases, Nuveen Asset Management may place separate, non-simultaneous, transactions for the Fund and other accounts which may temporarily affect the market price of the security or the execution of the
transaction, or both, to the detriment of the Fund or the other accounts.
Some clients are subject to different regulations.
As a consequence of this difference in regulatory requirements, some clients may not be permitted to engage in all the investment techniques or transactions or to engage in these transactions to the same extent as the other accounts managed by the
portfolio manager. Finally, the appearance of a conflict of interest may arise where Nuveen Asset Management has an incentive, such as a performance-based management fee, which relates to the management of some accounts, with respect to which a
portfolio manager has day-to-day management responsibilities.
Nuveen Asset Management has adopted certain compliance
procedures which are designed to address these types of conflicts common among investment managers. However, there is no guarantee that such procedures will detect each and every situation in which a conflict arises.
Fund Shares Owned by the Portfolio Manager.
As of March 31, 2013, the Portfolio Manager beneficially owned (as determined pursuant
to Rule 16a-1(a)(2) under the 1934 Act) shares of the Fund having values within the indicated dollar range.
|
|
|
Portfolio Manager
|
|
Dollar Range of Equity Securities
Beneficially Owned in the Fund
|
Thomas Spalding
|
|
None
|
CODES OF ETHICS
The Fund, NFALLC, Nuveen Asset Management, Nuveen Securities and other related entities have adopted a combined code of ethics (the
Code of Ethics) that essentially prohibits certain of their personnel, including
49
the Funds Portfolio Manager, from engaging in personal investments that compete or interfere with, or attempt to take advantage of a clients, including the Funds, anticipated or
actual portfolio transactions, and designed to assure that the interests of clients, including Fund shareholders, are placed before the interests of personnel in connection with personal investment transactions. Personnel subject to the Code of
Ethics may purchase shares of the Fund subject to the restriction set forth in such code. While personnel subject to the codes of ethics may generally invest in securities in which the Fund may also invest, portfolio managers of municipal bond
funds, such as the Fund may not do so. Text-only versions of the Code of Ethics of the Fund, NFALLC, Nuveen Asset Management, and Nuveen Securities can be viewed online or downloaded from the EDGAR Database on the SECs internet web site at
www.sec.gov. You may also review and copy those documents by visiting the SECs Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 202-551-8090. In addition,
copies of the Code of Ethics may be obtained, after mailing the appropriate duplicating fee, by writing to the SECs Public Reference Section, 100 F Street, N.E., Washington, DC 20549-0102 or by e-mail request at
publicinfo@sec.gov
.
PROXY VOTING POLICIES
The Fund invests primarily in municipal securities. On rare occasions the Fund may acquire, directly or through a special purpose
vehicle, equity securities of a municipal bond issuer whose bonds the Fund already owns when such bonds have deteriorated or are expected shortly to deteriorate significantly in credit quality. The purpose of acquiring equity securities generally
will be to acquire control of the municipal bond issuer and to seek to prevent the credit deterioration or facilitate the liquidation or other workout of the distressed issuers credit problem. In the course of exercising control of a
distressed municipal issuer, Nuveen Asset Management may pursue the Funds interests in a variety of ways, which may entail negotiating and executing consents, agreements and other arrangements, and otherwise influencing the management of the
issuer. Nuveen Asset Management does not consider such activities proxy voting for purposes of Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended, but nevertheless provides reports to the Funds Board of Trustees on its control
activities on a quarterly basis.
In the rare event that a municipal issuer held by the Fund were to issue a proxy, or that
the Fund were to receive a proxy issued by a cash management security, Nuveen Asset Management would either engage an independent third party to determine how the proxy should be voted or vote the proxy with the consent, or based on the
instructions, of the Funds Board of Trustees or its representative. In the case of a conflict of interest, the proxy would be submitted to the Funds Board to determine how the proxy should be voted. A member of Nuveen Asset
Managements legal department would oversee the administration of the voting, and ensure that records were maintained in accordance with Rule 206(4)-6, reports were filed with the SEC on Form N-PX, and the results provided to the Funds
Board of Trustees and made available to shareholders as required by applicable rules. When required by applicable regulations, information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month
period ended June 30 is available without charge, upon request, by calling (800) 257-8787 or from the Funds website at http://www.nuveen.com, and on the Securities and Exchange Commissions website at http://www.sec.gov.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, Nuveen Asset Management is responsible for decisions to purchase and sell securities
for the Fund, the negotiation of the prices to be paid and the allocation of transactions among various dealer firms. Transactions on stock exchanges involve the payment by the Fund of brokerage commissions. There generally is no stated commission
in the case of securities traded in the over-the-counter (OTC) market but the price paid by the Fund usually includes an undisclosed dealer commission or mark-up. Transactions in the OTC market can also be placed with broker-dealers who
act as agents and charge brokerage commissions for effecting OTC transactions. The Fund may place its OTC
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transactions either directly with principal market makers, or with broker-dealers if that is consistent with Nuveen Asset Managements obligation to obtain best qualitative execution. In
certain instances, the Fund may make purchases of underwritten issues at prices that include underwriting fees.
Portfolio
securities may be purchased directly from an underwriter or in the OTC market from the principal dealers in such securities, unless it appears that a better price or execution may be obtained through other means. Portfolio securities will not be
purchased from Nuveen Investments or its affiliates or affiliates of NFALLC except in compliance with the 1940 Act.
It is
Nuveen Asset Managements policy to seek the best execution under the circumstances of each trade. Nuveen Asset Management will evaluate price as the primary consideration, with the financial condition, reputation and responsiveness of the
dealer considered secondary in determining best execution. Given the best execution obtainable, it will be Nuveen Asset Managements practice to select dealers that, in addition, furnish research information (primarily credit analyses of
issuers and general economic reports) and statistical and other services to Nuveen Asset Management. It is not possible to place a dollar value on information and statistical and other services received from dealers. Since it is only supplementary
to Nuveen Asset Managements own research efforts, the receipt of research information is not expected to reduce significantly Nuveen Asset Managements expenses. While Nuveen Asset Management will be primarily responsible for the
placement of the business of the Fund, Nuveen Asset Managements policies and practices in this regard must be consistent with the foregoing and will, at all times, be subject to review by the Board of Trustees of the Fund.
Nuveen Asset Management may manage other investment accounts and investment companies for other clients that may invest in the same types
of securities as the Fund and that may have investment objective similar to those of the Fund. Nuveen Asset Management seeks to allocate portfolio transactions equitably whenever concurrent decisions are made to purchase or sell assets or securities
by the Fund and another advisory account. If an aggregated order cannot be filled completely, allocations will generally be made on a pro rata basis. An order may not be allocated on a pro rata basis where, for example (i) consideration is
given to portfolio managers who have been instrumental in developing or negotiating a particular investment; (ii) consideration is given to an account with specialized investment policies that coincide with the particulars of a specific
investment; (iii) pro rata allocation would result in odd-lot or
de minimis
amounts being allocated to a portfolio or other client; or (iv) where Nuveen Asset Management reasonably determines that departure from a pro rata
allocation is advisable. There may also be instances where the Fund will not participate at all in a transaction that is allocated among other accounts. While these allocation procedures could have a detrimental effect on the price or amount of the
securities available to the Fund from time to time, it is the opinion of the Board of Trustees that the benefits available from Nuveen Asset Managements management outweigh any disadvantage that may arise from Nuveen Asset Managements
larger management activities and its need to allocate securities.
Substantially all of the Funds trades are effected on
a principal basis. The Fund did not pay any brokerage commissions for the fiscal years ended March 31, 2011, 2012 and 2013. During the fiscal year ended March 31, 2013, the Fund did not pay commissions to brokers in return for research services or
hold any securities of its regular broker-dealers.
