W. Scott Jardine, Esq., Secretary
First Trust Exchange-Traded Fund IV
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(Name and Address of Agent for Service)
Signatures
The Information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS DATED DECEMBER 14, 2012
SUBJECT TO COMPLETION
FIRST TRUST EXCHANGE-TRADED FUND IV
PROSPECTUS
First Trust Senior Loan Fund
Ticker Symbol: ______
Exchange: ______
First Trust Senior Loan Fund (the "Fund") is a series of First Trust
Exchange-Traded Fund IV (the "Trust") and an exchange-traded fund organized as a
separate series of a registered management investment company.
The Fund will list and principally trade its shares on ______ ("______"). Market
prices may differ to some degree from the net asset value of the shares. Unlike
mutual funds, the Fund issues and redeems shares, at net asset value, only in
large specified blocks each consisting of 50,000 shares (each such block of
shares, called a "Creation Unit," and collectively, the "Creation Units"). The
Fund's Creation Units are issued and redeemed principally in-kind for securities
in which the Fund invests and/or cash, only to and from broker-dealers and large
institutional investors that have entered into participation agreements.
THE FUND IS AN ACTIVELY MANAGED EXCHANGE-TRADED FUND AND EXCEPT WHEN AGGREGATED
IN CREATION UNITS, THE SHARES ARE NOT REDEEMABLE SECURITIES OF THE FUND.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
________________, 2013
TABLE OF CONTENTS
SUMMARY INFORMATION...........................................................2
ADDITIONAL INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE AND STRATEGIES......8
FUND INVESTMENTS..............................................................8
ADDITIONAL RISKS OF INVESTING IN THE FUND....................................11
FUND ORGANIZATION............................................................17
MANAGEMENT OF THE FUND.......................................................17
HOW TO BUY AND SELL SHARES...................................................19
DIVIDENDS, DISTRIBUTIONS AND TAXES...........................................21
FEDERAL TAX MATTERS..........................................................21
DISTRIBUTION PLAN............................................................25
NET ASSET VALUE..............................................................25
FUND SERVICE PROVIDERS.......................................................27
PREMIUM/DISCOUNT INFORMATION.................................................27
OTHER INFORMATION............................................................27
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SUMMARY INFORMATION
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide high current income.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage
of offering price) None
ANNUAL FUND OPERATING EXPENSES (Expenses that you pay each year as
a percentage of the value of your investment)
Management Fees 0.__%
Distribution and Service (12b-1) Fees(1) 0.00%
Other Expenses(2) 0.00%
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Total Annual Fund Operating Expenses 0.__%
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EXAMPLE
The example below is intended to help you compare the cost of investing
in the Fund with the cost of investing in other funds. This example does
not take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time
periods indicated. The example also assumes that your investment has a 5%
return each year and that the Fund's operating expenses remain at current
levels until _____, 2012 and thereafter at ___% to represent the
imposition of the 12b-1 fee of 0.25% per annum of the Fund's average
daily net assets(1). Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 YEAR 3 YEARS
$_____ $______
---------------
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(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before
__________, 20__.
(2) Because the Fund has no operating history, "Other Expenses" are based on
estimated net assets of $100 million for the current fiscal year.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and
sells securities (or "turns over" its portfolio). A higher portfolio
turnover rate may indicate higher transaction costs and may result in
higher taxes when Fund shares are held in a taxable account. These costs,
which are not reflected in annual fund operating expenses or in the
example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, the Fund invests at least 80% of its net assets
(plus the amount of any borrowing for investment purposes) in senior loans. The
Fund's investment adviser defines senior loans to include loans referred to as
leveraged loans, bank loans and/or floating rate loans. Senior loans can be made
to domestic or foreign corporations, partnerships and other entities
("borrowers") that operate in a variety of industries. Senior loans typically
have the most senior position in a borrower's capital structure or share the
senior position with other senior debt securities of the borrower. Senior loans
generally are arranged through private negotiations between a borrower and
several financial institutions (the "lenders") represented by one or more
lenders acting as agent for the other lenders in the group. The agent is
primarily responsible for negotiating the loan agreement that establishes the
relative terms and conditions of the senior loan and rights of the borrower and
the lenders.
The Fund pursues its objective by seeking to assemble a portfolio that includes
issuers the adviser believes have strong credit metrics, based on its evaluation
of cash flows, collateral coverage and management teams, among other things.
Senior loans are often below investment-grade instruments, which are commonly
known as "junk bonds." The Fund may invest in floating rate loans of companies
whose financial condition is troubled or uncertain and that may be involved in
bankruptcy proceedings, reorganizations or financial restructurings.
The Fund may invest up to 20% of its net assets in (1) fixed-rate or
floating-rate income producing securities (including, without limitation, U.S.
government debt securities and below-investment grade, subordinated and
unsubordinated corporate debt securities), (2) warrants and equity securities
issued by a borrower or its affiliates, in certain instances, as part of a
package of investments in the borrower or its affiliates, and (3) securities of
other investment companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CREDIT RISK. Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments. Credit risk may be heightened
for the fund because it may invest a substantial portion of its net assets in
high yield or "junk" debt; such securities, while generally offering higher
yields than investment-grade debt with similar maturities, involve greater
risks, including the possibility of dividend or interest deferral, default or
bankruptcy, and are regarded as predominantly speculative with respect to the
issuer's capacity to pay dividends or interest and repay principal. Credit risk
is heightened for loans in which the Fund invests because companies that issue
such loans tend to be highly leveraged and thus are more susceptible to the
risks of interest deferral, default and/or bankruptcy.
3
HIGH YIELD SECURITIES RISK. High yield securities are subject to greater market
fluctuations and risk of loss than securities with higher ratings. These
securities are issued by companies that may have limited operating history,
narrowly focused operations, and/or other impediments to the timely payment of
periodic interest and principal at maturity. If the economy slows down or dips
into recession, the issuers of high yield securities may not have sufficient
resources to continue making timely payment of periodic interest and principal
at maturity. The market for high yield securities is smaller and less liquid
than that for investment grade securities. High yield securities are generally
not listed on a national securities exchange but trade in the over-the-counter
markets. Due to the smaller, less liquid market for high yield securities, the
bid-offer spread on such securities is generally greater than it is for
investment grade securities and the purchase or sale of such securities may take
longer to complete.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the debt
securities in the Fund will decline because of rising market interest rates.
Interest rate risk is generally lower for shorter-term investments and higher
for longer-term investments. Duration is a common measure of interest rate risk,
which measures a bond's expected life on a present value basis, taking into
account the bond's yield, interest payments and final maturity. Duration is a
reasonably accurate measure of a bond's price sensitivity to changes in interest
rates. The longer the duration of a bond, the greater the bond's price
sensitivity is to changes in interest rates.
INCOME RISK. If interest rates fall, the income from the Fund's portfolio will
likely decline as the Fund generally holds floating rate debt that will adjust
lower with falling interest rates. For loans, interest rates typically reset
every 30 to 90 days.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments.
LOANS RISK. An investment in loans subjects the Fund to credit risk, which is
heightened for loans in which the Fund invests because companies that issue such
loans tend to be highly leveraged and thus are more susceptible to the risks of
interest deferral, default and/or bankruptcy. Senior floating rate loans are
usually rated below investment grade but may also be unrated. As a result, the
risks associated with these loans are similar to the risks of below investment
grade fixed income instruments. An economic downturn would generally lead to a
higher non-payment rate, and a senior floating rate loan may lose significant
market value before a default occurs. Moreover, any specific collateral used to
secure a senior floating rate loan may decline in value or become illiquid,
which would adversely affect the loan's value. Unlike the securities markets,
there is no central clearinghouse for loan trades, and the loan market has not
established enforceable settlement standards or remedies for failure to settle.
Therefore, portfolio transactions in loans may have uncertain settlement time
periods. Senior floating rate loans are subject to a number of risks described
4
elsewhere in this prospectus, including liquidity risk and the risk of investing
in below investment grade fixed income instruments.
LIQUIDITY RISK. The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders.
NON-U.S. SECURITIES RISK. Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; currency exchange rates; excessive taxation;
government seizure of assets; different legal or accounting standards; and less
government supervision and regulation of exchanges in foreign countries.
CURRENCY RISK. Because the Fund's net asset value is determined on the basis of
U.S. dollars and the Fund invests in foreign securities, you may lose money if
the local currency of a foreign market depreciates against the U.S. dollar, even
if the local currency value of the Fund's holdings goes up. The Fund intends to
hedge its non-U.S. dollar holdings.
PREPAYMENT RISK. Loans are subject to pre-payment risk. The degree to which
borrowers prepay loans, whether as a contractual requirement or at their
election, may be affected by general business conditions, the financial
condition of the borrower and competitive conditions among loan investors, among
others. As such, prepayments cannot be predicted with accuracy. Upon a
prepayment, either in part or in full, the actual outstanding debt on which the
Fund derives interest income will be reduced. The Fund may not be able to
reinvest the proceeds received on terms as favorable as the prepaid loan.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended. As a result, the Fund is only
limited as to the percentage of its assets that may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. The Fund may invest a relatively high
percentage of its assets in a limited number of issuers. As a result, the Fund
may be more susceptible to a single adverse economic or regulatory occurrence
affecting one or more of these issuers, experience increased volatility and be
highly concentrated in certain issuers.
NEW FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively new funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
5
CASH TRANSACTION RISK. The Fund may under certain circumstances effect a portion
of creations and redemptions for cash, rather than in-kind securities. As a
result, an investment in the Fund may be less tax-efficient than an investment
in an exchange-traded fund that effects its creations and redemption for in-kind
securities. Because the Fund may effect a portion of redemptions for cash, it
may be required to sell portfolio securities in order to obtain the cash needed
to distribute redemption proceeds. A sale of shares may result in capital gains
or losses, and may also result in higher brokerage costs.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Advisor will apply investment techniques and risk analyses that may not have the
desired result. There can be no guarantee that the Fund will meet its investment
objective.
PERFORMANCE
The Fund has not yet commenced operations and, therefore, does not have a
performance history. Once available, the Fund's performance information will be
available on the Fund's website at www.ftportfolios.com.
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The following persons serve as the portfolio managers of the Fund. Each
has managed the Fund since inception.
o William Housey, CFA, Senior Vice President, Senior Portfolio Manager
o Scott D. Fries, CFA, Senior Vice President, Portfolio Manager
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind, for securities in which the Fund
invests and/or cash, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on ______ through a broker-dealer. Shares of the Fund
will trade on ______ at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax deferred account.
6
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
7
ADDITIONAL INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE AND
STRATEGIES
The Fund's investment objective is fundamental and may not be changed without
approval by the holders of a majority of the outstanding voting securities of
the Fund. Unless an investment policy is identified as being fundamental, all
investment policies included in this prospectus and the Fund's Statement of
Additional Information ("SAI") are non-fundamental and may be changed by the
Board of Trustees (the "Board") of the First Trust Exchange-Traded Fund IV (the
"Trust"), of which the Fund is a series, without shareholder approval.
The Fund has adopted a non-fundamental investment policy pursuant to Rule 35d-1
(the "Name Policy") under the Investment Company Act of 1940 Act, as amended
(the "1940 Act"), whereby the Fund, under normal market conditions, will invest
at least 80% of its net assets (plus the amount of any borrowing for investment
purposes) in senior loans, which may include loan interests that are not secured
by any specific collateral of the borrower, loan interests that have a lower
than first lien priority on collateral of the borrower, loans to foreign
borrowers, loans in foreign currencies and other loans with characteristics that
the advisor believes qualify as senior loans.
The Name Policy may be changed by the Board of Trustees without shareholder
approval upon 60 days' prior written notice. If there is a material change to
the Fund's principal investment strategies, you should consider whether the Fund
remains an appropriate investment for you. There is no guarantee that the Fund
will achieve its investment objective.
The Fund may invest up to 20% of its net assets in (1) fixed-rate or
floating-rate income producing securities (including, without limitation, U.S.
government debt securities and below-investment grade, subordinated and
unsubordinated corporate debt securities), (2) warrants and equity securities
issued by a borrower or its affiliates, in certain instances, as part of a
package of investments in the borrower or its affiliates, and (3) securities of
other investment companies.
FUND INVESTMENTS
BANK LOANS
The Fund may invest in bank loans, including senior secured bank loans,
unsecured and/or subordinated bank loans, loan participations and unfunded
contracts. The Fund may invest in such loans by purchasing assignments on all or
a portion of loans or loan participations from third parties. These loans are
made by or issued to corporations primarily to finance acquisitions, refinance
existing debt, support organic growth, or pay out dividends, and are typically
originated by large banks and are then syndicated out to institutional investors
as well as to other banks. Bank loans typically bear interest at a floating rate
although some loans pay a fixed rate. Due to their subordination in the
borrower's capital structure, unsecured and/or subordinated loans involve a
higher degree of overall risk than senior bank loans of the same borrower.
Unfunded contracts are commitments by lenders (such as the Fund) to loan an
amount in the future or that is due to be contractually funded in the future.
8
Senior floating rate loans are made to companies whose debt is rated below
investment grade. Senior floating rate loans hold a first lien priority and
typically pay interest at rates which are determined periodically on the basis
of a floating base lending rate, primarily the London-Interbank Offered Rate
("LIBOR"), plus a premium. Senior floating rate loans are typically made to U.S.
and, to a lesser extent, non-U.S. corporations, partnerships and other business
entities which operate in various industries and geographical regions. Borrowers
may obtain these loans to, among other reasons, refinance existing debt and for
acquisitions, dividends, leveraged buyouts, and general corporate purposes.
Senior floating rate loans typically are rated below investment grade. Below
investment grade securities often are regarded as having predominately
speculative characteristics with respect to an issuer's capacity to pay interest
and repay principal. Although many of the Fund's investments may consist of
securities rated below investment grade, the Fund reserves the right to invest
in debt securities, including senior floating rate loans, of any credit quality,
maturity and duration.
CORPORATE DEBT SECURITIES
The Fund may invest in corporate debt securities issued by U.S. and non-U.S.
companies of all kinds, including those with small, mid and large
capitalizations. Corporate debt securities are fixed income securities issued by
businesses to finance their operations. Notes, bonds, debentures and commercial
paper are the most common types of corporate debt securities, with the primary
difference being their maturities and secured or unsecured status. Commercial
paper has the shortest term and is usually unsecured. Corporate debt may be
rated investment grade or below investment grade and may carry fixed or floating
rates of interest.
HIGH YIELD DEBT
The Fund invests primarily in debt instruments (e.g., bonds, loans and
convertible bonds), a substantial portion of which may be rated below investment
grade, or unrated securities deemed by the Fund's portfolio managers to be of
comparable quality. Debt rated below investment grade is commonly referred to as
high yield or "junk" debt. For purposes of determining whether a security is
below investment grade, the lowest available rating will be considered.
NON-U.S. INVESTMENTS
The Fund may invest in securities issued by non-U.S. companies that are traded
over-the-counter or listed on an exchange. Non-U.S. debt securities in which the
Fund may invest include debt securities issued or guaranteed by companies
organized under the laws of countries other than the United States, debt
securities issued or guaranteed by foreign, national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities and debt obligations of supranational governmental entities
such as the World Bank or European Union. These debt securities may be U.S.
dollar-denominated or non-U.S. dollar-denominated. Non-U.S. debt securities also
9
include U.S. dollar-denominated debt obligations, such as "Yankee Dollar"
obligations, of foreign issuers and of supra-national government entities.
Yankee Dollar obligations are U.S. dollar-denominated obligations issued in the
U.S. capital markets by foreign corporations, banks and governments. Foreign
debt securities also may be traded on foreign securities exchanges or in
over-the-counter capital markets. Under normal market conditions, up to 10% of
the net assets of the Fund may be denominated in currencies other than the U.S.
dollar To the extent the Fund invests in such instruments, the value of the
assets of the Fund as measured in U.S. dollars will be affected by changes in
exchange rates. Generally, the Fund's currency exchange transactions will be
conducted on a spot (i.e., cash) basis at the spot rate prevailing in the
currency exchange market. The cost of the Fund's currency exchange transactions
will generally be the difference between the bid and offer spot rate of the
currency being purchased or sold. In order to protect against uncertainty in the
level of future currency exchange rates, the Fund is authorized to enter into
various currency exchange transactions.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in securities and other
instruments that are, at the time of investment, illiquid (determined using the
Securities and Exchange Commission's standard applicable to investment
companies, i.e. securities that cannot be disposed of by the Fund within seven
days in the ordinary course of business at approximately the amount at which the
Fund has valued the securities). For this purpose, illiquid securities may
include, but are not limited to, certain restricted securities (securities the
disposition of which is restricted under the federal securities laws), certain
securities that may only be resold pursuant to Rule 144A under the Securities
Act of 1933, as amended (the "Securities Act"), that are deemed to be illiquid,
and certain repurchase agreements.
ADDITIONAL INVESTMENTS
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. government securities. U.S. government securities
include U.S. Treasury obligations and securities issued or guaranteed by various
agencies of the U.S. government, or by various instrumentalities which have been
established or sponsored by the U.S. government. U.S. Treasury obligations are
backed by the "full faith and credit" of the U.S. government. Securities issued
or guaranteed by federal agencies and U.S. government sponsored
instrumentalities may or may not be backed by the full faith and credit of the
U.S. government.
PREFERRED SECURITIES
The Fund may invest in preferred securities. Preferred securities, which
generally pay fixed or adjustable-rate dividends or interest to investors and
have preference over common stock in the payment of dividends or interest and
the liquidation of a company's assets, which means that a company typically must
pay dividends or interest on its preferred securities before paying any
dividends on its common stock. Preferred securities are generally junior to all
forms of the company's debt, including both senior and subordinated debt.
10
CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
Normally, the Fund invests substantially all of its assets to meet its
investment objective. Under normal market conditions, the Fund may invest up to
10% of its net assets in cash equivalents, or it may hold cash. The percentage
of the Fund invested in such holdings varies and depends on several factors,
including market conditions. For temporary defensive purposes and during periods
of high cash inflows or outflows, the Fund may depart from its principal
investment strategies and invest part or all of its assets in these securities
or it may hold cash. During such periods, the Fund may not be able to achieve
its investment objective. The Fund may adopt a defensive strategy when the
portfolio managers believe securities in which the Fund normally invests have
elevated risks due to political or economic factors and in other extraordinary
circumstances. For more information on eligible short term investments, see the
Fund's SAI.
INVESTMENT COMPANIES AND OTHER POOLED INVESTMENT VEHICLES
The fund may invest in securities of other open-end or closed-end investment
companies, including exchange-traded funds ("ETFs"), that invest primarily in
securities of the types in which the Fund may invest directly. In addition, the
Fund may invest a portion of its assets in pooled investment vehicles (other
than investment companies) that invest primarily in securities of the types in
which the Fund may invest directly. The Fund may invest in the securities of
ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive
orders obtained by certain ETFs and their sponsors from the Securities and
Exchange Commission. ETFs trade on a securities exchange and their shares may,
at times, trade at a premium or discount to their net asset value.
As a shareholder in a pooled investment vehicle, the Fund will bear its ratable
share of that vehicle's expenses, and would remain subject to payment of the
Fund's advisory and administrative fees with respect to assets so invested.
Shareholders would therefore be subject to duplicative expenses to the extent
the fund invests in other pooled investment vehicles. In addition, the Fund will
incur brokerage costs when purchasing and selling shares of ETFs and closed-end
investment companies. Securities of other pooled investment vehicles may be
leveraged, in which case the value and/or yield of such securities will tend to
be more volatile than securities of unleveraged vehicles.
DISCLOSURE OF PORTFOLIO HOLDINGS
A description of the policies and procedures with respect to the disclosure of
the Fund's portfolio securities is included in the Fund's SAI and on the Fund's
website at www.ftportfolios.com.
ADDITIONAL RISKS OF INVESTING IN THE FUND
Risk is inherent in all investing. Investing in the Fund involves risk,
including the risk that you may lose all or part of your investment. There can
be no assurance that the Fund will meet its stated objective. Before you invest,
you should consider the following risks in addition to the Principal Risks set
forth above in this prospectus:
11
LOANS RISK. In addition to the risks described above in "Principal Risks --
Loans Risk," the loans in which the Fund may invest may not (i) be rated at the
time of investment, (ii) be registered with the Securities and Exchange
Commission, (iii) be listed on a securities exchange or (iv) have sufficient
collateral securing the loan or the collateral may not be available in the event
of bankruptcy. In addition, the amount of public information available with
respect to such loans may be less extensive than that available for more widely
rated, registered and exchange-listed securities. Because no active trading
market may exist for some of the loans in which the Fund may invest, such loans
may be illiquid and more difficult to value than more liquid instruments for
which a trading market does exist. Unlike the securities markets, there is no
central clearinghouse for loan trades, and the loan market has not established
enforceable settlement standards or remedies for failure to settle. Therefore,
portfolio transactions in loans may have uncertain settlement time periods.
Because the interest rates of floating-rate loans in which the Fund may invest
may reset frequently, if market interest rates fall, the loans' interest rates
will be reset to lower levels, potentially reducing the Fund's income.
First Trust or its affiliates may participate in the primary and secondary
market for loans. Because of limitations imposed by applicable law, the presence
of such affiliates in the loan market may restrict the Fund's ability to acquire
some loans or affect the timing or price of loan acquisitions. Also, because
First Trust may wish to invest in the publicly-traded securities of an obligor,
the Fund may not have access to material non-public information regarding the
obligor to which other investors have access.
HIGH YIELD SECURITIES RISK. In addition to the risks described above in
"Principal Risks -- High Yield Securities Risk," the Fund's investment in high
yield, high risk, fixed rate, domestic and foreign obligations, or "junk"
securities, may entail increased credit risks and the risk that the value of
Fund's assets will decline, and may decline precipitously, with increases in
interest rates. In recent years there have been wide fluctuations in interest
rates and thus in the value of fixed rate, obligations generally. Securities
such as those included in the Fund are, under most circumstances, subject to
greater market fluctuations and risk of loss of income and principal than are
investments in lower-yielding, higher-rated securities, and their value may
decline precipitously because of increases in interest rates, not only because
the increases in rates generally decrease values, but also because increased
rates may indicate a slowdown in the economy and a decrease in the value of
assets generally that may adversely affect the credit of issuers of high yield,
high risk securities resulting in a higher incidence of defaults among high
yield, high risk securities. A slowdown in the economy, or a development
adversely affecting an issuer's creditworthiness, may result in the issuer being
unable to maintain earnings or sell assets at the rate and at the prices,
respectively, that are required to produce sufficient cash flow to meet its
interest and principal requirements. For an issuer that has outstanding both
senior commercial bank debt and subordinated high yield, high risk securities,
an increase in interest rates will increase that issuer's interest expense
insofar as the interest rate on the bank debt is fluctuating. However, many
leveraged issuers enter into interest rate protection agreements to fix or cap
the interest rate on a large portion of their bank debt. This reduces exposure
to increasing rates, but reduces the benefit to the issuer of declining rates.
12
The Advisor cannot predict future economic policies or their consequences or,
therefore, the course or extent of any similar market fluctuations in the
future.
High yield debt may be issued by companies without long track records of sales
and earnings, or by issuers that have questionable credit strength. High yield
debt and comparable unrated debt securities: (a) will likely have some quality
and protective characteristics that, in the judgment of the rating agency
evaluating the instrument, are outweighed by large uncertainties or major risk
exposures to adverse conditions; and (b) are predominantly speculative with
respect to the issuer's capacity to pay dividends or interest and repay
principal in accordance with the terms of the obligation. Many lower-quality
debt securities are subject to legal or contractual restrictions limiting the
Fund's ability to resell the securities to the general public.
CREDIT RISK. Credit risk is the risk that an issuer of a debt instrument may be
unable or unwilling to make dividend, interest and/or principal payments when
due and the related risk that the value of an instrument may decline because of
concerns about the issuer's ability or unwillingness to make such payments. High
yield and comparable unrated debt securities, while generally offering higher
yields than investment-grade debt with similar maturities, involve greater
risks, including the possibility of dividend or interest deferral, default or
bankruptcy, and are regarded as predominantly speculative with respect to the
issuer's capacity to pay dividends or interest and repay principal. Credit risk
is heightened for loans in which the Fund invests because companies that issue
such loans tend to be highly leveraged and thus are more susceptible to the
risks of interest deferral, default and/or bankruptcy.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the Fund's
debt will decline because of rising market interest rates. Interest rate risk is
generally lower for shorter-term investments and higher for longer-term
investments. Duration is a common measure of interest rate risk. Duration
measures a bond's expected life on a present value basis, taking into account
the bond's yield, interest payments and final maturity. Duration is a reasonably
accurate measure of a bond's price sensitivity to changes in interest rates. The
longer the duration of a bond, the greater the bond's price sensitivity is to
changes in interest rates.
INCOME RISK. In addition to the risks described above in "Principal Risks --
Income Risk," the income earned from the Fund's portfolio will likely decline
because of falling market interest rates. This can result because the Fund
generally holds floating rate debt that will adjust lower with falling interest
rates. For loans, interest rates typically reset every 30 to 90 days.
FIXED-INCOME SECURITIES RISK. An investment in the Fund also involves risk
associated with an investment in fixed-income securities including the risk that
certain of the securities in the Fund may not have the benefit of covenants
which would prevent the issuer from engaging in capital restructurings or
borrowing transactions in connection with corporate acquisitions, leveraged
buyouts or restructurings which could have the effect of reducing the ability of
the issuer to meet its payment obligations and might result in increased credit
13
risk. In addition, certain of the securities may be redeemed or prepaid by the
issuer, resulting in lower interest payments received by the Fund and reduced
distributions to shareholders.
NON-U.S. SECURITIES RISK. In addition to the risks described above in "Principal
Risks -- Non-U.S. Securities Risk," an investment in securities of non-U.S.
companies involves risk not associated with domestic issuers. Non-U.S. countries
may impose higher withholding taxes on dividends and interest than the United
States. Non-U.S. countries may also impose limitations on the use of or transfer
of portfolio assets. Enforcing legal rights may be more difficult, expensive and
time consuming in non-U.S. countries, and investors may force unique problems
enforcing claims against non-U.S. governments.
CURRENCY RISK. In addition to the risks described above in "Principal Risks -
Currency Risk," an investment in non-U.S. securities involves further risk due
to currency exchange rates. Changes in currency exchange rates may affect the
Fund's net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the strength of
the U.S. dollar relative to other currencies may cause the value of the Fund to
decline. Certain non-U.S. currencies may be particularly volatile, and non-U.S.
governments may intervene in the currency markets, causing a decline in value or
liquidity in the Fund's non-U.S. holdings whose value is tied to the affected
non-U.S. currency.
ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular
type of security can be more volatile than the market as a whole and can perform
differently from the value of the market as a whole.
MARKET CONDITIONS RISK. In addition to the risks described above in "Principal
Risks -- Market Risk," domestic and international markets have experienced a
period of decreased economic activity across all sectors of the world economy,
and unemployment remains at increased levels. These market conditions began with
problems in the financial sector, many of which were caused by defaults on
"subprime" mortgages and mortgage-backed securities. These market conditions
increase the risk that the value of the Fund's assets may be subject to steep
declines or increased volatility due to changes in performance or perception of
the issuers.
PREPAYMENT RISK. In addition to the risks described above in "Principal Risks --
Prepayment Risk," during periods of falling interest rates, an issuer of a loan
may exercise its right to pay principal on an obligation earlier than expected.
This may result in the Fund reinvesting proceeds at lower interest rates,
resulting in a decline in the Fund's income.
LIQUIDITY RISK. In addition to the risks described above in "Principal Risks --
Liquidity Risk," the Fund invests a substantial portion of its assets in
lower-quality debt instruments issued by companies that are highly leveraged.
Lower-quality debt tends to be less liquid than higher-quality debt. If the
economy experiences a sudden downturn, or if the debt markets for such companies
become distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
14
Fund shareholders. In such event, there would be a greater chance that the Fund
may be forced to curtail or suspend redemptions, in which case you might
experience a delay or inability to liquidate your investment at the desired time
or in the desired amount.
RISK OF CASH TRANSACTIONS. In addition to the risks described above in
"Principal Risks -- Cash Transaction Risk," the Fund currently intends to effect
a significant portion of creations and redemptions for cash, rather than in-kind
securities. As a result, an investment in the Fund may be less tax-efficient
than an investment in an exchange-traded fund that effects its creations and
redemptions for in-kind securities. Exchange-traded funds are able to make
in-kind redemptions and avoid being taxed on gains on the distributed portfolio
securities at the fund level. Because the Fund intends to effect a significant
portion of redemptions for cash, it may be required to sell portfolio securities
in order to obtain the cash needed to distribute redemption proceeds. Any
recognized gain on these sales by the Fund will generally cause the Fund to
recognize gain it might not otherwise have recognized, or to recognize such gain
sooner than would otherwise be required if it were to distribute portfolio
securities in-kind. The Fund generally intends to distribute these gains to
shareholders to avoid being taxed on this gain at the fund level and otherwise
comply with the special tax rules that apply to it. This strategy may cause
shareholders to be subject to tax on gains they would not otherwise be subject
to, or at an earlier date than if they had made an investment in a different
exchange-traded fund. Moreover, cash transactions may have to be carried out
over several days if the securities market is relatively illiquid and may
involve considerable brokerage fees and taxes. These brokerage fees and taxes,
which will be higher than if the Fund sold and redeemed its shares principally
in-kind, will be passed on to purchasers and redeemers of Creation Units in the
form of creation and redemption transaction fees. In addition, these factors may
result in wider spreads between the bid and the offered prices of the Fund's
Shares than for exchange-traded funds that distribute portfolio securities
in-kind.
