The Investment Manager has retained the Sub-Adviser to manage each Fund’s investments. Subject to the supervision of the Investment Manager, the Sub-Adviser is responsible for making all of the Funds’ investment decisions. The Investment Manager, and not the Funds, pays a portion of the fees it receives as Investment Manager to the Sub-Adviser in return for its services.
The weighted average daily balance of reverse repurchase agreements outstanding during the year ended May 31, 2010 for Municipal II, California Municipal II and New York Municipal II was $6,255,095, $10,969,994 and $4,530,595 at a weighted average interest rate of 0.75%, 0.73% and 0.75%, respectively. The total market value of underlying collateral (refer to the Schedules of Investments for positions segregated as collateral for reverse repurchase agreements) for open reverse repurchase agreements at May 31, 2010 was $8,284,710 and $4,278,500 for California Municipal II and New York Municipal II, respectively. There were no open reverse repurchase agreements for Municipal II at May 31, 2010.
New York Municipal II received $89,159 in principal value of U.S. government agency securities as collateral for reverse repurchase agreements outstanding. Collateral received as securities cannot be pledged.
|
PIMCO Municipal Income Funds II Notes to Financial Statements |
May 31, 2010 |
| |
5. Income Tax Information (continued)
At May 31, 2010, distributable earnings of $9,284,682 was comprised entirely from tax exempt income.
In accordance with U.S. Treasury regulations, Municipal II elected to defer realized capital losses of $220,751 arising after October 31, 2009. Such losses are treated as arising on June 1, 2010.
At May 31, 2010, Municipal II had a capital loss carryforward of $246,038,393 ($6,389,744 of which will expire in 2012, $54,505,416 of which will expire in 2013, $4,473,237 of which will expire in 2014, $7,912,932, of which will expire in 2015, $7,955,461, of which will expire in 2017, and $164,801,603 of which will expire in 2018), available as a reduction, to the extent provided in the regulations, of any future net realized capital gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be distributed.
For the year ended May 31, 2010, permanent “book-tax” differences were primarily attributable to the differing treatment of inverse floater transactions and federal excise tax. These adjustments were to increase undistributed net investment income by $29,399, decrease accumulated net realized loss by $2,500, and decrease paid-in-capital by $31,899.
| | | | | | | |
California Municipal II: | |
|
The tax character of dividends paid were: | |
|
| | Year ended
May 31, 2010 | | Year ended
May 31, 2009 | |
| | | | | | |
|
Ordinary Income | | $ | 3,653,860 | | $ | 6,111,678 | |
|
Tax Exempt Income | | $ | 21,127,173 | | $ | 24,297,770 | |
|
Return of Capital | | $ | — | | $ | 1,187,791 | |
At May 31, 2010, there were no distributable earnings.
At May 31, 2010, California Municipal II had a capital loss carryforward of $207,026,377 ($3,919,943 of which will expire in 2012, $16,328,922 of which will expire in 2013, $5,531,398 of which will expire in 2015, $4,849,597 of which will expire in 2016, $18,401,113 of which will expire in 2017 and $157,995,404 of which will expire in 2018), available as a reduction, to the extent provided in the regulations, of any future net realized capital gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be distributed.
For the year ended May 31, 2010, permanent “book-tax” differences were primarily attributable to the differing treatment of inverse floater transactions and taxable overdistributions. These adjustments were to decrease dividends in excess of net investment income by $1,579,671, decrease accumulated net realized loss by $169,020, and decrease paid in capital by $1,748,691.
| | | | | | | |
New York Municipal II: | |
|
The tax character of dividends paid were: | |
|
| | Year ended
May 31, 2010 | | Year ended
May 31, 2009 | |
| | | | | | |
|
Ordinary Income | | $ | 1,371,604 | | $ | 1,081,822 | |
|
Tax Exempt Income | | $ | 7,516,459 | | $ | 9,410,534 | |
At May 31, 2010, distributable earnings of $1,108,502 was comprised entirely from tax-exempt income.
In accordance with U.S. Treasury regulations, New York Municipal II elected to defer realized capital losses of $70,276 arising after October 31, 2009. Such losses are treated as arising on June 1, 2010.
At May 31, 2010, New York Municipal II had a capital loss carryforward of $44,698,440 ($378,802 of which will expire in 2012, $5,755,677 of which will expire in 2013, $51,848 of which will expire in 2015, $1,171,157 of which will expire in 2016, $2,961,908 of which will expire in 2017, and $34,379,048 of which will expire in 2018), available as a reduction, to the extent provided in the regulations, of any future net realized capital gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be distributed.
5.31.10 | PIMCO Municipal Income Funds II Annual Report 37
|
PIMCO Municipal Income Funds II Notes to Financial Statements |
May 31, 2010 |
| |
5. Income Tax Information (continued)
For the year ended May 31, 2010, permanent “book-tax” differences were primarily attributable to the differing treatment of inverse floater transactions. These adjustments were to decrease undistributed net investment income by $10,505 and decrease accumulated net realized loss by $10,505.
The cost of investments for federal income tax purposes and gross unrealized appreciation and gross unrealized depreciation of investments at May 31, 2010 were:
| | | | | | | | | | | | | |
| | Cost of
Investments | | Gross
Unrealized
Appreciation | | Gross
Unrealized
Depreciation | | Net
Unrealized
Appreciation | |
| | | | | | | | | | |
|
Municipal II | | $ | 980,383,399 | | $ | 58,977,327 | | $ | (25,708,034 | ) | $ | 33,269,293 | |
|
California Municipal II | | | 388,743,583 | | | 34,700,481 | | | (4,549,343 | ) | | 30,151,138 | |
|
New York Municipal II | | | 188,841,007 | | | 11,688,931 | | | (2,994,847 | ) | | 8,694,084 | |
The difference between book and tax appreciation is attributable to inverse floater transactions.
6. Auction-Rate Preferred Shares
Municipal II has 2,936 shares of Preferred Shares Series A, 2,936 shares of Preferred Shares Series B, 2,936 shares of Preferred Shares Series C, 2,936 shares of Preferred Shares Series D and 2,936 shares of Preferred Shares Series E outstanding, each with a liquidation preference of $25,000 per share plus any accumulated, unpaid dividends.
California Municipal II has 1,304 shares of Preferred Shares Series A, 1,304 shares of Preferred Shares Series B, 1,304 shares of Preferred Shares Series C, 1,304 shares of Preferred Shares Series D and 1,304 shares of Preferred Shares Series E outstanding, each with a liquidation preference of $25,000 per share plus any accumulated, unpaid dividends.
New York Municipal II has 1,580 shares of Preferred Shares Series A and 1,580 shares of Preferred Shares Series B outstanding, each with a liquidation preference of $25,000 per share plus any accumulated, unpaid dividends.
Dividends are accumulated daily at an annual rate (typically re-set every seven days) through auction procedures. Distributions of net realized capital gains, if any, are paid annually.
For the year ended May 31, 2010, the annualized dividend rates for each Fund ranged from:
| | | | | | | |
| | High | | Low | | At May 31, 2010 |
| | | | | | | |
|
Municipal II: | | | | | | | |
|
Series A | | 0.644 | % | 0.274 | % | 0.457 | % |
|
Series B | | 0.665 | % | 0.274 | % | 0.442 | % |
|
Series C | | 0.686 | % | 0.259 | % | 0.427 | % |
|
Series D | | 0.686 | % | 0.259 | % | 0.427 | % |
|
Series E | | 0.686 | % | 0.320 | % | 0.457 | % |
|
California Municipal II: | | | | | | | |
|
Series A | | 0.686 | % | 0.353 | % | 0.457 | % |
|
Series B | | 0.686 | % | 0.353 | % | 0.442 | % |
|
Series C | | 0.686 | % | 0.333 | % | 0.427 | % |
|
Series D | | 0.686 | % | 0.333 | % | 0.427 | % |
|
Series E | | 0.686 | % | 0.333 | % | 0.457 | % |
|
New York Municipal II: | | | | | | | |
|
Series A | | 0.686 | % | 0.333 | % | 0.427 | % |
|
Series B | | 0.686 | % | 0.333 | % | 0.457 | % |
38 PIMCO Municipal Income Funds II Annual Report | 5.31.10
|
PIMCO Municipal Income Funds II Notes to Financial Statements |
May 31, 2010 |
6. Auction-Rate Preferred Shares (continued)
The Funds are subject to certain limitations and restrictions while Preferred Shares are outstanding. Failure to comply with these limitations and restrictions could preclude the Funds from declaring any dividends or distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of Preferred Shares at their liquidation preference.
Preferred shareholders, who are entitled to one vote per share, generally vote with the common shareholders but vote separately as a class to elect two Trustees and on any matters affecting the rights of the preferred shareholders.
Since mid-February 2008, holders of auction-rate preferred shares (“ARPS”) issued by the Funds have been directly impacted by an unprecedented lack of liquidity, which has similarly affected ARPS holders in many of the nation’s closed-end funds. Since then, regularly scheduled auctions for ARPS issued by the Funds have consistently “failed” because of insufficient demand (bids to buy shares) to meet the supply (shares offered for sale) at each auction. In a failed auction, ARPS holders cannot sell all, and may not be able to sell any, of their shares tendered for sale. While repeated auction failures have affected the liquidity, holders have continued to receive dividends at the defined “maximum rate”, which is the higher of the 30-day “AA” Composite Commercial Paper Rate multiplied by 110% or the Taxable Equivalent of the Short-Term Municipal Obligations Rate-defined as 90% of the quotient of (A) the per annum rate expressed on an interest equivalent basis equal to the Kenny S&P 30-day High Grade Index divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal) multiplied by 110% (which is a function of short-term interest rates and typically higher than the rate that would have otherwise been set through a successful auction). If the Funds’ ARPS auctions continue to fail and the “maximum rate” payable on the ARPS rises as a result of changes in short-term interest rates, returns for the Funds’ common shareholders could be adversely affected.