NET ASSET VALUE
The Funds net asset value per share is determined as of the close of regular session trading (normally 4:00 p.m., Eastern
Time) on each day the New York Stock Exchange (the NYSE) is open for business. Net asset value is calculated by taking the fair value of the Funds total assets, including interest or dividends accrued but not yet collected, less
all liabilities, and dividing by the total number of shares outstanding. The result, rounded to the nearest cent, is the net asset value per share. All valuations are subject to review by the Funds Board of Trustees or its delegate, Nuveen
Asset Management.
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In determining net asset value, expenses are accrued and applied daily, and securities and
other assets for which market quotations are available are valued daily at market value. The prices of fixed income securities are provided by a pricing service and are based on the mean between the bid and asked price. When price quotes are not
readily available, which is typically the case for municipal bonds, the pricing service establishes a securitys fair value based on various factors, including prices of comparable fixed income securities utilizing a matrix pricing system. Due
to the subjective and variable nature of fair value pricing, it is possible that the fair value determined for a particular security may be different from the value realized upon the sale of the security.
Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Board of
Trustees or its delegate at fair value. These securities generally include but are not limited to, restricted securities (securities that may not be publicly sold without registration under the Securities Act of 1933) for which a pricing service is
unable to provide a market price; securities whose trading has been formally suspended; debt securities that have gone into default and for which there is no current market quotation; a security whose market price is not available from a
pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of net asset value; a security with respect
to which an event has occurred that is likely to make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the securitys fair value. As a
general principle, the current fair value of a security would be the amount that the owner might reasonably expect to receive for it upon its current sale. A variety of factors may be considered in determining the fair value of such
securities.
DISTRIBUTIONS
The Fund pays regular monthly distributions to Common Shareholders at a level rate (stated in terms of a fixed cents per Common Share
dividend rate) that reflects the past and projected performance of the Fund. Distributions can only be made from net investment income after paying any interest and required principal payments on borrowings to preferred shareholders, if preferred
shares are issued in the future.
To permit the Fund to maintain a more stable monthly distribution, the Fund may from time to
time distribute less than the entire amount of net investment income earned in a particular period. Such undistributed net investment income would be available to supplement future distributions, including distributions that might otherwise have
been reduced by a decrease in the Funds monthly net income due to fluctuations in investment income or expenses, an increase in interest payments on borrowings or due to an increase in the dividend rate on the Funds outstanding preferred
shares, if issued in the future. As a result, the distributions paid by the Fund for any particular period may be more or less than the amount of net investment income actually earned by the Fund during such period. However, the Fund intends to
maintain distributions of net investment income for any period in amounts sufficient to continue to qualify for treatment under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code), as a regulated investment company
(as explained more fully below in Tax Matters). Undistributed net investment income will be added to the Funds net asset value and, correspondingly, distributions from undistributed net investment income will be deducted from the
Funds net asset value.
As explained more fully below in Tax Matters, at least annually, the Fund intends to
distribute to Common Shareholders any net capital gain (which is the excess of net long-term capital gain over net short-term capital loss) after paying any interest and required principal payments on borrowings and making any redemption or
liquidation payments to preferred shareholders, if preferred shares are issued in the future or, alternatively, to retain all or a portion of the years net capital gain. The Fund will pay federal income tax on any net capital gain not used to
pay distributions to shareholders. Each Common Shareholder of record as of the end of the Funds taxable year (i) will include in income for federal income tax purposes, as long-term capital gain, his or her share of the retained gain, (ii)
will be deemed to have paid his or her proportionate share of tax paid by the Fund on such retained gain, and (iii) will be entitled to an income tax credit or refund for that share of the tax.
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For tax purposes, the Fund is currently required to allocate net capital gain and other
taxable income, if any, between Common Shares and preferred shares, if preferred shares are issued in the future, in proportion to total dividends paid to each class for the year in which such net capital gain or other taxable income is realized.
For information relating to the impact of the issuance of preferred shares on the distributions made by the Fund to Common Shareholders, see the Prospectus under Use of Leverage.
If preferred shares are outstanding, the Fund may not declare any cash dividend or other distribution on its Common Shares unless at the
time of such declaration (1) all accumulated dividends on the preferred shares have been paid, (2) all interest and required principal on borrowings has been paid, (3) the net asset value of the Funds portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of the liquidation value of any outstanding preferred shares and (4) the net asset value of the Funds portfolio (determined after deducting the amount of such
dividend or other distribution) is at least 300% of the value of the Funds borrowings. These limitations on the Funds ability to make distributions on its Common Shares could under certain circumstances impair the ability of the Fund to
maintain its qualification for treatment as a regulated investment company.
The Fund reserves the right to change its
distribution policy and the basis for establishing the rate of its monthly distributions at any time.
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your Common
Shares with a brokerage firm that participates in the Funds Dividend Reinvestment Plan (the Plan), you may elect to have all dividends, including any capital gain dividends, on your Common Shares automatically reinvested by the
Plan Agent (defined below) in additional Common Shares under the Plan. You may elect to participate in the Plan by contacting Nuveen Investor Services at (800) 257-8787. If you do not participate, you will receive all distributions in cash paid
by check mailed directly to you or your brokerage firm by State Street Bank and Trust Company as dividend paying agent (the Plan Agent).
If you decide to participate in the Plan, the number of Common Shares you will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value at the time of valuation, the Fund will issue new shares at
the then current market price;
(2) If Common Shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash and will purchase Common Shares in the open market, on the NYSE or elsewhere, for the participants accounts. It is possible that the market price for the Common Shares
may increase before the Plan Agent has completed its purchases. Therefore, the average purchase price per share paid by the Plan Agent may exceed the market price at the time of valuation, resulting in the purchase of fewer shares than if the
dividend or distribution had been paid in Common Shares issued by the Fund. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market within 30 days of the valuation date. Interest will not
be paid on any uninvested cash payments; or
(3) If the Plan Agent begins purchasing Fund shares on the open
market while shares are trading below net asset value, but the Funds shares subsequently trade at or above their net asset value before the Plan Agent is able to complete its purchases, the Plan Agent may cease open-market purchases and may
invest the uninvested portion of the distribution in newly-issued Fund shares at a price equal to the greater of the shares net asset value or 95% of the shares market value.
You may withdraw from the Plan at any time by giving written notice to the Plan Agent. If you withdraw or the Plan is terminated, you
will receive whole shares in your account under the Plan and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Agent will sell your shares and send you the proceeds, minus brokerage commissions and a
$2.50 service fee.
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The Plan Agent maintains all shareholders accounts in the Plan and gives written
confirmation of all transactions in the accounts, including information you may need for tax records. Upon a repurchase of your shares, the Fund (or its administrative agent) may be required to report to the IRS and furnish to you cost basis and
holding period information for the Funds shares purchased on or after January 1, 2012 (covered shares).
For
shares of the Fund held in the Plan, you are permitted to elect from among several permitted cost basis methods. In the absence of an election, the Plan will use first-in first-out (FIFO) methodology for tracking and reporting your cost
basis on covered shares as its default cost basis method. The cost basis method you use may not be changed with respect to a repurchase of shares after the settlement date of the repurchase. You should consult with your tax advisors to determine the
best permitted cost basis method for your tax situation and to obtain more information about how the new cost basis reporting rules apply to you.
Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a
pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases.
Automatically
reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions.
If you hold your Common Shares with a brokerage firm that does not participate in the Plan, you will not be able to participate in the Plan and any dividend reinvestment may be effected on different terms
than those described above. Consult your financial advisor for more information.
The Fund reserves the right to amend or
terminate the Plan if in the judgment of the Board of Trustees the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the
participants. Additional information about the Plan may be obtained from State Street Bank and Trust Company, Attn: ComputerShare Nuveen Investments, P.O. Box 43071, Providence, Rhode Island 02940-3071, (800) 257-8787.
PLAN OF DISTRIBUTION
The Fund may sell the Common Shares offered under this SAI through
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at-the-market transactions;
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underwriting syndicates; and
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privately negotiated transactions.
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The Fund will bear the costs of the offering, including but not limited to, the expense of preparing the Prospectus and SAI for the offering, and the expense of counsel, auditors and others in connection
with the offering.