CREDIT RATING AGENCY RISK. Credit ratings are determined by credit rating
agencies such as S&P, Moody's and Fitch, and are only the opinions of such
entities. Ratings assigned by a rating agency are not absolute standards of
credit quality and do not evaluate market risk or the liquidity of securities.
Any shortcomings or inefficiencies in credit rating agencies' processes for
determining credit ratings may adversely affect the credit ratings of securities
held by the Fund and, as a result, may adversely affect those securities'
perceived or actual credit risk.
VALUATION RISK. Unlike publicly traded securities that trade on national
exchanges, there is no central place or exchange for fixed income securities
trading. Fixed income securities generally trade on an "over-the-counter" market
which may be anywhere in the world where the buyer and seller can settle on a
price. Due to the lack of centralized information and trading, the valuation of
fixed income securities may carry more uncertainty and risk than that of
publicly traded securities. Accordingly, determinations of the fair value of
fixed income securities may be based on infrequent and dated information. Also,
because the available information is less reliable and more subjective, elements
of judgment may play a greater role in valuation of debt securities than for
other types of securities. Typically, fixed income securities are valued using
information provided by a third party pricing service, which primarily uses
broker quotes to value the securities.
15
NEW FUND RISK. The Fund currently has less assets than larger funds, and like
other relatively new funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time, causing the Fund's performance to
vary from that of the Fund's model portfolio. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
MANAGEMENT RISK. The Fund is subject to management risk because it has an
actively managed portfolio. The Advisor will apply investment techniques and
risk analyses in making investment decisions for the Fund, but there can be no
guarantee that the Fund will achieve its investment objectives.
DEPENDENCE ON KEY PERSONNEL. The Advisor is dependent upon the experience and
expertise of Messrs. Housey and Fries in providing advisory services with
respect to the Fund's investments. If the Advisor were to lose the services of
any of these individuals, its ability to service the Fund could be adversely
affected. There can be no assurance that a suitable replacement could be found
for any of Messrs. Housey and Fries in the event of their death, resignation,
retirement or inability to act on behalf of the Advisor.
INFLATION RISK. Inflation risk is the risk that the value of assets or income
from investments will be less in the future as inflation decreases the value of
money. As inflation increases, the value of the Fund's assets can decline as can
the value of the Fund's distributions. Common stock prices may be particularly
sensitive to rising interest rates, as the cost of capital rises and borrowing
costs increase.
BORROWING AND LEVERAGE RISK. When the Fund borrows money, it must pay interest
and other fees, which will reduce the Fund's returns if such costs exceed the
returns on the portfolio securities purchased or retained with such borrowings.
Any such borrowings are intended to be temporary. However, under certain market
conditions, including periods of low demand or decreased liquidity, such
borrowings might be outstanding for longer periods of time. As prescribed by the
1940 Act, the Fund will be required to maintain specified asset coverages of at
least 300% with respect to any bank borrowing immediately following such
borrowing. The Fund may be required to dispose of assets on unfavorable terms if
market fluctuations or other factors reduce the Fund's asset coverage to less
than the prescribed amount.
TRADING ISSUES
Although the Fund lists and trades its shares on ______, there can be no
assurance that an active trading market for such shares will develop or be
maintained. Trading in shares on ______ may be halted due to market conditions
or for reasons that, in the view of ______, make trading in shares inadvisable.
In addition, trading in shares on ______ is subject to trading halts caused by
extraordinary market volatility pursuant to ______ "circuit breaker" rules.
There can be no assurance that the requirements of ______ necessary to maintain
the listing of the Fund will continue to be met or will remain unchanged. Due to
the initial small asset size of the Fund, it may have difficulty maintaining its
listing on ______.
16
FLUCTUATION OF NET ASSET VALUE
The net asset value of shares of the Fund will generally fluctuate with changes
in the market value of the Fund's holdings. The market prices of shares will
generally fluctuate in accordance with changes in net asset value as well as the
relative supply of and demand for shares on ______. First Trust cannot predict
whether shares will trade below, at or above their net asset value. Price
differences may be due, in large part, to the fact that supply and demand forces
at work in the secondary trading market for shares will be closely related to,
but not identical to, the same forces influencing the prices of the holdings of
the Fund trading individually or in the aggregate at any point in time. However,
given that shares can only be purchased and redeemed in Creation Units (unlike
shares of closed-end funds, which frequently trade at appreciable discounts
from, and sometimes at premiums to, their net asset value), First Trust believes
that large discounts or premiums to the net asset value of shares should not be
sustained.
FUND ORGANIZATION
The Fund is a series of the Trust, an investment company registered under the
1940 Act. The Fund is treated as a separate fund with its own investment
objective and policies. The Trust is organized as a Massachusetts business
trust. Its Board is responsible for the overall management and direction of the
Trust. The Board elects the Trust's officers and approves all significant
agreements, including those with the investment advisor, custodian and fund
administrative and accounting agent.
MANAGEMENT OF THE FUND
First Trust Advisors L.P. ("First Trust" or the "Advisor"), 120 East Liberty
Drive, Wheaton, Illinois 60187, is the investment advisor to the Fund. In this
capacity, First Trust is responsible for the selection and ongoing monitoring of
the securities in the Fund's portfolio and certain other services necessary for
the management of the portfolio.
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of
DuPage L.P. is a limited partnership with one general partner, The Charger
Corporation, and a number of limited partners. The Charger Corporation is an
Illinois corporation controlled by James A. Bowen, the Chief Executive Officer
of First Trust. First Trust discharges its responsibilities subject to the
policies of the Board.
First Trust serves as advisor or sub-advisor for __ mutual fund portfolios, ____
exchange traded funds consisting of __ series and __ closed-end funds and is
also the portfolio supervisor of certain unit investment trusts sponsored by
First Trust Portfolios L.P. ("FTP"), 120 East Liberty Drive, Wheaton, Illinois
60187. FTP specializes in the underwriting, trading and distribution of unit
investment trusts and other securities. FTP is the principal underwriter of the
shares of the Fund.
17
To implement the investment strategy, the Advisor combines a rigorous
fundamental credit selection process with relative value analysis when selecting
investment opportunities. The Advisor believes that an evolving investment
environment offers varying degrees of investment risk opportunities in the bank
loan and high yield fixed income instrument markets. In order to capitalize on
attractive investments and effectively manage potential risk, the Advisor
believes that the combination of thorough and continuous credit analysis, market
evaluation, diversification and the ability to reallocate investments among
senior and subordinated debt is critical to achieving higher risk-adjusted
returns. Fundamental analysis involves the evaluation of industry trends,
management quality, collateral adequacy, and the consistency of corporate cash
flows. The key considerations of portfolio construction include liquidity,
diversification, relative value assessment, and ongoing monitoring. Through
fundamental credit analysis the Fund can position the Fund's portfolio in bank
loan and high yield securities that the Advisor believes provide the most
attractive relative value in the market.
William Housey and Scott D. Fries serve as the Fund's portfolio managers and
share responsibilities for the day-to-day management of the Fund's investment
portfolio.
o WILLIAM HOUSEY, CFA, joined First Trust in June 2010 as Senior Portfolio
Manager for the Leveraged Finance Investment Team and has 16 years of
investment experience. Mr. Housey is a Senior Vice President of First
Trust. Prior to joining First Trust, Mr. Housey was at Morgan Stanley/Van
Kampen Funds, Inc. for 11 years and served as Executive Director and
Co-Portfolio Manager. Mr. Housey has extensive experience in portfolio
management of both leveraged and unleveraged credit products, including
bank loans, high yield bonds, credit derivatives and corporate
restructurings. Mr. Housey received a B.S. in Finance from Eastern
Illinois University and an M.B.A. in Finance as well as Management and
Strategy from Northwestern University's Kellogg School of Business. He
also holds the FINRA Series 7, Series 52 and Series 63 licenses. Mr.
Housey also holds the Chartered Financial Analyst designation. He is a
member of the CFA Institute and the CFA Society of Chicago.
o SCOTT D. FRIES, CFA, joined First Trust in June 2010 as Co-Portfolio
Manager in the Leveraged Finance Investment Team and has 18 years of
investment industry experience. Mr. Fries is a Senior Vice President of
First Trust. Prior to joining First Trust, Mr. Fries spent 15 years at
Morgan Stanley/Van Kampen Funds, Inc, where he most recently served as
Executive Director and Co-Portfolio Manager of Institutional Separately
Managed Accounts. Mr. Fries received a B.A. in International Business from
Illinois Wesleyan University and an M.B.A. in Finance from DePaul
University. Mr. Fries holds the Chartered Financial Analyst designation.
He is a member of the CFA Institute and the CFA Society of Chicago.
For additional information concerning First Trust, including a description of
the services provided to the Fund, see the SAI. Additional information about the
portfolio managers' compensation, other accounts managed by the portfolio
managers and the portfolio managers' ownership of securities in the Fund is
provided in the SAI.
18
MANAGEMENT FEE
Pursuant to the Investment Management Agreement, First Trust will manage the
investment of the Fund's assets and will be responsible for the Fund's expenses,
including the cost of transfer agency, custody, fund administration, legal,
audit and other services, but excluding fee payments under the Investment
Management Agreement, interest, taxes, brokerage commissions and other expenses
connected with the execution of portfolio transactions, distribution and service
fees pursuant to a 12b-1 plan, if any, and extraordinary expenses.
The Fund has agreed to pay First Trust an annual management fee equal to 0.__%
of its average daily net assets.
A discussion regarding the Board's approval of the Investment Management
Agreement will be available in the Fund's Annual Report to Shareholders for the
period ended ________, 20__.
HOW TO BUY AND SELL SHARES
Most investors will buy and sell shares of the Fund in secondary market
transactions through brokers. Shares of the Fund are expected to be listed for
trading on the secondary market on ______. Shares can be bought and sold
throughout the trading day like other publicly traded shares. There is no
minimum investment when buying shares on ______. Although shares are generally
purchased and sold in "round lots" of 100 shares, brokerage firms typically
permit investors to purchase or sell shares in smaller "odd lots," at no
per-share price differential. When buying or selling shares through a broker,
investors should expect to incur customary brokerage commissions, investors may
receive less than the net asset value of the shares because shares are bought
and sold at market prices rather than net asset value, and investors may pay
some or all of the spread between the bid and the offer price in the secondary
market on each leg of a round trip (purchase and sale) transaction. Share prices
are reported in dollars and cents per share.
For purposes of the 1940 Act, the Fund is treated as a registered investment
company, and the acquisition of Shares by other registered investment companies
is subject to the restrictions of Section 12(d)(1) of the 1940 Act. The Trust,
on behalf of the Fund, has received an exemptive order from the Securities and
Exchange Commission that permits certain registered investment companies to
invest in the Fund beyond the limits set forth in Section 12(d)(1), subject to
certain terms and conditions, including that any such investment companies enter
into an agreement with the Fund regarding the terms of any investment.
BOOK ENTRY
Shares are held in book-entry form, which means that no share certificates are
issued. The Depository Trust Company ("DTC") or its nominee is the record owner
of all outstanding shares of the Fund and is recognized as the owner of all
shares for all purposes.
19
Investors owning shares are beneficial owners as shown on the records of DTC or
its participants. DTC serves as the securities depository for all shares.
Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of share certificates
or to have hares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other stocks that you may
hold in book-entry or "street name" form.
SHARE TRADING PRICES
The trading prices of shares of the Fund on ______ may differ from the Fund's
daily net asset value and can be affected by market forces of supply and demand,
economic conditions and other factors.
Information regarding the intra-day value of the shares of the Fund, also
referred to as the "indicative optimized portfolio value" ("IOPV"), is
disseminated every 15 seconds throughout the Fund's trading day by the national
securities exchange on which the shares are listed or by market data vendors or
other information providers. The IOPV should not be viewed as a "real-time"
update of the net asset value per share of the Fund because the IOPV may not be
calculated in the same manner as the net asset value, which is computed once a
day, generally at the end of the business day. The price of a non-U.S. security
that is primarily traded on a non-U.S. exchange will be updated, using the last
sale price, every 15 seconds throughout the trading day, provided, that upon the
closing of such non-U.S. exchange, the closing price of the security, after
being converted to U.S. dollars, will be used. Furthermore, in calculating the
IOPV of the Fund's shares, exchange rates may be used throughout the day (9:00
a.m. to 4:15 p.m., Eastern time) that may differ from those used to calculate
the net asset value per share of the Fund and consequently may result in
differences between the net asset value and the IOPV. The Fund is not involved
in, or responsible for, the calculation or dissemination of the IOPV of shares
of the Fund and the Fund does not make any warranty as to its accuracy.
FREQUENT PURCHASES AND REDEMPTIONS OF THE FUND'S SHARES
The Fund imposes no restrictions on the frequency of purchases and redemptions
("market timing"). In determining not to approve a written, established policy,
the Board evaluated the risks of market timing activities by the Fund's
shareholders. The Board considered that, unlike traditional mutual funds, the
Fund issues and redeems its shares at net asset value per share, generally for a
basket of securities instead to mirror the Fund's portfolio, plus a small amount
of cash, and the shares may be purchased and sold on ______________ at
prevailing market prices. The Board noted that the Fund's shares can only be
purchased and redeemed directly from the Fund in Creation Units by
broker-dealers and large institutional investors that have entered into
participation agreements (i.e., authorized participants ("APs")), and that the
vast majority of trading in the shares occurs on the secondary market. Because
the secondary market trades do not involve the Fund directly, it is unlikely
those trades would cause many of the harmful effects of market timing,
including: dilution, disruption of portfolio management, increases in the Fund's
20
trading costs and the realization of capital gains. With respect to trades
directly with the Fund, to the extent effected in-kind (i.e., for securities),
those trades do not cause any of the harmful effects (as noted above) that may
result from frequent cash trades. To the extent trades are effected in whole or
in part in cash, the Board noted that those trades could result in dilution to
the Fund and increased transaction costs, which could negatively impact the
Fund's ability to achieve its investment objective. However, the Board noted
that direct trading by APs is critical to ensuring that the shares trade at or
close to net asset value. The Fund also employs fair valuation pricing to
minimize potential dilution from market timing. The Fund imposes transaction
fees on in-kind purchases and redemptions of shares to cover the custodial and
other costs incurred by the Fund in executing in-kind trades, and with respect
to the redemption fees, these fees increase if an investor substitutes cash in
part or in whole for securities, reflecting the fact that the Fund's trading
costs increase in those circumstances. Given this structure, the Board
determined that it is not necessary to adopt policies and procedures to detect
and deter market timing of the Fund's shares.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends from net investment income, if any, are declared and paid at least
quarterly by the Fund. The Fund distributes its net realized capital gains, if
any, to shareholders annually.
Distributions in cash may be reinvested automatically in additional whole shares
only if the broker through whom you purchased shares makes such option
available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage
commissions charged by the broker.
FEDERAL TAX MATTERS
This section summarizes some of the main U.S. federal income tax consequences of
owning shares of the Fund. This section is current as of the date of this
prospectus. Tax laws and interpretations change frequently, and these summaries
do not describe all of the tax consequences to all taxpayers. For example, these
summaries generally do not describe your situation if you are a corporation, a
non-U.S. person, a broker-dealer, or other investor with special circumstances.
In addition, this section does not describe your state, local or non-U.S. tax
consequences.
This federal income tax summary is based in part on the advice of counsel to the
Fund. The Internal Revenue Service could disagree with any conclusions set forth
in this section. In addition, counsel to the Fund was not asked to review, and
has not reached a conclusion with respect to, the federal income tax treatment
of the assets to be included in the Fund. This may not be sufficient for you to
use for the purpose of avoiding penalties under federal tax law.
As with any investment, you should seek advice based on your individual
circumstances from your own tax advisor.
21
FUND STATUS
The Fund intends to continue to qualify as a "regulated investment company"
under the federal tax laws. If the Fund qualifies as a regulated investment
company and distributes its income as required by the tax law, the Fund
generally will not pay federal income taxes.
DISTRIBUTIONS
The Fund's distributions are generally taxable. After the end of each year, you
will receive a tax statement that separates the distributions of the Fund into
two categories, ordinary income distributions and capital gains dividends.
Ordinary income distributions are generally taxed at your ordinary tax rate,
however, as further discussed below, certain ordinary income distributions
received from the Fund may be taxed at the capital gains tax rates. Generally,
you will treat all capital gain dividends as long-term capital gains regardless
of how long you have owned your shares. To determine your actual tax liability
for your capital gains dividends, you must calculate your total net capital gain
or loss for the tax year after considering all of your other taxable
transactions, as described below. In addition, the Fund may make distributions
that represent a return of capital for tax purposes and thus will generally not
be taxable to you; however, such distributions may reduce basis, which could
result in you having to pay higher taxes in the future when shares are sold,
even if you sell the shares at a loss from your original investment. The tax
status of your distributions from the Fund is not affected by whether you
reinvest your distributions in additional shares or receive them in cash. The
income from the Fund that you must take into account for federal income tax
purposes is not reduced by amounts used to pay a deferred sales fee, if any. The
tax laws may require you to treat distributions made to you in January as if you
had received them on December 31 of the previous year.
Under the "Health Care and Education Reconciliation Act of 2010," income from
the Fund may also be subject to a new 3.8 % "Medicare tax" imposed for taxable
years beginning after 2012. This tax will generally apply to your net investment
income if your adjusted gross income exceeds certain threshold amounts, which
are $250,000 in the case of married couples filing joint returns and $200,000 in
the case of single individuals.
DIVIDENDS RECEIVED DEDUCTION
A corporation that owns shares generally will not be entitled to the dividends
received deduction with respect to many dividends received from the Fund because
the dividends received deduction is generally not available for distributions
from regulated investment companies. However, certain ordinary income dividends
on shares that are attributable to qualifying dividends received by the Fund
from certain corporations may be reported by the Fund as being eligible for the
dividends received deduction.
CAPITAL GAINS AND LOSSES AND CERTAIN ORDINARY INCOME DIVIDENDS
If you are an individual, the maximum marginal federal tax rate for net capital
gain is generally 15% (generally 0% for certain taxpayers in the 10% and 15% tax
brackets). These capital gain rates are generally effective for taxable years
beginning before January 1, 2013. For later periods, if you are an individual,
the maximum marginal federal tax rate for net capital gain is generally 20% (10%
for certain taxpayers in the 10% and 15% tax brackets). The 20% rate is reduced
22
to 18% for net capital gains from most property acquired after December 31, 2000
with a holding period of more than five years, and the 10% rate is reduced to 8%
for net capital gains from most property (regardless of when acquired) with a
holding period of more than five years.
Net capital gain equals net long-term capital gain minus net short-term capital
loss for the taxable year. Capital gain or loss is long-term if the holding
period for the asset is more than one year and is short-term if the holding
period for the asset is one year or less. You must exclude the date you purchase
your shares to determine your holding period. However, if you receive a capital
gain dividend from the Fund and sell your shares at a loss after holding it for
six months or less, the loss will be recharacterized as long-term capital loss
to the extent of the capital gain dividend received. The tax rates for capital
gains realized from assets held for one year or less are generally the same as
for ordinary income. The Internal Revenue Code of 1986, as amended, treats
certain capital gains as ordinary income in special situations.
Ordinary income dividends received by an individual shareholder from a regulated
investment company such as the Fund are generally taxed at the same rates that
apply to net capital gain (as discussed above), provided certain holding period
requirements are satisfied and provided the dividends are attributable to
qualifying dividends received by the Fund itself. These special rules relating
to the taxation of ordinary income dividends from regulated investment companies
generally apply to taxable years beginning before January 1, 2013. The Fund will
provide notice to its shareholders of the amount of any distribution which may
be taken into account as a dividend which is eligible for the capital gains tax
rates.
SALE OF SHARES
If you sell or redeem your shares, you will generally recognize a taxable gain
or loss. To determine the amount of this gain or loss, you must subtract your
tax basis in your shares from the amount you receive in the transaction. Your
tax basis in your shares is generally equal to the cost of your shares,
generally including sales charges. In some cases, however, you may have to
adjust your tax basis after you purchase your shares.
TAXES ON PURCHASE AND REDEMPTION OF CREATION UNITS
If you exchange equity securities for Creation Units you will generally
recognize a gain or a loss. The gain or loss will be equal to the difference
between the market value of the Creation Units at the time and your aggregate
basis in the securities surrendered and the cash component paid. If you exchange
Creation Units for equity securities, you will generally recognize a gain or
loss equal to the difference between your basis in the Creation Units and the
aggregate market value of the securities received and the cash redemption
amount. The Internal Revenue Service, however, may assert that a loss realized
upon an exchange of securities for Creation Units or Creation Units for
securities cannot be deducted currently under the rules governing "wash sales,"
or on the basis that there has been no significant change in economic position.
23
DEDUCTIBILITY OF FUND EXPENSES
Expenses incurred and deducted by the Fund will generally not be treated as
income taxable to you. In some cases, however, you may be required to treat your
portion of these Fund expenses as income. In these cases you may be able to take
a deduction for these expenses. However, certain miscellaneous itemized
deductions, such as investment expenses, may be deducted by individuals only to
the extent that all of these deductions exceed 2% of the individual's adjusted
gross income.
NON-U.S. TAX CREDIT
Because the Fund invests in non-U.S. securities, the tax statement that you
receive may include an item showing non-U.S. taxes the Fund paid to other
countries. In this case, dividends taxed to you will include your share of the
taxes the Fund paid to other countries. You may be able to deduct or receive a
tax credit for your share of these taxes.
NON-U.S. INVESTORS
If you are a non-U.S. investor (i.e., an investor other than a U.S. citizen or
resident or a U.S. corporation, partnership, estate or trust), you should be
aware that, generally, subject to applicable tax treaties, distributions from
the Fund will be characterized as dividends for federal income tax purposes
(other than dividends which the Fund properly reports as capital gain dividends)
and will be subject to U.S. federal income taxes, including withholding taxes,
subject to certain exceptions described below. However, distributions received
by a non-U.S. investor from the Fund that are properly reported by the Fund as
capital gain dividends may not be subject to U.S. federal income taxes,
including withholding taxes, provided that the Fund makes certain elections and
certain other conditions are met.
Distributions after December 31, 2013 may be subject to a U.S. withholding tax
of 30% in the case of distributions to (i) certain non-U.S. financial
institutions that have not entered into an agreement with the U.S. Treasury to
collect and disclose certain information and (ii) certain other non- U.S.
entities that do not provide certain certifications and information about the
entity's U.S. owners. Dispositions of shares by such persons may be subject to
such withholding after December 31, 2014.
INVESTMENTS IN CERTAIN NON-U.S. CORPORATIONS
If the Fund holds an equity interest in any PFICs, which are generally certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, certain rents and royalties
or capital gains) or that hold at least 50% of their assets in investments
producing such passive income, the Fund could be subject to U.S. federal income
tax and additional interest charges on gains and certain distributions with
respect to those equity interests, even if all the income or gain is timely
distributed to its shareholders. The Fund will not be able to pass through to
its shareholders any credit or deduction for such taxes. The Fund may be able to
make an election that could ameliorate these adverse tax consequences. In this
case, the Fund would recognize as ordinary income any increase in the value of
such PFIC shares, and as ordinary loss any decrease in such value to the extent
it did not exceed prior increases included in income. Under this election, the
Fund might be required to recognize in a year income in excess of its
distributions from PFICs and its proceeds from dispositions of PFIC stock during
24
that year, and such income would nevertheless be subject to the distribution
requirement and would be taken into account for purposes of the 4% excise tax.
Dividends paid by PFICs will not be treated as qualified dividend income.
DISTRIBUTION PLAN
FTP serves as the distributor of Creation Units for the Fund on an agency basis.
FTP does not maintain a secondary market in shares.
The Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1
under the 1940 Act. In accordance with its Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.__% of its average daily net assets each
year to reimburse FTP for amounts expended to finance activities primarily
intended to result in the sale of Creation Units or the provision of investor
services. FTP may also use this amount to compensate securities dealers or other
persons that are APs for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
The Fund does not currently pay 12b-1 fees, and pursuant to a contractual
arrangement, the Fund will not pay 12b-1 fees any time before _________.
However, in the event 12b-1 fees are charged in the future, because these fees
are paid out of the Fund's assets, over time these fees will increase the cost
of your investment and may cost you more than certain other types of sales
charges.
NET ASSET VALUE
The Fund's net asset value is determined as of the close of trading (normally
4:00 p.m., Eastern time) on each day the New York Stock Exchange is open for
business. Net asset value is calculated for the Fund by taking the market price
of the Fund's total assets, including interest or dividends accrued but not yet
collected, less all liabilities, and dividing such amount by the total number of
shares outstanding. The result, rounded to the nearest cent, is the net asset
value per share. All valuations are subject to review by the Board or its
delegate.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the 1940 Act. The senior loans in which the Fund invests are not listed on any
securities exchange or board of trade. Senior loans are typically bought and
sold by institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while having
grown substantially since its inception, generally has fewer trades and less
liquidity than the secondary market for other types of securities. Some senior
loans have few or no trades, or trade infrequently, and information regarding a
specific senior loan may not be widely available or may be incomplete.
Accordingly, determinations of the fair value of senior loans may be based on
infrequent and dated information. Because there is less reliable, objective data
available, elements of judgment may play a greater role in valuation of senior
25
loans than for other types of securities. Typically, senior loans are valued
using information provided by a third party pricing service. The third party
pricing service primarily uses broker quotes to value the senior loans.
The Fund's investments are valued at market value or, in the absence of market
value with respect to any portfolio securities, at fair value in accordance with
valuation procedures adopted by the Trust's Board of Trustees and in accordance
with the 1940 Act. Portfolio securities listed on any exchange other than The
NASDAQ(R) Stock Market ("NASDAQ(R)") and the London Stock Exchange Alternative
Investment Market ("AIM") are valued at the last sale price on the business day
as of which such value is being determined. Securities listed on the NASDAQ(R)
or the AIM are valued at the official closing price on the business day as of
which such value is being determined. If there has been no sale on such day, or
no official closing price in the case of securities traded on NASDAQ(R) or the
AIM, the securities are valued at the mean of the most recent bid and ask prices
on such day. Portfolio securities traded on more than one securities exchange
are valued at the last sale price or official closing price, as applicable, on
the business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. Portfolio
securities traded in the over-the-counter market, but excluding securities
trading on NASDAQ(R) and the AIM, are valued at the closing bid prices.
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board or its delegate at fair
value. The use of fair value pricing by the Fund is governed by valuation
procedures adopted by the Board and in accordance with the provisions of the
1940 Act. These securities generally include, but are not limited to, restricted
securities (securities which may not be publicly sold without registration under
the Securities Act) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market price is not available from a pre-established pricing source; a security
with respect to which an event has occurred that is likely to materially affect
the value of the security after the market has closed but before the calculation
of the Fund's net asset value or make it difficult or impossible to obtain a
reliable market quotation; and a security whose price, as provided by the
pricing service, does not reflect the security's "fair value." As a general
principle, the current "fair value" of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. The use of fair value prices by the Fund generally results in the
prices used by the Fund that may differ from current market quotations or
official closing prices on the applicable exchange. A variety of factors may be
considered in determining the fair value of such securities. See the Fund's SAI
for details.
Valuing the Fund's securities using fair value pricing will result in using
prices for those securities that may differ from current market valuations.
Because foreign securities exchanges may be open on different days than the days
during which an investor may purchase or sell shares of the Fund, the value of
the Fund's securities may change on days when investors are not able to purchase
26
or sell shares of the Fund. The value of securities denominated in foreign
currencies is converted into U.S. dollars at the exchange rates in effect at the
time of valuation.
FUND SERVICE PROVIDERS
______________________ acts as the administrator, accounting agent, custodian
and transfer agent to the Fund. Chapman and Cutler LLP, 111 West Monroe Street,
Chicago, Illinois 60603, serves as legal counsel to the Fund. First Trust serves
as the Fund reporting agent for the Fund.
PREMIUM/DISCOUNT INFORMATION
The Fund has not yet commenced operations and, therefore, does not have
information about the differences between the Fund's daily market price on
______ and its net asset value. Once the Fund has commenced operations, this
information will be available on the Fund's website at www.ftportfolios.com.