7. Legal Proceedings
In June and September 2004, the Investment Manager and certain of its affiliates (including PEA Capital LLC (“PEA”), Allianz Global Investors Distributors LLC and Allianz Global Investors of America, L.P.) agreed to settle, without admitting or denying the allegations, claims brought by the Securities and Exchange Commission (“SEC”) and the New Jersey Attorney General alleging violations of federal and state securities laws with respect to certain open-end funds for which the Investment Manager serves as investment adviser. The settlements related to an alleged “market timing” arrangement in certain open-end funds formerly sub-advised by PEA. The Investment Manager and its affiliates agreed to pay a total of $68 million to settle the claims. In addition to monetary payments, the settling parties agreed to undertake certain corporate governance, compliance and disclosure reforms related to market timing, and consented to cease and desist orders and censures. Subsequent to these events, PEA deregistered as an investment adviser and dissolved. None of the settlements alleged that any inappropriate activity took place with respect to the Funds.
Since February 2004, the Investment Manager and certain of its affiliates and their employees have been named as defendants in a number of pending lawsuits concerning “market timing,” which allege the same or similar conduct underlying the regulatory settlements discussed above. The market timing lawsuits have been consolidated in a multi-district litigation proceeding in the U.S. District Court for the District of Maryland (the “MDL Court”). After a number of claims in the lawsuits were dismissed by the MDL Court, the parties entered into a stipulation of settlement, which was publicly filed with the MDL Court in April 2010, resolving all remaining claims, but the settlement remains subject to the approval of the MDL Court.
In addition, the Sub-Adviser is the subject of a lawsuit in the Northern District of Illinois Eastern Division in which the complaint alleges that plaintiffs each purchased and sold a 10-year Treasury note futures contract and suffered damages from an alleged shortage when the Sub-Adviser held both physical and futures positions in 10-year Treasury notes for its client accounts. In July 2007, the court granted class certification of a class consisting of those persons who purchased futures contracts to offset short positions between May 9, 2005 and June 30, 2005. The Sub-Adviser currently believes that the complaint is without merit and the Sub-Adviser intends to vigorously defend against this action.
Several closed-end funds managed by the Investment Manager, including Municipal II and certain other funds sub-advised by the Sub-Adviser, have each received a demand letter from a law firm on behalf of certain common shareholders. The demand letters allege that the Investment Manager and certain officers and trustees of the funds breached their fiduciary duties in connection with the redemption at par of a portion of the funds’ ARPS and demand that the boards of trustees take certain action to remedy those alleged breaches. The independent trustees of the board of each such fund, including Municipal II, are evaluating the demand letters.
5.31.10 | PIMCO Municipal Income Funds II Annual Report 39
|
PIMCO Municipal Income Funds II Notes to Financial Statements |
May 31, 2010 |
7. Legal Proceedings (continued)
The Investment Manager and the Sub-Adviser believe that these matters are not likely to have a material adverse effect on the Funds or on their ability to perform their respective investment advisory activities relating to the Funds.
8. Subsequent Events
On June 1, 2010, the following dividends were declared to common shareholders payable June 29, 2010 to shareholders of record on June 11, 2010:
| | |
| Municipal II | $0.065 per common share |
| California Municipal II | $0.0625 per common share |
| New York Municipal II | $0.06625 per common share |
On July 1, 2010, the following dividends were declared to common shareholders payable August 2, 2010 to shareholders of record on July 12, 2010:
| | |
| Municipal II | $0.065 per common share |
| California Municipal II | $0.0625 per common share |
| New York Municipal II | $0.06625 per common share |
On July 1, 2010, BNY Mellon completed its acquisition of PNC Global Investment Servicing, the Funds’ shareholder servicing agent.
40 PIMCO Municipal Income Funds II Annual Report | 5.31.10
|
PIMCO Municipal Income Fund II Financial Highlights |
For a share of common stock outstanding throughout each year: |
| | | | | | | | | | | | | | | | | | | | |
| | Year ended May 31, |
| | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of year | | $ | 8.97 | | | $ | 13.86 | | | $ | 15.05 | | | $ | 14.71 | | | $ | 14.81 | |
Investment Operations: | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | 0.88 | | | | 1.02 | | | | 1.13 | | | | 1.13 | | | | 1.08 | |
Net realized and change in unrealized
gain (loss) on investments, futures contracts,
options written and swaps | | | 1.73 | | | | (4.94 | ) | | | (1.24 | ) | | | 0.33 | | | | 0.01 | |
Total from investment operations | | | 2.61 | | | | (3.92 | ) | | | (0.11 | ) | | | 1.46 | | | | 1.09 | |
Dividends on Preferred Shares from
Net Investment Income | | | (0.03 | ) | | | (0.19 | ) | | | (0.30 | ) | | | (0.30 | ) | | | (0.23 | ) |
Net increase (decrease) in net assets
applicable to common shareholders
resulting from investment operations | | | 2.58 | | | | (4.11 | ) | | | (0.41 | ) | | | 1.16 | | | | 0.86 | |
Dividends to Common Shareholders from
Net Investment Income | | | (0.78 | ) | | | (0.78 | ) | | | (0.78 | ) | | | (0.82 | ) | | | (0.96 | ) |
Net asset value, end of year | | $ | 10.77 | | | $ | 8.97 | | | $ | 13.86 | | | $ | 15.05 | | | $ | 14.71 | |
Market price, end of year | | $ | 11.12 | | | $ | 9.56 | | | $ | 14.14 | | | $ | 15.42 | | | $ | 14.45 | |
Total Investment Return (1) | | | 25.49 | % | | | (26.46 | )% | | | (3.09 | )% | | | 12.64 | % | | | 2.63 | % |
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | | | | | |
Net assets applicable to common
shareholders, end of year (000s) | | $ | 645,589 | | | $ | 534,046 | | | $ | 819,740 | | | $ | 886,815 | | | $ | 862,832 | |
Ratio of expenses to average net assets
including interest expense (2)(3)(4)(5) | | | 1.38 | % | | | 1.73 | % | | | 1.68 | % | | | 1.50 | % | | | 1.30 | % |
Ratio of expenses to average net assets,
excluding interest expense (2)(3)(5) | | | 1.24 | % | | | 1.35 | % | | | 1.19 | % | | | 1.01 | % | | | 1.05 | % |
Ratio of net investment income to average
net assets (2)(5) | | | 8.77 | % | | | 10.23 | % | | | 7.90 | % | | | 7.45 | % | | | 7.31 | % |
Preferred shares asset coverage per share | | $ | 68,974 | | | $ | 61,376 | | | $ | 65,570 | | | $ | 68,889 | | | $ | 67,701 | |
Portfolio turnover | | | 6 | % | | | 42 | % | | | 21 | % | | | 4 | % | | | 20 | % |
| |
(1) | Total investment return is calculated assuming a purchase of a share of common stock at the current market price on the first day of each period and a sale of a share of common stock at the current market price on the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Municipal II’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions or sales charges. |
(2) | Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. |
(3) | Inclusive of expenses offset by custody credits earned on cash balances at the custodian bank. (See note 1(i) in Notes to Financial Statements). |
(4) | Interest expense relates to the liability for floating rate notes issued in connection with inverse floater transactions and reverse repurchase agreement transactions. |
(5) | During the years indicated above, the Investment Manager waived a portion of its investment management fee. The effect of such waiver relative to the average net assets of common shareholders was 0.004%, 0.10%, 0.17%, 0.24% and 0.24% for the years ended May 31, 2010, May 31, 2009, May 31, 2008, May 31, 2007 and May 31, 2006, respectively. |
See accompanying Notes to Financial Statements | 5.31.10 | PIMCO Municipal Income Funds II Annual Report 41
|
PIMCO California Municipal Income Fund II Financial Highlights |
For a share of common stock outstanding throughout each year: |
| | | | | | | | | | | | | | | | | | | | |
| | Year ended May 31, |
| | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of year | | $ | 7.48 | | | $ | 13.34 | | | $ | 14.89 | | | $ | 14.58 | | | $ | 14.61 | |
Investment Operations: | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | 0.76 | | | | 0.85 | | | | 1.06 | | | | 1.08 | | | | 1.06 | |
Net realized and change in unrealized
gain (loss) on investments, futures contracts,
options written and swaps | | | 0.67 | | | | (5.69 | ) | | | (1.49 | ) | | | 0.34 | | | | 0.05 | |
Total from investment operations | | | 1.43 | | | | (4.84 | ) | | | (0.43 | ) | | | 1.42 | | | | 1.11 | |
Dividends on Preferred Shares from
Net Investment Income | | | (0.03 | ) | | | (0.18 | ) | | | (0.28 | ) | | | (0.27 | ) | | | (0.21 | ) |
Net increase (decrease) in net assets
applicable to common shareholders
resulting from investment operations | | | 1.40 | | | | (5.02 | ) | | | (0.71 | ) | | | 1.15 | | | | 0.90 | |
Dividends to Common Shareholders from: | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | (0.77 | ) | | | (0.80 | ) | | | (0.84 | ) | | | (0.84 | ) | | | (0.93 | ) |