Distribution Through At-the-Market Transactions
The Fund has entered into a distribution agreement with Nuveen Securities (the Distribution Agreement), 333 West Wacker Drive,
Chicago, Illinois 60606, which has been filed as an exhibit to the Registration Statement of which this SAI is a part. The summary of the Distribution Agreement contained herein is qualified by reference to the Distribution Agreement. Subject to the
terms and conditions of the Distribution Agreement,
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the Fund may issue and sell Common Shares from time to time through Nuveen Securities to certain broker-dealers that have entered into selected dealer agreements with Nuveen Securities.
Currently, Nuveen Securities has entered into a selected dealer agreement (the Selected Dealer Agreement) with UBS Securities LLC (UBS) pursuant to which UBS will be acting as the exclusive sub-placement agent with respect to
at-the-market offerings of Common Shares. The Selected Dealer Agreement has been filed as an exhibit to the Registration Statement of which this SAI forms a part. The summary of the Selected Dealer Agreement contained herein is qualified by
reference to the Selected Dealer Agreement.
Common Shares will only be sold on such days as shall be agreed to by the Fund
and Nuveen Securities. Common Shares will be sold at market prices, which shall be determined with reference to trades on the NYSE, subject to a minimum price to be established each day by the Fund. The minimum price on any day will not be less than
the current NAV per Common Share plus the per share amount of the commission to be paid to Nuveen Securities. The Fund and Nuveen Securities will suspend the sale of Common Shares if the per share price of the shares is less than the minimum price.
The Fund will compensate Nuveen Securities with respect to sales of the Common Shares at a commission rate of up to 1.0% of
the gross proceeds of the sale of Common Shares. Nuveen Securities will compensate broker-dealers participating in the offering at a rate of up to 0.8% of the gross proceeds of the sale of Common Shares sold by that broker-dealer. Settlements of
sales of Common Shares will occur on the third business day following the date on which any such sales are made.
In
connection with the sale of the Common Shares on behalf of the Fund, Nuveen Securities may be deemed to be an underwriter within the meaning of the 1933 Act, and the compensation of Nuveen Securities may be deemed to be underwriting commissions or
discounts. Unless otherwise indicated in a further Prospectus supplement, Nuveen Securities will act as underwriter on a reasonable efforts basis.
The offering of Common Shares pursuant to the Distribution Agreement will terminate upon the earlier of (i) the sale of all Common Shares subject thereto or (ii) termination of the Distribution
Agreement. The Fund and Nuveen Securities each has the right to terminate the Distribution Agreement in its discretion at any time.
The Fund currently intends to distribute the shares offered pursuant to this SAI primarily through at-the-market transactions, although from time to time it may also distribute shares through an
underwriting syndicate or a privately negotiated transaction. To the extent shares are distributed other than through at-the-market transactions, the Fund will file a supplement to this SAI describing such transactions.
The Funds closing price on the NYSE on May 31, 2013 was $13.86.
UBS, its affiliates and their respective employees hold or may hold in the future, directly or indirectly, investment interests in Nuveen
Investments and its funds. The interests held by employees of UBS or its affiliates are not attributable to, and no investment discretion is held by, UBS or its affiliates.
Distribution Through Underwriting Syndicates
The Fund from time to time
may issue additional Common Shares through a syndicated secondary offering. In order to limit the impact on the market price of the Funds Common Shares, underwriters will market and price the offering on an expedited basis,
e.g.
, in an
overnight or similarly abbreviated offering period. The Fund will launch a syndicated offering on a day, and upon terms, mutually agreed upon between the Fund, Nuveen Securities, one of the Funds underwriters, and the underwriting syndicate.
The Fund will offer its shares at a price equal to a specified discount of up to 2% from the closing market price of the
Funds Common Shares on the day prior to the offering date. The applicable discount will be negotiated by the Fund and Nuveen Securities in consultation with the underwriting syndicate on a
55
transaction-by-transaction basis. The Fund will compensate the underwriting syndicate out of the proceeds of the offering based upon a sales load of up to 4% of the gross proceeds of the sale of
Common Shares. The minimum net proceeds per share to the Fund will not be less than the greater of (i) the Funds latest net asset value per Common Share or (ii) 91% of the closing market price of the Funds Common Shares on the
day prior to the offering date.
Distribution Through Privately Negotiated Transactions
The Fund, through Nuveen Securities, from time to time may sell directly to, and solicit offers from, institutional and other
sophisticated investors, who may be deemed to be underwriters, as defined in the 1933 Act, for any resale of the Common Shares.
The terms of such privately negotiated transactions will be subject to the discretion of the management of the Fund. In determining whether to sell Common Shares through a privately negotiated
transaction, the Fund will consider relevant factors including, but not limited to, the attractiveness of obtaining additional funds through the sale of Common Shares, the purchase price to apply to any such sale of Common Shares and the person
seeking to purchase the Common Shares.
Common Shares issued by the Fund through privately negotiated transactions will be
issued at a price equal to the greater of (i) the NAV per Common Share of the Funds Common Shares or (ii) at a discount ranging from 0% to 5% of the average of the daily market price of the Funds Common Shares at the close of
business on the two business days preceding the date upon which Common Shares are sold pursuant to the privately negotiated transaction. The applicable discount will be determined by the Fund on a transaction-by-transaction basis.
The principal business address of Nuveen Securities is 333 West Wacker Drive, Chicago, Illinois 60606.
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DESCRIPTION OF SHARES
COMMON SHARES
The
Declaration of Trust (the Declaration) authorizes the issuance of an unlimited number of Common Shares. The Common Shares being offered have a par value of $0.01 per share and, subject to the rights of holders of preferred shares, if
issued, and borrowings, if incurred, have equal rights to the payment of dividends and the distribution of assets upon liquidation. The Common Shares being offered will, when issued, be fully paid and, subject to matters discussed in Certain
Provisions in the Declaration of Trust, non-assessable, and will have no pre-emptive or conversion rights or rights to cumulative voting. Each whole Common Share has one vote with respect to matters upon which a shareholder vote is required,
and each fractional share shall be entitled to a proportional fractional vote consistent with the requirements of the 1940 Act and the rules promulgated thereunder, and will vote together as a single class. Whenever the Fund incurs borrowings
and/or preferred shares are outstanding, Common Shareholders will not be entitled to receive any cash distributions from the Fund unless all interest on such borrowings has been paid and all accrued dividends on preferred shares have been paid,
unless asset coverage (as defined in the 1940 Act) with respect to any borrowings would be at least 300% after giving effect to the distributions and asset coverage (as defined in the 1940 Act) with respect to preferred shares would be at least 200%
after giving effect to the distributions. See Preferred Shares, below.
The Common Shares are listed on the
NYSE and trade under the ticker symbol NXP. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
The Fund will not issue share certificates.
Unlike open-end funds, closed-end funds like the Fund do not provide daily
redemptions. Rather, if a shareholder determines to buy additional Common Shares or sell shares already held, the shareholder may conveniently do so by trading on the exchange through a broker or otherwise. Shares of closed-end investment companies
may frequently trade on an exchange at prices lower than net asset value. Shares of closed-end investment companies like the Fund have during some periods traded at prices higher than net asset value and have during other periods traded at prices
lower than net asset value.
Because the market value of the Common Shares may be influenced by such factors as distribution
levels (which are in turn affected by expenses), call protection, dividend stability, portfolio credit quality, net asset value, relative demand for and supply of such shares in the market, general market and economic conditions, and other factors
beyond the control of the Fund, the Fund cannot assure you that Common Shares will trade at a price equal to or higher than net asset value in the future. The Common Shares are designed primarily for long-term investors, and investors in the Common
Shares should not view the Fund as a vehicle for trading purposes. See Repurchase of Fund Shares; Conversion to Open-End Fund.