OTHER INFORMATION
CONTINUOUS OFFERING
The Fund will issue, on a continuous offering basis, its shares in one or more
groups of a fixed number of Fund shares (each such group of such specified
number of individual Fund shares, a "Creation Unit Aggregation"). The method by
which Creation Unit Aggregations of Fund shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Unit
Aggregations of shares are issued and sold by the Fund on an ongoing basis, a
"distribution," as such term is used in the Securities Act, may occur at any
point. Broker-dealers and other persons are cautioned that some activities on
their part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery requirement and
liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an order with
FTP, breaks them down into constituent shares and sells such shares directly to
customers, or if it chooses to couple the creation of a supply of new shares
with an active selling effort involving solicitation of secondary market demand
for shares. A determination of whether one is an underwriter for purposes of the
Securities Act must take into account all the facts and circumstances pertaining
to the activities of the broker-dealer or its client in the particular case, and
the examples mentioned above should not be considered a complete description of
all the activities that could lead to a characterization as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters" but
are effecting transactions in shares, whether or not participating in the
distribution of shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(3) of the Securities Act
is not available in respect of such transactions as a result of Section 24(d) of
27
the 1940 Act. The Trust, on behalf of the Fund, however, has received from the
Securities and Exchange Commission an exemption from the prospectus delivery
obligation in ordinary secondary market transactions under certain
circumstances, on the condition that purchasers are provided with a product
description of the shares. As a result, broker-dealer firms should note that
dealers who are not underwriters but are participating in a distribution (as
contrasted with ordinary secondary market transactions) and thus dealing with
the shares that are part of an overallotment within the meaning of Section
4(3)(c) of the Securities Act would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(3) of the Securities Act.
Firms that incur a prospectus delivery obligation with respect to shares are
reminded that, under the Securities Act Rule 153, a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to a broker-dealer
in connection with a sale on ______ is satisfied by the fact that the prospectus
is available from ______ upon request. The prospectus delivery mechanism
provided in Rule 153 is available with respect to transactions on a national
securities exchange, a trading facility or an alternative trading system.
28
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29
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30
FIRST TRUST SENIOR LOAN FUND
FOR MORE INFORMATION
For more detailed information on the Fund, several additional sources of
information are available to you. The SAI, incorporated by reference into this
prospectus, contains detailed information on the Fund's policies and operation.
Additional information about the Fund's investments is available in the annual
and semi-annual reports to shareholders. In the Fund's annual reports, you will
find a discussion of the market conditions and investment strategies that
significantly impacted the Fund's performance during the last fiscal year. The
Fund's most recent SAI, annual or semi-annual reports and certain other
information are available free of charge by calling the Fund at (800) 621-1675,
on the Fund's website at www.ftportfolios.com or through your financial advisor.
Shareholders may call the toll-free number above with any inquiries.
You may obtain this and other information regarding the Fund, including the
Codes of Ethics adopted by First Trust, FTP and the Trust, directly from the
Securities and Exchange Commission (the "SEC"). Information on the SEC's website
is free of charge. Visit the SEC's on-line EDGAR database at http://www.sec.gov
or in person at the SEC's Public Reference Room in Washington, D.C., or call the
SEC at (202) 551-8090 for information on the Public Reference Room. You may also
request information regarding the Fund by sending a request (along with a
duplication fee) to the SEC's Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549-1520 or by sending an electronic request to
publicinfo@sec.gov.
First Trust Advisors L.P.
120 East Liberty Drive
Suite 400
Wheaton, Illinois 60187
(800) 621-1675 SEC File #: 333-174332
www.ftportfolios.com 811-22559
31
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OF SALE IS NOT PERMITTED.
STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT COMPANY ACT FILE NO. 811-22559
FIRST TRUST EXCHANGE-TRADED FUND IV
TICKER
FUND NAME SYMBOL EXCHANGE
FIRST TRUST SENIOR LOAN FUND
DATED _________, 2013
|
This Statement of Additional Information ("SAI") is not a prospectus. It
should be read in conjunction with the Prospectus dated _________, 2013, as it
may be revised from time to time (the "Prospectus"), for First Trust Senior Loan
Fund (the "Fund"), a series of the First Trust Exchange-Traded Fund IV (the
"Trust"). Capitalized terms used herein that are not defined have the same
meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus
may be obtained without charge by writing to the Trust's distributor, First
Trust Portfolios L.P., 120 East Liberty Drive, Suite 400, Wheaton, Illinois
60187, or by calling toll free at (800) 621-1675.
TABLE OF CONTENTS
GENERAL DESCRIPTION OF THE TRUST AND THE FUND.................................1
EXCHANGE LISTING AND TRADING..................................................3
INVESTMENT OBJECTIVE AND POLICIES.............................................4
INVESTMENT STRATEGIES.........................................................5
INVESTMENT RISKS.............................................................13
FUND MANAGEMENT OF THE FUND..................................................21
BROKERAGE ALLOCATIONS........................................................33
CUSTODIAN, ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT.................34
ADDITIONAL INFORMATION.......................................................36
PROXY VOTING POLICIES AND PROCEDURES.........................................37
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS........................38
FEDERAL TAX MATTERS..........................................................49
DETERMINATION OF NAV.........................................................55
DIVIDENDS AND DISTRIBUTIONS..................................................57
MISCELLANEOUS INFORMATION....................................................57
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GENERAL DESCRIPTION OF THE TRUST AND THE FUND
The Trust was organized as a Massachusetts business trust on September 15,
2010 and is authorized to issue an unlimited number of shares in one or more
series or "funds." The Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Trust currently offers shares in one series, the First Trust North
American Energy Infrastructure Fund, a non-diversified series. The Fund is a
non-diversified series.
This SAI relates to the Fund. The shares of the Fund are referred to
herein as "Shares" or "Fund Shares." The Fund, as a series of the Trust,
represents a beneficial interest in a separate portfolio of securities and other
assets, with its own objectives and policies.
The Board of Trustees of the Trust (the "Board of Trustees" or the
"Trustees") has the right to establish additional series in the future, to
determine the preferences, voting powers, rights and privileges thereof and to
modify such preferences, voting powers, rights and privileges without
shareholder approval. Shares of any series may also be divided into one or more
classes at the discretion of the Trustees.
The Trust or any series or class thereof may be terminated at any time by
the Board of Trustees upon written notice to the shareholders.
Each Share has one vote with respect to matters upon which a shareholder
vote is required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all series of the Trust vote together as a
single class except as otherwise required by the 1940 Act, or if the matter
being voted on affects only a particular series, and, if a matter affects a
particular series differently from other series, the Shares of that series will
vote separately on such matter. The Trust's Declaration of Trust (the
"Declaration") requires a shareholder vote only on those matters where the 1940
Act requires a vote of shareholders and otherwise permits the Trustees to take
actions without seeking the consent of shareholders. For example, the
Declaration gives the Trustees broad authority to approve reorganizations
between the Fund and another entity, such as another exchange-traded fund, or
the sale of all or substantially all of the Fund's assets, or the termination of
the Trust or the Fund without shareholder approval if the 1940 Act would not
require such approval.
The Declaration provides that by becoming a shareholder of the Fund, each
shareholder shall be expressly held to have agreed to be bound by the provisions
of the Declaration. The Declaration may, except in limited circumstances, be
amended by the Trustees in any respect without a shareholder vote. The
Declaration provides that the Trustees may establish the number of Trustees and
that vacancies on the Board of Trustees may be filled by the remaining Trustees,
except when election of Trustees by the shareholders is required under the 1940
Act. Trustees are then elected by a plurality of votes cast by shareholders at a
meeting at which a quorum is present. The Declaration also provides that
Trustees may be removed, with or without cause, by a vote of shareholders
holding at least two-thirds of the voting power of the Trust, or by a vote of
two-thirds of the remaining Trustees. The provisions of the Declaration relating
to the election and removal of Trustees may not be amended without the approval
of two-thirds of the Trustees.
The holders of Fund Shares are required to disclose information on direct
or indirect ownership of Fund Shares as may be required to comply with various
laws applicable to the Fund or as the Trustees may determine, and ownership of
Fund Shares may be disclosed by the Fund if so required by law or regulation. In
addition, pursuant to the Declaration, the Trustees may, in their discretion,
require the Trust to redeem Shares held by any shareholder for any reason under
terms set by the Trustees. The Declaration provides a detailed process for the
bringing of derivative actions by shareholders in order to permit legitimate
inquiries and claims while avoiding the time, expense, distraction and other
harm that can be caused to the Fund or its shareholders as a result of spurious
shareholder demands and derivative actions. Prior to bringing a derivative
action, a demand must first be made on the Trustees. The Declaration details
various information, certifications, undertakings and acknowledgements that must
be included in the demand. Following receipt of the demand, the Trustees have a
period of 90 days, which may be extended by an additional 60 days, to consider
the demand. If a majority of the Trustees who are considered independent for the
purposes of considering the demand determine that maintaining the suit would not
be in the best interests of the Fund, the Trustees are required to reject the
demand and the complaining shareholder may not proceed with the derivative
action unless the shareholder is able to sustain the burden of proof to a court
that the decision of the Trustees not to pursue the requested action was not a
good faith exercise of their business judgment on behalf of the Fund. In making
such a determination, a Trustee is not considered to have a personal financial
interest by virtue of being compensated for his or her services as a Trustee. If
a demand is rejected, the complaining shareholder will be responsible for the
costs and expenses (including attorneys' fees) incurred by the Fund in
connection with the consideration of the demand under a number of circumstances.
If a derivative action is brought in violation of the Declaration, the
shareholder bringing the action may be responsible for the Fund's costs,
including attorneys' fees. The Declaration also provides that any shareholder
bringing an action against the Fund waives the right to trial by jury to the
fullest extent permitted by law.
The Trust is not required to and does not intend to hold annual meetings
of shareholders.
Under Massachusetts law applicable to Massachusetts business trusts,
shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for its obligations. However, the Declaration
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and requires that notice of this disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees. The Declaration further provides for indemnification out of the assets
and property of the Trust for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust or the Fund itself was unable to meet its obligations.
The Declaration further provides that a Trustee acting in his or her
capacity as Trustee is not personally liable to any person other than the Trust
or its shareholders, for any act, omission, or obligation of the Trust. The
Declaration requires the Trust to indemnify any persons who are or who have been
Trustees, officers or employees of the Trust for any liability for actions or
failure to act except to the extent prohibited by applicable federal law. In
- 2 -
making any determination as to whether any person is entitled to the advancement
of expenses in connection with a claim for which indemnification is sought, such
person is entitled to a rebuttable presumption that he or she did not engage in
conduct for which indemnification is not available. The Declaration provides
that any Trustee who serves as chair of the Board of Trustees or of a committee
of the Board of Trustees, lead independent Trustee, or audit committee financial
expert, or in any other similar capacity will not be subject to any greater
standard of care or liability because of such position.
The Fund is advised by First Trust Advisors L.P. (the "Advisor" or "First
Trust").
The Fund intends to list and trade its Shares on [____________] (the
"Exchange"). The Shares will trade on the Exchange at market prices that may be
below, at or above net asset value ("NAV"). The Fund offers and issues Shares at
NAV only in aggregations of a specified number of Shares (each a "Creation Unit"
or a "Creation Unit Aggregation"), generally in exchange for a basket of equity
securities (the "Deposit Securities"), together with the deposit of a specified
cash payment (the "Cash Component"). Creation Units are aggregations of 50,000
Shares of the Fund.
The Trust reserves the right to offer a "cash" option for creations and
redemptions of Fund Shares. Fund Shares may be issued in advance of receipt of
Deposit Securities subject to various conditions including a requirement to
maintain on deposit with the Fund cash at least equal to 115% of the market
value of the missing Deposit Securities. See the "Creation and Redemption of
Creation Unit Aggregations" section. In each instance of such cash creations or
redemptions, transaction fees may be imposed that will be higher than the
transaction fees associated with in-kind creations or redemptions. In all cases,
such fees will be limited in accordance with the requirements of the Securities
and Exchange Commission (the "SEC") applicable to management investment
companies offering redeemable securities.
EXCHANGE LISTING AND TRADING
There can be no assurance that the requirements of the Exchange necessary
to maintain the listing of Shares of the Fund will continue to be met. The
Exchange may, but is not required to, remove the Shares of the Fund from listing
if (i) following the initial 12-month period beginning at the commencement of
trading of the Fund, there are fewer than 50 beneficial owners of the Shares of
the Fund for 30 or more consecutive trading days or (ii) such other event shall
occur or condition exist that, in the opinion of the Exchange, makes further
dealings on the Exchange inadvisable. The Exchange will remove the Shares of the
Fund from listing and trading upon termination of the Fund.
As in the case of other stocks traded on the Exchange, broker's
commissions on transactions will be based on negotiated commission rates at
customary levels.
The Fund reserves the right to adjust the price levels of Shares in the
future to help maintain convenient trading ranges for investors. Any adjustments
would be accomplished through stock splits or reverse stock splits, which would
have no effect on the net assets of the Fund.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus describes the investment objectives and certain policies of
the Fund. The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of the Fund.
The Fund is subject to the following fundamental policies, which may not
be changed without approval of the holders of a majority of the outstanding
voting securities of the Fund:
- 3 -
(1) The Fund may not issue senior securities, except as permitted
under the 1940 Act.
(2) The Fund may not borrow money, except that the Fund may (i)
borrow money from banks for temporary or emergency purposes (but not for
leverage or the purchase of investments) and (ii) engage in other
transactions permissible under the 1940 Act that may involve a borrowing
(such as obtaining short-term credits as are necessary for the clearance
of transactions, engaging in delayed-delivery transactions, or purchasing
certain futures, forward contracts and options), provided that the
combination of (i) and (ii) shall not exceed 33-1/3% of the value of the
Fund's total assets (including the amount borrowed), less the Fund's
liabilities (other than borrowings).
(3) The Fund will not underwrite the securities of other issuers
except to the extent the Fund may be considered an underwriter under the
Securities Act of 1933, as amended (the "1933 Act"), in connection with
the purchase and sale of portfolio securities.
(4) The Fund will not purchase or sell real estate or interests
therein, unless acquired as a result of ownership of securities or other
instruments (but this shall not prohibit the Fund from purchasing or
selling securities or other instruments backed by real estate or of
issuers engaged in real estate activities).
(5) The Fund may not make loans to other persons, except through
(i) the purchase of debt securities permissible under the Fund's
investment policies, (ii) repurchase agreements, or (iii) the lending of
portfolio securities, provided that no such loan of portfolio securities
may be made by the Fund if, as a result, the aggregate of such loans would
exceed 33-1/3% of the value of the Fund's total assets.
(6) The Fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other instruments (but
this shall not prevent the Fund from purchasing or selling options,
futures contracts, forward contracts or other derivative instruments, or
from investing in securities or other instruments backed by physical
commodities).
Except for restriction (2), if a percentage restriction is adhered to at
the time of investment, a later increase in percentage resulting from a change
in market value of the investment or the total assets will not constitute a
violation of that restriction.
- 4 -
For purposes of applying restriction (1) above, under the 1940 Act as
currently in effect, the Fund is not permitted to issue senior securities,
except that the Fund may borrow from any bank if immediately after such
borrowing the value of the Fund's total assets is at least 300% of the principal
amount of all of the Fund's borrowings (i.e., the principal amount of the
borrowings may not exceed 33 1/3% of the Fund's total assets). In the event that
such asset coverage shall at any time fall below 300% the Fund shall, within
three days thereafter (not including Sundays and holidays), reduce the amount of
its borrowings to an extent that the asset coverage of such borrowing shall be
at least 300%. The fundamental investment limitations set forth above limit the
Fund's ability to engage in certain investment practices and purchase securities
or other instruments to the extent permitted by, or consistent with, applicable
law. As such, these limitations will change as the statute, rules, regulations
or orders (or, if applicable, interpretations) change, and no shareholder vote
will be required or sought.
The Fund's investment objectives and the foregoing fundamental policies of
the Fund may not be changed without the affirmative vote of the majority of the
outstanding voting securities of the Fund. The 1940 Act defines a majority vote
as the vote of the lesser of (i) 67% or more of the voting securities
represented at a meeting at which more than 50% of the outstanding securities
are represented; or (ii) more than 50% of the outstanding voting securities.
With respect to the submission of a change in an investment policy to the
holders of outstanding voting securities of the Fund, such matter shall be
deemed to have been effectively acted upon with respect to the Fund if a
majority of the outstanding voting securities of the Fund vote for the approval
of such matter, notwithstanding that such matter has not been approved by the
holders of a majority of the outstanding voting securities of any other series
of the Trust affected by such matter.
In addition to the foregoing fundamental policies, the Fund is also
subject to strategies and policies discussed herein which, unless otherwise
noted, are non-fundamental restrictions and policies and may be changed by the
Board of Trustees.
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's
investment objectives, policies and strategies that appear in the Prospectus.
Under normal circumstances, the Fund will invest at least 80% of its net
assets (including investment borrowings) in floating rate securities that are
defined as senior debt. Fund shareholders are entitled to 60 days' notice prior
to any change in this non-fundamental investment policy.
TYPES OF INVESTMENTS
Loans: The Fund may invest in fixed and floating rate loans ("Loans").
Loans may include senior floating rate loans ("Senior Loans") and secured and
unsecured loans, second lien or more junior loans and bridge loans ("Junior
Loans"). Loans are typically arranged through private negotiations between
borrowers in the United States or in foreign markets which may be corporate
- 5 -
issuers or issuers of sovereign debt obligations ("Obligors") and one or more
financial institutions and other lenders ("Lenders"). The Fund may invest in
Loans by purchasing assignments of all or a portion of Loans ("Assignments") or
Loan participations ("Participations") from third parties.
The Fund has direct rights against the Obligor on the Loan when it
purchases an Assignment. Assignments are arranged through private negotiations
between potential assignees and potential assignors. With respect to
Participations, typically, the Fund will have a contractual relationship only
with the Lender and not with the Obligor. The agreement governing Participations
may limit the rights of the Fund to vote on certain changes which may be made to
the Loan agreement, such as waiving a breach of a covenant. However, the holder
of a Participation will generally have the right to vote on certain fundamental
issues such as changes in principal amount, payment dates and interest rate.
Participations may entail certain risks relating to the creditworthiness of the
parties from which the participations are obtained.
A Loan is typically originated, negotiated and structured by a U.S. or
foreign commercial bank, insurance company, finance company or other financial
institution (the "Agent") for a group of Loan investors. The Agent typically
administers and enforces the Loan on behalf of the other Loan investors in the
syndicate. The Agent's duties may include responsibility for the collection of
principal and interest payments from the Obligor and the apportionment of these
payments to the credit of all Loan investors. The Agent is also typically
responsible for monitoring compliance with the covenants contained in the Loan
agreement based upon reports prepared by the Obligor. In addition, an
institution, typically but not always the Agent, holds any collateral on behalf
of the Loan investors. In the event of a default by the Obligor, it is possible,
though unlikely, that the Fund could receive a portion of the borrower's
collateral. If the Fund receives collateral other than cash, any proceeds
received from liquidation of such collateral will be available for investment as
part of the Fund's portfolio.
In the process of buying, selling and holding Senior Loans, the Fund may
receive and/or pay certain fees. These fees are in addition to interest payments
received and may include facility fees, commitment fees, commissions and
prepayment penalty fees. When the Fund buys or sells a Loan it may pay a fee. In
certain circumstances, the Fund may receive a prepayment penalty fee upon
prepayment of a Loan.
There may be instances in which the Fund is required to vote upon
amendments to certain of the Loans in which it invests. In these cases, the Fund
will attempt to ensure that such amendments are voted consistently and solely in
the best interests of the Fund.
Additional Information Concerning Senior Loans: Senior Loans typically
hold the most senior position in the capital structure of the Obligor, are
typically secured with specific collateral and have a claim on the assets and/or
stock of the Obligor that is senior to that held by subordinated debtholders and
shareholders of the Obligor. Collateral for Senior Loans may include (i) working
capital assets, such as accounts receivable and inventory; (ii) tangible fixed
assets, such as real property, buildings and equipment; (iii) intangible assets,
such as trademarks and patent rights; and/or (iv) security interests in shares
of stock of subsidiaries or affiliates.
- 6 -
Additional Information Concerning Junior Loans: Junior Loans include
secured and unsecured loans including subordinated loans, second lien and more
junior loans, and bridge loans. Second lien and more junior loans ("Junior Lien
Loans") are generally second or further in line in terms of repayment priority.
In addition, Junior Lien Loans may have a claim on the same collateral pool as
the first lien or other more senior liens or may be secured by a separate set of
assets. Junior Lien Loans generally give investors priority over general
unsecured creditors in the event of an asset sale.
Junior Loans that are bridge loans or bridge facilities ("Bridge Loans")
are short-term loan arrangements (e.g., 12 to 18 months) typically made by an
Obligor in anticipation of intermediate term or long-term permanent financing.
Most Bridge Loans are structured as floating-rate debt with step-up provisions
under which the interest rate on the Bridge Loan rises the longer the Loan
remains outstanding. In addition, Bridge Loans commonly contain a conversion
feature that allows the Bridge Loan investor to convert its Loan interest to
senior exchange notes if the Loan has not been prepaid in full on or prior to
its maturity date. Bridge Loans may be subordinate to other debt and may be
secured or undersecured.
Additional Information Concerning Unfunded Commitments: Unfunded
commitments are contractual obligation pursuant to which the Fund agrees to
invest in a Loan at a future date. Typically, the Fund receives a commitment fee
for entering into the Unfunded Commitment.
Additional Information Concerning Synthetic Letters of Credit: Loans
include synthetic letters of credit. In a synthetic letter of credit
transaction, the Lender typically creates a special purpose entity or a
credit-linked deposit account for the purpose of funding a letter of credit to
the borrower. When the Fund invests in a synthetic letter of credit, the Fund is
typically paid a rate based on the Lender's borrowing costs and the terms
synthetic letter of credit. Synthetic letters of credit are typically structured
as Assignments with the Fund acquiring direct rights against the Obligor.
Limitations on Investments in Loan Assignments and Participations: If a
government entity is a borrower on a Loan, the Fund will consider the government
to be the issuer of an Assignment or Participation for purposes of the Fund's
fundamental investment policy that it will not invest 25% or more of its total
assets in securities of issuers conducting their principal business activities
in the same industry (i.e., foreign government).
Corporate Bonds. Corporate bonds, also known as fixed-income securities,
are debt obligations issued by corporations. Corporate bonds are generally used
by corporations to borrow money from investors. Corporate bonds may be either
secured or unsecured. Collateral used for secured debt includes, but is not
limited to, real property, machinery, equipment, accounts receivable, stocks,
bonds or notes. If a corporate bond is unsecured, it is known as a debenture.
Holders of corporate bonds, as creditors, have a prior legal claim over common
and preferred stockholders as to both income and assets of the issuer for the
principal and interest due them and may have a prior claim over other creditors
if liens or mortgages are involved. Interest on corporate bonds may be fixed or
floating, or the securities may be zero coupon fixed-income securities which pay
no interest. Interest on corporate bonds is typically paid semi-annually and is
fully taxable to the holder of the bonds. Corporate bonds contain elements of
- 7 -
both interest rate risk and credit risk. The market value of a corporate bond
generally may be expected to rise and fall inversely with changes in interest
rates and may also be affected by the credit rating of the issuer, the issuer's
performance and perceptions of the issuer in the marketplace. Corporate bonds
usually yield more than government or agency bonds due to the presence of credit
risk.
High Yield Securities. The Fund will invest in securities that are rated
below-investment grade at the time of purchase. The ratings of a rating agency
represent its opinion as to the quality of securities it undertakes to rate.
Ratings are not absolute standards of quality; consequently, securities with the
same maturity, duration, coupon, and rating may have different yields. For
purposes of determining whether a security is below-investment grade, the lowest
available rating will be considered. If a security owned by the Fund is
subsequently downgraded, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Advisor will consider what action,
including the sale of such security, is in the best interests of the Fund.
Because the risk of default is higher for below-investment grade
securities than investment grade securities, the Advisor's research and credit
analysis will be an especially important part of managing securities of this
type. The Advisor will attempt to identify those issuers of below-investment
grade securities whose financial condition the Advisor believes are adequate to
meet future obligations or who have improved or are expected to improve in the
future. The Advisor's analysis focuses on relative values based on such factors
as interest or dividend coverage, asset coverage, earnings prospects and the
experience and managerial strength of the issuer.
Derivatives: To the extent disclosed in the Prospectus, the Fund may
invest in futures, total return swaps, non U.S. currency swaps, loan credit
default swaps, credit default swaps, options, puts, calls and other derivative
instruments to seek to enhance return, to hedge some of the risks of its
investments in securities, as a substitute for a position in the underlying
asset, to reduce transaction costs, to maintain full market exposure (which
means to adjust the characteristics of its investments to more closely
approximate those of the markets in which it invests), to manage cash flows, to
limit exposure to losses due to changes to non-U.S. currency exchange rates or
to preserve capital.
U.S. Government Securities: The Fund may invest in U.S. government
securities. U.S. government securities include U.S. Treasury obligations and
securities issued or guaranteed by various agencies of the U.S. government, or
by various instrumentalities which have been established or sponsored by the
U.S. government. U.S. Treasury obligations are backed by the "full faith and
credit" of the U.S. government. Securities issued or guaranteed by federal
agencies and U.S. government sponsored instrumentalities may or may not be
backed by the full faith and credit of the U.S. government.
Non-U.S. Investments: The Fund may invest in non-U.S. securities
denominated in non-U.S. currencies. Non-U.S. debt securities in which the Fund
may invest include debt securities issued or guaranteed by companies organized
under the laws of countries other than the United States, debt securities issued
or guaranteed by foreign, national, provincial, state, municipal or other
governments with taxing authority or by their agencies or instrumentalities and
- 8 -
debt obligations of supranational governmental entities such as the World Bank
or European Union. Non-U.S. debt securities also include U.S. dollar-denominated
debt obligations, such as "Yankee Dollar" obligations, of foreign issuers and of
supra-national government entities. Yankee Dollar obligations are U.S.
dollar-denominated obligations issued in the U.S. capital markets by foreign
corporations, banks and governments. Foreign debt securities also may be traded
on foreign securities exchanges or in over-the-counter capital markets. The
non-U.S. securities held by the Fund may be denominated in currencies other than
the U.S. dollar. To the extent the Fund invests in such instruments, the value
of the assets of the Fund as measured in U.S. dollars will be affected by
changes in exchange rates. Generally, the Fund's currency exchange transactions
will be conducted on a spot (i.e., cash) basis at the spot rate prevailing in
the currency exchange market. The cost of the Fund's currency exchange
transactions will generally be the difference between the bid and offer spot
rate of the currency being purchased or sold. In order to protect against
uncertainty in the level of future currency exchange rates, the Fund is
authorized to enter into various currency exchange transactions.
Credit Linked Notes. Credit linked notes are structured securities
typically issued by banks whose principal and interest payments are contingent
on the performance of a reference issuer. Credit linked notes are created by
embedding a credit default swap in a funded asset to form an investment whose
credit risk and cash flow characteristics resemble those of a bond or loan.
These credit linked notes pay an enhanced coupon to the investor for taking on
the added credit risk of the reference issuer.
Warrants: The Fund may invest in warrants. Warrants acquired by the Fund
entitle it to buy common stock from the issuer at a specified price and time.
They do not represent ownership of the securities but only the right to buy
them. Warrants are subject to the same market risks as stocks, but may be more
volatile in price. The Fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before their expiration date.
When-Issued or Delayed-Delivery Transactions: The Fund may from time to
time purchase securities on a "when-issued" or other delayed-delivery basis. The
price of securities purchased in such transactions is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. During the period between the purchase and settlement,
the Fund does not remit payment to the issuer, no interest is accrued on debt
securities and dividend income is not earned on equity securities.
Delayed-delivery commitments involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date, which risk is in addition
to the risk of a decline in value of the Fund's other assets. While securities
purchased in delayed-delivery transactions may be sold prior to the settlement
date, the Fund intends to purchase such securities with the purpose of actually
acquiring them. At the time the Fund makes the commitment to purchase a security
in a delayed-delivery transaction, it will record the transaction and reflect
the value of the security in determining its NAV. The Fund will earmark or
maintain in a segregated account cash, U.S. government securities, and
high-grade liquid debt securities equal in value to commitments for
delayed-delivery securities. Such earmarked or segregated securities will mature
or, if necessary, be sold on or before the settlement date. When the time comes
to pay for delayed-delivery securities, the Fund will meet its obligations from
then-available cash flow, sale of the securities earmarked or held in the
- 9 -
segregated account as described above, sale of other securities, or, although it
would not normally expect to do so, from the sale of the delayed-delivery
securities themselves (which may have a market value greater or less than the
Fund's payment obligation).