Return of Capital | | | — | | | | (0.04 | ) | | | — | | | | — | | | | — | |
Net asset value, end of year | | $ | 8.11 | | | $ | 7.48 | | | $ | 13.34 | | | $ | 14.89 | | | $ | 14.58 | |
Market price, end of year | | $ | 9.33 | | | $ | 8.78 | | | $ | 14.25 | | | $ | 15.96 | | | $ | 14.62 | |
Total Investment Return (1) | | | 16.44 | % | | | (32.26 | )% | | | (5.17 | )% | | | 15.35 | % | | | 5.50 | % |
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | | | | | |
Net assets applicable to common
shareholders, end of year (000s) | | $ | 252,816 | | | $ | 231,415 | | | $ | 409,769 | | | $ | 455,284 | | | $ | 443,379 | |
Ratio of expenses to average net assets
including interest expense (2)(3)(4)(5) | | | 1.56 | % | | | 3.15 | % | | | 3.23 | % | | | 2.89 | % | | | 2.02 | % |
Ratio of expenses to average net assets,
excluding interest expense (2)(3)(5) | | | 1.33 | % | | | 1.43 | % | | | 1.18 | % | | | 1.01 | % | | | 1.06 | % |
Ratio of net investment income to average
net assets (2)(5) | | | 9.78 | % | | | 9.31 | % | | | 7.65 | % | | | 7.28 | % | | | 7.24 | % |
Preferred shares asset coverage per share | | $ | 63,773 | | | $ | 60,490 | | | $ | 64,390 | | | $ | 68,765 | | | $ | 67,620 | |
Portfolio turnover | | | 9 | % | | | 62 | % | | | 6 | % | | | 3 | % | | | 12 | % |
| |
(1) | Total investment return is calculated assuming a purchase of a share of common stock at the current market price on the first day of each period and a sale of a share of common stock at the current market price on the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the California Municipal II’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions or sales charges. |
(2) | Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. |
(3) | Inclusive of expenses offset by custody credits earned on cash balances at the custodian bank. (See note 1(i) in Notes to Financial Statements). |
(4) | Interest expense relates to the liability for floating rate notes issued in connection with inverse floater transactions and reverse repurchase agreement transactions. |
(5) | During the years indicated above, the Investment Manager waived a portion of its investment management fee. The effect of such waiver relative to the average net assets of common shareholders was 0.004%, 0.10%, 0.17%, 0.24% and 0.24% for the years ended May 31, 2010, May 31, 2009, May 31, 2008, May 31, 2007 and May 31, 2006, respectively. |
42 PIMCO Municipal Income Funds II Annual Report | 5.31.10 | See accompanying Notes to Financial Statements
|
PIMCO New York Municipal Income Fund II Financial Highlights |
For a share of common stock outstanding throughout each year: |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | Year ended May 31, | |
| | | |
| | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net asset value, beginning of year | | $ | 9.56 | | | $ | 13.67 | | | $ | 14.79 | | | $ | 14.66 | | | $ | 14.62 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investment Operations: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net investment income | | | 0.98 | | | | 1.00 | | | | 1.07 | | | | 1.10 | | | | 1.07 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net realized and change in unrealized
gain (loss) on investments, futures contracts,
options written and swaps | | | 1.19 | | | | (4.13 | ) | | | (1.11 | ) | | | 0.11 | | | | 0.11 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total from investment operations | | | 2.17 | | | | (3.13 | ) | | | (0.04 | ) | | | 1.21 | | | | 1.18 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Dividends on Preferred Shares from
Net Investment Income | | | (0.03 | ) | | | (0.19 | ) | | | (0.29 | ) | | | (0.28 | ) | | | (0.23 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in net assets
applicable to common shareholders
resulting from investment operations | | | 2.14 | | | | (3.32 | ) | | | (0.33 | ) | | | 0.93 | | | | 0.95 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Dividends to Common Shareholders from
Net Investment Income | | | (0.80 | ) | | | (0.79 | ) | | | (0.79 | ) | | | (0.80 | ) | | | (0.91 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net asset value, end of year | | $ | 10.90 | | | $ | 9.56 | | | $ | 13.67 | | | $ | 14.79 | | | $ | 14.66 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Market price, end of year | | $ | 11.42 | | | $ | 10.26 | | | $ | 14.42 | | | $ | 15.49 | | | $ | 14.14 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Investment Return (1) | | | 19.92 | % | | | (22.95 | )% | | | (1.46 | )% | | | 15.51 | % | | | 1.65 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | | | | | |
Net assets applicable to common
shareholders, end of year (000s) | | $ | 117,161 | | | $ | 102,126 | | | $ | 145,100 | | | $ | 156,218 | | | $ | 154,088 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets
including interest expense (2)(3)(4)(5) | | | 1.53 | % | | | 1.88 | % | | | 2.07 | % | | | 2.13 | % | | | 1.89 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets,
excluding interest expense (2)(3)(5) | | | 1.43 | % | | | 1.51 | % | | | 1.25 | % | | | 1.14 | % | | | 1.13 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Ratio of net investment income to average
net assets (2)(5) | | | 9.51 | % | | | 9.63 | % | | | 7.69 | % | | | 7.33 | % | | | 7.29 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Preferred shares asset coverage per share | | $ | 62,073 | | | $ | 57,316 | | | $ | 65,294 | | | $ | 68,386 | | | $ | 67,785 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Portfolio turnover | | | 5 | % | | | 33 | % | | | 9 | % | | | 3 | % | | | 26 | % |
| | | | | | | | | | | | | | | | | | | | | |
| |
(1) | Total investment return is calculated assuming a purchase of a share of common stock at the current market price on the first day of each period and a sale of a share of common stock at the current market price on the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the New York Municipal II’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions or sales charges. |
(2) | Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. |
(3) | Inclusive of expenses offset by custody credits earned on cash balances at the custodian bank. (See note 1(i) in Notes to Financial Statements). |
(4) | Interest expense relates to the liability for floating rate notes issued in connection with inverse floater transactions and reverse repurchase agreement transactions. |
(5) | During the years indicated above, the Investment Manager waived a portion of its investment management fee. The effect of such waiver relative to the average net assets of common shareholders was 0.004%, 0.10%, 0.17%, 0.24% and 0.24% for the years ended May 31, 2010, May 31, 2009, May 31, 2008, May 31, 2007 and May 31, 2006, respectively. |
See accompanying Notes to Financial Statements | 5.31.10 | PIMCO Municipal Income Funds II Annual Report 43
| |
PIMCO Municipal Income Funds II | Report of Independent Registered
Public Accounting Firm |
| | |
To the Shareholders and Board of Trustees of:
PIMCO Municipal Income Fund II,
PIMCO California Municipal Income Fund II and
PIMCO New York Municipal Income Fund II
In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets applicable to common shareholders and of cash flows (for PIMCO California Municipal Income Fund II only) and the financial highlights present fairly, in all material respects, the financial position of PIMCO Municipal Income Fund II, PIMCO California Municipal Income Fund II and PIMCO New York Municipal Income Fund II (collectively hereafter referred to as the “Funds”) at May 31, 2010, the results of their operations and of cash flows (for PIMCO California Municipal Income Fund II only) for the year then ended, the changes in their net assets applicable to common shareholders for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at May 31, 2010 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
July 21, 2010
44 PIMCO Municipal Income Funds II Annual Report | 5.31.10
| |
PIMCO Municipal Income Funds II | Tax Information/Annual Shareholder
Meetings Results (unaudited) |
| | |
Tax Information:
For the year ended May 31, 2010, the Funds designate the following percentages of the ordinary income dividends, (or such greater percentages that constitute the maximum amount allowable pursuant to Code Sections 103(a) and 852(b)(5)), as exempt-interest dividends which are exempt from federal income tax other than the alternative minimum tax.
| | | | |
Municipal Income II | | | 97.50 | % |
|
California Municipal Income II | | | 86.14 | % |
|
New York Municipal Income II | | | 84.57 | % |
Since the Funds’ tax year is not the calendar year, another notification will be sent with respect to calendar year 2010. In January 2011, shareholders will be advised on IRS Form 1099 DIV as to the federal tax status of the dividends and distributions received during calendar 2010. The amount that will be reported will be the amount to use on your 2010 federal income tax return and may differ from the amount which must be reported in connection with the Funds’ tax year ended May 31, 2010. Shareholders are advised to consult their tax advisers as to the federal, state and local tax status of the dividend income received from the Funds. In January 2011, an allocation of interest income by state will be provided which may be of value in reducing a shareholder’s state and local tax liability, if any.