BORROWINGS
The
Declaration authorizes the Fund, without approval of the Common Shareholders, to borrow money. In this connection, the Fund may issue notes or other evidence of indebtedness (including bank borrowings or commercial paper) and may secure any such
borrowings by mortgaging, pledging or otherwise subjecting as security the Funds assets. The Fund expects to borrow money at rates generally available to institutional investors. In connection with such Borrowings, the Fund may be required to
maintain minimum average balances with the lender or to pay a commitment or other fee to maintain a line of credit. Any such requirements will increase the cost of any such borrowings over the stated interest rate. Under the requirements of the 1940
Act, the Fund, immediately after any such Borrowings, must have an asset coverage of at least 300%. With respect to any such borrowings, asset coverage means the ratio that the value of the total assets of the Fund, less all liabilities
and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of such borrowings represented by senior securities issued by the Fund. Certain types of borrowings may result in the Fund being
subject to covenants in credit agreements relating to asset coverages or
57
portfolio coverages or otherwise. In addition, as with the issuance of preferred shares, certain types of borrowings may result in the Fund being subject to certain restrictions imposed by
guidelines of one or more rating agencies that may issue ratings for commercial paper or notes issued by the Fund. Such restrictions may be more stringent than those imposed by the 1940 Act.
The rights of lenders to the Fund to receive interest on and repayment of principal of any such borrowings will be senior to those of the
Common Shareholders, and the terms of any such borrowings may contain provisions which limit certain activities of the Fund, including the payment of dividends to Common Shareholders in certain circumstances. Further, the 1940 Act does (in certain
circumstances) grant to the lenders to the Fund certain voting rights in the event of default in the payment of interest on or repayment of principal. In the event that such provisions would impair the Funds eligibility for treatment as a
regulated investment company under the Code, the Fund will attempt to repay or restructure the borrowings to preserve that eligibility. Any borrowings will likely be ranked senior or equal to all other existing and future borrowings of the Fund. The
Fund may also borrow up to an additional 5% of its total assets for temporary purposes. The Fund may also borrow money for repurchase of its shares or as a temporary measure for extraordinary or emergency situations.
PREFERRED SHARES
The
Declaration authorizes the issuance of an unlimited number of preferred shares in one or more classes or series, with rights as determined by the Board of Trustees, by action of the Board of Trustees without the approval of the Common Shareholders.
The Fund does not currently have any preferred shares outstanding. The Fund may issue preferred shares in the future to increase the Funds leverage. The decision to issue additional preferred shares is subject to market conditions and to the
Board of Trustees belief that leveraging the Funds capital structure through the issuance of preferred shares is likely to achieve the benefits to the Common Shareholders described in the Prospectus.
Limited Issuance of Preferred Shares.
Under the 1940 Act, the Fund could issue preferred shares with an aggregate liquidation
value of up to one-half of the value of the Funds total net assets, including any liabilities associated with borrowings, measured immediately after issuance of the preferred shares. Liquidation value means the original purchase
price of the shares being liquidated plus any accrued and unpaid dividends. In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless the liquidation value of the preferred shares is less
than one-half of the value of the Funds total net assets (determined after deducting the amount of such dividend or distribution) immediately after the distribution.
Distribution Preference.
If issued in the future, the preferred shares would have complete priority over the Common Shares as to distribution of assets.
Liquidation Preference.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of
the Fund, holders of preferred shares, if issued in the future, would be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus accumulated and unpaid dividends thereon, whether or
not earned or declared) before any distribution of assets is made to Common Shareholders.
Voting
Rights.
Preferred shares are required to be voting shares and to have equal voting rights with Common Shares. Except as otherwise indicated in the Prospectus or this SAI and except as otherwise required by applicable law, holders of
preferred shares, if issued in the future, would vote together with Common Shareholders as a single class.
Holders of
preferred shares, if issued in the future, voting as a separate class, would be entitled to elect two of the Funds trustees (following the establishment of the Fund by an initial trustee, the Declaration provides for a total of no less than
two and no more than 15 trustees). The remaining trustees would be elected by Common Shareholders and holders of preferred shares, if issued in the future, voting together as a single class. In the unlikely event that two full years of accrued
dividends are unpaid on the preferred shares, if issued in the future,
58
the holders of all outstanding preferred shares, if issued in the future, voting as a separate class, would be entitled to elect a majority of the Funds trustees until all dividends in
arrears have been paid or declared and set apart for payment. In order for the Fund to take certain actions or enter into certain transactions, a separate class vote of holders of preferred shares, if issued in the future, would be required, in
addition to the single class vote of the holders of preferred shares, if issued in the future, and Common Shares. See Certain Provisions in the Declaration of Trust.
Redemption, Purchase and Sale of Preferred Shares.
The terms of the preferred shares, if issued in the future, would provide
that they may be redeemed by the issuer at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends. Any redemption or purchase of preferred shares, if issued in the future, by the Fund will reduce the
leverage applicable to Common Shares, while any issuance of shares by the Fund would increase such leverage.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund. However, the Declaration contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by the Fund or the trustees. The Declaration further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes
that the likelihood of such circumstances is remote.
The Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. Specifically, the Declaration requires a vote by holders of at least two-thirds of the Common Shares and preferred shares, if issued in the future,
voting together as a single class, except as described below, to authorize (1) a conversion of the Fund from a closed-end to an open-end investment company, (2) a merger or consolidation of the Fund, or a series or class of the Fund, with
any corporation, association, trust or other organization or a reorganization of the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all or substantially all of the Funds assets (other than in the regular course
of the Funds investment activities), (4) in certain circumstances, a termination of the Fund, or a series or class of the Fund, or (5) a removal of trustees by shareholders (except at the end of a trustees term), and then only
for cause, unless, with respect to (1) through (4), such transaction has already been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-Laws, in which case the
affirmative vote of the holders of at least a majority of the Funds Common Shares and preferred shares, if issued in the future, outstanding at the time, voting together as a single class, is required; provided, however, that where only a
particular class or series is affected (or, in the case of removing a trustee, when the trustee has been elected by only one class), only the required vote by the applicable class or series will be required. Approval of shareholders is not required,
however, for any transaction, whether deemed a merger, consolidation, reorganization or otherwise whereby the Fund issues shares in connection with the acquisition of assets (including those subject to liabilities) from any other investment company
or similar entity. In the case of the conversion of the Fund to an open-end investment company, or in the case of any of the foregoing transactions constituting a plan of reorganization which adversely affects the holders of preferred shares, if
issued in the future, the action in question will also require the affirmative vote of the holders of at least two-thirds of the Funds preferred shares, if issued in the future, outstanding at the time, voting as a separate class, or, if such
action has been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-Laws, the affirmative vote of the holders of at least a majority of the Funds preferred shares,
if issued in the future, outstanding at the time, voting as a separate class. None of the foregoing provisions may be amended except by the vote of at least two-thirds of the Common Shares and preferred shares, if issued in the future, voting
together as a single class. The votes required to approve the
59
conversion of the Fund from a closed-end to an open-end investment company or to approve transactions constituting a plan of reorganization which adversely affects the holders of preferred
shares, if issued in the future, are higher than those required by the 1940 Act. The Board of Trustees believes that the provisions of the Declaration relating to such higher votes are in the best interest of the Fund and its shareholders.
The provisions of the Declaration described above could have the effect of depriving the Common Shareholders of opportunities
to sell their Common Shares at a premium over the then current market price of the Common Shares by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these
provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Funds investment objective and policies. The Board of Trustees is divided into three classes, such a staggered board could delay for up to two years the replacement of a
majority of the Board of Trustees. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the SEC for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not binding upon the trustees of the Fund individually, but only upon the
assets and property of the Fund, and that the trustees shall not be liable for errors of judgment or mistakes of fact or law. Nothing in the Declaration, however, protects a trustee against any liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Funds common shares will trade in the open
market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, price, dividend stability, relative demand for and supply of such shares in the
market, general market and economic conditions and other factors. Because shares of a closed-end investment company may frequently trade at prices lower than net asset value, the Funds Board of Trustees has currently determined that, at least
annually, it will consider action that might be taken to reduce or eliminate any material discount from net asset value in respect of common shares, which may include the repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion of the Fund to an open-end investment company. There can be no assurance, however, that the Board of Trustees will decide to take any of these actions, or that share
repurchases or tender offers, if undertaken, will reduce market discount. On November 16, 2011, the Funds Board of Trustees approved an open market share repurchase program under which the Fund may repurchase up to 10% of its Common
Shares. To date, the Fund has not repurchased any Common Shares under the program.