Although the Prospectus and this SAI describe certain permitted methods of
segregating assets or otherwise "covering" certain transactions, the Fund may
segregate against or cover such transactions using other methods permitted under
the 1940 Act, the rules and regulations thereunder, or orders issued by the SEC
thereunder. For these purposes, interpretations and guidance provided by the SEC
staff may be taken into account when deemed appropriate by the Fund.
Illiquid Securities: The Fund may invest in illiquid securities (i.e.,
securities that are not readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to, certain restricted
securities (securities the disposition of which is restricted under the federal
securities laws), securities that may only be resold pursuant to Rule 144A under
the 1933 Act that are deemed to be illiquid; and repurchase agreements with
maturities in excess of seven days. However, the Fund will not acquire illiquid
securities if, as a result, such securities would comprise more than 15% of the
value of the Fund's net assets. The Board of Trustees or its delegate has the
ultimate authority to determine, to the extent permissible under the federal
securities laws, which securities are liquid or illiquid for purposes of this
15% limitation. The Board of Trustees has delegated to First Trust the
day-to-day determination of the illiquidity of any equity or fixed-income
security, although it has retained oversight for such determinations. With
respect to Rule 144A securities, First Trust considers factors such as (i) the
nature of the market for a security (including the institutional private resale
market, the frequency of trades and quotes for the security, the number of
dealers willing to purchase or sell the security, the amount of time normally
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer), (ii) the terms of certain securities or other
instruments allowing for the disposition to a third party or the issuer thereof
(e.g., certain repurchase obligations and demand instruments), and (iii) other
permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the 1933 Act. Where registration is required, the
Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than that which
prevailed when it decided to sell. Illiquid securities will be priced at fair
value as determined in good faith under procedures adopted by the Board of
Trustees. If, through the appreciation of illiquid securities or the
depreciation of liquid securities, the Fund should be in a position where more
than 15% of the value of its net assets are invested in illiquid securities,
including restricted securities which are not readily marketable, the Fund will
take such steps as is deemed advisable, if any, to protect liquidity.
Money Market Funds: The Fund may invest in shares of money market funds to
the extent permitted by the 1940 Act.
- 10 -
Temporary Investments: The Fund may, without limit as to percentage of
assets, purchase U.S. government securities or short-term debt securities to
keep cash on hand fully invested or for temporary defensive purposes. According
to the Registration Statement, short-term debt securities are securities from
issuers having a long-term debt rating of at least A by Standard & Poor's
Ratings Group ("S&P Ratings"), Moody's Investors Service, Inc. ("Moody's") or
Fitch, Inc. ("Fitch") and having a maturity of one year or less. The use of
temporary investments is not a part of a principal investment strategy of the
Fund.
Short-term debt securities are defined to include, without limitation, the
following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United
States; (b) the Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Tennessee Valley Authority, whose securities are supported
by the right of the agency to borrow from the U.S. Treasury; (c) Federal
National Mortgage Association ("FNMA" or "Fannie Mae") which is a
government-sponsored organization owned entirely by private stockholders
and whose securities are guaranteed as to principal and interest by FNMA;
and (d) the Student Loan Marketing Association, whose securities are
supported only by its credit. In September 2008, FNMA was placed into
conservatorship overseen by the Federal Housing Finance Agency ("FHFA").
As conservator, FHFA will succeed to the rights, titles, powers and
privileges of FNMA and any stockholder, officer or director of the company
with respect to FNMA and its assets and title to all books, records and
company assets held by any other custodian or third party. FHFA is charged
with operating FNMA. While the U.S. government provides financial support
to such U.S. government-sponsored agencies or instrumentalities, no
assurance can be given that it always will do so since it is not so
obligated by law. The U.S. government, its agencies, and instrumentalities
do not guarantee the market value of their securities, and consequently,
the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a
bank or savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. If such certificates of deposit are non-negotiable, they will
be considered illiquid securities and be subject to the Fund's 15%
restriction on investments in illiquid securities. Pursuant to the
certificate of deposit, the issuer agrees to pay the amount deposited plus
interest to the bearer of the certificate on the date specified thereon.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008
increased the maximum amount of federal deposit insurance coverage payable
as to any certificate of deposit from $100,000 to $250,000 per depositor,
and the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted
on July 21, 2010, extended this increased coverage permanently.
Certificates of deposit purchased by the Fund may not be fully insured.
- 11 -
(3) Bankers' acceptances which are short-term credit instruments
used to finance commercial transactions. Generally, an acceptance is a
time draft drawn on a bank by an exporter or an importer to obtain a
stated amount of funds to pay for specific merchandise. The draft is then
"accepted" by a bank that, in effect, unconditionally guarantees to pay
the face value of the instrument on its maturity date. The acceptance may
then be held by the accepting bank as an asset or it may be sold in the
secondary market at the going rate of interest for a specific maturity.
(4) Repurchase agreements, which involve purchases of debt
securities. In such an action, at the time the Fund purchases the
security, it simultaneously agrees to resell and redeliver the security to
the seller, who also simultaneously agrees to buy back the security at a
fixed price and time. This assures a predetermined yield for the Fund
during its holding period since the resale price is always greater than
the purchase price and reflects an agreed upon market rate. The period of
these repurchase agreements will usually be short, from overnight to one
week. Such actions afford an opportunity for the Fund to invest
temporarily available cash. The Fund may enter into repurchase agreements
only with respect to obligations of the U.S. government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances in
which the Fund may invest. In addition, the Fund may only enter into
repurchase agreements where the market value of the purchased
securities/collateral equals at least 100% of principal including accrued
interest and is marked-to-market daily. The risk to the Fund is limited to
the ability of the seller to pay the agreed-upon sum on the repurchase
date; in the event of default, the repurchase agreement provides that the
Fund is entitled to sell the underlying collateral. If the value of the
collateral declines after the agreement is entered into, however, and if
the seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Fund could
incur a loss of both principal and interest. The Fund, however, intends to
enter into repurchase agreements only with financial institutions and
dealers believed by First Trust to present minimal credit risks in
accordance with criteria approved by the Board of Trustees. First Trust
will review and monitor the creditworthiness of such institutions. First
Trust monitors the value of the collateral at the time the action is
entered into and during the term of the repurchase agreement. First Trust
does so in an effort to determine that the value of the collateral always
equals or exceeds the agreed-upon repurchase price to be paid to the Fund.
If the seller were to be subject to a federal bankruptcy proceeding, the
ability of the Fund to liquidate the collateral could be delayed or
impaired because of certain provisions of the bankruptcy laws.
(5) Bank time deposits, which are monies kept on deposit with banks
or savings and loan associations for a stated period of time at a fixed
rate of interest. There may be penalties for the early withdrawal of such
time deposits, in which case the yields of these investments will be
reduced.
(6) Commercial paper, which are short-term unsecured promissory
notes, including variable rate master demand notes issued by corporations
to finance their current operations. Master demand notes are direct
lending arrangements between the Fund and a corporation. There is no
secondary market for the notes. However, they are redeemable by the Fund
- 12 -
at any time. The Fund's portfolio managers will consider the financial
condition of the corporation (e.g., earning power, cash flow, and other
liquidity ratios) and will continuously monitor the corporation's ability
to meet all of its financial obligations, because the Fund's liquidity
might be impaired if the corporation were unable to pay principal and
interest on demand. The Fund may only invest in commercial paper rated A-2
or higher by S&P Ratings, Prime-2 or higher by Moody's or F2 or higher by
Fitch.
Pooled Investment Vehicles: The Fund may invest in other pooled investment
vehicles, including other open-end or closed-end investment companies and
exchange-traded funds ("ETFs") that invest primarily in securities of the types
in which the Fund may invest directly. As a shareholder in a pooled investment
vehicle, the Fund will bear its ratable share of that vehicle's expenses, and
would remain subject to payment of the Fund's advisory and administrative fees
with respect to assets so invested. Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other pooled investment
vehicles. In addition, the Fund will incur brokerage costs when purchasing and
selling shares of ETFs and closed-end funds. Other pooled investment vehicles
may be leveraged, and the net asset value and market value of their securities
will therefore be more volatile and the yield to shareholders will tend to
fluctuate more than the yield of unleveraged pooled investment vehicles.
The Fund may invest in the securities of ETFs in excess of the limits
imposed under the 1940 Act pursuant to exemptive orders obtained by certain ETFs
and their sponsors from the Securities and Exchange Commission ("SEC"). An ETF
is a fund that holds a portfolio of securities generally designed to track the
performance of a securities index, including industry, sector, country and
region indexes. ETFs trade on a securities exchange and their shares may, at
times, trade at a premium or discount to their net asset value.
PORTFOLIO TURNOVER
The Fund buys and sells portfolio securities in the normal course of its
investment activities. The proportion of the Fund's investment portfolio that is
bought and sold during a year is known as the Fund's portfolio turnover rate. A
turnover rate of 100% would occur, for example, if the Fund bought and sold
securities valued at 100% of its net assets within one year. A high portfolio
turnover rate could result in the payment by the Fund of increased brokerage
costs, expenses and taxes.
HEDGING STRATEGIES
To the extent disclosed in the Prospectus, the Fund may engage in hedging
activities.
INVESTMENT RISKS
Risk Factors of Loan Assignments and Participations
Loans are subject to the risks associated with debt obligations in general
including interest rate risk, credit risk and market risk. When a Loan is
- 13 -
acquired from a Lender, the risk includes the credit risk associated with the
Obligor of the underlying Loan. The Fund may incur additional credit risk when
the Fund acquires a participation in a Loan from another lender because the Fund
must assume the risk of insolvency or bankruptcy of the other lender from which
the Loan was acquired. To the extent that Loans involve Obligors in foreign
markets, such Loans are subject to the risks associated with foreign
investments.
High Yield Securities Risk
The Loans that the Fund invests in may not be rated by a Nationally
Recognized Statistical Rating Organization ("NRSRO"), may not be registered with
the SEC or any state securities commission and will not be listed on any
national securities exchange. To the extent that such high yield Loans are
rated, they typically will be rated below investment grade and are subject to an
increased risk of default in the payment of principal and interest as well as
other risks. Loans are vulnerable to market sentiment such that economic
conditions or other events may reduce the demand for Loans and cause their value
to decline rapidly and unpredictably.
Liquidity Risk
Although the Fund limits its investments in illiquid securities to no more
than 15% its net assets at the time of purchase, securities that are deemed to
be liquid at the time of purchase may become illiquid or less liquid. No active
trading market may exist for certain securities and certain securities may be
subject to restrictions on resale or have a limited secondary market. Certain
securities may be subject to irregular trading activity, wide bid/ask spreads
and extended trade settlement periods. The inability to dispose of certain Loans
in a timely fashion or at a favorable price could result in losses to the Fund.
Collateral, Subordination and Litigation Risk
With respect to Loans that are secured, the Fund is subject to the risk
that collateral securing the Loan will decline in value or have no value or that
the Fund's lien is or will become junior in payment to other liens. A decline in
value, whether as a result of bankruptcy proceedings or otherwise, could cause
the Loan to be undercollateralized or unsecured. There may be no formal
requirement for the Obligor to pledge additional collateral. In addition,
collateral may consist of assets that may not be readily liquidated, and there
is no assurance that the liquidation of such assets would satisfy an Obligor's
obligation on a Loan.
If an Obligor becomes involved in bankruptcy proceedings, a court may
invalidate the Loan or the Fund's security interest in loan collateral or
subordinate the Fund's rights under a Senior Loan or Junior Loan to the interest
of the Obligor's other creditors, including unsecured creditors, or cause
interest or principal previously paid to be refunded to the Obligor. If a court
required interest or principal to be refunded, it could negatively affect Fund
performance. Such action by a court could be based, for example, on a
"fraudulent conveyance" claim to the effect that the Obligor did not receive
fair consideration for granting the security interest in the Loan collateral to
the Fund. For Senior Loans made in connection with a highly leveraged
- 14 -
transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Loan were not received or retained by the
Obligor, but were instead paid to other persons (such as shareholders of the
Obligor) in an amount which left the Obligor insolvent or without sufficient
working capital. There are also other events, such as the failure to perfect a
security interest due to faulty documentation or faulty official filings, which
could lead to the invalidation of the Fund's security interest in Loan
collateral. If the Fund's security interest in Loan collateral is invalidated or
the Senior Loan is subordinated to other debt of an Obligor in bankruptcy or
other proceedings, the Fund would have substantially lower recovery, and perhaps
no recovery on the full amount of the principal and interest due on the Loan, or
the Fund could have to refund interest.
Lenders and investors in Loans can be sued by other creditors and
shareholders of the Obligors. Losses can be greater than the original Loan
amount and occur years after the principal and interest on the Loan have been
repaid.
Agent Risk
Selling Lenders, Agents and other entities who may be positioned between
the Fund and the Obligor will likely conduct their principal business activities
in the banking, finance and financial services industries. Investments in Loans
may be more impacted by a single economic, political or regulatory occurrence
affecting such industries than other types of investments. Entities engaged in
such industries may be more susceptible to, among other things, fluctuations in
interest rates, changes in the Federal Open Market Committee's monetary policy,
government regulations concerning such industries and concerning capital raising
activities generally and fluctuations in the financial markets generally. An
Agent, Lender or other entity positioned between the Fund and the Obligor may
become insolvent or enter FDIC receivership or bankruptcy. The Fund might incur
certain costs and delays in realizing payment on a Loan or suffer a loss of
principal and/or interest if assets or interests held by the Agent, Lender or
other party positioned between the Fund and the Obligor are determined to be
subject to the claims of the Agent's, Lender's or such other party's creditors.
Regulatory Changes
To the extent that legislation or state or federal regulators that
regulate certain financial institutions impose additional requirements or
restrictions with respect to the ability of such institutions to make Loans,
particularly in connection with highly leveraged transactions, the availability
of Loans for investment may be adversely affected. Furthermore, such legislation
or regulation could depress the market value of Loans held by the Fund.
Inventory Risk
Affiliates of the Advisor may participate in the primary and secondary
market for Loans. Because of limitations imposed by applicable law, the presence
of the Advisor's affiliates in the Loan market may restrict the Fund's ability
to acquire some Loans, affect the timing of such acquisition or affect the price
at which the Loan is acquired.
- 15 -
Information Risk
There is typically less publicly available information concerning Loans
than other types of fixed income investments. As a result, the Fund generally
will be dependent on reports and other information provided by the Obligor,
either directly or through an Agent, to evaluate the Obligor's creditworthiness
or to determine the Obligor's compliance with the covenants and other terms of
the Loan Agreement. Such reliance may make investments in Loans more susceptible
to fraud than other types of investments. In addition, because the Advisor may
wish to invest in the publicly traded securities of an Obligor, it may not have
access to material non-public information regarding the Obligor to which other
Loan investors have access.
Junior Loan Risk
Junior Loans are subject to the same general risks inherent to any Loan
investment. Due to their lower place in the Obligor's capital structure and
possible unsecured status, Junior Loans involve a higher degree of overall risk
than Senior Loans of the same Obligor. Junior Loans that are Bridge Loans
generally carry the expectation that the Obligor will be able to obtain
permanent financing in the near future. Any delay in obtaining permanent
financing subjects the Bridge Loan investor to increased risk. An Obligor's use
of Bridge Loans also involves the risk that the Obligor may be unable to locate
permanent financing to replace the Bridge Loan, which may impair the Obligor's
perceived creditworthiness.
ADDITIONAL RISKS OF INVESTING IN THE FUND
Real Estate Investment Trust ("REIT") Risk
REITs are financial vehicles that pool investors' capital to purchase or
finance real estate. REITs may concentrate their investments in specific
geographic areas or in specific property types, e.g., hotels, shopping malls,
residential complexes and office buildings. The market value of REIT shares and
the ability of the REITs to distribute income may be adversely affected by
several factors, including rising interest rates; changes in the national, state
and local economic climate and real estate conditions; perceptions of
prospective tenants of the safety, convenience and attractiveness of the
properties; the ability of the owners to provide adequate management,
maintenance and insurance; the cost of complying with the Americans with
Disabilities Act; increased competition from new properties; the impact of
present or future environmental legislation and compliance with environmental
laws; changes in real estate taxes and other operating expenses; adverse changes
in governmental rules and fiscal policies; adverse changes in zoning laws; and
other factors beyond the control of the issuers of the REITs. In addition,
distributions received by the Fund from REITs may consist of dividends, capital
gains and/or return of capital. Many of these distributions however will not
generally qualify for favorable treatment as qualified dividend income.
- 16 -
Non-U.S. Securities Risk
An investment in non-U.S. securities involves risks in addition to the
usual risks inherent in domestic investments, including currency risk. The value
of a non-U.S. security in U.S. dollars tends to decrease when the value of the
U.S. dollar rises against the non-U.S. currency in which the security is
denominated and tends to increase when the value of the U.S. dollar falls
against such currency. Non-U.S. securities are affected by the fact that in many
countries there is less publicly available information about issuers than is
available in the reports and ratings published about companies in the United
States and companies may not be subject to uniform accounting, auditing and
financial reporting standards. Other risks inherent in non-U.S. investments may
include expropriation; confiscatory taxation; withholding taxes on dividends and
interest; less extensive regulation of non-U.S. brokers, securities markets and
issuers; diplomatic developments; and political or social instability. Non-U.S.
economies may differ favorably or unfavorably from the U.S. economy in various
respects, and many non-U.S. securities are less liquid and their prices tend to
be more volatile than comparable U.S. securities. From time to time, non-U.S.
securities may be difficult to liquidate rapidly without adverse price effects.
Depositary Receipts Risk
The Fund may hold securities of certain non-U.S. companies in the form of
Depositary Receipts. Depositary Receipts may not necessarily be denominated in
the same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by an American bank or trust company that
evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued by a European bank or trust company evidencing
ownership of securities issued by a foreign corporation. New York shares are
typically issued by a company incorporated in the Netherlands and represent a
direct interest in the company. Unlike traditional depositary receipts, New York
share programs do not involve custody of the Dutch shares of the company. GDRs
are receipts issued throughout the world that evidence a similar arrangement.
ADRs, EDRs and GDRs may trade in foreign currencies that differ from the
currency the underlying security for each ADR, EDR or GDR principally trades in.
Global shares are the actual (ordinary) shares of a non-U.S. company which trade
both in the home market and the United States. Generally, ADRs and New York
shares, in registered form, are designed for use in the U.S. securities markets.
EDRs, in registered form, are used to access European markets. GDRs, in
registered form, are tradable both in the United States and in Europe and are
designed for use throughout the world. Global shares are represented by the same
share certificate in the United States and the home market. Separate registrars
in the United States and the home country are maintained. In most cases,
purchases occurring on a U.S. exchange would be reflected on the U.S. registrar.
Global shares may also be eligible to list on exchanges in addition to the
United States and the home country. The Fund may hold unsponsored Depositary
Receipts. The issuers of unsponsored Depositary Receipts are not obligated to
disclose material information in the United States; therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts.
- 17 -
Passive Foreign Investment Companies Risk
The Fund may invest in companies that are considered to be "passive
foreign investment companies" ("PFICs"), which are generally certain non-U.S.
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) or that hold at least 50% of their assets in investments producing such
passive income. Therefore, the Fund could be subject to U.S. federal income tax
and additional interest charges on gains and certain distributions with respect
to those equity interests, even if all the income or gain is distributed to its
shareholders in a timely manner. The Fund will not be able to pass through to
its shareholders any credit or deduction for such taxes.
Liquidity Risk
Whether or not the securities in the Fund are listed on a securities
exchange, the principal trading market for certain of the equity securities in
the Fund may be in the over-the-counter ("OTC") market. As a result, the
existence of a liquid trading market for the equity securities may depend on
whether dealers will make a market in the equity securities. There can be no
assurance that a market will be made for any of the equity securities, that any
market for the equity securities will be maintained or that there will be
sufficient liquidity of the equity securities in any markets made. The price at
which the equity securities are held in the Fund will be adversely affected if
trading markets for the equity securities are limited or absent.
Derivatives Risk
The use of derivatives presents risks different from, and possibly greater
than, the risks associated with investing directly in traditional securities.
Among the risks presented are market risk, credit risk, management risk and
liquidity risk. The use of derivatives can lead to losses because of adverse
movements in the price or value of the underlying asset, index or rate, which
may be magnified by certain features of the derivatives. In addition, when the
Fund invests in certain derivative securities, including, but not limited to,
when-issued securities, forward commitments, futures contracts and interest rate
swaps, they are effectively leveraging their investments, which could result in
exaggerated changes in the net asset value of the Fund's Shares and can result
in losses that exceed the amount originally invested. The success of the
Advisor's derivatives strategies will depend on its ability to assess and
predict the impact of market or economic developments on the underlying asset,
index or rate and the derivative itself, without the benefit of observing the
performance of the derivative under all possible market conditions. Liquidity
risk exists when a security cannot be purchased or sold at the time desired, or
cannot be purchased or sold without adversely affecting the price.
- 18 -
ADDITIONAL RISKS OF INVESTING IN THE FUND
RISKS AND SPECIAL CONSIDERATIONS CONCERNING DERIVATIVES
In addition to the foregoing, the use of derivative instruments involves
certain general risks and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of the
underlying assets may go up or down. Adverse movements in the value of an
underlying asset can expose the Fund to losses. Derivative instruments may
include elements of leverage and, accordingly, fluctuations in the value
of the derivative instrument in relation to the underlying asset may be
magnified. The successful use of derivative instruments depends upon a
variety of factors, particularly the portfolio managers' ability to
predict movements of the securities, currencies, and commodities markets,
which may require different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular
strategy adopted will succeed. A decision to engage in a derivative
transaction will reflect the portfolio managers' judgment that the
derivative transaction will provide value to the Fund and its shareholders
and is consistent with the Fund's objectives, investment limitations, and
operating policies. In making such a judgment, the portfolio managers will
analyze the benefits and risks of the derivative transactions and weigh
them in the context of the Fund's overall investments and investment
objectives.
(2) Credit Risk. Credit risk is the risk that a loss may be
sustained as a result of the failure of a counterparty to comply with the
terms of a derivative instrument. The counterparty risk for
exchange-traded derivatives is generally less than for
privately-negotiated or over-the-counter ("OTC") derivatives, since
generally a clearing agency, which is the issuer or counterparty to each
exchange-traded instrument, provides a guarantee of performance. For
privately-negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the derivative transactions and possibly other losses to the
Fund. The Fund will enter into transactions in derivative instruments only
with counterparties that First Trust reasonably believes are capable of
performing under the contract.
(3) Correlation Risk. Correlation risk is the risk that there might
be an imperfect correlation, or even no correlation, between price
movements of a derivative instrument and price movements of investments
being hedged. When a derivative transaction is used to completely hedge
another position, changes in the market value of the combined position
(the derivative instrument plus the position being hedged) result from an
imperfect correlation between the price movements of the two instruments.
With a perfect hedge, the value of the combined position remains unchanged
with any change in the price of the underlying asset. With an imperfect
hedge, the value of the derivative instrument and its hedge are not
perfectly correlated. For example, if the value of a derivative instrument
used in a short hedge (such as writing a call option, buying a put option
or selling a Futures Contract) increased by less than the decline in value
- 19 -
of the hedged investments, the hedge would not be perfectly correlated.
This might occur due to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on the markets in
which these instruments are traded. The effectiveness of hedges using
instruments on indices will depend, in part, on the degree of correlation
between price movements in the index and the price movements in the
investments being hedged.
(4) Liquidity Risk. Liquidity risk is the risk that a derivative
instrument cannot be sold, closed out, or replaced quickly at or very
close to its fundamental value. Generally, exchange contracts are very
liquid because the exchange clearinghouse is the counterparty of every
contract. OTC transactions are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party
to the transaction. The Fund might be required by applicable regulatory
requirements to maintain assets as "cover," maintain segregated accounts,
and/or make margin payments when it takes positions in derivative
instruments involving obligations to third parties (i.e., instruments
other than purchase options). If the Fund is unable to close out its
positions in such instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expires, matures, or is closed out. These requirements might impair the
Fund's ability to sell a security or make an investment at a time when it
would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. The Fund's ability to sell
or close out a position in an instrument prior to expiration or maturity
depends upon the existence of a liquid secondary market or, in the absence
of such a market, the ability and willingness of the counterparty to enter
into a transaction closing out the position. Due to liquidity risk, there
is no assurance that any derivatives position can be sold or closed out at
a time and price that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the
unenforceability of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside in
exchange for downside protection, the party taking the risk is looking for
a positive payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative transaction may try to
avoid payment by exploiting various legal uncertainties about certain
derivative products.
(6) Systemic or "Interconnection" Risk. Systemic or interconnection
risk is the risk that a disruption in the financial markets will cause
difficulties for all market participants. In other words, a disruption in
one market will spill over into other markets, perhaps creating a chain
reaction. Much of the OTC derivatives market takes place among the OTC
dealers themselves, thus creating a large interconnected web of financial
obligations. This interconnectedness raises the possibility that a default
by one large dealer could create losses for other dealers and destabilize
the entire market for OTC derivative instruments.
- 20 -
FUND MANAGEMENT
TRUSTEES AND OFFICERS
The general supervision of the duties performed for the Fund under the
investment management agreement is the responsibility of the Board of Trustees.
There are five Trustees of the Trust, one of whom is an "interested person" (as
the term is defined in the 1940 Act) and four of whom are Trustees who are not
officers or employees of First Trust or any of its affiliates ("Independent
Trustees"). The Trustees set broad policies for the Fund, choose the Trust's
officers and hire the Trust's investment advisor. The officers of the Trust
manage its day-to-day operations and are responsible to the Trust's Board of
Trustees. The following is a list of the Trustees and officers of the Trust and
a statement of their present positions and principal occupations during the past
five years, the number of portfolios each Trustee oversees and the other
directorships they hold, if applicable. Each Trustee has been elected for an
indefinite term. The officers of the Trust serve indefinite terms. Each Trustee,
except for James A. Bowen, is an Independent Trustee. Mr. Bowen is deemed an
"interested person" (as that term is defined in the 1940 Act) ("Interested
Trustee") of the Trust due to his position as Chief Executive Officer of First
Trust, investment advisor to the Fund.
NUMBER OF
PORTFOLIOS IN OTHER
TERM OF OFFICE THE FIRST TRUST TRUSTEESHIPS
AND YEAR FIRST FUND COMPLEX OR
NAME, ADDRESS POSITION AND OFFICES ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Trustee who is an Interested
Person of the Trust
----------------------------
James A. Bowen(1) Chairman of the Board o Indefinite Chief Executive Officer __ Portfolios None
120 East Liberty Drive, and Trustee term (December 2010 to
Suite 400 Present), President
Wheaton, IL 60187 (until December 2010),
D.O.B.: 09/55 o Since First Trust Advisors L.P.
inception and First Trust
Portfolios L.P.; Chairman
of the Board of
Directors, BondWave LLC
(Software Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
Independent Trustees
----------------------------
Richard E. Erickson Trustee o Indefinite Physician; President, __ Portfolios None
c/o First Trust Advisors L.P. term Wheaton Orthopedics;
120 East Liberty Drive, Co-owner and Co-Director
Suite 400 (January 1996 to May
Wheaton, IL 60187 o Since 2007), Sports Med Center
D.O.B.: 04/51 inception for Fitness; Limited
Partner, Gundersen Real
Estate Limited
Partnership; Member,
Sportsmed LLC
- 21 -
|
NUMBER OF
PORTFOLIOS IN OTHER
TERM OF OFFICE THE FIRST TRUST TRUSTEESHIPS
AND YEAR FIRST FUND COMPLEX OR
NAME, ADDRESS POSITION AND OFFICES ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Thomas R. Kadlec Trustee o Indefinite President (March 2010 to __ Portfolios Director of ADM
c/o First Trust Advisors L.P. term Present), Senior Vice Investor
120 East Liberty Drive, President and Chief Services, Inc.
Suite 400 o Since Financial Officer (May and ADM
Wheaton, IL 60187 inception 2007 to March 2010), Vice Investor
D.O.B.: 11/57 President and Chief Services
Financial Officer (1990 International
to May 2007), ADM
Investor Services, Inc.