Annual Shareholder Meetings Results:
The Funds held their joint annual meeting of shareholders on December 18, 2009. Common/Preferred shareholders voted as indicated below:
| | | | | | | |
| | Affirmative | | Withheld
Authority | |
| | | | | | |
| | | | | | | |
Municipal II | | | | | | | |
|
Re-election of Robert E. Connor – Class I to serve until 2012 | | | 53,806,374 | | | 2,503,163 | |
|
Re-election of William B. Ogden IV – Class I to serve until 2012 | | | 53,725,888 | | | 2,583,649 | |
|
Re-election of Hans W. Kertess* – Class I to serve until 2012 | | | 11,601 | | | 7 | |
| | | | | | | |
California Municipal II | | | | | | | |
|
Re-election of Robert E. Connor – Class I to serve until 2012 | | | 26,616,435 | | | 1,428,355 | |
|
Re-election of William B. Ogden IV – Class I to serve until 2012 | | | 26,609,463 | | | 1,435,327 | |
|
Re-election of Hans W. Kertess* – Class I to serve until 2012 | | | 4,109 | | | 69 | |
| | | | | | | |
New York Municipal II | | | | | | | |
|
Re-election of Robert E. Connor – Class I to serve until 2012 | | | 9,809,420 | | | 332,045 | |
|
Re-election of William B. Ogden, IV – Class I to serve until 2012 | | | 9,810,091 | | | 331,373 | |
|
Re-election of Hans W. Kertess* – Class I to serve until 2012 | | | 2,467 | | | — | |
Messrs. Paul Belica, John C. Maney†, James A. Jacobson and R. Peter Sullivan, III continue to serve as Trustees of the Funds.
| | |
| | |
* | Preferred Shares Trustee |
† | Interested Trustee |
5.31.10 | PIMCO Municipal Income Funds II Annual Report 45
| |
PIMCO Municipal Income Funds II | Changes to the Board of Trustees
(unaudited) |
| | |
| |
• | On December 14, 2009, the Funds’ Board of Trustees appointed James A. Jacobson as a Trustee. |
| |
• | Robert E. Connor served as Trustee of the Funds until his death on April 8, 2010. |
| |
• | On June 22, 2010, the Funds’ Board of Trustees appointed Alan Rappaport as a Trustee. |
| |
• | R. Peter Sullivan, III announced his retirement from the Funds’ Board of Trustees effective July 31, 2010. |
46 PIMCO Municipal Income Funds II Annual Report | 5.31.10
| |
PIMCO Municipal Income Funds II | Privacy Policy/Proxy Voting Policies &
Procedures (unaudited) |
| | |
|
Privacy Policy: |
|
Our Commitment to You |
We consider customer privacy to be a fundamental aspect of our relationship with shareholders and are committed to maintaining the confidentiality, integrity and security of our current, prospective and former shareholders’ personal information. To ensure shareholders’ privacy, we have developed policies designed to protect this confidentiality, while allowing shareholders’ needs to be served. |
|
Obtaining Personal Information |
In the course of providing shareholders with products and services, we may obtain non-public personal information about shareholders, which may come from sources such as account applications and other forms, from other written, electronic or verbal correspondence, from shareholder transactions, from a shareholder’s brokerage or financial advisory firm, financial adviser or consultant, and/or from information captured on our internet web sites. |
|
Respecting Your Privacy |
As a matter of policy, we do not disclose any personal or account information provided by shareholders or gathered by us to non-affiliated third parties, except as required for our everyday business purposes, such as to process transactions or service a shareholder’s account, or a otherwise permitted by law. As is common in the industry, non-affiliated companies may from time to time be used to provide certain services, such as preparing and mailing prospectuses, reports, account statements and other information, and gathering shareholder proxies. We may also retain non-affiliated financial service providers, such as broker-dealers, to market our shares or products and we may enter into joint-marketing agreements with them and other financial companies. We also may retain marketing and research service firms to conduct research on shareholder satisfaction. These companies may have access to a shareholder’s personal and account information, but are permitted to use the information solely to provide the specific service or as otherwise permitted by law. We may also provide a shareholder’s personal and account information to their respective brokerage or financial advisory firm, Custodian, and/or to your financial adviser or consultant. |
|
Sharing Information with Third Parties |
We reserve the right to disclose or report personal information to non-affiliated third parties, in limited circumstances, where we believe in good faith that disclosure is required under law to cooperate with regulators or law enforcement authorities, to protect our rights or property or upon reasonable request by any Fund in which a shareholder’s has chosen to invest. In addition, we may disclose information about a shareholder’s accounts to a non-affiliated third party only if we receive a shareholder’s written request or consent. |
|
Sharing Information with Affiliates |
We may share client information with our affiliates in connection with our affiliates’ everyday business purposes, such as servicing a shareholder’s account, but our affiliates may not use this information to market products and services to you except in conformance with applicable laws or regulations. The information we share includes information about our experiences and transactions with a shareholder and may include, for example, a shareholder’s participation in one of the Funds or in other investment programs, a shareholder’s ownership of certain types of accounts (such as IRAs), or other data about a shareholder’s transactions or accounts. Our affiliates, in turn, are not permitted to share your information with non-affiliated entities, except as required or permitted by law. |
|
Procedures to Safeguard Private Information |
We take seriously the obligation to safeguard shareholder non-public personal information. In addition to this policy, we have also implemented procedures that are designed to restrict access to a shareholder’s non-public personal information only to internal personnel who need to know that information in order to provide products or services to such shareholders. In addition, we have physical, electronic and procedural safeguards in place to guard a shareholder’s non-public personal information. |
|
Disposal of Confidential Records |
We will dispose of records, if any, that are knowingly derived from data received from a consumer reporting agency regarding a shareholder that is an individual in a manner that ensures the confidentiality of the data is maintained. Such records include, among other things, copies of consumer reports and notes of conversations with individuals at consumer reporting agencies. |
| |
Proxy Voting Policies & Procedures: |
A description of the policies and procedures that the Funds have adopted to determine how to vote proxies relating to portfolio securities and information about how the Funds voted proxies relating to portfolio securities held during the most recent twelve month period ended June 30 is available (i) without charge, upon request, by calling the Funds’ shareholder servicing agent at (800) 254-5197; (ii) on the Funds��� website at www.allianzinvestors.com/closedendfunds; and (iii) on the Securities and Exchange Commission’s website at www.sec.gov. |
5.31.10 | PIMCO Municipal Income Funds II Annual Report 47
|
PIMCO Municipal Income Funds II Dividend Reinvestment Plan (unaudited) |
|
| |
Pursuant to the Funds’ Dividend Reinvestment Plan (the “Plan”), all Common Shareholders whose shares are registered in their own names will have all dividends, including any capital gain dividends, reinvested automatically in additional Common Shares by BNY Mellon, as agent for the Common Shareholders (the “Plan Agent”), unless the shareholder elects to receive cash. An election to receive cash may be revoked or reinstated at the option of the shareholder. In the case of record shareholders such as banks, brokers or other nominees that hold Common Shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Common Shares certified from time to time by the record shareholder as representing the total amount registered in such shareholder’s name and held for the account of beneficial owners who are to participate in the Plan. Shareholders whose shares are held in the name of a bank, broker or nominee should contact the bank, broker or nominee for details. All distributions to investors who elect not to participate in the Plan (or whose broker or nominee elects not to participate on the investor’s behalf), will be paid cash by check mailed, in the case of direct shareholder, to the record holder by BNY Mellon, as the Funds’ dividend disbursement agent.
Unless you elect (or your broker or nominee elects) not to participate in the Plan, the number of Common Shares you will receive will be determined as follows:
| |
(1) | If on the payment date the net asset value of the Common Shares is equal to or less than the market price per Common Share plus estimated brokerage commissions that would be incurred upon the purchase of Common Shares on the open market, the Funds will issue new shares at the greater of (i) the net asset value per Common Share on the payment date or (ii) 95% of the market price per Common Share on the payment date; or |
| |
(2) | If on the payment date the net asset value of the Common Shares is greater than the market price per Common Share plus estimated brokerage commissions that would be incurred upon the purchase of Common Shares on the open market, 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 on the payment date, resulting in the purchase of fewer shares than if the dividend or distribution had been paid in Common Shares issued by the Funds. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market on or shortly after the payment date, but in no event later than the ex-dividend date for the next distribution. Interest will not be paid on any uninvested cash payments. |
You may withdraw from the Plan at any time by giving notice to the Plan Agent. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share 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.
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. The Plan Agent will also furnish each person who buys Common Shares with written instructions detailing the procedures for electing not to participate in the Plan and to instead receive distributions in cash. 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 reinvested dividends and distributions are taxed in the same manner as cash dividends and distributions.
The Funds and the Plan Agent reserve the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Funds reserve the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan may be obtained from the Funds’ shareholder servicing agent, BNY Mellon, P.O. Box 43027, Providence, RI 02940-3027, telephone number (800) 254-5197.
48 PIMCO Municipal Income Funds II Annual Report | 5.31.10
|
PIMCO Municipal Income Funds II Board of Trustees (unaudited) |
|
| |
| | |
Name, Date of Birth, Position(s) Held with
Funds, Length of Service, Other Trusteeships/
Directorships Held by Trustee; Number of
Portfolios in Fund Complex/Outside Fund
Complexes Currently Overseen by Trustee | | Principal Occupation(s) During Past 5 years: |
| | | |
The address of each trustee is 1345 Avenue of the
Americas, New York, NY 10105 | | |
| | |
Hans W. Kertess
Date of Birth: 7/12/39
Chairman of the Board of Trustees since: 2007
Trustee since: 2002
Term of office: Expected to stand for re-election at 2012
annual meeting of shareholders.
Trustee/Director of 52 funds in Fund Complex;
Trustee/Director of no funds outside of Fund Complex | | President, H. Kertess & Co., a financial advisory company. Formerly, Managing Director, Royal Bank of Canada Capital Markets. |
| | |
Paul Belica
Date of Birth: 9/27/21
Trustee since: 2002
Term of office: Expected to stand for re-election at 2010
annual meeting of shareholders.
Trustee/Director of 52 funds in Fund Complex
Trustee/Director of no funds outside of Fund Complex | | Retired. Formerly Director, Student Loan Finance Corp., Education Loans, Inc., Goal Funding, Inc., Goal Funding II, Inc. and Surety Loan Fund, Inc. Formerly, Manager of Stratigos Fund LLC, Whistler Fund LLC, Xanthus Fund LLC & Wynstone Fund LLC. |
| | |
James A. Jacobson
Date of Birth: 2/3/45
Trustee since: 2009
Term of office: Expected to stand for election at 2010
annual meeting of shareholders.
Trustee/Director of 47 funds in Fund Complex
Trustee/Director of 16 Alpine Mutual Funds | | Retired. Formerly, Vice Chairman and Managing Director of Spear, Leeds & Kellogg Specialists LLC, specialist firm on the New York Stock Exchange. |
| | |
John C. Maney†
Date of Birth: 8/3/59
Trustee since: 2006
Term of office: Expected to stand for re-election at 2011
annual meeting of shareholders.