Notwithstanding the foregoing, at any time
if the Fund has preferred shares outstanding, the Fund may not purchase, redeem or otherwise acquire any of its Common Shares unless (1) all accrued preferred shares dividends have been paid and (2) at the time of such purchase, redemption
or acquisition, the net asset value of the Funds portfolio (determined after deducting the acquisition price of the Common Shares) is at least 200% of the liquidation value of the outstanding preferred shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). The staff of the SEC currently requires that any tender offer made by a closed-end investment company for its shares must be at a price equal to the net asset value of such
shares at the close of business on the last day of the tender offer. Any service fees incurred in connection with any tender offer made by the Fund will be borne by the Fund and will not reduce the stated consideration to be paid to tendering
shareholders.
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Subject to its investment limitations, the Fund may borrow to finance the repurchase of
shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Fund in anticipation of share repurchases or tenders will reduce the Funds net income. Any share
repurchase, tender offer or borrowing that might be approved by the Board of Trustees would have to comply with the Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net asset value will be made by the Board of the Fund at the time it
considers such issue, it is the Boards present policy, which may be changed by the Board, not to authorize repurchases of common shares or a tender offer for such shares if (1) such transactions, if consummated, would (a) result in
the delisting of the common shares from the NYSE, or (b) impair the Funds eligibility for treatment as a regulated investment company under the Code or impair the Funds status as a registered closed-end investment company under the
1940 Act; (2) the Fund would not be able to liquidate portfolio securities in an orderly manner and consistent with the Funds investment objective and policies in order to repurchase shares; or (3) there is, in the Boards
judgment, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Fund, (b) general suspension of or limitation on prices for trading securities on
the NYSE, (c) declaration of a banking moratorium by Federal or state authorities or any suspension of payment by United States or state banks in which the Fund invests, (d) material limitation affecting the Fund or the issuers of its
portfolio securities by federal or state authorities on the extension of credit by lending institutions or on the exchange of foreign currency, (e) commencement of war, armed hostilities or other international or national calamity directly or
indirectly involving the United States, or (f) other event or condition which would have a material adverse effect (including any adverse tax effect) on the Fund or its shareholders if shares were repurchased. The Board of Trustees of the Fund
may in the future modify these conditions in light of experience.
Conversion to an open-end company would require the
approval of the holders of at least two-thirds of the Funds common shares and preferred shares, if issued in the future, outstanding at the time, voting together as a single class, and of the holders of at least two-thirds of the Funds
preferred shares, if issued in the future, outstanding at the time, voting as a separate class, provided however, that such separate class vote shall be a majority vote if the action in question has previously been approved, adopted or authorized by
the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or By-Laws. See the Prospectus under Certain Provisions in the Declaration of Trust for a discussion of voting requirements
applicable to conversion of the Fund to an open-end company. If the Fund converted to an open-end company, it would be required to redeem all preferred shares then outstanding, and the Funds common shares would no longer be listed on the NYSE.
Shareholders of an open-end investment company may require the company to redeem their shares on any business day (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charge, if any,
as might be in effect at the time of redemption. In order to avoid maintaining large cash positions or liquidating favorable investments to meet redemptions, open-end companies typically engage in a continuous offering of their shares. Open-end
companies are thus subject to periodic asset in-flows and out-flows that can complicate portfolio management. The Board of Trustees of the Fund may at any time propose conversion of the Fund to an open-end company depending upon their judgment as to
the advisability of such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices
below net asset value would result in an increase in the net asset value of those shares that remain outstanding. However, there can be no assurance that share repurchases or tenders at or below net asset value would result in the Funds shares
trading at a price equal to their net asset value. Nevertheless, the fact that the Funds shares may be the subject of repurchase or tender offers at net asset value from time to time, or that the Fund may be converted to an open-end company,
may reduce any spread between market price and net asset value that might otherwise exist.
In addition, a purchase by the
Fund of its common shares would decrease the Funds total assets which would likely have the effect of increasing the Funds expense ratio. Any purchase by the Fund of its common shares at a time when preferred shares are outstanding will
increase the leverage applicable to the outstanding common shares then remaining.
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Before deciding whether to take any action if the Funds common shares trade below net
asset value, the Board of the Fund would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Funds portfolio, the impact of any action that might be taken on the Fund or its shareholders and
market considerations. Based on these considerations, even if the Funds shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken.
TAX MATTERS
The following is intended to be a general summary of certain US federal income tax consequences of investing, holding and disposing of Common Shares of the Fund. It is not intended to be a complete
discussion of all such federal income tax consequences, nor does it purport to deal with all categories of investors (including investors in Common Shares with large positions in the Fund). Investors are advised to consult with their own tax
advisors before investing in the Fund.
The Fund has elected and intends to qualify each year to be treated as a regulated
investment company (a RIC) under Subchapter M of the Code. The Fund also intends to satisfy conditions under which dividends on Common Shares attributable to interest on municipal securities (as defined above) are exempt from federal
income tax in the hands of owners of such stock, subject to the possible application of the federal alternative minimum tax.
To qualify under Subchapter M of the Code for treatment as a RIC, the Fund must, among other things: (a) distribute to its
shareholders each year at least 90% of the sum of (i) its investment company taxable income (as that term is defined in the Code, determined without regard to the deduction for dividends paid) and (ii) its net tax-exempt income (the excess
of its gross tax-exempt interest income over certain disallowed deductions), (b) derive at least 90% of its gross income (including income on municipal securities exempt from regular federal income tax) for each taxable year from dividends,
interest (including interest income on municipal securities exempt from regular federal income tax), payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other
income (including gains from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership (as
defined in the Code), and (c) diversify its holdings so that, at the end of each quarter of the Funds taxable year (i) at least 50% of the market value of the Funds assets is represented by cash, cash items, U.S. government
securities, securities of other regulated investment companies, and other securities, with these other securities limited, with respect to any one issuer, to an amount not greater in value than 5% of the Funds total assets, and to not more
than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the market value of the Funds assets is invested in the securities of any one issuer (other than U.S. government securities or securities of other
regulated investment companies), the securities of two or more issuers (other than securities of other regulated investment companies) controlled by the Fund and engaged in the same, similar or related trades or businesses, or the securities of one
or more qualified publicly traded partnerships. To meet these requirements, the Fund may need to restrict its use of certain of the investment techniques described under Investment Policies and Techniques and Other Investment
Policies and Techniques above.
If the Fund fails to satisfy the qualifying income or diversification requirements in
any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally,
relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period of time. In order to be eligible for the relief provisions with respect to a failure to meet the
diversification requirements, the Fund may be required to dispose of certain assets. If these relief provisions are not available to the Fund and it fails to qualify for treatment as a RIC for a taxable year, the Fund will be taxable at regular
corporate tax rates (and, to the extent applicable, at corporate alternative minimum tax rates). In such an event, all distributions (including capital gains distributions and distributions derived from interest on municipal securities) will be
taxable as ordinary dividends to the extent of the Funds current and accumulated
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earnings and profits, subject to the dividends-received deduction for corporate shareholders and to the tax rates applicable to qualified dividend income distributed to individuals. Distributions
in excess of the Funds current and accumulated earnings and profits would be treated first as a tax-free return of capital to the extent of the holders adjusted tax basis in the shares (reducing that basis accordingly), and any remaining
distributions would generally be treated as a capital gain. To requalify for treatment as a RIC in a subsequent taxable year, the Fund would be required to satisfy the RIC qualification requirements for that year and to distribute any earnings and
profits from any year in which the Fund failed to qualify for tax treatment as a RIC. In addition, if the Fund failed to qualify as a RIC for a period greater than two taxable years, it would generally be required to pay a Fund-level tax on certain
net built-in gains recognized with respect to certain of its assets upon a disposition of such assets within ten years of qualifying as a RIC in a subsequent year.