(Futures Commission
Merchant)
Robert F. Keith Trustee o Indefinite President (2003 to __ Portfolios Director of
c/o First Trust Advisors L.P. term Present), Hibs Trust Company
120 East Liberty Drive, Enterprises (Financial of Illinois
Suite 400 o Since and Management
Wheaton, IL 60187 inception Consulting)
D.O.B.: 11/56
Niel B. Nielson Trustee o Indefinite President and Chief __ Portfolios Director of
c/o First Trust Advisors L.P. term Executive Officer (July Covenant
120 East Liberty Drive, 2012 to Present), Dew Transport Inc.
Suite 400 o Since Learning LLC; President
Wheaton, IL 60187 inception (June 2002 to June 2012),
D.O.B.: 03/54 Covenant College
Officers of the Trust
----------------------------
Mark R. Bradley President and Chief o Indefinite Chief Financial Officer, N/A N/A
120 East Liberty Drive, Executive Officer term Chief Operating Officer
Suite 400 (December 2010 to
Wheaton, IL 60187 Present), First Trust
D.O.B.: 11/57 o President and Advisors L.P. and First
Chief Trust Portfolios L.P.;
Executive Chief Financial Officer,
Officer since BondWave LLC (Software
January 2012; Development
Treasurer and Company/Investment
Chief Advisor) and Stonebridge
Financial Advisors LLC (Investment
Officer Advisor)
(inception to
January 2012)
James M. Dykas Treasurer, Chief o Indefinite Controller (January 2011 N/A N/A
120 East Liberty Drive, Financial Officer and term to Present), Senior Vice
Suite 400 Chief Accounting President (April 2007 to
Wheaton, IL 60187 Officer o Treasurer, January 2011), Vice
D.O.B.: 01/66 Chief President (January 2005
Financial to April 2007), First
Officer and Trust Advisors L.P. and
Chief First Trust Portfolios
Accounting L.P
Officer since
January 2012;
Assistant
Treasurer
(inception to
January 2012)
W. Scott Jardine Secretary o Indefinite General Counsel, First N/A N/A
120 East Liberty Drive, term Trust Advisors L.P. and
Suite 400 First Trust Portfolios
Wheaton, IL 60187 o Since L.P.; Secretary, BondWave
D.O.B.: 05/60 inception LLC (Software Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
- 22 -
|
NUMBER OF
PORTFOLIOS IN OTHER
TERM OF OFFICE THE FIRST TRUST TRUSTEESHIPS
AND YEAR FIRST FUND COMPLEX OR
NAME, ADDRESS POSITION AND OFFICES ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Daniel J. Lindquist Vice President o Indefinite Senior Vice President N/A N/A
120 East Liberty Drive, term (September 2005 to
Suite 400 Present), Vice President
Wheaton, IL 60187 o Since (April 2004 to September
D.O.B.: 02/70 inception 2005), First Trust
Advisors L.P. and First
Trust Portfolios L.P.
Kristi A. Maher Assistant Secretary o Indefinite Deputy General Counsel N/A N/A
120 East Liberty Drive, and Chief Compliance term (May 2007 to Present),
Suite 400 Officer Assistant General Counsel
Wheaton, IL 60187 o Assistant (March 2004 to May 2007),
D.O.B.: 12/66 Secretary First Trust Advisors L.P.
since and First Trust
inception; Portfolios L.P.
Chief
Compliance
Officer since
January 2011
Roger F. Testin Vice President o Indefinite Senior Vice President N/A N/A
120 East Liberty Drive, term (November 2003 to
Suite 400 Present), First Trust
Wheaton, IL 60187 o Since Advisors L.P. and First
D.O.B.: 06/66 inception Trust Portfolios L.P.
Stan Ueland Vice President o Indefinite Vice President (August N/A N/A
120 East Liberty Drive, term 2005 to Present), First
Suite 400 Trust Advisors L.P. and
Wheaton, IL 60187 o Since First Trust Portfolios
D.O.B.: 11/70 inception L.P; Vice President (May
2004 to August 2005),
BondWave LLC (Software
Development
Company/Investment
Advisor)
|
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
UNITARY BOARD LEADERSHIP STRUCTURE
Each Trustee serves as a trustee of all open-end and closed-end funds in
the First Trust Fund Complex (as defined below), which is known as a "unitary"
board leadership structure. Each Trustee currently serves as a trustee of First
Trust Series Fund, First Trust Variable Insurance Trust and First Defined
Portfolio Fund, LLC, open-end funds with [___] portfolios advised by First
Trust; First Trust Senior Floating Rate Income Fund II, Macquarie/First Trust
Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Active Dividend Income Fund, First Trust High Income
Long/Short Fund and First Trust Energy Infrastructure Fund, closed-end funds
advised by First Trust; and the Trust, First Trust Exchange-Traded Fund, First
Trust Exchange-Traded Fund II, First Trust Exchange-Traded Fund VI, First Trust
Exchange-Traded AlphaDEX(R) Fund and First Trust Exchange-Traded AlphaDEX(R)
Fund II, exchange-traded funds with __ portfolios advised by First Trust (each a
- 23 -
"First Trust Fund" and collectively, the "First Trust Fund Complex"). None of
the Trustees who are not "interested persons" of the Trust (i.e., the
"Independent Trustees"), nor any of their immediate family members, has ever
been a director, officer or employee of, or consultant to, First Trust, First
Trust Portfolios or their affiliates. In addition, the officers of the Trust
(other than Stan Ueland and Roger Testin) hold the same positions with the other
funds in the First Trust Fund Complex as they hold with the Trust. Mr. Ueland,
Vice President of the Trust, serves in the same position for all of the funds in
the First Trust Fund Complex with the exception of First Defined Portfolio Fund,
LLC, First Trust Series Fund and the closed-end funds. Mr. Testin, Vice
President of the Trust, serves in the same position for all funds in the First
Trust Fund Complex with the exception of the closed-end funds.
The management of the Fund, including general supervision of the duties
performed for the Fund under the investment management agreement between the
Trust, on behalf of the Fund, and the Advisor, is the responsibility of the
Board of Trustees. The Trustees of the Trust set broad policies for the Fund,
choose the Trust's officers, and hire the Fund's investment advisor and other
service providers. The officers of the Trust manage the day to-day operations
and are responsible to the Trust's Board. The Trust's Board is composed of four
Independent Trustees and one Interested Trustee. The Interested Trustee, James
A. Bowen, serves as the Chairman of each Board for each fund in the First Trust
Fund Complex.
The same five persons serve as Trustees on the Trust's Board and on the
Boards of all other First Trust Funds. The unitary board structure was adopted
for the First Trust Funds because of the efficiencies it achieves with respect
to the governance and oversight of the First Trust Funds. Each First Trust Fund
is subject to the rules and regulations of the 1940 Act (and other applicable
securities laws), which means that many of the First Trust Funds face similar
issues with respect to certain of their fundamental activities, including risk
management, portfolio liquidity, portfolio valuation and financial reporting.
Because of the similar and often overlapping issues facing the First Trust
Funds, including the Fund, the Board of the First Trust Funds believes that
maintaining a unitary board structure promotes efficiency and consistency in the
governance and oversight of all First Trust Funds and reduces the costs,
administrative burdens and possible conflicts that may result from having
multiple boards. In adopting a unitary board structure, the Trustees seek to
provide effective governance through establishing a board the overall
composition of which will, as a body, possesses the appropriate skills,
diversity, independence and experience to oversee the Fund's business.
Annually, the Board reviews its governance structure and the committee
structures, their performance and functions and reviews any processes that would
enhance Board governance over the Fund's business. The Board has determined that
its leadership structure, including the unitary board and committee structure,
is appropriate based on the characteristics of the funds it serves and the
characteristics of the First Trust Fund Complex as a whole.
In order to streamline communication between the Advisor and the
Independent Trustees and create certain efficiencies, the Board has a Lead
Independent Trustee who is responsible for: (i) coordinating activities of the
Independent Trustees; (ii) working with the Advisor, Fund counsel and the
independent legal counsel to the Independent Trustees to determine the agenda
for Board meetings; (iii) serving as the principal contact for and facilitating
- 24 -
communication between the Independent Trustees and the Fund's service providers,
particularly the Advisor; and (iv) any other duties that the Independent
Trustees may delegate to the Lead Independent Trustee. The Lead Independent
Trustee is selected by the Independent Trustees and serves a two year term or
until his successor is selected. The Board has established four standing
committees (as described below) and has delegated certain of its
responsibilities to those committees. The Board and its committees meet
frequently throughout the year to oversee the Fund's activities, review
contractual arrangements with and performance of service providers, oversee
compliance with regulatory requirements, and review Fund performance. The
Independent Trustees are represented by independent legal counsel at all Board
and committee meetings (other than meetings of the Executive Committee).
Generally, the Board acts by majority vote of all the Trustees, including a
majority vote of the Independent Trustees if required by applicable law.
The three committee Chairmen and the Lead Independent Trustee rotate every
two years in serving as Chairman of the Audit Committee, the Nominating and
Governance Committee or the Valuation Committee, or as Lead Independent Trustee.
The Lead Independent Trustee also serves on the Executive Committee with the
Interested Trustee.
The four standing committees of the First Trust Fund Complex are: the
Executive Committee (and Pricing and Dividend Committee), the Nominating and
Governance Committee, the Valuation Committee and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to
exercise all powers of and to act in the place of the Board of Trustees to the
extent permitted by the Trust's Declaration of Trust and By-Laws. Such Committee
is also responsible for the declaration and setting of dividends. Mr. Keith and
Mr. Bowen are members of the Executive Committee.
The Nominating and Governance Committee is responsible for appointing and
nominating non-interested persons to the Trust's Board of Trustees. Messrs.
Erickson, Kadlec, Keith and Nielson are members of the Nominating and Governance
Committee. If there is no vacancy on the Board of Trustees, the Board will not
actively seek recommendations from other parties, including shareholders. The
Board of Trustees adopted a mandatory retirement age of 72 for Trustees, beyond
which age Trustees are ineligible to serve. The Committee will not consider new
trustee candidates who are 72 years of age or older. When a vacancy on the Board
of Trustees of a First Trust Fund occurs and nominations are sought to fill such
vacancy, the Nominating and Governance Committee may seek nominations from those
sources it deems appropriate in its discretion, including shareholders of the
Fund. To submit a recommendation for nomination as a candidate for a position on
the Board of Trustees, shareholders of the Fund shall mail such recommendation
to W. Scott Jardine, Secretary, at the Trust's address, 120 East Liberty Drive,
Suite 400, Wheaton, Illinois 60187. Such recommendation shall include the
following information: (i) evidence of Fund ownership of the person or entity
recommending the candidate (if a Fund shareholder); (ii) a full description of
the proposed candidate's background, including their education, experience,
current employment and date of birth; (iii) names and addresses of at least
three professional references for the candidate; (iv) information as to whether
the candidate is an "interested person" in relation to the Fund, as such term is
defined in the 1940 Act, and such other information that may be considered to
impair the candidate's independence; and (v) any other information that may be
helpful to the Committee in evaluating the candidate. If a recommendation is
- 25 -
received with satisfactorily completed information regarding a candidate during
a time when a vacancy exists on the Board or during such other time as the
Nominating and Governance Committee is accepting recommendations, the
recommendation will be forwarded to the Chairman of the Nominating and
Governance Committee and the counsel to the Independent Trustees.
Recommendations received at any other time will be kept on file until such time
as the Nominating and Governance Committee is accepting recommendations, at
which point they may be considered for nomination.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec, Keith and Nielson are members
of the Valuation Committee.
The Audit Committee is responsible for overseeing the Fund's accounting
and financial reporting process, the system of internal controls, audit process
and evaluating and appointing independent auditors (subject also to Board
approval). Messrs. Erickson, Kadlec, Keith and Nielson serve on the Audit
Committee.
RISK OVERSIGHT
As part of the general oversight of the Fund, the Board is involved in the
risk oversight of the Fund. The Board has adopted and periodically reviews
policies and procedures designed to address the Fund's risks. Oversight of
investment and compliance risk, including oversight of any sub-advisors, is
performed primarily at the Board level in conjunction with the Advisor's
investment oversight group and the Trust's Chief Compliance Officer ("CCO").
Oversight of other risks also occurs at the committee level. The Advisor's
investment oversight group reports to the Board at quarterly meetings regarding,
among other things, Fund performance and the various drivers of such performance
as well as information related to sub-advisors and their operations and
processes. The Board reviews reports on the Fund's and the service providers'
compliance policies and procedures at each quarterly Board meeting and receives
an annual report from the CCO regarding the operations of the Fund's and the
service providers' compliance program. In addition, the Independent Trustees
meet privately each quarter with the CCO. The Audit Committee reviews with the
Advisor the Fund's major financial risk exposures and the steps the Advisor has
taken to monitor and control these exposures, including the Fund's risk
assessment and risk management policies and guidelines. The Audit Committee
also, as appropriate, reviews in a general manner the processes other Board
committees have in place with respect to risk assessment and risk management.
The Nominating and Governance Committee monitors all matters related to the
corporate governance of the Fund. The Valuation Committee monitors valuation
risk and compliance with the Fund's Valuation Procedures and oversees the
pricing agents and actions by the Advisor's Pricing Committee with respect to
the valuation of portfolio securities.
Not all risks that may affect the Fund can be identified nor can controls
be developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
Fund or the Advisor or other service providers. Moreover, it is necessary to
bear certain risks (such as investment related risks) to achieve the Fund's
goals. As a result of the foregoing and other factors, the Fund's ability to
manage risk is subject to substantial limitations.
- 26 -
BOARD DIVERSIFICATION AND TRUSTEE QUALIFICATIONS
As described above, the Nominating and Governance Committee of each Board
oversees matters related to the nomination of Trustees. The Nominating and
Governance Committee seeks to establish an effective Board with an appropriate
range of skills and diversity, including, as appropriate, differences in
background, professional experience, education, vocations, and other individual
characteristics and traits in the aggregate. Each Trustee must meet certain
basic requirements, including relevant skills and experience, time availability,
and if qualifying as an Independent Trustee, independence from the Advisor,
sub-advisors, underwriters or other service providers, including any affiliates
of these entities.
In concluding that each of the current Trustees is appropriate to serve on
the Board, the Nominating and Governance Committee considered each Trustee's
business and educational experience, as well as each Trustee's service on a
range of other funds in the First Trust Fund Complex, in light of the Fund's
business and structure. Listed below for each current Trustee are the
experiences, qualifications and attributes that led to the conclusion, as of the
date of this SAI, that each current Trustee should serve as a trustee.
Richard E. Erickson, M.D., is an orthopedic surgeon and President of
Wheaton Orthopedics. He also has been a co-owner and director of a fitness
center and a limited partner of two real estate companies. Dr. Erickson has
served as a Trustee of each First Trust Fund since its inception. Dr. Erickson
has also served as the Lead Independent Trustee (2008 - 2009), Chairman of the
Nominating and Governance Committee (2003 - 2007) and Chairman of the Valuation
Committee (June 2006 - 2007 and 2010 - 2011) of the First Trust Funds. He
currently serves as Chairman of the Audit Committee (since January 1, 2012) of
the First Trust Funds.
Thomas R. Kadlec is President of ADM Investor Services Inc. ("ADMIS"), a
futures commission merchant and wholly-owned subsidiary of the Archer Daniels
Midland Company ("ADM"). Mr. Kadlec has been employed by ADMIS and its
affiliates since 1990 in various accounting, financial, operations and risk
management capacities. Mr. Kadlec serves on the boards of several international
affiliates of ADMIS and is a member of ADM's Integrated Risk Committee, which is
tasked with the duty of implementing and communicating enterprise-wide risk
management. Mr. Kadlec has served as a Trustee of each First Trust Fund, except
First Trust Portfolio Fund, LLC, since its inception. He has served as a Trustee
of First Defined Portfolio Fund, LLC, since 2004. Mr. Kadlec also served on the
Executive Committee from the organization of the first First Trust closed-end
fund in 2003 until he was elected as the first Lead Independent Trustee in
December 2005, serving as such through 2007. He also served as Chairman of the
Valuation Committee (2008 - 2009), Chairman of the Audit Committee (2010 - 2011)
and he currently serves as Chairman of the Nominating and Governance Committee
(since January 1, 2012) of the First Trust Funds.
Robert F. Keith is President of Hibs Enterprises, a financial and
management consulting firm. Mr. Keith has been with Hibs Enterprises since 2003.
Prior thereto, Mr. Keith spent 18 years with ServiceMaster and Aramark,
including three years as President and COO of ServiceMaster Consumer Services,
where he led the initial expansion of certain products overseas, five years as
- 27 -
President and COO of ServiceMaster Management Services and two years as
President of Aramark ServiceMaster Management Services. Mr. Keith is a certified
public accountant and also has held the positions of Treasurer and Chief
Financial Officer of ServiceMaster, at which time he oversaw the financial
aspects of ServiceMaster's expansion of its Management Services division in to
Europe, the Middle East and Asia. Mr. Keith has served as a Trustee of the First
Trust Funds since June 2006. Mr. Keith has also served as the Chairman of the
Audit Committee (2008 - 2009) and Chairman of the Nominating and Governance
Committee (2010 - 2011) of the First Trust Funds. He currently serves as Lead
Independent Trustee and on the Executive Committee (since January 1, 2012) of
the First Trust Funds.
Niel B. Nielson, Ph.D., has served as President and Chief Executive
Officer of Dew Learning LLC (a global provider of digital and on-line
educational products and services) since 2012. Mr. Nielson formerly served as
President of Covenant College (2002 - 2012), and as a partner and trader (of
options and futures contracts for hedging options) for Ritchie Capital Markets
Group (1996 - 1997), where he held an administrative management position at this
proprietary derivatives trading company. He also held prior positions in new
business development for ServiceMaster Management Services Company, and in
personnel and human resources for NationsBank of North Carolina, N.A. and
Chicago Research and Trading Group, Ltd. ("CRT"). His international experience
includes serving as a director of CRT Europe, Inc. for two years, directing out
of London all aspects of business conducted by the U.K. and European subsidiary
of CRT. Prior to that, Mr. Nielson was a trader and manager at CRT in Chicago.
Mr. Nielson has served as a Trustee of each First Trust Fund since its inception
and of the First Trust Funds since 1999. Mr. Nielson has also served as the
Chairman of the Audit Committee (2003 - 2006), Chairman of the Nominating and
Governance Committee (2008 - 2009) and Lead Independent Trustee (2010 - 2011)
and currently serves as Chairman of the Valuation Committee (since January 1,
2012) of the First Trust Funds.
James A. Bowen is Chief Executive Officer of First Trust Advisors L.P. and
First Trust Portfolios L.P. and until January 23, 2012, also served as President
and Chief Executive Officer of the First Trust Funds. Mr. Bowen is involved in
the day-to-day management of the First Trust Funds and serves on the Executive
Committee. He has over 26 years of experience in the investment company business
in sales, sales management and executive management. Mr. Bowen has served as a
Trustee of each First Trust Fund since its inception and of the First Trust
Funds since 1999.
Each Independent Trustee is paid a fixed annual retainer of $125,000 per
year and an annual per fund fee of $4,000 for each closed-end fund or other
actively managed fund and $1,000 for each index fund in the First Trust Fund
Complex. The fixed annual retainer is allocated pro rata among each fund in the
First Trust Fund Complex based on net assets. Additionally, the Lead Independent
Trustee is paid $15,000 annually, the Chairman of the Audit Committee is paid
$10,000 annually, and each of the Chairmen of the Nominating and Governance
Committee and the Valuation Committee is paid $5,000 annually to serve in such
capacities, with such compensation allocated pro rata among each fund in the
First Trust Fund Complex based on net assets. Trustees are also reimbursed by
the investment companies in the First Trust Fund Complex for travel and
out-of-pocket expenses incurred in connection with all meetings. Each Chairman
and the Lead Independent Trustee will serve a two year term expiring December
- 28 -
31, 2013 before rotating to serve as a Chairman of another Committee or as Lead
Independent Trustee.
The following table sets forth the estimated compensation (including
reimbursement for travel and out-of-pocket expenses) to be paid by the Fund and
the actual compensation paid by the First Trust Fund Complex for the calendar
year ended December 31, 2012, respectively. The Trust has no retirement or
pension plans. The officers and Trustee who are "interested persons" as
designated above serve without any compensation from the Trust. The Trust has no
employees. Its officers are compensated by First Trust.
ESTIMATED COMPENSATION FROM THE TOTAL COMPENSATION FROM
NAME OF TRUSTEE FUND(1) THE FIRST TRUST FUND COMPLEX(2)
Richard E. Erickson $ $
Thomas R. Kadlec $ $
Robert F. Keith $ $
Niel B. Nielson $ $
|
(1) The estimated compensation to be paid to the Independent Trustees for a
full fiscal year for services to the Fund.
(2) The total compensation paid to the Independent Trustees for the calendar
year ended December 31, 2012 for services to the ten portfolios of First
Defined Portfolio Fund, LLC and First Trust Series Fund open-end funds,
12 closed-end funds and 60 series of First Trust Exchange-Traded Fund,
First Trust Exchange-Traded Fund II, First Trust Exchange-Traded
AlphaDEX(R) Fund and First Trust Exchange-Traded AlphaDEX(R) Fund II,
all advised by First Trust.
The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in the Fund and in other funds overseen by
the Trustees in the First Trust Fund Complex as of ____________, 2012:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
DOLLAR RANGE OF ALL REGISTERED INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN THE FIRST
IN THE FUND TRUST
TRUSTEE (NUMBER OF SHARES HELD) FUND COMPLEX
Interested Trustee
James A. Bowen None $50,001 - $100,000
Independent Trustees
Richard E. Erickson None Over $100,000
Thomas R. Kadlec None Over $100,000
Robert F. Keith None Over $100,000
Niel B. Nielson None Over $100,000
|
As of _________, 2012 the Independent Trustees of the Trust and immediate
family members do not own beneficially or of record any class of securities of
an investment advisor or principal underwriter of the Fund or any person
directly or indirectly controlling, controlled by, or under common control with
an investment advisor or principal underwriter of the Fund.
- 29 -
As of _________, 2012 the officers and Trustees, in the aggregate, owned
less than 1% of the Shares of the Fund.
As of _________, 2012 First Trust Portfolios was the sole shareholder of
the Fund. As sole shareholder, First Trust Portfolios has the ability to control
the outcome of any item presented to shareholders for approval.
As of _____, 2012, the Advisor does not own any Shares of the Fund.
Investment Advisor. The Board of Trustees of the Trust, including the
Independent Trustees, approved an investment management agreement (the
"Investment Management Agreement") for the Fund for an initial two-year term at
a meeting held on [_________, 2012]. The Board of Trustees determined that the
Investment Management Agreement is in the best interests of the Fund in light of
the services, expenses and such other matters as the Board of Trustees
considered to be relevant in the exercise of its reasonable business judgment.
Pursuant to the Investment Management Agreement between First Trust and
the Trust, First Trust will manage the investment of the Fund's assets and will
be responsible for paying all expenses of the Fund, excluding the fee payments
under the Investment Management Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees payable pursuant to a Rule 12b-1
plan, if any, and extraordinary expenses. The Fund has agreed to pay First Trust
an annual management fee equal to 0.__% of its average daily net assets.
First Trust, 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187,
is the investment advisor to the Fund. First Trust is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. Grace Partners of DuPage L.P. is a limited partnership with
one general partner, The Charger Corporation, and a number of limited partners.
The Charger Corporation is an Illinois corporation controlled by James A. Bowen,
the Chief Executive Officer of First Trust. First Trust discharges its
responsibilities subject to the policies of the Board of Trustees.
First Trust provides investment tools and portfolios for advisors and
investors. First Trust is committed to theoretically sound portfolio
construction and empirically verifiable investment management approaches. Its
asset management philosophy and investment discipline are deeply rooted in the
application of intuitive factor analysis and model implementation to enhance
investment decisions.
First Trust acts as investment advisor for and manages the investment and
reinvestment of the assets of the Fund. First Trust also administers the Trust's
business affairs, provides office facilities and equipment and certain clerical,
bookkeeping and administrative services, and permits any of its officers or
employees to serve without compensation as Trustees or officers of the Trust if
elected to such positions.
Under the Investment Management Agreement, First Trust shall not be liable
for any loss sustained by reason of the purchase, sale or retention of any
security, whether or not such purchase, sale or retention shall have been based
- 30 -
upon the investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been selected with due care and
in good faith, except loss resulting from willful misfeasance, bad faith, or
gross negligence on the part of First Trust in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties. The Investment Management Agreement continues until two
years after the initial issuance of Fund Shares, and thereafter only if approved
annually by the Board of Trustees, including a majority of the Independent
Trustees. The Investment Management Agreement terminates automatically upon
assignment and is terminable at any time without penalty as to the Fund by the
Board of Trustees, including a majority of the Independent Trustees, or by vote
of the holders of a majority of the Fund's outstanding voting securities on 60
days' written notice to First Trust, or by First Trust on 60 days' written
notice to the Fund.
Portfolio Managers.
POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION
NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS
William Housey, CFA Senior Vice President, Since June 2010 Senior Vice President, Senior
Senior Portfolio Manager Portfolio Manager (June 2010
to Present), First Trust
Advisors L.P. and First Trust
Portfolios L.P.; Executive
Director and Co-Portfolio
Manager, Van Kampen Funds,
Inc.
Scott D. Fries, CFA Senior Vice President, Since June 2010 Vice President, Portfolio
Portfolio Manager Manager, First Trust Advisors
L.P. and First Trust
Portfolios L.P.; Co-Portfolio
Manager of Institutional
Seperately Managed Account,
Van Kampen Funds, Inc.
|
William Housey, CFA, joined First Trust in June 2010 as Senior Portfolio
Manager for the Leveraged Finance Investment Team and has 16 years of investment
experience. Mr. Housey is a Senior Vice President of First Trust. Prior to
joining First Trust, Mr. Housey was at Morgan Stanley/Van Kampen Funds, Inc. for
11 years and served as Executive Director and Co-Portfolio Manager. Mr. Housey
has extensive experience in portfolio management of both leveraged and
unleveraged credit products, including Senior Loans, high-yield bonds, credit
derivatives and corporate restructurings. Mr. Housey received a B.S. in Finance
from Eastern Illinois University and an M.B.A. in Finance as well as Management
and Strategy from Northwestern University's Kellogg School of Business. He also
holds the FINRA Series 7, Series 52 and Series 63 licenses. Mr. Housey also
holds the Chartered Financial Analyst designation. He is a member of the CFA
Institute and the CFA Society of Chicago.
Scott D. Fries, CFA, joined First Trust in June 2010 as Co-Portfolio
Manager in the Leveraged Finance Investment Team and has 18 years of investment
industry experience. Mr. Fries is a Senior Vice President of First Trust. Prior
- 31 -
to joining First Trust, Mr. Fries spent 15 years at Morgan Stanley/Van Kampen
Funds, Inc, where he most recently served as Executive Director and Co-Portfolio
Manager of Institutional Separately Managed Accounts. Mr. Fries received a B.A.
in International Business from Illinois Wesleyan University and an M.B.A. in
Finance from DePaul University. Mr. Fries holds the Chartered Financial Analyst
designation. He is a member of the CFA Institute and the CFA Society of Chicago.
Neither portfolio manager beneficially owns any Shares of the Fund.
Compensation. The portfolio managers are compensated with an industry
competitive salary and a year-end discretionary bonus based on client service,
asset growth and the performance of the Fund. Each portfolio manager's
performance is formally evaluated annually based on a variety of factors. Bonus
compensation is primarily a function of the firm's overall annual profitability
and the individual portfolio manager's contribution as measured by the overall
investment performance of client portfolios in the strategy the portfolio
manager manages relative to the strategy's general benchmark.
NUMBER OF ASSETS OF
ACCOUNTS WITH ACCOUNTS WITH
TYPE OF NUMBER OF ($ ASSETS PERFORMANCE PERFORMANCE
PORTFOLIO MANAGER ACCOUNT MANAGED ACCOUNTS IN MILLIONS) BASED FEES BASED FEES
William Housey
Retail SMA [___] [___] [___] [___]
Registered Investment
Companies [___] [___] [___] [___]
Other Pooled Investment
Vehicles [___] [___] [___] [___]
Other Accounts [___] [___] [___] [___]
Scott D. Fries
Retail SMA [___] [___] [___] [___]
Registered Investment
Companies [___] [___] [___] [___]
Other Pooled Investment
Vehicles [___] [___] [___] [___]
Other Accounts [___] [___] [___] [___]
|
Neither of the accounts managed by the portfolio managers pay an advisory
fee that is based upon the performance of the account. In addition, First Trust
believes that there are no material conflicts of interest that may arise in
connection with the portfolio managers' management of the Fund's investments and
the investments of the other accounts managed by the portfolio managers.
However, because the investment strategy of the Fund and the investment
strategies of many of the other accounts managed by the portfolio managers are
based on fairly mechanical investment processes, the portfolio managers may
recommend that certain clients sell and other clients buy a given security at
the same time. In addition, because the investment strategies of the Fund and
other accounts managed by the portfolio managers generally result in the clients
investing in readily available securities, First Trust believes that there
should not be material conflicts in the allocation of investment opportunities
between the Fund and other accounts managed by the portfolio managers.