Trustee/Director of 81 funds in Fund Complex
Trustee/Director of no funds outside the Fund Complex | | Management Board of Allianz Global Investors Fund Management LLC; Management Board and Managing Director of Allianz Global Investors of America L.P. since January 2005 and Chief Operating Officer of Allianz Global Investors of America L.P. since November 2006. |
| | |
William B. Ogden, IV
Date of Birth: 1/11/45
Trustee since: 2006
Term of office: Expected to stand for re-election at 2012
annual meeting of shareholders.
Trustee/Director of 52 Funds in Fund Complex;
Trustee/Director of no funds outside of Fund Complex | | Asset Management Industry Consultant. Formerly, Managing Director, Investment Banking Division of Citigroup Global Markets Inc. |
| | |
Alan Rappaport
Date of Birth: 3/3/1953
Trustee since: 2010
Term of office: Expected to stand for election
at 2010 annual meeting of shareholders.
Trustee/Director of 47 funds in Fund Complex | | Vice Chairman, Roundtable Investment Partners since 2009; Chairman (formerly President), Private Bank of Bank of America; Vice Chairman, US Trust (2001-2008). |
5.31.10 | PIMCO Municipal Income Funds II Annual Report 49
|
PIMCO Municipal Income Funds II Board of Trustees (unaudited) |
|
| |
| | |
Name, Date of Birth, Position(s) Held with
Funds, Length of Service, Other Trusteeships/
Directorships Held by Trustee; Number of
Portfolios in Fund Complex/Outside Fund
Complexes Currently Overseen by Trustee | | Principal Occupation(s) During Past 5 years: |
| | | |
R. Peter Sullivan, III
Date of Birth: 9/4/41
Trustee since: 2002
Term of office: Expected to stand for re-election at
2011 annual meeting of shareholders.
Trustee/Director of 52 funds in Fund Complex
Trustee/Director of no funds outside of Fund Complex | | Retired. Formerly, Managing Partner, Bear Wagner Specialists LLC, specialist firm on the New York Stock Exchange. |
† Mr. Maney is an “interested person” of the Funds due to his affiliation with Allianz Global Investors of America L.P. In addition to Mr. Maney’s positions set forth in the table above, he holds the following positions with affiliated persons: Management Board, Managing Director and Chief Operating Officer of Allianz Global Investors of America L.P. and Allianz Global Investors of America LLC; Member — Board of Directors and Chief Operating Officer of Allianz Global Investors of America Holdings Inc. and Oppenheimer Group, Inc.; Managing Director and Chief Operating Officer of Allianz Global Investors NY Holdings LLC; Management Board and Managing Director of Allianz Global Investors U.S. Holding LLC; Managing Director and Chief Financial Officer of Allianz Hedge Fund Partners Holding L.P. and Allianz Global Investors U.S. Retail LLC; Member — Board of Directors and Managing Director of Allianz Global Investors Advertising Agency Inc.; Compensation Committee of NFJ Investment Group LLC; Nicholas-Applegate Holdings LLC; Member — Board of Directors and Chief Operating Officer of PIMCO Global Advisors (Resources) Limited; Executive Vice President of PIMCO Japan Ltd ; Chief Operating Officer of Allianz Global Investors U.S. Holding II LLC; and Member and Chairman — Board of Directors, President and Chief Operating Officer of PFP Holdings, Inc., and Managing Director of Allianz Global Investors Capital LLC.
* Robert E. Conner served as a Trustee of the Funds until his death on April 8, 2010.
Further information about certain of the Funds’ Trustees is available in the Funds’ Statements of Additional Information, dated June 25, 2002, which can be obtained upon request, without charge, by calling the Funds’ shareholder servicing agent at (800) 254-5197.
50 PIMCO Municipal Income Funds II Annual Report | 5.31.10
|
PIMCO Municipal Income Funds II Fund Officers (unaudited) |
|
| |
| | |
Name, Date of Birth, Position(s) Held with
Fund | | Principal Occupation(s) During Past 5 Years: |
| | | |
Brian S. Shlissel
Date of Birth: 11/14/64
President & Chief Executive Officer since: 2002 | | Managing Director, Head of Mutual Fund Services, Allianz Global Investors Fund Management LLC; President and Chief Executive Officer of 33 funds in the Fund Complex; Treasurer; Principal Financial and Accounting Officer of 45 funds in the Fund Complex and The Korea Fund, Inc. Formerly, Director of 4 funds in the Fund Complex, 2002-2008. |
| | |
Lawrence G. Altadonna
Date of Birth: 3/10/66
Treasurer, Principal Financial and Accounting
Officer since: 2002 | | Senior Vice President, Director of Fund Administration, Allianz Global Investors Fund Management LLC; Treasurer, Principal Financial and Accounting Officer of 33 funds in the Fund Complex; Assistant Treasurer of 45 funds in the Fund Complex and The Korea Fund, Inc. |
| | |
Thomas J. Fuccillo
Date of Birth: 3/22/68
Vice President, Secretary & Chief Legal Officer
since: 2004 | | Executive Vice President, Chief Legal Officer and Secretary of Allianz Global Investors Fund Management LLC; Executive Vice President of Allianz Global Investors of America L.P., Vice President, Secretary and Chief Legal Officer of 78 funds in the Fund Complex. Secretary and Chief Legal Officer of The Korea Fund, Inc. |
| | |
Scott Whisten
Date of Birth: 3/13/71
Assistant Treasurer since: 2007 | | Senior Vice President, Allianz Global Investors Fund Management LLC; Assistant Treasurer of 78 funds in the Fund Complex. Formerly, Accounting Manager, Prudential Investments, 2002-2005. |
| | |
Richard J. Cochran
Date of Birth: 1/23/61
Assistant Treasurer since: 2008 | | Vice President, Allianz Global Investors Fund Management LLC, Assistant Treasurer of 78 funds in the Funds Complex. Formerly, Tax Manager, Teacher Insurance Annuity Association/College Retirement Equity Fund (TIAA-CREF), 2002-2008. |
| | |
Youse E. Guia
Date of Birth: 9/3/72
Chief Compliance Officer since: 2004 | | Senior Vice President and Group Compliance Officer of Allianz Global Investors of America L.P.; Chief Compliance Officer of 78 funds in the Fund Complex and The Korea Fund, Inc. |
| | |
Kathleen A. Chapman
Date of Birth: 11/11/54
Assistant Secretary since: 2006 | | Assistant Secretary of 78 funds in the Fund Complex; Manager IIG Advisory Law, Morgan Stanley, 2004-2005. |
| | |
Lagan Srivastava
Date of Birth: 9/20/77
Assistant Secretary since: 2006 | | Assistant Secretary of 78 funds in the Fund Complex and The Korea Fund, Inc.; Formerly, Research Assistant, Dechert LLP, 2004-2005. |
Officers hold office at the pleasure of the Board and until their successors are appointed and qualified or until their earlier resignation or removal.
5.31.10 | PIMCO Municipal Income Funds II Annual Report 51
| |
Trustees | Fund Officers |
Hans W. Kertess | Brian S. Shlissel |
Chairman of the Board of Trustees | President & Chief Executive Officer |
Paul Belica | Lawrence G. Altadonna |
James A. Jacobson | Treasurer, Principal Financial & Accounting Officer |
John C. Maney | Thomas J. Fuccillo |
William B. Ogden, IV | Vice President, Secretary & Chief Legal Officer |
Alan Rappaport | Scott Whisten |
R. Peter Sullivan, III | Assistant Treasurer |
| Richard J. Cochran |
| Assistant Treasurer |
| Youse E. Guia |
| Chief Compliance Officer |
| Kathleen A. Chapman |
| Assistant Secretary |
| Lagan Srivastava |
| Assistant Secretary |
|
Investment Manager |
Allianz Global Investors Fund Management LLC |
1345 Avenue of the Americas |
New York, NY 10105 |
Sub-Adviser |
Pacific Investment Management Company LLC |
840 Newport Center Drive |
Newport Beach, CA 92660 |
Custodian & Accounting Agent |
State Street Bank & Trust Co. |
225 Franklin Street |
Boston, MA 02110 |
Transfer Agent, Dividend Paying Agent and Registrar |
BNY Mellon |
P.O. Box 43027 |
Providence, RI 02940-3027 |
Independent Registered Public Accounting Firm |
PricewaterhouseCoopers LLP |
300 Madison Avenue |
New York, NY 10017 |
Legal Counsel |
Ropes & Gray LLP |
One International Place |
Boston, MA 02110-2624 |
|
This report, including the financial information herein, is transmitted to the shareholders of PIMCO Municipal Income Fund II, PIMCO California Municipal Income Fund II and PIMCO New York Municipal Income Fund II for their information. It is not a prospectus, circular or representation intended for use in the purchase of shares of the Funds or any securities mentioned in this report. |
|
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Funds may purchase shares of their common stock in the open market. |
|
The Funds file their complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of their fiscal year on Form N-Q. The Funds’ Form N-Q are available on the SEC’s website at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. The information on Form N-Q is also available on the Funds’ website at www.allianzinvestors.com/closedendfunds. |
|
|
Information on the Funds is available at www.allianzinvestors.com/closedendfunds or by calling the Funds’ shareholder servicing agent at (800) 254-5197. |
Receive this report electronically and eliminate paper mailings. To enroll, go to
www.allianzinvestors.com/edelivery.