A regulated investment company that fails to distribute, by the close of each calendar year, an amount at least equal to the sum of 98% of its ordinary taxable income for such year and 98.2% of its
capital gain net income for the one-year period ending October 31 in such year, plus any shortfalls from the prior years required distribution, is liable for a nondeductible 4% federal excise tax on the excess of the required distribution
for such calendar year over the distributed amount for such calendar year. To avoid the imposition of this excise tax, the Fund generally intends to make the required distributions of its ordinary taxable income, if any, and its capital gain net
income, to the extent possible, by the close of each calendar year.
Certain minimum net asset value coverage limitations on
distributions made with respect to Common Shares may under certain circumstances impair the ability of the Fund to maintain its qualification for treatment as a RIC or to pay distributions sufficient to avoid the imposition of the 4% federal excise
tax.
As described in Distributions above, the Fund may retain for investment or otherwise use some (or all) of
its net capital gain. If the Fund retains any net capital gain or taxable net investment income, it will be subject to tax at regular corporate rates on the amount retained. If the Fund retains any net capital gain, it may designate the retained
amount as undistributed capital gains in a notice to its shareholders who, if subject to federal income tax on long-term capital gains, (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their
shares of such undistributed amount; (ii) will be deemed to have paid their proportionate shares of the tax paid by the Fund on such undistributed amount and will be entitled to credit that amount of tax against their federal income tax
liabilities, if any; and (iii) will be entitled to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by an amount equal
to the difference between the amount of undistributed capital gains included in the shareholders gross income and the tax deemed paid by the shareholder.
The Fund intends to qualify to pay exempt-interest dividends, as defined in the Code, on its Common Shares by satisfying the requirement that, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consists of municipal securities. Exempt-interest dividends are dividends or any part thereof (other than a capital gain dividend) paid by the Fund which are attributable to interest on municipal
securities and which are so reported by the Fund. Exempt-interest dividends will be exempt from federal income tax, subject to the possible application of the federal alternative minimum tax. Insurance proceeds received by the Fund under any
insurance policies in respect of scheduled interest payments on defaulted municipal bonds, as described herein, will generally be correspondingly excludable from federal gross income. In the case of non-appropriation by a political subdivision,
however, there can be no assurance that payments made by the issuer representing interest on municipal lease obligations will be excludable from gross income for federal income tax purposes. See Investment Policies and Techniques above.
Any gains of the Fund that are attributable to market discount on municipal securities are treated as ordinary income to the extent of accrued market discount on those securities.
A 3.8% Medicare contribution tax generally applies to all or a portion of the net investment income of a shareholder who is an individual
and not a nonresident alien for federal income tax purposes and who has adjusted gross income (subject to certain adjustments) that exceeds a threshold amount ($250,000 if married
63
filing jointly or if considered a surviving spouse for federal income tax purposes, $125,000 if married filing separately, and $200,000 in other cases). This 3.8% tax also applies to
all or a portion of the undistributed net investment income of certain shareholders that are estates and trusts. For these purposes, interest, dividends and certain capital gains are generally taken into account in computing a shareholders net
investment income, but exempt-interest dividends are not taken into account.
A portion of the Funds expenditures that
would otherwise be deductible may not be allowed as deductions by reason of the Funds investment in municipal securities (such disallowed portion, in general, being the same percentage of the Funds aggregate expenses as the percentage of
the Funds aggregate gross income that constitutes exempt interest income from municipal securities). A similar disallowance rule also applies to interest expense paid or incurred by the Fund, if any. Any such disallowed deductions will offset
the Funds gross exempt-interest income for purposes of calculating the dividends that the Fund can report as exempt-interest dividends. Interest on indebtedness incurred or continued to purchase or carry the Funds shares is not
deductible to the extent the interest relates to exempt-interest dividends. Under rules used by the IRS for determining when borrowed funds are considered used for the purpose of purchasing or carrying particular assets, the purchase or ownership of
shares may be considered to have been made with borrowed funds even though such funds are not directly used for the purchase or ownership of such shares.
Distributions to shareholders of net investment income received by the Fund from taxable investments, if any, including temporary taxable investments, and of net short-term capital gains realized by the
Fund, if any, will be taxable to its shareholders as ordinary income. Distributions by the Fund of net capital gain (
i.e.
, the excess of net long-term capital gain over net short-term capital loss), if any, are taxable as long-term capital
gain, regardless of the length of time the shareholder has owned the shares with respect to which such distributions are made. The amount of taxable income allocable to the Funds shares will depend upon the amount of such income realized by
the Fund. Distributions, if any, in excess of the Funds earnings and profits will first reduce the adjusted tax basis of a shareholders shares and, after that basis has been reduced to zero, will constitute capital gain to the
shareholder (assuming the shares are held as capital assets). As long as the Fund qualifies as a RIC under the Code, it is not expected that any part of its distributions to shareholders from its investments will qualify for the dividends-received
deduction available to corporate shareholders or as qualified dividend income taxable to noncorporate shareholders at reduced rates.
The IRS requires the Fund to report distributions paid with respect to its Common Shares and any preferred shares, if any such preferred shares are issued in the future, as consisting of a portion of each
type of income distributed by the Fund. The portion of each type of income deemed received by the holders of each class of shares will be equal to the portion of total Fund dividends received by such class. Thus, the Fund will report dividends paid
as exempt-interest dividends in a manner that allocates such dividends between the holders of the Common Shares and any preferred shares, if any such shares are issued in the future, in proportion to the total dividends paid to each such class
during or with respect to the taxable year, or otherwise as required by applicable law. Capital gain dividends and ordinary income dividends will also be allocated between the two classes under these rules.
The interest on private activity bonds in most instances is not federally tax-exempt to a person who is a substantial user of
a facility financed by such bonds or a related person of such substantial user. As a result, the Fund may not be an appropriate investment for a shareholder who is considered either a substantial user or a
related person within the meaning of the Code. In general, a substantial user of a facility includes a nonexempt person who regularly uses a part of such facility in his trade or business. Related
persons are in general defined to include persons among whom there exists a relationship, either by family or business, which would result in a disallowance of losses in transactions among them under various provisions of the Code (or if they
are members of the same controlled group of corporations under the Code), including a partnership and each of its partners (and certain members of their families), an S corporation and each of its shareholders (and certain members of their families)
and various combinations of these and other relationships. The foregoing is not a complete description of all of the provisions of the Code covering the definitions of substantial user and related person.
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Although dividends generally will be treated as distributed when paid, dividends declared in
October, November or December, payable to shareholders of record on a specified date in one of those months and paid during the following January, will be treated as having been distributed by the Fund (and received by the shareholders) on
December 31 of the year declared. The U.S. federal income tax status of all distributions will be reported to shareholders annually.
Federal income tax law imposes an alternative minimum tax with respect to corporations, individuals, trusts and estates. Interest on certain municipal securities, such as bonds issued to make loans for
housing purposes or to private entities (but not to certain tax-exempt organizations such as universities and non-profit hospitals), is included as an item of tax preference in determining the amount of a taxpayers alternative minimum taxable
income. If the Fund receives income from municipal securities the interest on which is a tax preference item, a portion of the dividends paid by the Fund, although otherwise exempt from federal income tax, will be taxable to shareholders whose tax
liabilities are determined under the federal alternative minimum tax. The Fund will annually provide a report indicating the percentage of the Funds income attributable to municipal securities and the portion thereof the interest on which is a
tax preference item. In addition, for certain corporations, federal alternative minimum taxable income is increased by 75% of the difference between an alternative measure of income (adjusted current earnings) and the amount otherwise
determined to be the alternative minimum taxable income. Interest on all municipal securities, and therefore all distributions by the Fund that would otherwise be tax-exempt, is included in calculating a corporations adjusted current earnings.