- 32 -
BROKERAGE ALLOCATIONS
First Trust is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the
negotiation of the commissions to be paid on brokered transactions, the prices
for principal trades in securities, and the allocation of portfolio brokerage
and principal business. It is the policy of First Trust to seek the best
execution at the best security price available with respect to each transaction,
and with respect to brokered transactions in light of the overall quality of
brokerage and research services provided to First Trust and its clients. The
best price to the Fund means the best net price without regard to the mix
between purchase or sale price and commission, if any. Purchases may be made
from underwriters, dealers, and, on occasion, the issuers. Commissions will be
paid on the Fund's Futures and options transactions, if any. The purchase price
of portfolio securities purchased from an underwriter or dealer may include
underwriting commissions and dealer spreads. The Fund may pay mark-ups on
principal transactions. In selecting broker/dealers and in negotiating
commissions, First Trust considers, among other things, the firm's reliability,
the quality of its execution services on a continuing basis and its financial
condition. Fund portfolio transactions may be effected with broker/dealers who
have assisted investors in the purchase of Shares.
Section 28(e) of the Securities Exchange Act of 1934, as amended (the
"1934 Act") permits an investment advisor, under certain circumstances, to cause
an account to pay a broker or dealer who supplies brokerage and research
services a commission for effecting a transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody). Such brokerage
and research services are often referred to as "soft dollars." First Trust has
advised the Board of Trustees that it does not currently intend to use soft
dollars.
Notwithstanding the foregoing, in selecting brokers, First Trust may in
the future consider investment and market information and other research, such
as economic, securities and performance measurement research, provided by such
brokers, and the quality and reliability of brokerage services, including
execution capability, performance, and financial responsibility. Accordingly,
the commissions charged by any such broker may be greater than the amount
another firm might charge if First Trust determines in good faith that the
amount of such commissions is reasonable in relation to the value of the
research information and brokerage services provided by such broker to First
Trust or the Trust. In addition, First Trust must determine that the research
information received in this manner provides the Fund with benefits by
supplementing the research otherwise available to the Fund. The Investment
Management Agreement provides that such higher commissions will not be paid by
the Fund unless the Advisor determines in good faith that the amount is
reasonable in relation to the services provided. The investment advisory fees
paid by the Fund to First Trust under the Investment Management Agreement would
not be reduced as a result of receipt by First Trust of research services.
- 33 -
First Trust places portfolio transactions for other advisory accounts
advised by it, and research services furnished by firms through which the Fund
effects its securities transactions may be used by First Trust in servicing all
of its accounts; not all of such services may be used by First Trust in
connection with the Fund. First Trust believes it is not possible to measure
separately the benefits from research services to each of the accounts
(including the Fund) advised by it. Because the volume and nature of the trading
activities of the accounts are not uniform, the amount of commissions in excess
of those charged by another broker paid by each account for brokerage and
research services will vary. However, First Trust believes such costs to the
Fund will not be disproportionate to the benefits received by the Fund on a
continuing basis. First Trust seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by the
Fund and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the Fund.
In making such allocations between the Fund and other advisory accounts, the
main factors considered by First Trust are the respective investment objectives,
the relative size of portfolio holding of the same or comparable securities, the
availability of cash for investment and the size of investment commitments
generally held.
CUSTODIAN, ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT
Custodian, Administrator, Fund Accountant and Transfer Agent.
[______________________] ("_____"), as custodian for the Fund pursuant to a
Custodian Agreement, holds the Fund's assets. Also, pursuant to an
Administrative Agency Agreement, _____ provides certain administrative and
accounting services to the Fund, including maintaining the Fund's books of
account, records of the Fund's securities transactions and certain other books
and records; acting as liaison with the Fund's independent registered public
accounting firm by providing such accountant with various audit-related
information with respect to the Fund; and providing other continuous accounting
and administrative services. _____ also serves as the Fund's transfer agent
pursuant to a ___________ Agreement. _____ is located at
[_______________________].
Pursuant to the Administrative Agency Agreement, the Trust on behalf of
the Fund has agreed to indemnify the Administrator for certain liabilities,
including certain liabilities arising under the federal securities laws, unless
such loss or liability results from negligence or willful misconduct in the
performance of its duties.
Pursuant to the Fund Administration and Accounting Agreement between _____
and the Trust, the Fund has agreed to pay such compensation as is mutually
agreed from time to time and such out-of-pocket expenses as incurred by _____ in
the performance of its duties.
Distributor. First Trust Portfolios L.P., an affiliate of First Trust, is
the distributor (the "Distributor") and principal underwriter of the Shares of
the Fund. Its principal address is 120 East Liberty Drive, Suite 400, Wheaton,
Illinois 60187. The Distributor has entered into a Distribution Agreement with
the Trust pursuant to which it distributes Fund Shares. Shares are continuously
offered for sale by the Fund through the Distributor only in Creation Unit
Aggregations, as described in the Prospectus and below under the heading
"Creation and Redemption of Creation Unit Aggregations."
- 34 -
The Advisor may, from time to time and from its own resources, pay, defray
or absorb costs relating to distribution, including payments out of its own
resources to the Distributor, or to otherwise promote the sale of Shares. The
Advisor's available resources to make these payments may include profits from
advisory fees received from the Fund. The services the Advisor may pay for
include, but are not limited to, advertising and attaining access to certain
conferences and seminars, as well as being presented with the opportunity to
address investors and industry professionals through speeches and written
marketing materials.
12b-1 Plan. The Trust has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act (the "Plan") pursuant to which the Fund may reimburse
the Distributor up to a maximum annual rate of 0.25% its average daily net
assets.
Under the Plan and as required by Rule 12b-1, the Trustees will receive
and review after the end of each calendar quarter a written report provided by
the Distributor of the amounts expended under the Plan and the purpose for which
such expenditures were made. With the exception of the Distributor and its
affiliates, no "interested person" of the Trust (as that term is defined in the
1940 Act) and no Trustee of the Trust has a direct or indirect financial
interest in the operation of the Plan or any related agreement.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. However, no such fee is currently paid by the Fund, and
pursuant to a contractual agreement, the Fund will not pay 12b-1 fees any time
before ___________.
Aggregations. Fund Shares in less than Creation Unit Aggregations are not
distributed by the Distributor. The Distributor will deliver the Prospectus and,
upon request, this SAI to persons purchasing Creation Unit Aggregations and will
maintain records of both orders placed with it and confirmations of acceptance
furnished by it. The Distributor is a broker-dealer registered under the 1934
Act and a member of the Financial Industry Regulatory Authority ("FINRA").
The Distribution Agreement provides that it may be terminated at any time,
without the payment of any penalty, on at least 60 days' written notice by the
Trust to the Distributor (i) by vote of a majority of the Independent Trustees
or (ii) by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the Fund. The Distribution Agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
The Distributor shall enter into agreements with participants that utilize
the facilities of the Depository Trust Company (the "DTC Participants"), which
have international, operational, capabilities and place orders for Creation Unit
Aggregations of Fund Shares. Participating Parties (as defined in "Creation and
Redemption of Creation Unit Aggregations" below) shall be DTC Participants (as
defined in "Additional Information" below).
[Additional Service Provider. First Trust, on behalf of the Fund has
engaged ____________ or its designee (the "IPV Calculator"), to calculate the
intra-day values for the shares of the Fund. The Fund will reimburse First Trust
for some or all of the fees paid to the IPV Calculator.]
- 35 -
Exchange. The only relationship that the Exchange has with First Trust or
the Distributor of the Fund in connection with the Fund is that the Exchange
will list the Shares of the Fund and disseminates the intra-day portfolio values
that are calculated by the IPV Calculator pursuant to its listing agreement with
the Trust. The Exchange is not responsible for and has not participated in the
determination of pricing or the timing of the issuance or sale of the Shares of
the Fund or in the determination or calculation of the asset value of the Fund.
The Exchange has no obligation or liability in connection with the
administration, marketing or trading of the Fund.
ADDITIONAL INFORMATION
Book Entry Only System. The following information supplements and should
be read in conjunction with the Prospectus.
DTC Acts as Securities Depository for Fund Shares. Shares of the Fund are
represented by securities registered in the name of The Depository Trust Company
("DTC") or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of
its participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities,
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange (the "NYSE")
and FINRA. Access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
"Indirect Participants").
Beneficial ownership of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in Shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase and sale of
Shares.
Conveyance of all notices, statements and other communications to
Beneficial Owners is effected as follows. Pursuant to a letter agreement between
DTC and the Trust, DTC is required to make available to the Trust upon request
and for a fee to be charged to the Trust a listing of the Shares of the Fund
held by each DTC Participant. The Trust shall inquire of each such DTC
Participant as to the number of Beneficial Owners holding Shares, directly or
indirectly, through such DTC Participant. The Trust shall provide each such DTC
Participant with copies of such notice, statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be
- 36 -
transmitted by such DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participants a fair
and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Fund distributions shall be made to DTC or its nominee, as the registered
holder of all Fund Shares. DTC or its nominee, upon receipt of any such
distributions, shall immediately credit DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in Shares of
the Fund as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such Shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to Shares
at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
Intra-Day Portfolio Value. The price of a non-U.S. security that is
primarily traded on a non-U.S. exchange shall be updated every 15 seconds
throughout its trading day, provided, that upon the closing of such non-U.S.
exchange the closing price of the security will be used throughout the remainder
of the business day where the markets remain open. These exchange rates may
differ from those used by First Trust and consequently result in intra-day
portfolio values that may vary. Furthermore, in calculating the intra-day
portfolio values of the Fund's Shares, the exchange rates that are deemed to be
most appropriate.
PROXY VOTING POLICIES AND PROCEDURES
The Board has delegated to First Trust the proxy voting responsibilities
for the Fund and has directed First Trust to vote proxies consistent with the
Fund's best interests. First Trust has engaged the services of ISS Governance
Services, a division of RiskMetrics Group, Inc. ("ISS"), to make recommendations
to First Trust on the voting of proxies relating to securities held by the Fund.
If First Trust manages the assets of a company or its pension plan and any of
First Trust's clients hold any securities of that company, First Trust will vote
proxies relating to such company's securities in accordance with the ISS
recommendations to avoid any conflict of interest. While these guidelines are
not intended to be all-inclusive, they do provide guidance on First Trust's
general voting policies.
- 37 -
Information regarding how the Fund voted proxies (if any) relating to
portfolio securities during the most recent 12-month period ended June 30, 2013,
will be available upon request and without charge on the Fund's website at
http://www.ftportfolios.com, by calling (800) 621-1675 or by accessing the SEC's
website at http://www.sec.gov.
Quarterly Portfolio Schedule. The Trust is required to disclose, after its
first and third fiscal quarters, the complete schedule of the Fund's portfolio
holdings with the SEC on Form N-Q. Form N-Q for the Trust is available on the
SEC's website at http://www.sec.gov. The Fund's Form N-Q may also be reviewed
and copied at the SEC's Public Reference Room in Washington, D.C. and
information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The Trust's Form N-Q will be available without charge,
upon request, by calling (800) 621-1675 or by writing to First Trust Portfolios
L.P., 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
Policy Regarding Disclosure of Portfolio Holdings. The Trust has adopted a
policy regarding the disclosure of information about the Fund's portfolio
holdings. The Board of Trustees must approve all material amendments to this
policy. The Fund's portfolio holdings are publicly disseminated each day the
Fund is open for business through financial reporting and news services,
including publicly accessible Internet websites. In addition, a basket
composition file, which includes the security names and share quantities to
deliver in exchange for Fund Shares, together with estimates and actual cash
components, is publicly disseminated each day the NYSE is open for trading via
the National Securities Clearing Corporation ("NSCC"). The basket represents one
Creation Unit of the Fund. The Fund's portfolio holdings are also available on
the Fund's website at http://www.ftportfolios.com. The Trust, First Trust, First
Trust Portfolios, L.P. and _____ will not disseminate non-public information
concerning the Trust.
Codes of Ethics. In order to mitigate the possibility that the Fund will
be adversely affected by personal trading, the Trust, First Trust and the
Distributor have adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These
Codes of Ethics contain policies restricting securities trading in personal
accounts of the officers, Trustees and others who normally come into possession
of information on portfolio transactions. Personnel subject to the Codes of
Ethics may invest in securities that may be purchased or held by the fund;
however, the Codes of Ethics require that each transaction in such securities be
reviewed by the Board or its designee. These Codes of Ethics are on public file
with, and are available from, the SEC.
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS
Creation. The Trust issues and sells Shares of the Fund only in Creation
Unit Aggregations on a continuous basis through the Distributor, without a sales
load, at their NAVs next determined after receipt, on any Business Day (as
defined below), of an order in proper form.
A "Business Day" is any day on which the NYSE is open for business. As of
the date of this SAI, the NYSE observes the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
- 38 -
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of Securities and Deposit or Delivery of Cash. The consideration
for purchase of Creation Unit Aggregations of the Fund may consist of (i) cash
in lieu of all or a portion of the Deposit Securities, as defined below, and/or
(ii) a designated portfolio of equity securities determined by First Trust--the
"Deposit Securities"--per each Creation Unit Aggregation ("Fund Securities") and
generally an amount of cash--the "Cash Component"--computed as described below.
Together, the Deposit Securities and the Cash Component (including the cash in
lieu amount) constitute the "Fund Deposit," which represents the minimum initial
and subsequent investment amount for a Creation Unit Aggregation of the Fund.
The Cash Component is sometimes also referred to as the Balancing Amount.
The Cash Component serves the function of compensating for any differences
between the NAV per Creation Unit Aggregation and the Deposit Amount (as defined
below). The Cash Component is an amount equal to the difference between the NAV
of Fund Shares (per Creation Unit Aggregation) and the "Deposit Amount"--an
amount equal to the market value of the Deposit Securities and/or cash in lieu
of all or a portion of the Deposit Securities. If the Cash Component is a
positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit
Amount), the creator will deliver the Cash Component. If the Cash Component is a
negative number (i.e., the NAV per Creation Unit Aggregation is less than the
Deposit Amount), the creator will receive the Cash Component.
The Custodian, through the NSCC (discussed below), makes available on each
Business Day, prior to the opening of business of the NYSE (currently 9:30 a.m.,
Eastern Time), the list of the names and the required number of shares of each
Deposit Security to be included in the current Fund Deposit (based on
information at the end of the previous Business Day) for the Fund.
Such Fund Deposit is applicable, subject to any adjustments as described
below, in order to effect creations of Creation Unit Aggregations of the Fund
until such time as the next-announced composition of the Deposit Securities is
made available.
The identity and number of shares of the Deposit Securities required for a
Fund Deposit for the Fund changes as rebalancing adjustments and corporate
action events are reflected within the Fund from time to time by First Trust
with a view to the investment objectives of the Fund. In addition, the Trust
reserves the right to permit or require the substitution of an amount of
cash--i.e., a "cash in lieu" amount--to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient quantity
for delivery or which might not be eligible for trading by an Authorized
Participant (as defined below) or the investor for which it is acting or other
relevant reason. The adjustments described above will reflect changes known to
First Trust on the date of announcement to be in effect by the time of delivery
of the Fund Deposit or resulting from certain corporate actions.
In addition to the list of names and numbers of securities constituting
the current Deposit Securities of a Fund Deposit, the Custodian, through the
- 39 -
NSCC, also makes available on each Business Day, the estimated Cash Component,
effective through and including the previous Business Day, per outstanding
Creation Unit Aggregation of the Fund.
Procedures for Creation of Creation Unit Aggregations. In order to be
eligible to place orders with the Distributor and to create a Creation Unit
Aggregation of the Fund, an entity must be a DTC Participant (see the Book Entry
Only System section), and must have executed an agreement with the Distributor
and transfer agent, with respect to creations and redemptions of Creation Unit
Aggregations ("Participant Agreement") (discussed below), and have international
operational capabilities. A DTC Participant is also referred to as an
"Authorized Participant." Investors should contact the Distributor for the names
of Authorized Participants that have signed a Participant Agreement. All Fund
Shares, however created, will be entered on the records of DTC in the name of
Cede & Co. for the account of a DTC Participant.
All orders to create Creation Unit Aggregations must be received by the
transfer agent no later than the closing time of the regular trading session on
the NYSE ("Closing Time") (ordinarily 4:00 p.m., Eastern Time) in each case on
the date such order is placed in order for creation of Creation Unit
Aggregations to be effected based on the NAV of Shares of the Fund as next
determined on such date after receipt of the order in proper form. In the case
of custom orders, the order must be received by the transfer agent no later than
3:00 p.m. Eastern Time on the trade date. A custom order may be placed by an
Authorized Participant in the event that the Trust permits or requires the
substitution of an amount of cash to be added to the Cash Component to replace
any Deposit Security which may not be available, which may not be available in
sufficient quantity for delivery or which may not be eligible for trading by
such Authorized Participant or the investor for which it is acting or other
relevant reason. The date on which an order to create Creation Unit Aggregations
(or an order to redeem Creation Unit Aggregations, as discussed below) is placed
is referred to as the "Transmittal Date." Orders must be transmitted by an
Authorized Participant by telephone or other transmission method acceptable to
the transfer agent pursuant to procedures set forth in the Participant
Agreement, as described below. Severe economic or market disruptions or changes,
or telephone or other communication failure may impede the ability to reach the
transfer agent or an Authorized Participant.
For non-U.S. Securities, Deposit Securities must be delivered to an
account maintained at the applicable local subcustodian of the Trust on or
before the International Contractual Settlement Date (as defined below). If a
Deposit Security is an ADR or similar domestic instrument, it may be delivered
to the Custodian. The Authorized Participant must also pay on or before the
International Contractual Settlement Date immediately available or same-day
funds estimated by Trust to be sufficient to pay the Cash Component next
determined after acceptance of the Creation Order, together with the applicable
Creation Transaction Fee (as defined below) and, if applicable, any operational
processing and brokerage costs, transfer fees or stamp taxes. Orders must be
transmitted by an Authorized Participant by telephone or other transmission
method acceptable to the transfer agent pursuant to procedures set forth in the
Participant Agreement (as described below).
All orders from investors who are not Authorized Participants to create
Creation Unit Aggregations shall be placed with an Authorized Participant, as
applicable, in the form required by such Authorized Participant. In addition,
- 40 -
the Authorized Participant may request the investor to make certain
representations or enter into agreements with respect to the order, e.g., to
provide for payments of cash, when required. Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to create Creation Unit Aggregations of the Fund have to be
placed by the investor's broker through an Authorized Participant that has
executed a Participant Agreement. In such cases there may be additional charges
to such investor. At any given time, there may be only a limited number of
broker-dealers that have executed a Participant Agreement. Those persons placing
orders should ascertain the deadlines applicable to DTC and the Federal Reserve
Bank wire system by contacting the operations department of the broker or
depository institution effectuating such transfer of Deposit Securities and Cash
Component.
Placement of Creation Orders. In order to purchase Creation Units of the
Fund, an Authorized Participant must submit an order to purchase for one or more
Creation Units. All such orders must be received by the Fund's transfer agent in
proper form no later than the close of regular trading on the NYSE (ordinarily
4:00 p.m. Eastern Time) in order to receive that day's closing NAV per share.
Orders must be placed in proper form by or through an Authorized Participant,
which is a DTC Participant, i.e., a subcustodian of the Trust. Deposit
Securities must be delivered to the Trust through DTC or NSCC, and Deposit
Securities which are non-U.S. securities must be delivered to an account
maintained at the applicable local subcustodian of the Trust on or before the
International Contractual Settlement Date, as defined below. If a Deposit
Security is an ADR or similar domestic instrument, it may be delivered to the
Custodian. The Authorized Participant must also pay on or before the
International Contractual Settlement Date immediately available or same-day
funds estimated by Trust to be sufficient to pay the Cash Component next
determined after acceptance of the Creation Order, together with the applicable
Creation Transaction Fee (as defined below) and, if applicable, any operational
processing and brokerage costs, transfer fees or stamp taxes. The "International
Contractual Settlement Date" is the earlier of (i) the date upon which all of
the required Deposit Securities, the Cash Component and any other cash amounts
which may be due are delivered to the Fund or (ii) the latest day for settlement
on the customary settlement cycle in the jurisdiction(s) where any of the
securities of such Fund are customarily traded. A custom order may be placed by
an Authorized Participant in the event that the Fund permits or requires the
substitution of an amount of cash to be added to the Cash Component (if
applicable) to replace any Deposit Security which may not be available in
sufficient quantity for delivery or which may not be eligible for trading by
such Authorized Participant or the investor for which it is acting or any other
relevant reason.
The Authorized Participant must also make available no later than 2:00
p.m., Eastern Time, on the International Contractual Settlement Date, by means
satisfactory to the Trust, immediately-available or same-day funds estimated by
the Trust to be sufficient to pay the Cash Component next determined after
acceptance of the purchase order, together with the applicable purchase
transaction fee. Any excess funds will be returned following settlement of the
issue of the Creation Unit Aggregation.
A Creation Unit Aggregation will not be issued until the transfer of good
title to the Trust of the portfolio of Deposit Securities, the payment of the
Cash Component, the payment of any other cash amounts and the Creation
- 41 -
Transaction Fee (as defined below) have been completed. When the required
Deposit Securities which are U.S. securities have been delivered to the Trust
through DTC or NSCC, and Deposit Securities which are non-U.S. securities have
been delivered to the Custodian and each relevant subcustodian confirms to
Custodian that the required Deposit Securities which are non-U.S. securities
(or, when permitted in the sole discretion of Trust, the cash in lieu thereof)
have been delivered to the account of the relevant subcustodian, the Custodian
shall notify the Distributor and the transfer agent which, acting on behalf of
the Trust, will issue and cause the delivery of the Creation Unit Aggregations.
The Trust may in its sole discretion permit or require the substitution of an
amount of cash (i.e., a "cash in lieu" amount) to be added to the Cash Component
to replace any Deposit Security which may not be available in sufficient
quantity for delivery or for other similar reasons. If the Distributor, acting
on behalf of the Trust, determines that a "cash in lieu" amount will be
accepted, the Distributor will notify the Authorized Participant and the
transfer agent, and the Authorized Participant shall deliver, on behalf of
itself or the party on whose behalf it is acting, the "cash in lieu" amount,
with any appropriate adjustments as advised by the Trust as discussed below.
In the event that an order for a Creation Unit is incomplete on the
International Contractual Settlement Date because certain or all of the Deposit
Securities are missing, the Trust may issue a Creation Unit notwithstanding such
deficiency in reliance on the undertaking of the Authorized Participant to
deliver the missing Deposit Securities as soon as possible, which undertaking
shall be secured by an Additional Cash Deposit with respect to undelivered
Deposit Securities. The Trust may permit, in its discretion, the Authorized
Participant to substitute a different security in lieu of depositing some or all
of the Deposit Securities. Substitution of cash or a different security might be
permitted or required, for example, because one or more Deposit Securities may
be unavailable in the quantity needed or may not be eligible for trading by the
Authorized Participant due to local trading restrictions or other restrictions.
To the extent contemplated by the applicable Participant Agreement,
Creation Unit Aggregations of the Fund will be issued to such Authorized
Participant notwithstanding the fact that the corresponding Fund Deposits have
not been received in part or in whole, in reliance on the undertaking of the
Authorized Participant to deliver the missing Deposit Securities as soon as
possible, which undertaking shall be secured by such Authorized Participant's
delivery and maintenance of collateral consisting of cash in the form of U.S.
dollars in immediately available funds having a value (marked to market daily)
at least equal to 115% which First Trust may change from time to time of the
value of the missing Deposit Securities. Such cash collateral must be delivered
no later than 2:00 p.m., Eastern Time, on the contractual settlement date. The
Participant Agreement will permit the Fund to buy the missing Deposit Securities
at any time and will subject the Authorized Participant to liability for any
shortfall between the cost to the Trust of purchasing such securities and the
value of the collateral.
Acceptance of Orders for Creation Unit Aggregations. The Trust reserves
the absolute right to reject a creation order transmitted to it by the
Distributor with respect to the Fund if: (i) the order is not in proper form;
(ii) the investor(s), upon obtaining the Fund Shares ordered, would own 80% or
more of the currently outstanding shares of the Fund; (iii) the required Fund
Deposit is not delivered; (iv) acceptance of the Deposit Securities would have
- 42 -
certain adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit
would, in the opinion of the Trust, be unlawful; (vi) acceptance of the Fund
Deposit would otherwise have an adverse effect on the Trust, the Fund or the
rights of Beneficial Owners; or (vii) in the event that circumstances outside
the control of the Trust, or the Fund make it for all practical purposes
impossible to process creation orders. Examples of such circumstances include
acts of God or public service or utility problems such as fires, floods, extreme
weather conditions and power outages resulting in telephone, telecopy and
computer failures; market conditions or activities causing trading halts;
systems failures involving computer or other information systems affecting the
Fund, the Trust, First Trust, the Distributor, the transfer agent, DTC, NSCC,
the Custodian or sub-custodian or any other participant in the creation process,
and similar extraordinary events. In addition, an order may be rejected for
practical reasons such as the imposition by a foreign government or a regulatory
body of controls, or other monetary, currency or trading restrictions that
directly affect the portfolio securities held or systems failures involving
computer or other information systems affecting any relevant sub-custodian. The
Distributor shall notify a prospective creator of a Creation Unit and/or the
Authorized Participant acting on behalf of such prospective creator of its
rejection of the order of such person. The Trust, the Custodian, any
sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits,
nor shall any of them incur any liability for the failure to give any such
notification.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility, and acceptance for deposit of
any securities to be delivered shall be determined by the Trust, and the Trust's
determination shall be final and binding.
Creation Transaction Fee. Purchasers of Creation Units must pay a creation
transaction fee (the "Creation Transaction Fee") that is currently $_______. The
Creation Transaction Fee is applicable to each purchase transaction regardless
of the number of Creation Units purchased in the transaction. The Creation
Transaction Fee may vary and is based on the composition of the securities
included in the Fund's portfolio and the countries in which the transactions are
settled. The price for each Creation Unit will equal the daily NAV per Share
times the number of Shares in a Creation Unit plus the fees described above and,
if applicable, any operational processing and brokerage costs, transfer fees or
stamp taxes. When the Fund permits an Authorized Participant to substitute cash
or a different security in lieu of depositing one or more of the requisite
Deposit Securities, the Authorized Participant may also be assessed an amount to
cover the cost of purchasing the Deposit Securities and/or disposing of the
substituted securities, including operational processing and brokerage costs,
transfer fees, stamp taxes, and part or all of the spread between the expected
bid and offer side of the market related to such Deposit Securities and/or
substitute securities.
Shares of the Fund may be issued in advance of receipt of all Deposit
Securities subject to various conditions including a requirement to maintain on
deposit with the Fund cash at least equal to 115% of the market value of the
missing Deposit Securities.
Redemption of Fund Shares In Creation Units Aggregations. Fund Shares may
be redeemed only in Creation Unit Aggregations at their NAV next determined
after receipt of a redemption request in proper form by the Fund through the
transfer agent and only on a Business Day. The Fund will not redeem Shares in
- 43 -
amounts less than Creation Unit Aggregations. Beneficial Owners must accumulate
enough Shares in the secondary market to constitute a Creation Unit Aggregation
in order to have such Shares redeemed by the Trust. Shares generally will be
redeemed in Creation Unit Aggregations in exchange for a particular portfolio of
securities ("Fund Securities"). A redeeming beneficial owner must maintain
appropriate security arrangements with a broker-dealer, bank or other custody
provider in each jurisdiction in which any of the portfolio securities are
customarily traded. If such arrangements cannot be made, or it is not possible
to effect deliveries of the portfolio securities in a particular jurisdiction or
under certain other circumstances (for example, holders may incur unfavorable
tax treatment in some countries if they are entitled to receive "in-kind"
redemption proceeds), Fund Shares may be redeemed for cash at the discretion of
First Trust. There can be no assurance, however, that there will be sufficient
liquidity in the public trading market at any time to permit assembly of a
Creation Unit Aggregation. Investors should expect to incur customary brokerage
and other costs in connection with assembling a sufficient number of Fund Shares
to constitute a redeemable Creation Unit Aggregation.
With respect to the Fund, the Custodian, through the NSCC, makes available
prior to the opening of business on the NYSE (currently 9:30 a.m. Eastern Time)
on each Business Day, the identity of the Fund Securities that will be
applicable (subject to possible amendment or correction) to redemption requests
received in proper form (as described below) on that day. Fund Securities
received on redemption may not be identical to Deposit Securities that are
applicable to creations of Creation Unit Aggregations.
Unless cash redemptions are available or specified for the Fund, the
redemption proceeds for a Creation Unit Aggregation generally consist of Fund
Securities--as announced on the Business Day of the request for redemption
received in proper form--plus or minus cash in an amount equal to the difference
between the NAV of the Creation Unit Aggregation being redeemed, as next
determined after a receipt of a request in proper form, and the value of the
Fund Securities (the "Cash Redemption Amount"), less the applicable Redemption
Transaction Fee as listed below and, if applicable, any operational processing
and brokerage costs, transfer fees or stamp taxes. In the event that the Fund
Securities have a value greater than the NAV of the Fund Shares, a compensating
cash payment equal to the difference plus, the applicable Redemption Transaction
Fee and, if applicable, any operational processing and brokerage costs, transfer
fees or stamp taxes is required to be made by or through an Authorized
Participant by the redeeming shareholder.