AZ611AR_053110
ITEM 2. CODE OF ETHICS
| |
(a) | As of the end of the period covered by this report, the registrant has adopted a code of ethics (the “Section 406 Standards for Investment Companies — Ethical Standards for Principal Executive and Financial Officers”) that applies to the registrant’s Principal Executive Officer and Principal Financial Officer; the registrant’s Principal Financial Officer also serves as the Principal Accounting Officer. The registrant undertakes to provide a copy of such code of ethics to any person upon request, without charge, by calling 1-800-254-5197. The code of ethics are included as an Exhibit 99.CODE ETH hereto. |
| |
(b) | The CODE OF ETHICS PURSUANT TO SECTION 406 OF THE SARBANES-OXLEY ACT OF 2002 FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS (THE “Code”) was updated to remove interested trustees from being subject to the Code, which is not required under Section 406 of the Sarbanes-Oxley Act of 2002. The Code also was updated to remove examples of specific conflict of interest situations and to add an annual certification requirement for Covered Officers. In addition, the approval of ratification process for material amendments to the Code was clarified to include approval by a majority of the independent trustees. |
| |
(c) | During the period covered by this report, there were not any waivers or implicit waivers to a provision of the code of ethics adopted in 2(a) above. |
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The registrant’s Board has determined that Mr. Paul Belica and James A. Jacobson, members of the Board’s Audit Oversight Committee are “audit committee financial experts,” and that they are “independent,” for purposes of this Item.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
| |
a) | Audit fees. The aggregate fees billed for each of the last two fiscal years (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $53,973 in 2009 and $55,006 in 2010. |
| |
b) | Audit-Related Fees. The aggregate fees billed in the Reporting Periods for assurance and related services by the principal accountant that are reasonably related to the performance of the audit registrant’s financial statements and are not reported under paragraph (e) of this Item were $11,733 in 2009 and $15,582 in 2010. These services consist of accounting consultations, agreed upon procedure reports (inclusive of annual review of basic maintenance testing associated with the Preferred Shares), attestation reports and comfort letters. |
| |
c) | Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax service and tax planning (“Tax Services”) were $10,000 in 2009 and $10,000 in 2010. These services consisted of review or preparation of U.S. federal, state, local and excise tax returns and calculation of excise tax distributions. |
| |
d) | All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor to the Registrant. |
| |
e) | 1. Audit Committee Pre-Approval Policies and Procedures. The Registrant’s Audit Committee has established policies and procedures for pre-approval of all audit and permissible non-audit services by the Auditor for the Registrant, as well as the Auditor’s engagements related directly to the operations and financial reporting of the Registrant. The Registrant’s policy is stated below. |
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| |
| PIMCO Municipal Income Fund II (the “Fund”) |
AUDIT OVERSIGHT COMMITTEE POLICY FOR PRE-APPROVAL OF SERVICES PROVIDED BY THE INDEPENDENT ACCOUNTANTS
The Fund’s Audit Oversight Committee (“Committee”) is charged with the oversight of the Fund’s financial reporting policies and practices and their internal controls. As part of this responsibility, the Committee must pre-approve any independent accounting firm’s engagement to render audit and/or permissible non-audit services, as required by law. In evaluating a proposed engagement by the independent accountants, the Committee will assess the effect that the engagement might reasonably be expected to have on the accountant’s independence. The Committee’s evaluation will be based on:
| |
| a review of the nature of the professional services expected to provided, |
| |
| the fees to be charged in connection with the services expected to be provided, |
| |
| a review of the safeguards put into place by the accounting firm to safeguard independence, and |
| |
| periodic meetings with the accounting firm. |
POLICY FOR AUDIT AND NON-AUDIT SERVICES TO BE PROVIDED TO THE FUND
On an annual basis, the Fund’s Committee will review and pre-approve the scope of the audit of the Fund and proposed audit fees and permitted non-audit (including audit-related) services that may be performed by the Fund’s independent accountants. At least annually, the Committee will receive a report of all audit and non-audit services that were rendered in the previous calendar year pursuant to this Policy. In addition to the Committee’s pre-approval of services pursuant to this Policy, the engagement of the independent accounting firm for any permitted non-audit service provided to the Fund will also require the separate written pre-approval of the President of the Fund, who will confirm, independently, that the accounting firm’s engagement will not adversely affect the firm’s independence. All non-audit services performed by the independent accounting firm will be disclosed, as required, in filings with the Securities and Exchange Commission.
AUDIT SERVICES
The categories of audit services and related fees to be reviewed and pre-approved annually by the Committee are:
| |
| Annual Fund financial statement audits |
| Seed audits (related to new product filings, as required) |
| SEC and regulatory filings and consents |
| Semiannual financial statement reviews |
AUDIT-RELATED SERVICES
The following categories of audit-related services are considered to be consistent with the role of the Fund’s independent accountants and services falling under one of these categories will be pre-approved by the Committee on an annual basis if the Committee deems those services to be consistent with the accounting firm’s independence:
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| |
| Accounting consultations |
| Fund merger support services |
| Agreed upon procedure reports (inclusive of quarterly review of Basic Maintenance testing associated with issuance of Preferred Shares and semiannual report review) |
| Other attestation reports |
| Comfort letters |
| Other internal control reports |
Individual audit-related services that fall within one of these categories and are not presented to the Committee as part of the annual pre-approval process described above, may be pre-approved, if deemed consistent with the accounting firm’s independence, by the Committee Chair (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $250,000. Any such pre-approval shall be reported to the full Committee at its next regularly scheduled meeting.
TAX SERVICES
The following categories of tax services are considered to be consistent with the role of the Fund’s independent accountants and services falling under one of these categories will be pre-approved by the Committee on an annual basis if the Committee deems those services to be consistent with the accounting firm’s independence:
Tax compliance services related to the filing or amendment of the following:
| |
| Federal, state and local income tax compliance; and, sales and use tax compliance |
| Timely RIC qualification reviews |
| Tax distribution analysis and planning |
| Tax authority examination services |
| Tax appeals support services |
| Accounting methods studies |
| Fund merger support service |
| Other tax consulting services and related projects |
Individual tax services that fall within one of these categories and are not presented to the Committee as part of the annual pre-approval process described above, may be pre-approved, if deemed consistent with the accounting firm’s independence, by the Committee Chairman (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $250,000. Any such pre-approval shall be reported to the full Committee at its next regularly scheduled meeting.
PROSCRIBED SERVICES
The Fund’s independent accountants will not render services in the following categories of non-audit services:
| |
| Bookkeeping or other services related to the accounting records or financial statements of the Fund
Financial information systems design and implementation |
| Appraisal or valuation services, fairness opinions, or contribution-in-kind reports |
| Actuarial services |
| Internal audit outsourcing services |
| Management functions or human resources |
| Broker or dealer, investment adviser or investment banking services |
| Legal services and expert services unrelated to the audit |
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Any other service that the Public Company Accounting Oversight Board determines, by regulation, is impermissible
PRE-APPROVAL OF NON-AUDIT SERVICES PROVIDED TO OTHER ENTITIES WITHIN THE FUND COMPLEX
The Committee will pre-approve annually any permitted non-audit services to be provided to Allianz Global Investors Fund Management LLC (Formerly, PA Fund Management LLC) or any other investment manager to the Funds (but not including any sub-adviser whose role is primarily portfolio management and is sub-contracted by the investment manager) (the “Investment Manager”) and any entity controlling, controlled by, or under common control with the Investment Manager that provides ongoing services to the Fund (including affiliated sub-advisers to the Fund), provided, in each case, that the engagement relates directly to the operations and financial reporting of the Fund (such entities, including the Investment Manager, shall be referred to herein as the “Accounting Affiliates”). Individual projects that are not presented to the Committee as part of the annual pre-approval process, may be pre-approved, if deemed consistent with the accounting firm’s independence, by the Committee Chairman (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $250,000. Any such pre-approval shall be reported to the full Committee at its next regularly scheduled meeting.
Although the Committee will not pre-approve all services provided to the Investment Manager and its affiliates, the Committee will receive an annual report from the Fund’s independent accounting firm showing the aggregate fees for all services provided to the Investment Manager and its affiliates.
DE MINIMUS EXCEPTION TO REQUIREMENT OF PRE-APPROVAL OF NON-AUDIT SERVICES
With respect to the provision of permitted non-audit services to a Fund or Accounting Affiliates, the pre-approval requirement is waived if:
| | | |
| (1) | The aggregate amount of all such permitted non-audit services provided constitutes no more than (i) with respect to such services provided to the Fund, five percent (5%) of the total amount of revenues paid by the Fund to its independent accountant during the fiscal year in which the services are provided, and (ii) with respect to such services provided to Accounting Affiliates, five percent (5%) of the total amount of revenues paid to the Fund’s independent accountant by the Fund and the Accounting Affiliates during the fiscal year in which the services are provided; |
| | | |
| (2) | Such services were not recognized by the Fund at the time of the engagement for such services to be non-audit services; and |
| | | |
| (3) | Such services are promptly brought to the attention of the Committee and approved prior to the completion of the audit by the Committee or by the Committee Chairman (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this Committee Chairman or other delegate shall be reported to the full Committee at its next regularly scheduled meeting. |
| | | |
| | e) | 2. No services were approved pursuant to the procedures contained in paragraph (C) (7) (i) (C) of Rule 2-01 of Registration S-X. |
| | | |
| | f) | Not applicable |
| | | |
| | g) | Non-audit fees. The aggregate non-audit fees billed by the Auditor for services rendered to |
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| | | |
| | | the Registrant, and rendered to the Adviser, for the 2009 Reporting Period was $3,422,141 and the 2010 Reporting Period was $3,618,948. |
| | | |
| | h) | Auditor Independence. The Registrant’s Audit Oversight Committee has considered whether the provision of non-audit services that were rendered to the Adviser which were not pre- approved is compatible with maintaining the Auditor’s independence. |
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANT
The Fund has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The audit committee of the Fund is comprised of Paul Belica, Hans W. Kertess, Alan Rappaport, R. Peter Sullivan III, William B. Ogden, IV and James A. Jacobson. R. Peter Sullivan III will retire from the Fund's Board of Trustees and audit committee effective July 31, 2010.
