Investment Objective and Policies

Objective. The Fund’s investment objective is high current income for holders of its Common Stock consistent with preservation of capital. Flaherty & Crumrine Incorporated, the Fund’s investment adviser (the Adviser), intends to pursue strategies that it expects generally to result in the Fund’s income increasing in response to significant increases in long-term interest rates while being relatively resistant to the impact of declines in long-term interest rates. This strategy involves hedging strategies and is described more fully below.

In seeking its objectives, the Fund normally will invest at least 80% of its total assets in a diversified portfolio of preferred securities, some or all of which are expected to be hedged. The Fund may also invest up to 20% of its total assets in debt securities and up to 15% of its total assets in common stocks. The portions of the Fund’s assets invested in various types of preferred, debt or common stock may vary from time to time depending on market conditions. The portion of securities that the Fund will hedge, as well as the types of hedge positions utilized, may also vary significantly from time to time.

Credit Quality. At time of purchase, at least 75% of the securities that the Fund will acquire will be rated investment grade by any one of Moody’s Investors Services, Inc. (Moody’s) or Standard & Poor’s Corporation (S&P), or Fitch Ratings Group (Fitch). In addition, the Fund may invest up to 25% of its assets at the time of purchase in securities rated below investment grade by all of Moody’s, S&P and Fitch, as long (a) such securities are rated at least Ba3 by Moody’s, BB- by S&P, or BB- by Fitch or (b) such securities are issued by an issuer having an outstanding class of senior debt rated investment grade at the time of purchase. Thus, the Fund may invest in securities rated below Ba3 by Moody’s, BB- by S&P and BB- by Fitch if the issuer has investment grade senior debt outstanding. The Fund will apply the ratings criteria at the time of purchase, and the Fund will not be required to dispose of securities if, after purchase, they are downgraded, although the Adviser may take this into account in determining whether to retain the security. As a result, more than 25% of the Fund’s holdings at any time may be rated below investment grade or in equivalent securities.

The Fund will not enter into a credit derivative transaction with a counterparty that is rated below investment grade.

Hedging Strategies. The Fund may hedge some or all of the general exposure to long-term U.S. Treasury interest rates inherent in its holdings of preferred and debt securities. The response of the Fund’s income to changes in long-term interest rates will be impacted by the effectiveness and use of its hedging strategies. Under normal market conditions, this hedging would be accomplished principally by one or more of the following strategies: (1) purchasing put options (called a long position in a put option) on Treasury Bond and/or Treasury Note futures contracts, (2) entering into futures contracts to sell Treasury Bonds and/or Treasury Notes (called a short position in a futures contract), (3) entering into interest rate swap agreements as a fixed rate payer, (4) purchasing options to enter into interest rate swap agreements as a fixed rate payer (called a pay fixed swaption), and/or (5) entering into swap futures and Eurodollar futures contracts.

If a Fund hedged its U.S. Treasury interest rate exposure, the hedging positions that the Fund would hold normally appreciate in value when long-term interest rates rise significantly, reflecting either the expected rise in yields of long-term Treasury securities or interest rate swap yields, as applicable, and the associated decline in the prices of underlying Treasury securities or decreased net market value of an obligation to pay a fixed income stream in a higher interest rate environment.

The Fund may also buy and sell credit derivatives, including credit default swaps and market spread swaps, to manage credit risk and, in certain instances, to increase total return.

The Fund expects to use gains, if any, on its hedging instruments to purchase additional preferred securities, potentially increasing dividends available to the Fund’s Common Shareholders.

The response of the Fund’s income to changes in interest rates or credit spreads will be impacted by the effectiveness and use of hedging strategies. There are economic costs of hedging reflected in the pricing of futures, interest rate swaps, options and swaptions contracts and credit derivatives which can be significant, particularly in periods when long-term interest rates are substantially above short-term interest rates or when credit spreads are wide and the Fund buys credit protection. In addition, in times of market dislocation, there can be additional economic costs of using any of the above strategies that could potentially diminish, or even outweigh, the benefits of hedging. Consequently, in those circumstances, the Adviser may elect to reduce or potentially eliminate the Fund’s hedging activity. Of course, if significant increases in long-term Treasury rates cause preferred securities prices to fall when hedging instruments are not being employed by the Fund or are being employed to a limited extent, the Fund’s income would not increase in response and Fund’s total return can be expected to decline.

Preferred Securities. Preferred securities in which the Fund may invest include (i) traditional preferred/preference stock whose dividends qualify for the inter-corporate dividends received deduction (DRD) that meet certain criteria (as described below) and (ii) hybrid or taxable preferred securities. Most of the traditional preferred securities pay Qualified Dividend Income (QDI), which is eligible for lower individual tax rates under the Jobs and Growth Tax Relief Reconciliation Act of 2003. The portion of the Fund’s assets that generate dividends qualifying for the DRD and constituting QDI will vary depending on market conditions. The preferred securities in which the Fund invests consist principally of fixed rate and adjustable rate securities, some or all of which are expected to be hedged against changes in the general level of interest rates. Hybrid preferred securities include securities that are commonly known as MIPs, QUIPS, TOPrS, TrUPS, QUIBS, QUIDS, CorTS, Trust Preferred Securities or capital securities. A security will be characterized as a hybrid preferred security (a) if an issuer can defer payment of income for eighteen months or more without triggering an event of default and (b) if such issue is a junior and fully subordinated liability of an issuer or its ultimate guarantor. Certain of the Fund’s investments in hybrid, i.e. fully taxable, preferred securities will be considered debt securities to the extent that, in the opinion of the Adviser, such investments are deemed not to have these characteristics.