PURPOSE. Chartwell Investment Partners ("Chartwell") has adopted these Proxy
Voting Policies and Procedures ("Policies") to seek to ensure that it exercises
voting authority on behalf of Chartwell clients in a manner consistent with the
best interests of each client and its agreement with the client.
SCOPE. These Policies apply where clients have delegated the authority and
responsibility to Chartwell to decide how to vote proxies. Chartwell does not
accept or retain authority to vote proxies in accordance with individual client
guidelines with the exception of those clients who wish their proxies voted in
accordance with Taft-Hartley Proxy Voting Guidelines and who have instructed
Chartwell to do so. In addition, Clients who wish to instruct Chartwell not to
vote in accordance with AFL-CIO Key Vote Survey recommendations, as described
below, retain that authority. Clients who wish to arrange to vote proxies in
accordance with their own guidelines may elect to do so at any time by notifying
Chartwell. Chartwell generally will follow these Policies if asked to make
recommendations about proxy voting to clients who request that advice but have
not delegated proxy voting responsibility to Chartwell.
GUIDING PRINCIPLES. Chartwell believes that voting proxies in the best interests
of each client means making a judgment as to what voting decision is most likely
to maximize total return to the client as an investor in the securities being
voted, and casting the vote accordingly. For this reason, Chartwell's evaluation
of the possible impact of a proxy vote on the economic interests of company
shareholders similarly situated to Chartwell's clients will be the primary
factor governing Chartwell's proxy voting decisions.
USE OF INDEPENDENT PROXY VOTING SERVICE. Chartwell has retained ISS, an
independent proxy voting service, to assist it in analyzing specific proxy votes
with respect to securities held by Chartwell clients and to handle the
mechanical aspects of casting votes. Historically, Chartwell has placed
substantial reliance on ISS' analyses and recommendations and generally gives
instructions to ISS to vote proxies in accordance with ISS' recommendations,
unless Chartwell reaches a different conclusion than ISS about how a particular
matter should be voted. ISS' proxy voting recommendations typically are made
available to Chartwell about a week before the proxy must be voted, and are
reviewed and monitored by members of the Proxy Voting Committee (and, in certain
cases, by Chartwell portfolio managers), with a view to determining whether it
is in the best interests of Chartwell's clients to vote proxies as recommended
by ISS, or whether client proxies should be voted on a particular proposal in
another manner. In addition, Chartwell generally votes in accordance with
AFL-CIO Key Votes Survey, a list of proposals and meetings based on
recommendations by the AFL-CIO Office of Investment. To the extent that any of
the proxy voting positions stated in these Policies are inconsistent with a Key
Vote Survey recommendation, Chartwell will generally vote in accordance with the
Key Vote Survey recommendation on all impacted securities unless any client has
chosen to instruct Chartwell to refrain from doing so. In that case, Chartwell
will vote the client's securities position in accordance with these Policies
(which may or may not cause the vote to be the same as the Key Vote Survey
recommendation).
ADMINISTRATION OF POLICIES. Chartwell has established a Proxy Voting Committee
to oversee and administer the voting of proxies on behalf of clients, comprised
of approximately five representatives of the firm's compliance and operations
departments. The Committee's responsibilities include reviewing and updating
these Policies as may be appropriate from time to time; identifying and
resolving any material conflicts of interest on the part of Chartwell or its
personnel that may affect particular proxy votes; evaluating and monitoring, on
an ongoing basis, the analyses, recommendations and other services provided by
ISS or another third party retained to assist Chartwell in carrying out its
proxy voting responsibilities; when deemed appropriate by the Committee,
consulting with Chartwell portfolio managers and investment professionals on
particular proposals or categories of proposals presented for vote; and
determining when and how client proxies should be voted other than in accordance
with the general rules and criteria set forth in Chartwell's Proxy Voting
Guidelines or with the recommendations of ISS or another independent proxy
voting service retained by Chartwell.
CONFLICTS OF INTEREST. It is Chartwell's policy not to exercise its authority to
decide how to vote a proxy if there is a material conflict of interest between
Chartwell's interests and the interests of the client that owns the shares to be
voted that could affect the vote on that matter. To seek to identify any such
material conflicts, a representative of the Proxy Voting Committee screens all
proxies and presents any potential conflicts identified to the Committee for
determination of whether the conflict exists and if so, whether it is material.