The right of redemption may be suspended or the date of payment postponed
(i) for any period during which the NYSE is closed (other than customary weekend
and holiday closings); (ii) for any period during which trading on the NYSE is
suspended or restricted; (iii) for any period during which an emergency exists
as a result of which disposal of the Shares of the Fund or determination of the
Fund's NAV is not reasonably practicable; or (iv) in such other circumstances as
is permitted by the SEC.
Redemption Transaction Fee. Parties redeeming Creation Units must pay a
redemption transaction fee (the "Redemption Transaction Fee") that is currently
$________. The Redemption Transaction Fee is applicable to each redemption
transaction regardless of the number of Creation Units redeemed in the
- 44 -
transaction. The Redemption Transaction Fee may vary and is based on the
composition of the securities included in the Fund's portfolio and the countries
in which the transactions are settled. The Fund reserves the right to effect
redemptions in cash. A shareholder may request a cash redemption in lieu of
securities; however, the Fund may, in its discretion, reject any such request.
Investors will also bear the costs of transferring the Fund Securities from the
Trust to their account or on their order. Investors who use the services of a
broker or other such intermediary in addition to an Authorized Participant to
effect a redemption of a Creation Unit Aggregation may also be assessed the
amount to cover the cost of such services.
Placement of Redemption Orders. Orders to redeem Creation Unit
Aggregations must be delivered through an Authorized Participant that has
executed a Participant Agreement. Investors other than Authorized Participants
are responsible for making arrangements for a redemption request to be made
through an Authorized Participant. An order to redeem Creation Unit Aggregations
of the Fund is deemed received by the Trust on the Transmittal Date if: (i) such
order is received by _____ (in its capacity as transfer agent) not later than
the Closing Time on the Transmittal Date; (ii) such order is accompanied or
followed by the requisite number of shares of the Fund specified in such order,
which delivery must be made through DTC to _____; and (iii) all other procedures
set forth in the Participant Agreement are properly followed.
Under the 1940 Act, the Fund would generally be required to make payment
of redemption proceeds within seven days after a security is tendered is
redemption. However, because the settlement of redemptions of Fund Shares is
contingent not only on the settlement cycle of the United States securities
markets, but also on delivery cycles of foreign markets, the Fund's redemption
proceeds must be paid within the maximum number of calendar days required for
such payment or satisfaction in the principal local foreign markets where
transactions in portfolio securities customarily clear and settle, but no later
than 12 calendar days following tender of a Creation Unit Aggregation. Due to
the schedule of holidays in certain countries, however, the delivery of in-kind
redemption proceeds for the Fund may take longer than three Business Days after
the day on which the redemption request is received in proper form. In such
cases, the local market settlement procedures will not commence until the end of
the local holiday periods. See below for a list of the local holidays in the
foreign countries relevant to the Fund.
In connection with taking delivery of shares of Fund Securities upon
redemption of shares of the Fund, a redeeming Beneficial Owner, or Authorized
Participant acting on behalf of such Beneficial Owner must maintain appropriate
security arrangements with a qualified broker-dealer, bank or other custody
provider in each jurisdiction in which any of the Fund Securities are
customarily traded, to which account such Fund Securities will be delivered.
To the extent contemplated by an Authorized Participant's agreement, in
the event the Authorized Participant has submitted a redemption request in
proper form but is unable to transfer all or part of the Creation Unit
Aggregation to be redeemed to the Fund's transfer agent, the transfer agent will
nonetheless accept the redemption request in reliance on the undertaking by the
Authorized Participant to deliver the missing shares as soon as possible. Such
- 45 -
undertaking shall be secured by the Authorized Participant's delivery and
maintenance of collateral consisting of cash having a value (marked to market
daily) at least equal to 115%, which First Trust may change from time to time,
of the value of the missing shares.
The current procedures for collateralization of missing shares require,
among other things, that any cash collateral shall be in the form of U.S.
dollars in immediately available funds and shall be held by _____ and marked to
market daily, and that the fees of _____ and any sub-custodians in respect of
the delivery, maintenance and redelivery of the cash collateral shall be payable
by the Authorized Participant. The Authorized Participant's agreement will
permit the Trust, on behalf of the affected Fund, to purchase the missing shares
or acquire the Deposit Securities and the Cash Component underlying such shares
at any time and will subject the Authorized Participant to liability for any
shortfall between the cost to the Trust of purchasing such shares, Deposit
Securities or Cash Component and the value of the collateral.
The calculation of the value of the Fund Securities and the Cash
Redemption Amount to be delivered/received upon redemption will be made by _____
according to the procedures set forth in this SAI under "Determination of NAV"
computed on the Business Day on which a redemption order is deemed received by
the Trust. Therefore, if a redemption order in proper form is submitted to _____
by a DTC Participant not later than Closing Time on the Transmittal Date, and
the requisite number of shares of the relevant Fund are delivered to _____ prior
to the DTC Cut-Off-Time, then the value of the Fund Securities and the Cash
Redemption Amount to be delivered will be determined by _____ on such
Transmittal Date. If, however, a redemption order is submitted to _____ by a DTC
Participant not later than the Closing Time on the Transmittal Date but either
(i) the requisite number of Shares of the relevant Fund are not delivered by the
DTC Cut-Off-Time, as described above, on such Transmittal Date, or (ii) the
redemption order is not submitted in proper form, then the redemption order will
not be deemed received as of the Transmittal Date. In such case, the value of
the Fund Securities and the Cash Redemption Amount to be delivered/received will
be computed on the Business Day that such order is deemed received by the Trust,
i.e., the Business Day on which the shares of the relevant Fund are delivered
through DTC to _____ by the DTC Cut-Off-Time on such Business Day pursuant to a
properly submitted redemption order.
If it is not possible to effect deliveries of the Fund Securities, the
Trust may in its discretion exercise its option to redeem such Fund Shares in
cash, and the redeeming Beneficial Owner will be required to receive its
redemption proceeds in cash. In addition, an investor may request a redemption
in cash that the Fund may, in its sole discretion, permit. In either case, the
investor will receive a cash payment equal to the NAV of its Fund Shares based
on the NAV of Shares of the relevant Fund next determined after the redemption
request is received in proper form (minus a redemption transaction fee and
additional charges for requested cash redemptions specified above, to offset the
Trust's brokerage and other transaction costs associated with the disposition of
Fund Securities). The Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer cash in lieu of some securities added to the
Cash Redemption Amount, but in no event will the total value of the securities
delivered and the cash transmitted differ from the NAV.
- 46 -
Redemptions of Fund Shares for Fund Securities will be subject to
compliance with applicable federal and state securities laws and the Fund
(whether or not it otherwise permits cash redemptions) reserves the right to
redeem Creation Unit Aggregations for cash to the extent that the Trust could
not lawfully deliver specific Fund Securities upon redemptions or could not do
so without first registering the Fund Securities under such laws. An Authorized
Participant or an investor for which it is acting subject to a legal restriction
with respect to a particular stock included in the Fund Securities applicable to
the redemption of a Creation Unit Aggregation may be paid an equivalent amount
of cash. The Authorized Participant may request the redeeming Beneficial Owner
of the Fund Shares to complete an order form or to enter into agreements with
respect to such matters as compensating cash payment, beneficial ownership of
Shares or delivery instructions.
Because the Portfolio Securities of the Fund may trade on the relevant
exchange(s) on days that the listing exchange for the Fund is closed or are
otherwise not Business Days for the Fund, shareholders may not be able to redeem
their shares of such Fund, or purchase and sell shares of such Fund on the
listing exchange for the Fund, on days when the NAV of the Fund could be
significantly affected by events in the relevant foreign markets.
REGULAR HOLIDAYS
The Fund generally intends to effect deliveries of Creation Units and
securities in its portfolio ("Portfolio Securities") on a basis of "T" plus
three Business Days (i.e., days on which the NYSE is open). The Fund may effect
deliveries of Creation Units and portfolio securities on a basis other than T
plus three in order to accommodate local holiday schedules, to account for
different treatment among non-U.S. and U.S. markets of dividend record dates and
ex-dividend dates, or under certain other circumstances. The ability of the Fund
to effect in-kind creations and redemptions within three Business Days of
receipt of an order in good form is subject, among other things, to the
condition that, within the time period from the date of the order to the date of
delivery of the securities, there are no days that are holidays in the
applicable foreign market. For every occurrence of one or more intervening
holidays in the applicable non-U.S. market that are not holidays observed in the
U.S. equity market, the redemption settlement cycle will be extended by the
number of such intervening holidays. In addition to holidays, other
unforeseeable closings in a non-U.S. market due to emergencies may also prevent
the Trust from delivering securities within normal settlement period.
The securities delivery cycles currently practicable for transferring
portfolio securities to redeeming investors, coupled with non-U.S. market
holiday schedules, may require a delivery process longer than seven calendar
days for some the Fund in certain circumstances. The holidays applicable to the
Fund during such periods are listed below, as are instances where more than
seven days will be needed to deliver redemption proceeds. Although certain
holidays may occur on different dates in subsequent years, the number of days
required to deliver redemption proceeds in any given year is not expected to
exceed the maximum number of days listed below for the Fund. The proclamation of
new holidays, the treatment by market participants of certain days as "informal
holidays" (e.g., days on which no or limited securities transactions occur, as a
result of substantially shortened trading hours), the elimination of existing
- 47 -
holidays, or changes in local securities delivery practices, could affect the
information set forth herein at some time in the future.
The dates of the regular holidays affecting the relevant securities
markets from November 1, 2012 through November 1, 2013 of the below-listed
countries are as follows:
[REGULAR HOLIDAYS TABLE TO BE INCLUDED]
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FEDERAL TAX MATTERS
This section summarizes some of the main U.S. federal income tax
consequences of owning Shares of the Fund. This section is current as of the
date of the Prospectus. Tax laws and interpretations change frequently, and
these summaries do not describe all of the tax consequences to all taxpayers.
For example, these summaries generally do not describe your situation if you are
a corporation, a non-U.S. person, a broker-dealer, or other investor with
special circumstances. In addition, this section does not describe your state,
local or foreign tax consequences.
This federal income tax summary is based in part on the advice of counsel
to the Fund. The Internal Revenue Service could disagree with any conclusions
set forth in this section. In addition, our counsel was not asked to review, and
has not reached a conclusion with respect to the federal income tax treatment of
the assets to be deposited in the Fund. This may not be sufficient for
prospective investors to use for the purpose of avoiding penalties under federal
tax law.
As with any investment, prospective investors should seek advice based on
their individual circumstances from their own tax advisor.
The Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
To qualify for the favorable U.S. federal income tax treatment generally
accorded to regulated investment companies, the Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies, or net income derived from interests in certain publicly traded
partnerships; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer generally limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. government securities or
the securities of other regulated investment companies) of any one issuer, or
two or more issuers which the Fund controls which are engaged in the same,
similar or related trades or businesses, or the securities of one or more of
certain publicly traded partnerships; and (c) distribute at least 90% of its
investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of net long-term capital
losses) and at least 90% of its net tax-exempt interest income each taxable
- 49 -
year. There are certain exceptions for failure to qualify if the failure is for
reasonable cause or is de minimis, and certain corrective action is taken and
certain tax payments are made by the Fund.
As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income (as that
term is defined in the Code, but without regard to the deduction for dividends
paid) and net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any, that it distributes to shareholders. The Fund
intends to distribute to its shareholders, at least annually, substantially all
of its investment company taxable income and net capital gain. If the Fund
retains any net capital gain or investment company taxable income, it will
generally be subject to federal income tax at regular corporate rates on the
amount retained. In addition, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax unless, generally, the Fund distributes during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98.2% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years. In order to prevent
application of the excise tax, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of the current calendar year if it is declared
by the Fund in October, November or December with a record date in such a month
and paid by the Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Subject to certain reasonable cause and de minimis exceptions, if the Fund
failed to qualify as a regulated investment company or failed to satisfy the 90%
distribution requirement in any taxable year, the Fund would be taxed as an
ordinary corporation on its taxable income (even if such income were distributed
to its shareholders) and all distributions out of earnings and profits would be
taxed to shareholders as ordinary income.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income are
generally taxable to a shareholder as ordinary income to the extent of the
Fund's earnings and profits, whether paid in cash or reinvested in additional
Shares. However, certain ordinary income distributions received from the Fund
may be taxed at capital gains tax rates. In particular, ordinary income
dividends received by an individual shareholder from a regulated investment
company such as the Fund are generally taxed at the same rates that apply to net
capital gain, provided that certain holding period requirements are satisfied
and provided the dividends are attributable to qualifying dividends received by
the Fund itself. Dividends received by the Fund from foreign corporations are
qualifying dividends eligible for this lower tax rate only in certain
circumstances.
These special rules relating to the taxation of ordinary income dividends
from regulated investment companies generally apply to taxable years beginning
before January 1, 2013. The Fund will provide notice to its shareholders of the
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amount of any distributions that may be taken into account as a dividend which
is eligible for the capital gains tax rates. The Fund cannot make any guarantees
as to the amount of any distribution which will be regarded as a qualifying
dividend.
Under the "Health Care and Education Reconciliation Act of 2010," income
from the Fund may also be subject to a new 3.8% "Medicare tax" imposed for
taxable years beginning after 2012. This tax will generally apply to net
investment income if the taxpayer's adjusted gross income exceeds certain
threshold amounts, which are $250,000 in the case of married couples filing
joint returns and $200,000 in the case of single individuals.
A corporation that owns Shares generally will not be entitled to the
dividends received deduction with respect to many dividends received from the
Fund because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary
income dividends on Shares that are attributable to qualifying dividends
received by the Fund from certain domestic corporations may be reported by the
Fund as being eligible for the dividends received deduction.
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, properly reported as capital
gain dividends are taxable to a shareholder as long-term capital gains,
regardless of how long the shareholder has held Fund Shares. Shareholders
receiving distributions in the form of additional Shares, rather than cash,
generally will have a cost basis in each such Share equal to the value of a
Share of the Fund on the reinvestment date. A distribution of an amount in
excess of the Fund's current and accumulated earnings and profits will be
treated by a shareholder as a return of capital which is applied against and
reduces the shareholder's basis in his or her Shares. To the extent that the
amount of any such distribution exceeds the shareholder's basis in his or her
Shares, the excess will be treated by the shareholder as gain from a sale or
exchange of the Shares.
Shareholders will be notified annually as to the U.S. federal income tax
status of distributions, and shareholders receiving distributions in the form of
additional Shares will receive a report as to the value of those Shares.
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of Shares of the Fund, which a
shareholder holds as a capital asset, such a shareholder may realize a capital
gain or loss which will be long-term or short-term, depending upon the
shareholder's holding period for the Shares. Generally, a shareholder's gain or
loss will be a long-term gain or loss if the Shares have been held for more than
one year.
Any loss realized on a sale or exchange will be disallowed to the extent
that Shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of Shares or to the extent that the shareholder, during
such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In such a case, the basis of the
- 51 -
Shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund Shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of long-term capital gain received by the
shareholder with respect to such Shares.
TAXES ON PURCHASE AND REDEMPTION OF CREATION UNITS
If a shareholder exchanges equity securities for Creation Units the
shareholder will generally recognize a gain or a loss. The gain or loss will be
equal to the difference between the market value of the Creation Units at the
time and the shareholder's aggregate basis in the securities surrendered and the
Cash Component paid. If a shareholder exchanges Creation Units for equity
securities, then the shareholder will generally recognize a gain or loss equal
to the difference between the shareholder's basis in the Creation Units and the
aggregate market value of the securities received and the Cash Redemption
Amount. The Internal Revenue Service, however, may assert that a loss realized
upon an exchange of securities for Creation Units or Creation Units for
securities cannot be deducted currently under the rules governing "wash sales,"
or on the basis that there has been no significant change in economic position.
NATURE OF FUND INVESTMENTS
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions.
FUTURES CONTRACTS AND OPTIONS
The Fund's transactions in Futures Contracts and options will be subject
to special provisions of the Code that, among other things, may affect the
character of gains and losses realized by the Fund (i.e., may affect whether
gains or losses are ordinary or capital, or short-term or long-term), may
accelerate recognition of income to the Fund and may defer Fund losses. These
rules could, therefore, affect the character, amount and timing of distributions
to shareholders. These provisions also (a) will require the Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were closed out), and (b) may cause the Fund to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy the 90% distribution requirement for qualifying to be taxed as a
regulated investment company and the distribution requirements for avoiding
excise taxes.
- 52 -
INVESTMENTS IN CERTAIN FOREIGN CORPORATIONS
If the Fund holds an equity interest in any PFICs, which are generally
certain foreign corporations that receive at least 75% of their annual gross
income from passive sources (such as interest, dividends, certain rents and
royalties or capital gains) or that hold at least 50% of their assets in
investments producing such passive income, the Fund could be subject to U.S.
federal income tax and additional interest charges on gains and certain
distributions with respect to those equity interests, even if all the income or
gain is timely distributed to its shareholders. The Fund will not be able to
pass through to its shareholders any credit or deduction for such taxes. The
Fund may be able to make an election that could ameliorate these adverse tax
consequences. In this case, the Fund would recognize as ordinary income any
increase in the value of such PFIC shares, and as ordinary loss any decrease in
such value to the extent it did not exceed prior increases included in income.
Under this election, the Fund might be required to recognize in a year income in
excess of its distributions from PFICs and its proceeds from dispositions of
PFIC stock during that year, and such income would nevertheless be subject to
the distribution requirement and would be taken into account for purposes of the
4% excise tax (described above). Dividends paid by PFICs will not be treated as
qualified dividend income.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. The withholding percentage
is 28% until 2013, when the percentage will revert to 31% unless amended by
Congress. Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from such backup withholding. This withholding is not
an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("non-U.S. shareholder") depends on whether the income of
the Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
In addition to the rules described in this section concerning the
potential imposition of withholding on distributions to non-U.S. persons,
distributions after December 31, 2013, to non-U.S. persons that are "financial
institutions" may be subject to a withholding tax of 30% unless an agreement is
in place between the financial institution and the U.S. Treasury to collect and
disclose information about accounts, equity investments, or debt interests in
the financial institution held by one or more U.S. persons. For these purposes,
a "financial institution" means any entity that (i) accepts deposits in the
ordinary course of a banking or similar business, (ii) holds financial assets
for the account of others as a substantial portion of its business, or (iii) is
engaged (or holds itself out as being engaged) primarily in the business of
- 53 -
investing, reinvesting or trading in securities, partnership interests,
commodities or any interest (including a futures contract or option) in such
securities, partnership interests or commodities. Dispositions of Shares by such
persons may be subject to such withholding after December 31, 2014.
Distributions to non-financial non-U.S. entities (other than publicly
traded foreign entities, entities owned by residents of U.S. possessions,
foreign governments, international organizations, or foreign central banks)
after December 31, 2013, will also be subject to a withholding tax of 30% if the
entity does not certify that the entity does not have any substantial U.S.
owners or provide the name, address and TIN of each substantial U.S. owner.
Dispositions of Shares by such persons may be subject to such withholding after
December 31, 2014.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the non-U.S.
shareholder, distributions of investment company taxable income will generally
be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally
withheld from such distributions.
Distributions of capital gain dividends and any amounts retained by the
Fund which are properly reported by the Fund as undistributed capital gains will
not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless the
non-U.S. shareholder is a nonresident alien individual and is physically present
in the United States for more than 182 days during the taxable year and meets
certain other requirements. However, this 30% tax on capital gains of
nonresident alien individuals who are physically present in the United States
for more than the 182 day period only applies in exceptional cases because any
individual present in the United States for more than 182 days during the
taxable year is generally treated as a resident for U.S. income tax purposes; in
that case, he or she would be subject to U.S. income tax on his or her worldwide
income at the graduated rates applicable to U.S. citizens, rather than the 30%
U.S. tax. In the case of a non-U.S. shareholder who is a nonresident alien
individual, the Fund may be required to withhold U.S. income tax from
distributions of net capital gain unless the non-U.S. shareholder certifies his
or her non-U.S. status under penalties of perjury or otherwise establishes an
exemption. If a non-U.S. shareholder is a nonresident alien individual, any gain
such shareholder realizes upon the sale or exchange of such shareholder's Shares
of the Fund in the United States will ordinarily be exempt from U.S. tax unless
the gain is U.S. source income and such shareholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements.
Income Effectively Connected. If the income from the Fund is "effectively
connected" with a U.S. trade or business carried on by a non-U.S. shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the Fund which are properly reported by the
Fund as undistributed capital gains and any gains realized upon the sale or
exchange of Shares of the Fund will be subject to U.S. income tax at the
graduated rates applicable to U.S. citizens, residents and domestic
corporations. Non-U.S. corporate shareholders may also be subject to the branch
profits tax imposed by the Code. The tax consequences to a non-U.S. shareholder
entitled to claim the benefits of an applicable tax treaty may differ from those
described herein. Non-U.S. shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Fund.
- 54 -
OTHER TAXATION
Fund shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Fund.
DETERMINATION OF NAV
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Net Asset Value."
The per share NAV of the Fund is determined by dividing the total value of
the securities and other assets, less liabilities, by the total number of Shares
outstanding. Under normal circumstances, daily calculation of the NAV will
utilize the last closing sale of each security held by the Fund at the close of
the market on which such security is principally listed. In determining NAV,
portfolio securities for the Fund for which accurate market quotations are
readily available will be valued by the Fund accounting agent as follows:
(1) Common stocks and other equity securities listed on any
national or foreign exchange other than NASDAQ(R) and the London Stock
Exchange Alternative Investment Market ("AIM") will be valued at the last
sale price on the business day as of which such value is being determined.
Securities listed on NASDAQ(R) or AIM are valued at the official closing
price on the business day as of which such value is being determined. If
there has been no sale on such day, or no official closing price in the
case of securities traded on NASDAQ(R) and AIM, the securities are valued
at the mean of the most recent bid and ask prices on such day. Portfolio
securities traded on more than one securities exchange are valued at the
last sale price or official closing price, as applicable, on the business
day as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
(2) Securities traded in the over-the-counter market are valued at
their closing bid prices.
(3) Exchange-traded options and Futures Contracts will be valued at
the closing price in the market where such contracts are principally
traded. If no closing price is available, exchange-traded options and
futures contracts will be valued at the mean between the last bid and
asked price. Over-the-counter options and Futures Contracts will be valued
at their closing bid prices.
(4) Forward foreign currency exchange contracts which are traded in
the United States on regulated exchanges will be valued by calculating the
mean between the last bid and asked quotations supplied to a pricing
service by certain independent dealers in such contracts.
- 55 -
In addition, the following types of securities will be valued as follows:
(1) Fixed income securities with a remaining maturity of 60 days or
more will be valued by the fund accounting agent using a pricing service.
When price quotes are not available, fair value is based on prices of
comparable securities.
(2) Fixed income securities maturing within 60 days are valued by
the Fund accounting agent on an amortized cost basis.
(3) Repurchase agreements will be valued as follows. Overnight
repurchase agreements will be valued at cost. Term repurchase agreements
(i.e., those whose maturity exceeds seven days) will be valued by First
Trust at the average of the bid quotations obtained daily from at least
two recognized dealers.
The value of any portfolio security held by the Fund for which market
quotations are not readily available will be determined by First Trust in a
manner that most fairly reflects fair value of the security on the valuation
date, based on a consideration of all available information.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board of Trustees or its delegate
at fair value. These securities generally include but are not limited to,
restricted securities (securities which may not be publicly sold without
registration under the 1933 Act) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of Fund NAV (as may be the case in foreign markets on
which the security is primarily traded) or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's "fair value." As a general
principle, the current "fair value" of an issue of securities would appear to be
the amount which the owner might reasonably expect to receive for them upon
their current sale. A variety of factors may be considered in determining the
fair value of such securities.
Valuing the Fund's investments using fair value pricing will result in
using prices for those investments that may differ from current market
valuations.
Because foreign markets may be open on different days than the days during
which a shareholder may purchase the Shares of the Fund, the value of the Fund's
investments may change on the days when shareholders are not able to purchase
the Shares of the Fund.
The value of assets denominated in foreign currencies is converted into
U.S. dollars using exchange rates in effect at the time of valuation.
The Fund may suspend the right of redemption for the Fund only under the
following unusual circumstances: (a) when the NYSE is closed (other than
weekends and holidays) or trading is restricted; (b) when trading in the markets
- 56 -
normally utilized is restricted, or when an emergency exists as determined by
the SEC so that disposal of the Fund's investments or determination of its net
assets is not reasonably practicable; or (c) during any period when the SEC may
permit.
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Dividends, Distributions and
Taxes."
General Policies. Dividends from net investment income of the Fund, if
any, are declared and paid monthly. Distributions of net realized securities
gains, if any, generally are declared and paid once a year, but the Trust may
make distributions on a more frequent basis. The Trust reserves the right to
declare special distributions if, in its reasonable discretion, such action is
necessary or advisable to preserve the status of the Fund as a regulated
investment company or to avoid imposition of income or excise taxes on
undistributed income.
Dividends and other distributions of Fund Shares are distributed, as
described below, on a pro rata basis to Beneficial Owners of such Shares.
Dividend payments are made through DTC Participants and Indirect Participants to
Beneficial Owners then of record with proceeds received from the Fund.
Dividend Reinvestment Service. No reinvestment service is provided by the
Trust. Broker-dealers may make available the DTC book-entry Dividend
Reinvestment Service for use by Beneficial Owners of the Fund for reinvestment
of their dividend distributions. Beneficial Owners should contact their brokers
in order to determine the availability and costs of the service and the details
of participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables. If this service is available and used,
dividend distributions of both income and realized gains will be automatically
reinvested in additional whole Shares of the Fund purchased in the secondary
market.
MISCELLANEOUS INFORMATION
Counsel. Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois
60603, is counsel to the Trust.
Independent Registered Public Accounting Firm. Deloitte & Touche LLP, 111
S. Wacker Drive, Chicago, Illinois 60606, serves as the Fund's independent
registered public accounting firm. The firm audits the Fund's financial
statements and performs other related audit services.
- 57 -
APPENDIX A - RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS GROUP--A BRIEF DESCRIPTION OF THE APPLICABLE
STANDARD & POOR'S ("S&P") RATING SYMBOLS AND THEIR MEANINGS (AS PUBLISHED BY
S&P) FOLLOWS:
A Standard & Poor's issue credit rating is a forward-looking opinion about
the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program (including ratings on medium-term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes into
account the currency in which the obligation is denominated. The opinion
reflects Standard & Poor's view of the obligor's capacity and willingness to
meet its financial commitments as they come due, and may assess terms, such as
collateral security and subordination, which could affect ultimate payment in
the event of default.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days--including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on Standard & Poor's
analysis of the following considerations:
1. Likelihood of payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
Issue ratings are an assessment of default risk, but may incorporate an
assessment of relative seniority or ultimate recovery in the event of default.
Junior obligations are typically rated lower than senior obligations, to reflect
the lower priority in bankruptcy, as noted above. (Such differentiation may
apply when an entity has both senior and subordinated obligations, secured and
unsecured obligations, or operating company and holding company obligations.)
AAA An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
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AA An obligation rated 'AA' differs from the highest-rated obligations only to a
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C A 'C' rating is assigned to obligations that are currently highly vulnerable
to nonpayment, obligations that have payment arrearages allowed by the terms of
the documents, or obligations of an issuer that is the subject of a bankruptcy
petition or similar action which have not experienced a payment default. Among
others, the 'C' rating may be assigned to subordinated debt, preferred stock or
other obligations on which cash payments have been suspended in accordance with
the instrument's terms or when preferred stock is the subject of a distressed
exchange offer, whereby some or all of the issue is either repurchased for an
amount of cash or replaced by other instruments having a total value that is
less than par.
D An obligation rated 'D' is in payment default. The 'D' rating category is used
when payments on an obligation are not made on the date due, unless Standard &
Poor's believes that such payments will be made within five business days,
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irrespective of any grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized. An obligation's rating is lowered to 'D' upon
completion of a distressed exchange offer, whereby some or all of the issue is
either repurchased for an amount of cash or replaced by other instruments having
a total value that is less than par.
NR This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular obligation as a matter of policy.
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major rating
categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B A short-term obligion rated 'B' is regarded as vulnerable and has significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitments; however, it faces major ongoing uncertainties which could
lead to the obligor's inadequate capacity to meet its financial commitments.
C A short-term obligation rated 'C' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due,
unless Standard & Poor's believes that such payments will be made within any
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stated grace period. However, any stated grace period longer than five business
days will be treated as five business days. The 'D' rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
MOODY'S INVESTORS SERVICE, INC.--A BRIEF DESCRIPTION OF THE APPLICABLE
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") RATING SYMBOLS AND THEIR MEANINGS
(AS PUBLISHED BY MOODY'S) FOLLOWS:
Ratings assigned on Moody's global long-term and short-term rating scales
are forward-looking opinions of the relative credit risks of financial
obligations issued by non-financial corporates, financial institutions,
structured finance vehicles, project finance vehicles, and public sector
entities. Long-term ratings are assigned to issuers or obligations with an
original maturity of one year or more and reflect both on the likelihood of a
default on contractually promised payments and the expected financial loss
suffered in the event of default. Short-term ratings are assigned to obligations
with an original maturity of thirteen months or less and reflect the likelihood
of a default on contractually promised payments.