ITEM 6. SCHEDULE OF INVESTMENTS Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
PIMCO MUNICIPAL INCOME FUND II
PIMCO CALIFORNIA MUNICIPAL INCOME FUND II
PIMCO NEW YORK MUNICIPAL INCOME FUND II
(each a “Trust”)
PROXY VOTING POLICY
| |
1. | It is the policy of each Trust that proxies should be voted in the interest of its shareholders, as determined by those who are in the best position to make this determination. Each Trust believes that the firms and/or persons purchasing and selling securities for the Trust and analyzing the performance of a Trust’s securities are in the best position and have the information necessary to vote proxies in the best interests of the Trust and its shareholders, including in situations where conflicts of interest may arise between the interests of shareholders, on one hand, and the interests of the investment adviser, a sub-adviser and/or any other affiliated person of the Trust, on the other. Accordingly, each Trust’s policy shall be to delegate proxy voting responsibility to those entities with portfolio management responsibility for the Trust. |
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2. | Each Trust delegates the responsibility for voting proxies to Allianz Global Investors Fund Management LLC (“AGIFM”), which will in turn delegate such responsibility to the sub-adviser of the particular Trust. AGIFM’s Proxy Voting Policy Summary is attached as Appendix A hereto. A summary of the detailed proxy voting policy of PIMCO, the Trusts’ current sub-adviser, is set forth in Appendix B attached hereto. Such summary may be revised from time to time to reflect changes to the sub-adviser’s detailed proxy voting policy. |
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3. | The party voting the proxies (i.e., the sub-adviser) shall vote such proxies in accordance with such party’s proxy voting policies and, to the extent consistent with such policies, may rely on information and/or recommendations supplied by others. |
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4. | AGIFM and the sub-adviser of each Trust with proxy voting authority shall deliver a copy of its respective proxy voting policies and any material amendments thereto to the applicable Board of the Trust promptly after the adoption or amendment of any such policies. |
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5. | The party voting the proxy shall: (i) maintain such records and provide such voting information as is required for the Trusts’ regulatory filings including, without limitation, Form N-PX and the required disclosure of policy called for by Item 18 of Form N-2 and Item 7 of Form N-CSR; and (ii) shall provide such additional |
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| |
| information as may be requested, from time to time, by the Board or the Trusts’ Chief Compliance Officer. |
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6. | This Proxy Voting Policy Statement (including Appendix B), the Proxy Voting Policy Summary of AGIFM and summary of the detailed proxy voting policy of PIMCO, the sub-adviser of each Trust with proxy voting authority, shall be made available (i) without charge, upon request, by calling 1-800-254-5197 and (ii) on the Trusts’ website at www.allianzinvestors.com. In addition, to the extent required by applicable law or determined by the Trusts’ Chief Compliance Officer or Board of Trustees, the Proxy Voting Policy Summary of AGIFM and summary of the detailed proxy voting policy of PIMCO, the Trusts’ sub-adviser with proxy voting authority shall also be included in the Trusts’ Registration Statements or Form N-CSR filings. |
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Appendix A
ALLIANZ GLOBAL INVESTORS FUND MANAGEMENT LLC (“AGIFM”)
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1. | It is the policy of AGIFM that proxies should be voted in the interest of the shareholders of the applicable fund, as determined by those who are in the best position to make this determination. AGIFM believes that the firms and/or persons purchasing and selling securities for the funds and analyzing the performance of the funds’ securities are in the best position and have the information necessary to vote proxies in the best interests of the funds and their shareholders, including in situations where conflicts of interest may arise between the interests of shareholders, on one hand, and the interests of the investment adviser, a sub-adviser and/or any other affiliated person of the fund, on the other. Accordingly, AGIFM’s policy shall be to delegate proxy voting responsibility to those entities with portfolio management responsibility for the funds. |
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2. | AGIFM, for each fund which it acts as an investment adviser, delegates the responsibility for voting proxies to the sub-adviser for the respective fund, subject to the terms hereof. |
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3. | The party voting the proxies (e.g., the sub-adviser) shall vote such proxies in accordance with such party’s proxy voting policies and, to the extent consistent with such policies, may rely on information and/or recommendations supplied by others. |
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4. | AGIFM and each sub-adviser of a fund shall deliver a copy of its respective proxy voting policies and any material amendments thereto to the board of the relevant fund promptly after the adoption or amendment of any such policies. |
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5. | The party voting the proxy shall: (i) maintain such records and provide such voting information as is required for such funds’ regulatory filings including, without limitation, Form N-PX and the required disclosure of policy called for by Item 18 of Form N-2 and Item 7 of Form N-CSR; and (ii) shall provide such additional information as may be requested, from time to time, by such funds’ respective boards or chief compliance officers. |
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6. | This Proxy Voting Policy Summary and summaries of the proxy voting policies for each sub-adviser of a fund advised by AGIFM shall be available (i) without charge, upon request, by calling 1-800-254-5197 and (ii) at www.allianzinvestors.com. In addition, to the extent required by applicable law or determined by the relevant fund’s board of directors/trustees or chief compliance officer, this Proxy Voting Policy Summary and summaries of the detailed proxy voting policies of each sub-adviser and each other entity with proxy voting authority for a fund advised by AGIFM shall also be included in the Registration Statement or Form N-CSR filings for the relevant fund. |
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Appendix B
PACIFIC INVESTMENT MANAGEMENT COMPANY LLC
Pacific Investment Management Company LLC (“PIMCO”) has adopted written proxy voting policies and procedures (“Proxy Policy”) as required by Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended. PIMCO has implemented the Proxy Policy for each of its clients as required under applicable law, unless expressly directed by a client in writing to refrain from voting that client’s proxies. Recognizing that proxy voting is a rare event in the realm of fixed income investing and is typically limited to solicitation of consent to changes in features of debt securities, the Proxy Policy also applies to any voting rights and/or consent rights of PIMCO, on behalf of its clients, with respect to debt securities, including but not limited to, plans of reorganization, and waivers and consents under applicable indentures.
The Proxy Policy is designed and implemented in a manner reasonably expected to ensure that voting and consent rights are exercised in the best interests of PIMCO’s clients. Each proxy is voted on a case-bycase basis taking into consideration any relevant contractual obligations as well as other relevant facts and circumstances at the time of the vote. In general, PIMCO reviews and considers corporate governance issues related to proxy matters and generally supports proposals that foster good corporate governance practices. PIMCO may vote proxies as recommended by management on routine matters related to the operation of the issuer and on matters not expected to have a significant economic impact on the issuer and/or its shareholders.
PIMCO will supervise and periodically review its proxy voting activities and implementation of the Proxy Policy. PIMCO will review each proxy to determine whether there may be a material conflict between PIMCO and its client. If no conflict exists, the proxy will be forwarded to the appropriate portfolio manager for consideration. If a conflict does exist, PIMCO will seek to resolve any such conflict in accordance with the Proxy Policy. PIMCO seeks to resolve any material conflicts of interest by voting in good faith in the best interest of its clients. If a material conflict of interest should arise, PIMCO will seek to resolve such conflict in the client’s best interest by pursuing any one of the following courses of action: (i) convening a committee to assess and resolve the conflict; (ii) voting in accordance with the instructions of the client; (iii) voting in accordance with the recommendation of an independent third-party service provider; (iv) suggesting that the client engage another party to determine how the proxy should be voted; (v) delegating the vote to a third-party service provider; or (vi) voting in accordance with the factors discussed in the Proxy Policy.
Clients may obtain a copy of PIMCO’s written Proxy Policy and the factors that PIMCO may consider in determining how to vote a client’s proxy. Except as required by law, PIMCO will not disclose to third parties how it voted on behalf of a client. However, upon request from an appropriately authorized individual, PIMCO will disclose to its clients or the entity delegating the voting authority to PIMCO for such clients, how PIMCO voted such client’s proxy. In addition, a client may obtain copies of PIMCO’s Proxy Policy and information as to how its proxies have been voted by contacting PIMCO.
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ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
(a)(1)
As of August 2, 2010, the following individual has primary responsibility for the day-to-day implementation of the PIMCO Municipal Income Fund II (PML), PIMCO California Municipal Income Fund II (PCK) and PIMCO New York Municipal Income Fund II (PNI) (each a “Fund” and collectively, the “Funds”):
John B. Cummings
Mr. Cummings has been the portfolio manager for the Fund since December 11, 2008. Mr. Cummings is an executive vice president and head of the municipal bond desk at PIMCO in the Newport Beach office. Prior to joining PIMCO in 2002, he was vice president, municipal trading at Goldman Sachs, responsible for a number of municipal sectors, including industrials, airlines, utilities, healthcare and high-yield. He has 28 years of investment experience and holds an MBA, as well as his undergraduate degree, from Rutgers University.
