The Fund intends to
utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At
December 31, 2019, for federal income tax purposes, the Fund had no non-expiring capital loss carryforwards.
The Fund is subject to
accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. Taxable years ended 2016, 2017, 2018,
and 2019 remain open to federal and state audit. As of June 30, 2020, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the
Fund’s consolidated financial statements for uncertain tax positions.
G. Expenses
Expenses, other than the
investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3).
3. Investment
Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the
investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the Fund’s and the Subsidiary’s investment portfolios, managing
the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Pursuant to the
Investment Management Agreement between the Trust and the Advisor, First Trust manages the investment of the Fund’s assets and is responsible for the Fund’s and the Subsidiary’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 Rule 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay First Trust an annual
unitary management fee equal to 0.95% of its average daily net assets. First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual
unitary management fee. The Subsidiary does not pay First Trust a separate management fee.
The Trust has multiple
service agreements with Brown Brothers Harriman & Co. (“BBH”). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BBH is responsible for custody of the Fund’s assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of the Fund’s investments and
cash. As transfer agent, BBH is responsible for maintaining shareholder records for the Fund.
Each Trustee who is not
an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a defined-outcome fund or an index fund.
Additionally, the Lead
Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata
among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and
Committee Chairmen rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and
Sales of Securities
The cost of purchases and
proceeds from sales of securities, excluding short-term investments, derivatives, and in-kind transactions, for the six months ended June 30, 2020, were $0 and $0, respectively.
For the six months ended
June 30, 2020, the Fund did not have any in-kind purchases or sales.
5. Derivative
Transactions
The following table
presents the types of derivatives held by the Subsidiary at June 30, 2020, the primary underlying risk exposure and the location of these instruments as presented on the Consolidated Statement of Assets and
Liabilities.