August, 2008

An Update on the Auction Rate Securities (ARS) market and its impact on the Municipal Income Preferred Shares of Seligman Select Municipal Fund, Inc. (common stock traded on NYSE under the ticker symbol SEL).

What is an Auction Rate Security?

Auction Rate Securities (ARS) are typically long-term bonds or shares of perpetual preferred stock that pay short-term interest or preferred dividend rates that reset every seven, 28, or 35 days. The rate is typically established through a Dutch Auction or remarketing process which is conducted by the auction or remarketing agent (typically a large broker-dealer or bank). Until recently, ARS have been widely viewed as liquid instruments because holders of ARS may elect to tender (sell) their securities on any auction or remarketing date. In a Dutch Auction, prospective buyers submit bids for the tendered securities. A successful auction is one in which there are sufficient bids to cover the number of ARS tendered for auction or remarketing.

ARS are issued by a wide range of entities, including municipalities, corporations, and closed-end funds like Seligman Select Municipal Fund, Inc. (the “Fund”). The size of the ARS market is estimated to be $342 billion* and is comprised of taxable and tax-exempt securities. Many closed-end funds leverage their portfolios through the issuance of a type of Auction Rate Security known as Auction Rate or Remarketed Preferreds or Tax-Exempt Preferreds (also referred to as AMPS or ARPS). In April 1990, the Fund was leveraged through the issuance of Remarketed Preferreds (ARPS) designated as “Municipal Income Preferred Shares.” The Fund is the only Seligman closed-end fund that is leveraged with ARPS.

What are the details of the Fund’s Preferred Shares?

The Fund has two series of preferred shares outstanding that reset their dividend rates typically every 28 days. There are 375 shares of Series “A” and 375 shares of Series “B” (the “Fund’s ARPS”) outstanding. The total face value of all 750 shares outstanding is $75 million ($100,000 per share). Shares are subject to mandatory redemption in April 2020 for Series “A” and April 2022 for Series “B”, respectively. The Fund’s ARPS have been rated Aaa by Moody’s and AAA by Standard & Poor’s (S&P) since they were issued in 1990. The Fund’s ARPS first experienced failed remarketings on February 13 (Series A) and February 27, 2008 (Series B). Since these dates, the remarketings have occured weekly but have continued to fail. Preferred shareholders who are unable to tender their shares in the remarketing due to a lack of liquidity in the market continue to receive scheduled dividends, now paid weekly, and will have an opportunity to tender shares every seven days. However, there can be no assurances as to if and when a successful auction will occur.

What is a “failed” auction (remarketing)?

Auction Rate Securities that are tendered must be purchased at a rate that does not exceed the Maximum Dividend Rate as defined in the ARS’ legal documents. A “failed auction” (remarketing) occurs when there are insufficient bids below the Maximum Dividend Rate to purchase all shares tendered. It should be emphasized that a “fail” in the remarketing of the Fund’s ARPS is not a default. Additionally, a “failed auction” does not imply that the Fund is unable to meet its dividend requirements. The “failed remarketings” are liquidity events for the holders of the Fund’s ARPS, not credit events of the Fund.

How often do failed Auction Rate Security auctions occur?

A failure of an ARS auction by closed-end municipal bond funds has, historically, been a rare occurrence. We know of no instance of failed auctions of closed-end municipal preferred shares prior to 2008. The Fund’s ARPS had never experienced a failed remarketing before February 13, 2008.

What caused the auction failures?

There are two primary reasons for recent auction failures in the ARS market. First, many ARS are backed by monoline insurers (although the Fund’s ARPS are not), and as the financial condition of the these insurers has deteriorated, investors have increasingly shunned the securities they guarantee. As a result, there is reduced demand for ARS. Second, the auction and remarketing failures that occurred recently were caused by a significant increase in the amount of ARS holders seeking to tender bonds at the same time; remarketing agents were becoming increasingly reluctant to provide liquidity due to, in some cases, their own credit constraints. Although auction and remarketing agents are not legally bound to support their auctions or remarketings, previously they have always maintained an orderly market by committing their own capital whenever there was insufficient demand.

Have other closed-end funds experienced failed auctions on Auction Rate Preferreds?

Yes, the problem of failed auctions/remarketings is currently widespread among closed-end funds. However, the penalty rates payable to the holders of many closed-end fund Auction Rate or Remarketed Preferred shares did not result in a significant increase in dividend rates and, in some instances, the rates payable actually declined compared to what the funds had been paying previously. The Fund’s ARPS have reset at a lower rate than the Fund was paying prior to the failed remarketings because the Maximum Dividend Rate is calculated at 125% of the 60-day Commercial Paper composite rate, which had dropped significantly in the weeks following the initial failed remarketings.

Prior to the failed remarketings, the rates paid had been increasing because of the reduced demand for the ARPS as a result of the factors noted above.

How does the Fund’s remarketing failure affect holders of the Fund’s ARPS?

Holders of the Fund’s ARPS must generally retain their shares while being compensated at the new dividend rate (equal to the Maximum Dividend Rate). The Fund is obligated, and fully able, to continue paying weekly dividends to the holders of the Fund’s ARPS.

Payments to the owners of the Fund’s ARPS, other than dividend payments, will be made solely from the proceeds of the remarketing. Neither the Fund nor the remarketing agent is obligated to provide funds to make payments to the owners of preferred shares tendered for remarketing. We cannot predict if or when the capital markets will correct themselves to achieve successful remarketings for the Fund’s ARPS.