Long Term Obligation Ratings
Aaa Obligations rated Aaa are judged to be of the highest quality, subject to
the lowest level of credit risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to very
low credit risk.
A Obligations rated A are judged to be upper-medium grade and are subject to low
credit risk.
Baa Obligations rated Baa are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative characteristics.
Ba Obligations rated Ba are judged to be speculative and are subject to
substantial credit risk.
B Obligations rated B are considered speculative and are subject to high credit
risk.
Caa Obligations rated Caa are judged to be speculative of poor standing and are
subject to very high credit risk.
Ca Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
C Obligations rated C are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic
rating classification from Aaa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
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Short-Term Obligation Ratings
P-1 Issuers (or supporting institutions) rated Prime-1 have a superior ability
to repay short-term debt obligations.
P-2 Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
P-3 Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
NP Issuers (or supporting institutions) rated Not Prime do not fall within any
of the Prime rating categories.
Medium-Term Note Program Ratings
Moody's assigns provisional ratings to medium-term note (MTN) programs and
definitive ratings to the individual debt securities issued from them (referred
to as drawdowns or notes).
MTN program ratings are intended to reflect the ratings likely to be
assigned to drawdowns issued from the program with the specified priority of
claim (e.g. senior or subordinated). To capture the contingent nature of a
program rating, Moody's assigns provisional ratings to MTN programs. A
provisional rating is denoted by a (P) in front of the rating.
The rating assigned to a drawdown from a rated MTN or bank/deposit note
program is definitive in nature, and may differ from the program rating if the
drawdown is exposed to additional credit risks besides the issuer's default,
such as links to the defaults of other issuers, or has other structural features
that warrant a different rating. In some circumstances, no rating may be
assigned to a drawdown.
Moody's encourages market participants to contact Moody's Ratings Desks or
visit www.moodys.com directly if they have questions regarding ratings for
specific notes issued under a medium-term note program. Unrated notes issued
under an MTN program may be assigned an NR (not rated) symbol.
U.S. Municipal Short-Term Debt and Demand Obligation Ratings
Short-Term Obligation Ratings
The Municipal Investment Grade (MIG) scale is used to rate US municipal
bond anticipation notes of up to three years maturity. Municipal notes rated on
the MIG scale may be secured by either pledged revenues or proceeds of a
take-out financing received prior to note maturity. MIG ratings expire at the
maturity of the obligation, and the issuer's long-term rating is only one
consideration in assigning the MIG rating. MIG ratings are divided into three
levels--MIG 1 through MIG 3--while speculative grade short-term obligations are
designated SG.
MIG 1 This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
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MIG 2 This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
MIG 3 This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt instruments
in this category may lack sufficient margins of protection.
Demand Obligation Ratings
In the case of variable rate demand obligations (VRDOs), a two-component
rating is assigned: a long or short-term debt rating and a demand obligation
rating. The first element represents Moody's evaluation of risk associated with
scheduled principal and interest payments. The second element represents Moody's
evaluation of risk associated with the ability to receive purchase price upon
demand ("demand feature"). The second element uses a rating from a variation of
the MIG scale called the Variable Municipal Investment Grade (VMIG) scale.
VMIG 1 This designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand. VMIG 2 This designation denotes strong credit quality. Good
protection is afforded by the strong short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand. VMIG 3 This designation denotes acceptable credit
quality. Adequate protection is afforded by the satisfactory short-term credit
strength of the liquidity provider and structural and legal protections that
ensure the timely payment of purchase price upon demand. SG This designation
denotes speculative-grade credit quality. Demand features rated in this category
may be supported by a liquidity provider that does not have an investment grade
short-term rating or may lack the structural and/or legal protections necessary
to ensure the timely payment of purchase price upon demand.
FITCH RATINGS--A BRIEF DESCRIPTION OF THE APPLICABLE FITCH RATINGS
("FITCH") RATINGS SYMBOLS AND MEANINGS (AS PUBLISHED BY FITCH) FOLLOWS:
Fitch Ratings' credit ratings provide an opinion on the relative ability
of an entity to meet financial commitments, such as interest, preferred
dividends, repayment of principal, insurance claims or counterparty obligations.
Credit ratings are used by investors as indications of the likelihood of
receiving the money owed to them in accordance with the terms on which they
invested. The agency's credit ratings cover the global spectrum of corporate,
sovereign (including supranational and sub-national), financial, bank,
insurance, municipal and other public finance entities and the securities or
other obligations they issue, as well as structured finance securities backed by
receivables or other financial assets.
The terms "investment grade" and "speculative grade" have established
themselves over time as shorthand to describe the categories 'AAA' to 'BBB'
(investment grade) and 'BB' to 'D' (speculative grade). The terms "investment
grade" and "speculative grade" are market conventions, and do not imply any
recommendation or endorsement of a specific security for investment purposes.
- 63 -
"Investment grade" categories indicate relatively low to moderate credit risk,
while ratings in the "speculative" categories either signal a higher level of
credit risk or that a default has already occurred.
A designation of "Not Rated" or "NR" is used to denote securities not
rated by Fitch where Fitch has rated some, but not all, securities comprising an
issuance capital structure.
Credit ratings express risk in relative rank order, which is to say they
are ordinal measures of credit risk and are not predictive of a specific
frequency of default or loss.
Fitch's credit ratings do not directly address any risk other than credit
risk. In particular, ratings do not deal with the risk of a market value loss on
a rated security due to changes in interest rates, liquidity and other market
considerations. However, in terms of payment obligation on the rated liability,
market risk may be considered to the extent that it influences the ability of an
issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk
to the extent that they influence the size or other conditionality of the
obligation to pay upon a commitment (for example, in the case of index-linked
bonds).
In the default components of ratings assigned to individual obligations or
instruments, the agency typically rates to the likelihood of non-payment or
default in accordance with the terms of that instrument's documentation. In
limited cases, Fitch Ratings may include additional considerations (i.e. rate to
a higher or lower standard than that implied in the obligation's documentation).
In such cases, the agency will make clear the assumptions underlying the
agency's opinion in the accompanying rating commentary.
International Long-Term Ratings
Issuer Credit Rating Scales
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
default risk. They are assigned only in cases of exceptionally strong capacity
for payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote expectations of very low
default risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. 'A' ratings denote expectations of low default risk. The
capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that expectations of default
risk are currently low. The capacity for payment of financial commitments is
considered adequate but adverse business or economic conditions are more likely
to impair this capacity.
- 64 -
BB Speculative. 'BB' ratings indicate an elevated vulnerability to default risk,
particularly in the event of adverse changes in business or economic conditions
over time; however, business or financial flexibility exists which supports the
servicing of financial commitments.
B Highly speculative. 'B' ratings indicate that material default risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is vulnerable to
deterioration in the business and economic environment.
CCC Substantial credit risk. Default is a real possibility.
CC Very high levels of credit risk. Default of some kind appears probable.
C Exceptionally high levels of credit risk. Default is imminent or inevitable,
or the issuer is in standstill. Conditions that are indicative of a 'C' category
rating for an issuer include:
a. the issuer has entered into a grace or cure period following
non-payment of a material financial obligation;
b. the issuer has entered into a temporary negotiated waiver or standstill
agreement following a payment default on a material financial obligation; or
c. Fitch Ratings otherwise believes a condition of 'RD' or 'D' to be
imminent or inevitable, including through the formal announcement of a
distressed debt exchange.
RD: Restricted default. 'RD' ratings indicate an issuer that in Fitch Ratings'
opinion has experienced an uncured payment default on a bond, loan or other
material financial obligation but which has not entered into bankruptcy filings,
administration, receivership, liquidation or other formal winding-up procedure,
and which has not otherwise ceased operating. This would include:
a. the selective payment default on a specific class or currency of debt;
b. the uncured expiry of any applicable grace period, cure period or
default forbearance period following a payment default on a bank loan, capital
markets security or other material financial obligation;
c. the extension of multiple waivers or forbearance periods upon a payment
default on one or more material financial obligations, either in series or in
parallel; or
d. execution of a distressed debt exchange on one or more material
financial obligations.
D: Default. 'D' ratings indicate an issuer that in Fitch Ratings' opinion has
entered into bankruptcy filings, administration, receivership, liquidation or
other formal winding-up procedure, or which has otherwise ceased business.
Default ratings are not assigned prospectively to entities or their
obligations; within this context, non-payment on an instrument that contains a
deferral feature or grace period will generally not be considered a default
until after the expiration of the deferral or grace period, unless a default is
- 65 -
otherwise driven by bankruptcy or other similar circumstance, or by a distressed
debt exchange.
"Imminent" default typically refers to the occasion where a payment
default has been intimated by the issuer, and is all but inevitable. This may,
for example, be where an issuer has missed a scheduled payment, but (as is
typical) has a grace period during which it may cure the payment default.
Another alternative would be where an issuer has formally announced a distressed
debt exchange, but the date of the exchange still lies several days or weeks in
the immediate future.
In all cases, the assignment of a default rating reflects the agency's
opinion as to the most appropriate rating category consistent with the rest of
its universe of ratings, and may differ from the definition of default under the
terms of an issuer's financial obligations or local commercial practice.
Note. The modifiers "+" or "-" may be appended to a rating to denote
relative status within major rating categories. Such suffixes are not added to
the 'AAA', or to categories below 'B'.
International Short-Term Ratings
A short-term issuer or obligation rating is based in all cases on the
short-term vulnerability to default of the rated entity or security stream and
relates to the capacity to meet financial obligations in accordance with the
documentation governing the relevant obligation. Short-Term Ratings are assigned
to obligations whose initial maturity is viewed as "short term" based on market
convention. Typically, this means up to 13 months for corporate, sovereign, and
structured obligations, and up to 36 months for obligations in U.S. public
finance markets.
F1 Highest short-term credit quality. Indicates the strongest intrinsic capacity
for timely payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good short-term credit quality. Good intrinsic capacity for timely payment of
financial commitments.
F3 Fair short-term credit quality. The intrinsic capacity for timely payment of
financial commitments is adequate.
B Speculative short-term credit quality. Minimal capacity for timely payment of
financial commitments, plus heightened vulnerability to near term adverse
changes in financial and economic conditions.
C High short-term default risk. Default is a real possibility.
RD Restricted default. Indicates an entity that has defaulted on one or more of
its financial commitments, although it continues to meet other financial
obligations. Applicable to entity ratings only.
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D Default. Indicates a broad-based default event for an entity, or the default
of a short-term obligation.
Notes to Long-term and Short-term ratings:
'WD' indicates that the rating has been withdrawn and the issue or issuer
is no longer rated by Fitch Ratings
Rating Watch: Rating Watches indicate that there is a heightened
probability of a rating change and the likely direction of such a change. These
are designated as "Positive", indicating a potential upgrade, "Negative", for a
potential downgrade, or "Evolving", if ratings may be raised, lowered or
affirmed. However, ratings that are not on Rating Watch can be raised or lowered
without being placed on Rating Watch first, if circumstances warrant such an
action. A Rating Watch is typically event-driven and, as such, it is generally
resolved over a relatively short period.
- 67 -
First Trust Exchange-Traded Fund IV
PART C - OTHER INFORMATION
ITEM 28. EXHIBITS
EXHIBIT NO. DESCRIPTION
(a) (1) Declaration of Trust of the Registrant and Establishment and
Designation of Series Attached Thereto as Schedule A. (1)
(2) Amended and Restated Establishment and Designation of Series
dated July 18, 2011. (2)
(3) Amended and Restated Establishment and Designation of Series
dated July 12, 2011. (4)
(4) Amended and Restated Establishment and Designation of Series
dated September 17, 2012. (5)
(b) By-Laws of the Registrant. (1)
(c) Not Applicable.
(d) (1) Investment Management Agreement. (3)
(2) Sub-Advisory Agreement. (3)
(e) Distribution Agreement. (3)
(f) Not Applicable.
(g) Custody Agreement between the Registrant and The Bank of New York
Mellon. (3)
(h) (1) Transfer Agency Agreement between the Registrant and The Bank
of New York Mellon. (3)
(2) Administration and Accounting Agreement between the Registrant
and The Bank of New York Mellon. (3)
(3) Subscription Agreement. (3)
(4) Participant Agreement. (3)
(i) (1) Opinion and Consent of Bingham McCutchen LLP dated
_________. (6)
(2) Opinion and Consent of Chapman and Cutler LLP dated
_________. (6)
(j) Consent of Independent Registered Public Accounting Firm. (3)
(k) Not Applicable.
(l) Not Applicable.
(m) 12b-1 Distribution and Service Plan. (3)
(n) Not Applicable.
(o) Not Applicable.
(p) (1) First Trust Advisors L.P., First Trust Portfolios L.P. Code of
Ethics, amended on January 1, 2009. (3)
(2) First Trust Funds Code of Ethics, amended on January 1, 2009.
(3)
(q) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec and Keith
authorizing James A. Bowen, Mark R. Bradley, W. Scott Jardine,
Kristi A. Maher and Eric F. Fess to execute the Registration
Statement. (1)
(1) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-174332) filed on May 19, 2011.
(2) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-174332) filed on July 19, 2011.
(3) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-174332) filed on June 14, 2012.
(4) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-174332) filed on July 13, 2012.
(5) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-174332) filed on October 11, 2012.
(6) To be filed by amendment.
ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
ITEM 30. INDEMNIFICATION
Section 9.5 of the Registrant's Declaration of Trust provides as follows:
Section 9.5. Indemnification and Advancement of Expenses. Subject to the
exceptions and limitations contained in this Section 9.5, every person who is,
or has been, a Trustee, officer, or employee of the Trust, including persons who
serve at the request of the Trust as directors, trustees, officers, employees or
agents of another organization in which the Trust has an interest as a
shareholder, creditor or otherwise (hereinafter referred to as a "Covered
Person"), shall be indemnified by the Trust to the fullest extent permitted by
law against liability and against all expenses reasonably incurred or paid by
him or in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or having been
such a Trustee, director, officer, employee or agent and against amounts paid or
incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person to the
extent such indemnification is prohibited by applicable federal law.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Subject to applicable federal law, expenses of preparation and
presentation of a defense to any claim, action, suit or proceeding subject to a
claim for indemnification under this Section 9.5 shall be advanced by the Trust
prior to final disposition thereof upon receipt of an undertaking by or on
behalf of the recipient to repay such amount if it is ultimately determined that
he is not entitled to indemnification under this Section 9.5.
To the extent that any determination is required to be made as to whether
a Covered Person engaged in conduct for which indemnification is not provided as
described herein, or as to whether there is reason to believe that a Covered
Person ultimately will be found entitled to indemnification, the Person or
Persons making the determination shall afford the Covered Person a rebuttable
presumption that the Covered Person has not engaged in such conduct and that
there is reason to believe that the Covered Person ultimately will be found
entitled to indemnification.
As used in this Section 9.5, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, demands, actions, suits, investigations,
regulatory inquiries, proceedings or any other occurrence of a similar nature,
whether actual or threatened and whether civil, criminal, administrative or
other, including appeals, and the words "liability" and "expenses" shall include
without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
First Trust Advisors L.P. ("First Trust"), investment adviser to the
Registrant, serves as adviser or subadviser to 22 mutual funds, 43
exchange-traded funds and 13 closed-end funds and is the portfolio supervisor of
certain unit investment trusts. Its principal address is 120 East Liberty Drive,
Suite 400, Wheaton, Illinois 60187.
The principal business of certain of First Trust's principal executive
officers involves various activities in connection with the family of unit
investment trusts sponsored by First Trust Portfolios L.P. ("FTP"). FTP's
principal address is 120 East Liberty Drive, Wheaton, Illinois 60187.
Information as to other business, profession, vocation or employment
during the past two years of the officers and directors of First Trust is as
follows:
NAME AND POSITION WITH FIRST TRUST EMPLOYMENT DURING PAST TWO YEARS
James A. Bowen, Chief Executive Officer Chief Executive Officer (since December 2010) and
President (prior to December 2010), FTP; Chairman of the
Board of Directors, BondWave LLC and Stonebridge
Advisors LLC
Ronald D. McAlister, Managing Director Managing Director, FTP
Mark R. Bradley, Chief Financial Officer/Chief Chief Financial Officer and Chief Operating Officer
Operating Officer (since December 2010), FTP; Chief Financial Officer,
BondWave LLC and Stonebridge Advisors LLC
Robert F. Carey, Chief Market Strategist and Senior Senior Vice President, FTP
Vice President
W. Scott Jardine, General Counsel and Secretary Secretary and General Counsel, FTP; Secretary of
BondWave LLC and Stonebridge Advisors LLC
Kristi A. Maher, Deputy General Counsel Deputy General Counsel, FTP
Erin Klassman, Assistant General Counsel Assistant General Counsel, FTP
John Vasko, Assistant General Counsel Assistant General Counsel, FTP
Amy Lum, Assistant General Counsel Assistant General Counsel (since November 2010), FTP;
Of Counsel, The Law Offices of Beau T. Grieman (August 2009 to
March 2010); Associate, Perkins Coie (April 2008 to August 2009)
Lisa Weier, Assistant General Counsel Assistant General Counsel (since January 2011), FTP;
Associate, Chapman and Cutler LLP
Heidemarie Gregoriev, Compliance Counsel Compliance Counsel (since October 2011), FTP; Of
Counsel, Vedder Price P.C.
|
NAME AND POSITION WITH FIRST TRUST EMPLOYMENT DURING PAST TWO YEARS
Benjamin D. McCulloch Associate Counsel, FTP
R. Scott Hall, Managing Director Managing Director, FTP
Andrew S. Roggensack, President Managing Director and President (since December 2010), FTP
Kathleen Brown, Senior Vice President and Chief CCO and Senior Vice President, FTP
Compliance Officer
Elizabeth H. Bull, Senior Vice President Senior Vice President, FTP
Christopher L. Dixon, Senior Vice President Senior Vice President, FTP
Jane Doyle, Senior Vice President Senior Vice President, FTP
James M. Dykas, Senior Vice President and Controller Senior Vice President and Controller (since December 2010), FTP
Jon C. Erickson, Senior Vice President Senior Vice President, FTP
Ken Fincher, Senior Vice President Senior Vice President, FTP
Rosanne Gatta, Board Liaison Associate Board Liaison Associate (July 2010 to Present), FTP;
Assistant Vice President (July 2010 to February 2011),
PNC Global Investment Servicing
Kenneth N. Hass, Senior Vice President Senior Vice President, FTP
Jason T. Henry, Senior Vice President Senior Vice President, FTP
Daniel J. Lindquist, Senior Vice President Senior Vice President, FTP
David G. McGarel, Chief Investment Officer and Senior Senior Vice President, FTP
Vice President
Mitchell Mohr, Senior Vice President Senior Vice President, FTP
Robert M. Porcellino, Senior Vice President Senior Vice President, FTP
Alan M. Rooney, Senior Vice President Senior Vice President, FTP
Roger F. Testin, Senior Vice President Senior Vice President, FTP
Christina Knierim, Senior Vice President Vice President, FTP
Brad Bradley, Vice President Vice President, FTP
|
NAME AND POSITION WITH FIRST TRUST EMPLOYMENT DURING PAST TWO YEARS
Chris Fallow, Vice President Vice President, FTP
Todd Larson, Vice President Vice President, FTP
Ronda L. Saeli-Chiappe, Vice President Vice President, FTP
Stan Ueland, Vice President Vice President, FTP
Katherine Urevig, Vice President Vice President, FTP
Katie D. Collins, Assistant Vice President Assistant Vice President, FTP
Kristen Johanneson, Assistant Vice President Assistant Vice President, FTP
Coleen D. Lynch, Assistant Vice President Assistant Vice President, FTP
Omar Sepulveda, Assistant Vice President Assistant Vice President, FTP
John H. Sherren, Assistant Vice President Assistant Vice President, FTP
Brian Wesbury, Chief Economist Senior Vice President, FTP
Rob Stein, Senior Economist Vice President, FTP
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ITEM 32. PRINCIPAL UNDERWRITER
(a) FTP serves as principal underwriter of the shares of the Registrant
and several other trusts of exchange-traded funds and open-end funds. FTP serves
as principal underwriter and depositor of the following investment companies
registered as unit investment trusts: the First Trust Combined Series, FT Series
(formerly known as the First Trust Special Situations Trust), the First Trust
Insured Corporate Trust, the First Trust of Insured Municipal Bonds and the
First Trust GNMA. The name of each director, officer and partner of FTP is
provided below.
(b) Positions and Offices with Underwriter.
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
The Charger Corporation General Partner None
Grace Partners of DuPage L.P. Limited Partner None
James A. Bowen Chief Executive Officer Trustee and Chairman of the Board
Mark R. Bradley Chief Financial Officer/Chief President and Chief Executive
Operating Officer Officer
James M. Dykas Senior Vice President/Controller Treasurer, Chief Financial Officer
and Chief Accounting Officer
Frank L. Fichera Managing Director None
Russell J. Graham Managing Director None
R. Scott Hall Managing Director None
Ronald D. McAlister Managing Director None
Richard A. Olson Managing Director None
Andrew S. Roggensack Managing Director/President None
|
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
W. Scott Jardine Secretary and General Counsel Secretary
Kristi A. Maher Deputy General Counsel Chief Compliance Officer and
Assistant Secretary
Erin Klassman Assistant General Counsel Assistant Secretary
John Vasko Assistant General Counsel None
Amy Lum Assistant General Counsel None
Lisa Weier Assistant General Counsel None
Heidemarie Gregoriev Compliance Counsel None
Benjamin D. McCulloch Associate Counsel None
Dan Affeto Senior Vice President None
Bob Bartel Senior Vice President None
Elizabeth H. Bull Senior Vice President None
Robert F. Carey Senior Vice President None
Patricia L. Costello Senior Vice President None
Christopher L. Dixon Senior Vice President None
Jane Doyle Senior Vice President None
Jon C. Erickson Senior Vice President None
Ken Fincher Senior Vice President None
Rosanne Gatta Board Liaison Associate Assistant Secretary
Kenneth N. Hass Senior Vice President None
Jason T. Henry Senior Vice President None
Rich Jaeger Senior Vice President None
Christian D. Jeppesen Senior Vice President None
Christopher A. Lagioia Senior Vice President None
Daniel J. Lindquist Senior Vice President Vice President
|
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
David G. McGarel Senior Vice President None
Mark R. McHenney Senior Vice President None
Mitchell Mohr Senior Vice President None
Paul E. Nelson Senior Vice President None
Steve R. Nelson Senior Vice President None
Robert M. Porcellino Senior Vice President None
Steven R. Ritter Senior Vice President None
Alan Rooney Senior Vice President None
Francine Russell Senior Vice President None
Brad A. Shaffer Senior Vice President None
Brian Sheehan Senior Vice President None
Andrew C. Subramanian Senior Vice President None
Mark P. Sullivan Senior Vice President None
Roger F. Testin Senior Vice President Vice President
Gregory E. Wearsch Senior Vice President None
Patrick Woelfel Senior Vice President None
Kathleen Brown Senior Vice President; Chief None
Compliance Officer
Jonathan Ackerhalt Vice President None
Lance Allen Vice President None
Jeff Ambrose Vice President None
Kyle Baker Vice President None
Carlos Barbosa Vice President None
Andrew Barnum Vice President None
Michael Bean Vice President None
|
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
Dan Blong Vice President None
Bill Braasch Vice President None
Brad Bradley Vice President None
Cory Bringle Vice President None
Mike Britt Vice President None
Alex Brozyna Vice President None
Nathan S. Cassel Vice President None
Joshua Crosley Vice President None
Michael Dawson Vice President None
Michael Darr Vice President None
Daren J. Davis Vice President None
Michael DeBella Vice President None
Sean Degnan Vice President None
Joel D. Donley Vice President None
Brett Egner Vice President None
Stacy Eppen Vice President None
Chris Fallow Vice President Assistant Vice President
Ben Ferwerdo Vice President None
Don Fuller Vice President None
Joann Godbout Vice President None
Matt D. Graham Vice President None
William M. Hannold Vice President None
Mary Jane Hansen Vice President None
Gaby Harman Vice President None
Ryan Issakainen Vice President None
|
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
Rich Jacquemart Vice President None
Rick Johnson Vice President None
Greg Keefer Vice President None
Tom Knickerbocker Vice President None
Christina Knierim Vice President None
Thomas E. Kotcher Vice President None
Todd Larson Vice President None
Daniel Lavin Vice President None
Michael P. Leyden Vice President None
Keith L. Litavsky Vice President None
Eric Maisel Vice President None
Grant Markgraf Vice President None
Stephanie L. Martin Vice President None
Marty McFadden Vice President None
Nate Memmott Vice President None
Sean Moriarty Vice President None
John O'Sullivan Vice President None
David Pagano Vice President None
Brian K. Penney Vice President None
Blair R. Peterson Vice President None
Jason Peterson Vice President None
Craig Pierce Vice President None
Marisa Prestigiacomo Vice President None
Craig Prichard Vice President None
David A. Rieger Vice President None
|
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
James Rowlette Vice President None
Ronda L. Saeli-Chiappe Vice President None
Jeffrey M. Samuel Vice President None
Debra K. Scherbring Vice President None
Nim Short Vice President None
Edward J. Sistowicz Vice President None
Cal Smith Vice President None
Eric Stoiber Vice President None
Terry Swagerty Vice President None
Brian Taylor Vice President None
Kerry Tazakine Vice President None
Timothy Trudo Vice President None
Stanley Ueland Vice President Assistant Vice President
Bryan Ulmer Vice President None
Katherine Urevig Vice President None
Barbara E. Vinson Vice President None
Dan Waldron Vice President None
Lewin M. Williams Vice President None
Jeffrey S. Barnum Assistant Vice President None
Toby A. Bohl Assistant Vice President None
Steve Claiborne Assistant Vice President None
Katie D. Collins Assistant Vice President None
Ann Marie Giudice Assistant Vice President/Treasurer None
Debbie Del Giudice Assistant Vice President None
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NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
Ken Harrison Assistant Vice President None
Anita K. Henderson Assistant Vice President None
James V. Huber Assistant Vice President None
Kristen Johanneson Assistant Vice President None
Daniel C. Keller Assistant Vice President None
Coleen D. Lynch Assistant Vice President Assistant Vice President
Robert J. Madeja Assistant Vice President None
David M. McCammond-Watts Assistant Vice President None
Michelle Parker Assistant Vice President None
Steve Schwarting Assistant Vice President None
Omar Sepulveda Assistant Vice President None
John H. Sherren Assistant Vice President None
Lee Sussman Assistant Vice President None
Christopher J. Thill Assistant Vice President None
Dave Tweeten Assistant Vice President None
Thomas G. Wisnowski Assistant Vice President None
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* All addresses are
120 East Liberty Drive,
Wheaton, Illinois 60187
unless otherwise noted.
(c) Not Applicable.
ITEM 33. LOCATION OF ACCOUNTS AND RECORDS
First Trust, 120 East Liberty Drive, Wheaton, Illinois 60187, maintains
the Registrant's organizational documents, minutes of meetings, contracts of the
Registrant and all advisory material of the investment adviser.
ITEM 34. MANAGEMENT SERVICES
Not Applicable.
ITEM 35. UNDERTAKINGS
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, duly authorized in the
City of Wheaton, and State of Illinois on the 14th day of December, 2012.
FIRST TRUST EXCHANGE-TRADED FUND IV
By: /s/ Mark R. Bradley
----------------------------------
Mark R. Bradley, President and
Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
SIGNATURE TITLE DATE
/s/ Mark R. Bradley President and Chief Executive December 14, 2012
------------------------------------- Officer
Mark R. Bradley
/s/ James M. Dykas Treasurer, Chief Financial Officer December 14, 2012
------------------------------------- and Chief Accounting Officer
James M. Dykas
)
James A. Bowen* Trustee )
)
)
Richard E. Erickson* Trustee )
)
)
Thomas R. Kadlec* Trustee ) BY: /s/ W. Scott Jardine
) ------------------------------
) W. Scott Jardine
Robert F. Keith* Trustee ) Attorney-In-Fact
) December 14, 2012
)
Niel B. Nielson* Trustee )
)
|
* Original powers of attorney authorizing James A. Bowen, W. Scott
Jardine, Mark R. Bradley, Eric F. Fess and Kristi A. Maher to execute
Registrant's Registration Statement, and Amendments thereto, for each
of the trustees of the Registrant on whose behalf this Registration
Statement is filed, were previously executed, filed as an exhibit and
are incorporated by reference herein.