Certain small corporations are not subject to the federal alternative minimum tax. Bonds issued in 2009 or 2010 generally will not be treated as private activity bonds, and interest earned on such bonds (and Fund distributions consisting of such
interest) generally will not be treated as a tax preference item and generally will not result in or increase a corporate shareholders liability for the federal alternative minimum tax.
Tax-exempt income, including exempt-interest dividends paid by the Fund, is taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal income tax.
The Funds investment in zero
coupon bonds will cause it to realize income prior to the receipt of cash payments with respect to these bonds. Such income will be accrued daily by the Fund. In order to avoid a tax payable by the Fund, the Fund may be required to liquidate
securities that it might otherwise continue to hold in order to generate cash so that the Fund may make required distributions to its shareholders.
Certain of the Funds investment practices are subject to special provisions of the Code that, among other things, may defer the use of certain deductions or losses of the Fund, affect the holding
period of securities held by the Fund, and alter the character of the gains or losses realized by the Fund. These provisions may also require the Fund to recognize income or gain without receiving cash with which to make distributions in the amounts
necessary to satisfy the requirements for maintaining RIC status and for avoiding income and excise taxes. The Fund will monitor its transactions and may make certain tax elections in order to mitigate the effect of these rules and prevent
disqualification of the Fund for treatment as a regulated investment company.
Capital losses in excess of capital gains
(net capital losses) are not permitted to be deducted against a RICs net investment income. Instead, for U.S. federal income tax purposes, potentially subject to certain limitations, the Fund may carry net capital losses from any
taxable year forward to offset capital gains in future years. The Fund is permitted to carry forward a net capital loss from any taxable year that began on or before December 22, 2010 to offset its capital gains, if any, for up to eight years
following the year of the loss. The Fund is permitted to carry forward indefinitely a net capital loss from any taxable year that began after December 22, 2010 to offset its capital gains, if any, in years following the year of the loss. To the
extent subsequent capital gains are offset by such losses, they will not result in U.S. federal income tax liability to the Fund and may not be distributed as capital gains to shareholders. Carryforwards of losses from taxable years that began after
December 22, 2010 must be fully utilized before the Fund may utilize carryforwards of losses from taxable years that began on or before December 22, 2010. Generally, the Fund may not carry forward any losses
65
other than net capital losses. Under certain circumstances, the Fund may elect to treat certain losses as though they were incurred on the first day of the taxable year immediately following the
taxable year in which they were actually incurred.
The repurchase, sale or exchange of Common Shares normally will result in
capital gain or loss to holders of Common Shares who hold their shares as capital assets. Generally a shareholders gain or loss will be long-term capital gain or loss if the shares have been held for more than one year even though the increase
in value in such Common Shares may be at least partly attributable to tax-exempt interest income. Present law taxes both long-term and short-term capital gains of corporations at the rates applicable to ordinary income. For noncorporate taxpayers,
however, long-term capital gains are taxed at rates of up to 20%. Short-term capital gains and other ordinary income are taxed to noncorporate shareholders at ordinary income rates. If a shareholder sells or otherwise disposes of Common Shares
before holding them for six months, any loss on the sale or disposition will be treated as a long-term capital loss to the extent of any amounts treated as distributions to the Common Shareholder of long-term capital gain (including any amount
credited to the shareholder as undistributed capital gain). Any loss realized on a sale or exchange of shares of the Fund will be disallowed to the extent those shares of the Fund are replaced (including, without limitation, under the Plan) by
substantially identical shares of the Fund within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the original shares, or to the extent the shareholder enters into a contract or option to
repurchase shares within such period. In that event, the basis of the replacement shares of the Fund will be adjusted to reflect the disallowed loss.
The Fund is required in certain circumstances to withhold (as backup withholding) a portion of dividends (including exempt-interest dividends) and certain other payments paid to certain
holders of the Funds shares who do not furnish to the Fund their correct taxpayer identification numbers (in the case of individuals, their social security numbers) and certain certifications, or who are otherwise subject to backup
withholding. The backup withholding rate is 28%. Backup withholding is not an additional tax. Any amounts withheld from payments made to a shareholder may be refunded or credited against such shareholders federal income tax liability, provided
the required information and forms are timely furnished to the IRS.
The Code provides that every shareholder required to file
a tax return must include for information purposes on such return the amount of tax-exempt interest received during the taxable year, including any exempt-interest dividends received from the Fund.
The description of certain federal tax provisions above relates only to U.S. federal income tax consequences for shareholders who are
U.S. persons,
i.e.
, generally, U.S. citizens or residents or U.S. corporations, partnerships, trusts or estates, and who are subject to U.S. federal income tax and hold their shares as capital assets. Except as otherwise provided, this
description does not address the special tax rules that may be applicable to particular types of investors, such as financial institutions, insurance companies, securities dealers, other regulated investment companies, or tax-exempt or tax-deferred
plans, accounts or entities. Investors that are not U.S. persons may be subject to different U.S. federal income tax treatment, including a non-resident alien U.S. withholding tax at the rate of 30% or any lower applicable treaty rate on amounts
treated as ordinary dividends from the Fund (other than, for taxable years of the Fund that begin on or before December 31, 2013, certain dividends reported by the Fund as (i) interest-related dividends, to the extent such dividends are derived from
the Funds qualified net-interest income, or (ii) short-term capital gain dividends, to the extent such dividends are derived from the Funds qualified short-term gain) or, in certain circumstances, unless an
effective IRS Form W-8BEN or other authorized withholding certificate is on file, to backup withholding on certain other payments from the Fund. Qualified net interest income is the Funds net income derived from U.S.-source
interest and original issue discount, subject to certain exceptions and limitations. Qualified short-term gain generally means the excess of net short-term capital gain of the Fund for the taxable year over its net long-term capital
loss, if any. Backup withholding will not be applied to payments that have been subject to the 30% (or lower applicable treaty rate) withholding tax on shareholders who are neither citizens nor residents of the United States.
66
Unless certain non-U.S. entities that hold Fund shares comply with IRS requirements that
will generally require them to report information regarding U.S. persons investing in, or holding accounts with, such entities, a 30% withholding tax may apply to Fund distributions payable to such entities after December 31, 2013 (or, in
certain cases, after later dates) and to repurchase proceeds and certain capital gain dividends payable to such entities after December 31, 2016. A non-U.S. shareholder may be exempt from the withholding described in this paragraph under an
applicable intergovernmental agreement between the U.S. and a foreign government, provided that the shareholder and the applicable foreign government comply with the terms of such agreement. Exempt-interest dividends may be exempt from this
withholding tax.
The foregoing is a general summary of certain provisions of the Code and regulations thereunder presently in
effect as they directly govern the federal income taxation of the Fund and its shareholders. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive. Moreover, the foregoing does not
address many of the factors that may be determinative of whether an investor will be liable for the alternative minimum tax. Shareholders are advised to consult their own tax advisors for more detailed information concerning the federal, foreign,
state and local tax consequences of purchasing, holding and disposing of Fund shares.
STATE AND LOCAL TAX MATTERS
The exemption from U.S. federal income tax for exempt-interest dividends generally does not result in exemption for such dividends under
the income or other tax laws of any state or local taxing authority. In some states, however, the portion of any exempt-interest dividends derived from interest received by the Fund on its holdings of that states securities and its political
subdivisions and instrumentalities is exempt from the states income tax. The Fund will report annually to its shareholders the percentage of interest income earned by the Fund during the preceding year on tax-exempt obligations indicating, on
a state-by-state basis, the source of such income. Shareholders of the Fund are advised to consult with their own tax advisors about state and local tax matters.
FINANCIAL STATEMENTS
The Financial
Statements and the independent registered public accounting firms reports thereon, appearing in the Funds annual shareholder report for the fiscal year ended March 31, 2013, are incorporated herein by reference in this SAI. The
Funds annual shareholder report may be obtained without charge by calling (800)
257-8787.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts 02110 (the
Custodian). The Custodian performs custodial, fund accounting and portfolio accounting services. The Funds transfer, shareholder services and dividend paying agent is also State Street Bank and Trust Company (the Transfer
Agent). The Transfer Agent is located at 250 Royall Street, Canton, Massachusetts 02021.