What is being done to remedy the situation with respect to closed-end fund preferreds?

A number of closed-end funds — primarily taxable (equity and fixed-income) funds — have announced solutions to provide partial and in some case full liquidity for their funds’ ARS.

The partial redemptions occur because the funds are replacing the preferred stock with debt that is subject to higher coverage ratios. The Securities and Exchange Commission (SEC) requires closed-end funds to a have minimum coverage ratio of 300% ($3 for every $1 of leverage) with debt, compared to 200% minimum coverage ratio ($2 for every $1 of leverage) with preferred stock. Several of these funds were at their maximum leverage ratios with preferred stock and would be unable to satisfy the higher ratio if they replaced all of the preferred stock with debt.

The Investment Company Institute (an industry trade group) has submitted a request to the SEC for a temporary exemption that would, if granted, permit funds that replace preferred stock with debt to have 200%, rather than 300%, asset coverage ratios.

It is important to note that while taxable fixed-income funds have several alternative sources of financing at their disposal to replace their ARS, municipal closed-end funds face several challenges because they must obtain cost-effective tax-free financing.

Although under no obligation to do so, like some other closed-end funds, the Fund has been discussing possible measures with the remarketing agent and other financial institutions to address the Fund’s ARPS holders’ liquidity concerns. We maintain constant vigilance on any regulatory and industry progress and have participated on a number of industry conference calls, including with the Investment Company Institute.

Has there been any progress in developing alternative sources of leverage for municipal closed-end funds?

While still facing many challenges, the industry has seen some progress in developing alternative sources of leverage for municipal closed-end funds including Tender Option Bond programs.

How does a Tender Option Bond program (TOBs) work?

A closed-end fund will contribute one or more highly rated municipal bonds into a trust. The trust will issue short-term floating rate securities called TOBs. The proceeds derived from the TOBs are paid to the fund and typically are used to purchase additional municipal bonds. However, the fund may also use the proceeds from the TOBs to redeem a portion of its ARPS outstanding. In addition, TOBs have a put-like feature that make them eligible for money market funds to purchase. In essence, similar to ARPS, a Tender Option Bond program allows a municipal closed-end fund to leverage some of its assets with tax-free financing.

Are there any drawbacks to TOBs?

The municipal closed-end funds that have announced redemptions so far have done so with TOBs that provide a partial replacement of their leverage. The ability to replace ARPS with TOBs will depend on several factors. First, the portfolio composition is critical; only the highest quality bonds can be deposited in the trust in order for the TOB to be money market eligible. Many money market funds also have preferences as to the minimum block size, maturity dates, and call exposure of the TOB. Additionally, rating agencies may impose limits on the use of TOBs.

Can ARS be valued at below par?

It has been reported that, as a result of the ongoing illiquidity in the ARS market, some broker dealers have decided to value ARS below par. Seligman is unaware of its two series of preferred shares being valued at below par. Investors should review their account statements and contact their broker dealer.

If my broker dealer values my ARS at below par, how does that affect the Fund?

A broker dealer decision to value an ARS below par does not affect the credit quality of the ARS and the Fund’s ability to pay dividends.

ADDITIONAL NOTES ON SELIGMAN SELECT MUNICIPAL FUND:

Strong asset coverage: The Investment Company Act of 1940 requires minimum asset coverage of 200%. The Asset Coverage Ratio for the Fund on July 31, 2008 was 292%. Important Note: Asset Coverage Ratio is subject to change.

The Fund’s ARPS rated AAA: The Fund’s ARPS are rated Aaa by Moody’s and AAA by S&P and must continually meet strict criteria to maintain this rating. Ratings of Aaa and AAA are respectively, the highest rankings given by Moody’s and S&P.

The Fund has no exposure to derivatives.

Seligman Select Municipal Fund (NYSE: SEL) Statistics (7-31-08):

Option Adjusted Duration:	8.0 years
Average Weighted Maturity:	14.6 years
Market Price	$9.55
Net Asset Value:	$10.82
(Discount) / Premium:	(11.74%)

IMPORTANT PERFORMANCE INFORMATION

The rate of return will vary and the principal value of your investment will fluctuate. Shares, if sold, may be worth more or less than their original cost. The net asset value of your shares may not always correspond to the market price of such shares. In fact, shares of many closed-end funds frequently trade at a discount from their net asset value. An investment in Seligman Select Municipal Fund could be adversely affected by market risk, income risk, interest rate risk, call risk, and credit risk.

Information provided herein is as of the date stated and is subject to change. An investment in the Fund is not insured or guaranteed by the US government. To the extent that the Fund concentrates its investments in municipal securities issued by a single state and its municipalities, specific events or factors affecting a particular state may have an impact on the municipal securities of that state without affecting the municipal market in general.

On July 7, 2008, Ameriprise Financial, Inc. (“Ameriprise”) announced an agreement to acquire J. & W. Seligman & Co. Incorporated (“Seligman”), the Fund’s manager, in a transaction that is likely to close in the fourth quarter of 2008. Consummation of Ameriprise’s acquisition of Seligman will result in a change of control of Seligman and an assignment and automatic termination of the Fund’s management agreement with Seligman. At a meeting on July 29, 2008, the Fund’s Board approved new advisory and administration agreements between the Fund and subsidiaries of Ameriprise. The new advisory agreement will be presented to the shareholders of the Fund for their approval.