(a)(2)
The following summarizes information regarding each of the accounts, excluding the respective Fund managed by the Portfolio Manager as of May 31, 2010, including accounts managed by a team, committee, or other group that includes the Portfolio Manager. Unless mentioned otherwise, the advisory fee charged for managing each of the accounts listed below is not based on performance.
| | | | | | | | | | | | | | |
| | | | Registered Investment Companies | | Other Pooled Investment Vehicles | | Other Accounts |
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| |
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|
PM | | Fund | | # | | AUM($million) | | # | | AUM($million) | | # | | AUM($million) |
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| |
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John B. Cummings | | PML | | 20 | | 5,128.01 | | 1 | | 428.89 | | 66 | | 4,126.84 |
| | PCK | | 20 | | 5,725.19 | | 1 | | 428.89 | | 66 | | 4,126.84 |
| | PNI | | 20 | | 5,945.00 | | 1 | | 428.89 | | 66 | | 4,126.84 |
From time to time, potential and actual conflicts of interest may arise between a portfolio manager’s management of the investments of a Fund, on the one hand, and the management of other accounts, on the other. Potential and actual conflicts of interest may also arise as a result of PIMCO’s other business activities and PIMCO’s possession of material non-public information about an issuer. Other accounts managed by a portfolio manager might have similar investment objectives or strategies as the Funds, track the same index a Fund tracks or otherwise hold, purchase, or sell securities that are eligible to be held, purchased or sold by the Funds. The other accounts might also have different investment objectives or strategies than the Funds.
Knowledge and Timing of Fund Trades. A potential conflict of interest may arise as a result of the portfolio manager’s day-to-day management of a Fund. Because of their positions with the Funds, the portfolio managers know the size, timing and possible market impact of a Fund’s trades. It is theoretically possible that the portfolio managers could use this information to the advantage of other accounts they manage and to the possible detriment of a Fund.
Investment Opportunities. A potential conflict of interest may arise as a result of the portfolio manager’s management of a number of accounts with varying investment guidelines. Often, an investment opportunity may be suitable for both a Fund and other accounts managed by the portfolio manager, but may not be available in sufficient quantities for both the Fund and the other accounts to participate fully.
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Similarly, there may be limited opportunity to sell an investment held by a Fund and another account. PIMCO has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time.
Under PIMCO’s allocation procedures, investment opportunities are allocated among various investment strategies based on individual account investment guidelines and PIMCO’s investment outlook. PIMCO has also adopted additional procedures to complement the general trade allocation policy that are designed to address potential conflicts of interest due to the side-by-side management of the Funds and certain pooled investment vehicles, including investment opportunity allocation issues.
Conflicts potentially limiting a Fund’s investment opportunities may also arise when the Fund and other PIMCO clients invest in different parts of an issuer’s capital structure, such as when the Fund owns senior debt obligations of an issuer and other clients own junior tranches of the same issuer. In such circumstances, decisions over whether to trigger an event of default, over the terms of any workout, or how to exit an investment may result in conflicts of interest. In order to minimize such conflicts, a portfolio manager may avoid certain investment opportunities that would potentially give rise to conflicts with other PIMCO clients or PIMCO may enact internal procedures designed to minimize such conflicts, which could have the effect of limiting a Fund’s investment opportunities. Additionally, if PIMCO acquires material non-public confidential information in connection with its business activities for other clients, a portfolio manager may be restricted from purchasing securities or selling securities for a Fund. When making investment decisions where a conflict of interest may arise, PIMCO will endeavor to act in a fair and equitable manner as between a Fund and other clients; however, in certain instances the resolution of the conflict may result in PIMCO acting on behalf of another client in a manner that may not be the best interest, or may be opposed to the best interest, of the Fund.
Performance Fees. A portfolio manager may advise certain accounts with respect to which the advisory fee is based entirely or partially on performance. Performance fee arrangements may create a conflict of interest for the portfolio manager in that the portfolio manager may have an incentive to allocate the investment opportunities that he or she believes might be the most profitable to such other accounts instead of allocating them to a Fund. PIMCO has adopted policies and procedures reasonably designed to allocate investment opportunities between the Funds and such other accounts on a fair and equitable basis over time.
(a) (3)
As of May 31, 2010, the following explains the compensation structure of the individual that shares primary responsibility for day-to-day portfolio management of the Fund:
PIMCO has adopted a Total Compensation Plan for its professional level employees, including its portfolio managers, that is designed to pay competitive compensation and reward performance, integrity and teamwork consistent with the firm’s mission statement. The Total Compensation Plan includes an incentive component that rewards high performance standards, work ethic and consistent individual and team contributions to the firm. The compensation of portfolio managers consists of a base salary, discretionary performance bonus, and may include an equity or long term incentive component.
Portfolio managers who are Managing Directors of PIMCO also receive compensation from PIMCO’s profits. Certain employees of PIMCO, including portfolio managers, may elect to defer compensation through PIMCO’s deferred compensation plan. PIMCO also offers its employees a non-contributory defined contribution plan through which PIMCO makes a contribution based on the employee’s compensation.
The Total Compensation Plan consists of three components:
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• | Base Salary – Base salary is determined based on core job responsibilities, market factors and business considerations. Salary levels are reviewed annually or when there is a significant change in job responsibilities or the market. |
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• | Performance Bonus – Performance bonuses are designed to reward high performance standards, work ethic and consistent individual and team contributions to the firm. Each professional and his or her supervisor will agree upon performance objectives to serve as the basis for performance evaluation during the year. The objectives will outline individual goals according to pre-established measures of group or department success. Achievement against these goals is measured by the employee and supervisor will be an important, but not exclusive, element of the bonus decision process. |
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• | Equity or Long Term Incentive Compensation �� Equity allows certain professionals to participate in the long-term growth of the firm. The M unit program provides for annual option grants which vest over a number of years and may convert into PIMCO equity that shares in the profit distributions of the firm. M Units are non-voting common equity of PIMCO and provide a mechanism for individuals to build a significant equity stake in PIMCO over time. Option awards may represent a significant portion of individual’s total compensation. |
In certain countries with significant tax implications for employees to participate in the M Unit Option Plan, PIMCO continues to use the Long Term Incentive Plan (“LTIP”) in place of the M Unit Option Plan. The LTIP provides cash awards that appreciate or depreciate based upon the performance of PIMCO’s parent company, Allianz Global Investors, and PIMCO over a three-year period. The aggregate amount available for distribution to participants is based upon Allianz Global Investors’ profit growth and PIMCO’s profit growth.
Participation in the M Unit Option Plan and LTIP is contingent upon continued employment at PIMCO.
In addition, the following non-exclusive list of qualitative criteria may be considered when specifically determining the total compensation for portfolio managers:
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| • | 3-year, 2-year and 1-year dollar-weighted and account-weighted, pre-tax investment performance as judged against the applicable benchmarks for each account managed by a portfolio manager (including the Funds) and relative to applicable industry peer groups; |
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| • | Appropriate risk positioning that is consistent with PIMCO’s investment philosophy and the Investment Committee/CIO approach to the generation of alpha; |
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| • | Amount and nature of assets managed by the portfolio manager; |
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| • | Consistency of investment performance across portfolios of similar mandate and guidelines (reward low dispersion); |
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| • | Generation and contribution of investment ideas in the context of PIMCO’s secular and cyclical forums, portfolio strategy meetings, Investment Committee meetings, and on a day-to-day basis; |
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| • | Absence of defaults and price defaults for issues in the portfolios managed by the portfolio manager; |
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| • | Contributions to asset retention, gathering and client satisfaction; |
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| • | Contributions to mentoring, coaching and/or supervising; and |
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| • | Personal growth and skills added. |
A portfolio manager’s compensation is not based directly on the performance of any Fund or any other account managed by that portfolio manager.
Profit Sharing Plan. Instead of a bonus, portfolio managers who are Managing Directors of PIMCO receive compensation from a non-qualified profit sharing plan consisting of a portion of PIMCO’s net profits. Portfolio managers who are Managing Directors receive an amount determined by the Partner Compensation Committee, based upon an individual’s overall contribution to the firm and the Bonus Factors. Under his employment agreement, William Gross receives a fixed percentage of the profit sharing plan.
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Allianz Transaction Related Compensation. In May 2000, a majority interest in the predecessor holding company of PIMCO was acquired by a subsidiary of Allianz AG (currently known as Allianz SE) (“Allianz”). In connection with the transaction, Mr. Gross received a grant of restricted stock of Allianz, the last of which vested on May 5, 2005.
Portfolio managers who are Managing Directors also have long-term employment contracts, which guarantee severance payments in the event of involuntary termination of a Managing Director’s employment with PIMCO.
(a)(4)
The following summarizes the dollar range of securities the portfolio manager for the Fund beneficially owned of the Fund that he managed as of May 31, 2010.
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PIMCO Municipal Income Fund II |
PIMCO California Municipal Income Fund II |
PIMCO New York Municipal Income Fund II |
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|
Portfolio Manager | Dollar Range of Equity Securities in the Fund |
|
John B. Cummings | None |
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ITEM 9.
Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Companies
None
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board of Trustees since the Fund last provided disclosure in response to this item.
ITEM 11. CONTROLS AND PROCEDURES
(a) The registrant’s President and Chief Executive Officer and Treasurer, Principal Financial Accounting Officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-2(c) under the Act (17 CFR 270.30a-3(c))), as amended are effective based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document.
(b) There were no significant changes over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d))) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants control over financial reporting.
ITEM 12. EXHIBITS
(a) (1) Exhibit 99.CODE ETH - Code of Ethics
(a) (2) Exhibit 99 Cert. - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(b) Exhibit 99.906 Cert. - Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) PIMCO Municipal Income Fund II
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By | /s/ Brian S. Shlissel |
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President and Chief Executive Officer |
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Date: | August 2, 2010 |
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By | /s/ Lawrence G. Altadonna |
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Treasurer, Principal Financial & Accounting Officer |
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Date: | August 2, 2010 |
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
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By | /s/ Brian S. Shlissel |
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President and Chief Executive Officer |
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Date: | August 2, 2010 |
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By | /s/ Lawrence G. Altadonna |
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Treasurer, Principal Financial & Accounting Officer |
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Date: | August 2, 2010 |
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