I
NDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, an independent registered public accounting firm, provides auditing services to the Fund. The principal
business address of Ernst & Young LLP is 155 North Wacker Drive, Chicago, Illinois 60606.
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LEGAL OPINION
Certain legal matters in connection with the Common Shares will be passed upon for the Fund by Bingham McCutchen LLP, Washington, D.C.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to the shares of the Fund offered hereby, has been filed by
the Fund with the SEC, Washington, D.C. The Prospectus and this SAI do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Fund and the
shares offered hereby, reference is made to the Funds Registration Statement. Statements contained in the Prospectus and this SAI as to the contents of any contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement may be inspected
without charge at the SECs principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the SEC upon the payment of certain fees prescribed by the SEC.
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APPENDIX A
Ratings of Investments
Standard & Poors CorporationA brief description of the applicable Standard & Poors Corporation, a
division of The McGraw-Hill Companies (Standard & Poors or S&P), rating symbols and their meanings (as published by S&P) follows:
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a
specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion evaluates the obligors capacity and willingness to meet its financial commitments as they
come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch
as it does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current
information furnished by the obligors or obtained by Standard & Poors from other sources it considers reliable. Standard & Poors does not perform an audit in connection with any credit rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 daysincluding commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following considerations:
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Likelihood of paymentcapacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of
the obligation;
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Nature of and provisions of the obligation;
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Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors rights.
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Issue ratings are an assessment of default
risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such
differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
An
obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is extremely strong.
A-1
AA
An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitment on the obligation is very strong.
A
An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions
than obligations in higher-rated categories. However, the obligors capacity to meet its financial commitment on the obligation is still strong.
BBB
An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, and C
Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least
degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB
An
obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligors
inadequate capacity to meet its financial commitment on the obligation.
B
An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has
the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitment on the obligation.
CCC
An
obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC
An obligation rated CC is currently highly vulnerable to
nonpayment.
C
A C rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or obligations of an
issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the C rating may be assigned to subordinated debt, preferred stock or other obligations on which cash
payments have been suspended in accordance with the instruments terms.
A-2
D
An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poors believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-)
The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories.
NR
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poors does not rate a particular obligation as a
matter of policy.
Short-Term Issue Credit Ratings
A-1
A
short-term obligation rated A-1 is rated in the highest category by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitment on these obligations is extremely strong.
A-2
A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligors capacity to meet its financial commitment on the obligation is satisfactory.
A-3
A
short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
B
A short-term obligation rated B is regarded as having significant speculative characteristics. Ratings of B-1, B-2, and B-3 may be assigned to indicate
finer distinctions within the B category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity
to meet its financial commitment on the obligation.
B-1.
A short-term obligation rated B-1 is regarded as having significant speculative characteristics, but the obligor has a
relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2.
A short-term obligation rated B-2 is regarded as having
significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
A-3
B-3.
A short-term obligation rated B-3 is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the
short-term compared to other speculative-grade obligors.
C
A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment on the obligation.
D
A short-term obligation rated D is in payment default. The D rating category is used when payments on an
obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be made during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Dual
Ratings
Standard & Poors assigns dual ratings to all debt issues that have a put option or demand
feature as part of their structure. The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the demand feature. The long-term rating symbols are used for bonds to denote the
long-term maturity and the short-term rating symbols for the put option (for example, AAA/A-1+). With U.S. municipal short-term demand debt, note rating symbols are used with the short-term issue credit rating symbols (for example,
SP-1+/A-1+).
Moodys Investors Service, Inc.A brief description of the applicable Moodys
Investors Service, Inc. (Moodys) rating symbols and their meanings (as published by Moodys) follows:
Municipal Bonds
Aaa
Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to as gilt edged. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds mat are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other elements present mat make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds that
are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa
Bonds that are rated Baa are considered as medium grade obligations,
i.e.
, they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the present but certain
A-4
protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B
Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal or interest.
Ca
Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor Prospects of ever attaining any real investment standing.
#(hatchmark): Represents issues that are secured by escrowed funds held in cash, held in trust, invested and reinvested in direct,
non-callable, non-prepayable United States government obligations or non-callable, non-prepayable obligations unconditionally guaranteed by the U.S. Government, Resolution Funding Corporation debt obligations.
Con. (...): Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals that begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. The parenthetical rating denotes probable credit stature upon completion of construction or elimination of the basis of the condition.
(P): When applied to forward delivery bonds, indicates the rating is provisional pending delivery of the bonds. The rating may be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
Note: Moodys applies numerical modifiers 1,2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates mat the issue ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Short-Term Loans
MIG 1/VMIG 1
This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing.
A-5
MIG 2/VMIG 2
This designation denotes high quality. Margins of protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3
This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established.
MIG 4/VMIG 4
This designation denotes adequate quality. Protection commonly regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG
This designation denotes speculative quality. Debt instruments in this category lack margins of protection.
Commercial Paper
Issuers (or supporting institutions) rated Prime-1 have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will normally be evidenced by the following
characteristics:
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Leading market positions in well-established industries.
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High rates of return on funds employed.
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Conservative capitalization structures with moderate reliance on debt and ample asset protection.
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Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
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Well-established access to a range of financial markets and assured sources of alternate liquidity.
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Issuers (or supporting institutions) rated Prime-2 have a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation than is the case for Prime-2 securities. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
Issuers (or
supporting institutions) rated Prime-3 have an acceptable ability for repayment of senior short-term debt obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability
may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch RatingsA brief description of the applicable Fitch Ratings (Fitch) ratings symbols and meanings (as published by
Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA
Highest credit quality. AAA ratings denote the lowest expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
A-6
AA
Very high credit quality. AA ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A
High credit quality. A ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more
vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB
Good credit quality. BBB ratings indicate that there is currently a low expectation of credit risk. The capacity for timely
payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
Speculative Grade
BB
Speculative. BB ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment
grade.
B
Highly speculative. B ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and economic environment.
CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some kind appears probable. C ratings signal imminent default.
DDD, DD, and D Default
The ratings of obligations in this category are based on
their Prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines.
DDD obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest DD indicates potential recoveries in the range of 50%-90%, and D the lowest recovery potential,
i.e.
, below 50%. Entities rated in this category have defaulted on some or all of their obligations. Entities rated DDD have the highest Prospect for resumption of performance or continued operation with or without a formal
reorganization process. Entities rated DD and D are generally undergoing a formal reorganization or liquidation process; those rated DD are likely to satisfy a higher portion of their outstanding obligations,
while entities rated D have a poor Prospect for repaying all obligations.
Short-Term Credit Ratings
The following ratings scale applies to foreign currency and local currency ratings. A Short-term rating has a time horizon
of less than 13 months for most obligations, or up to three years for US public finance, in line with
A-7
industry standards, to reflect unique risk characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus place
greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
Fl
Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added + to
denote any exceptionally strong credit feature.
F2
Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3
Fair credit
quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade.
B
Speculative Minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
C
High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D
Default. Denotes actual or imminent payment default.
Notes to Long-term and
Short-term ratings:
+ or - may be appended to a rating to denote relative status within major rating categories. Such
suffixes are not added to the AAA Long-term rating category, to categories below CCC, or to Short-term ratings other than FT.
NR indicates that Fitch Ratings does not rate the issuer or issue in question.
Withdrawn: A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating
change and the likely direction of such change. These are designated as Positive, indicating a potential upgrade, Negative, for a potential downgrade, or Evolving, if ratings may be raised, lowered or maintained.
Rating Watch is typically resolved over a relatively short period.
A Rating Outlook indicates the direction a rating is
likely to move over a one to two year period. Outlooks may be positive, stable, or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are stable could be
downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
A-8