Conflicts of interest could result from a variety of circumstances, including,
but not limited to, significant personal relationships between executive
officers of an issuer and Chartwell personnel, a current or prospective
investment adviser-client relationship between an issuer or a pension plan
sponsored by an issuer and Chartwell, a significant ownership interest by
Chartwell or its personnel in the issuer and various other business, personal or
investment relationships. Generally, a current or prospective adviser-client
relationship will not be considered material for these purposes if the net
advisory revenues to Chartwell have not in the most recent fiscal year and are
not expected in the current fiscal year to exceed 1/2 of 1 percent of
Chartwell's annual advisory revenue.
Currently, the Proxy Voting Committee has determined that voting in accordance
with AFL-CIO Key Votes Survey recommendations is not a material conflict of
interest. In reaching this decision, the Committee recognized that Chartwell has
many union clients and many clients that are not union-oriented. By voting all
impacted securities positions in accordance with AFL-CIO recommendations, it
could be said that Chartwell is attempting to retain or attract existing and
prospective union clients. However, the overall number of proxy issues in the
AFL-CIO Key Votes Survey on which Chartwell has historically voted is
approximately 14 - 30 out of a total of approximately 500 company meetings and
thousands of proxy votes cast by Chartwell each year. Chartwell does not use its
AFL-CIO Key Votes Survey rankings for marketing purposes, so to the extent any
client or prospect becomes aware of how Chartwell votes in the Surveys, it does
so on its own. In addition, Union Clients have the ability to instruct Chartwell
to vote their proxies entirely in accordance with the Taft-Hartley policy.
Recognizing that deciding this is not a material conflict of interest is
fundamentally subjective, Chartwell nonetheless discloses its practices to
clients and invites clients to instruct Chartwell not to change any vote in
these Policies to be consistent with an AFL-CIO Key Votes Survey recommendation
(even though voting consistently with these Policies may result in voting the
same way).
In the event the Committee determines that there is a material conflict of
interest that may affect a particular proxy vote, Chartwell will NOT make the
decision how to vote the proxy in accordance with these Policies unless the
Policies specify how votes shall be cast on that particular type of matter,
i.e., "for" or "against" the proposal. Where the Policies provide that the
voting decision will be made on a "case-by-case" basis, Chartwell will either
request the client to make the voting decision, or the vote will be cast in
accordance with the recommendations of ISS or another independent proxy voting
service retained by Chartwell for that purpose. Chartwell also will not provide
advice to clients on proxy votes without first disclosing any material conflicts
to the client requesting such advice.
WHEN CHARTWELL DOES NOT VOTE PROXIES. Chartwell may not vote proxies respecting
client securities in certain circumstances, including, but not limited to,
situations where (a) the securities are no longer held in a client's account;
(b) the proxy and other relevant materials are not received in sufficient time
to allow analysis or an informed vote by the voting deadline; (c) Chartwell
concludes that the cost of voting the proxy will exceed the expected potential
benefit to the client; or (d) the securities have been loaned out pursuant to a
client's securities lending program and are unavailable to vote.
The policies contained herein are a sampling of select, key proxy voting
guidelines and are not exhaustive.
o An auditor has a financial interest in or association with the
company and is therefore not independent;
o There is reason to believe that the independent auditor has rendered
an opinion which is neither accurate nor indicative of the company's
financial position;
o Poor accounting practices are identified that rise to a serious
level of concern, such as: fraud; misapplication of GAAP; and
material weaknesses identified in Section 404 disclosures; or
o Non-audit ("other") fees > audit fees + audit-related fees + tax
compliance/preparation fees
BOARD OF DIRECTORS:
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be determined CASE-BY-CASE.
Four fundamental principles apply when determining votes on director nominees:
1. Board Accountability
2. Board Responsiveness
3. Director Independence
4. Director Competence
1. BOARD ACCOUNTABILITY
Vote AGAINST(1) or WITHHOLD from the entire board of directors (except new
nominees(2) who should be considered CASE-BY-CASE for the following:
1 IN GENERAL, COMPANIES WITH A PLURALITY VOTE STANDARD USE "WITHHOLD" AS THE
CONTRARY VOTE OPTION IN DIRECTOR ELECTIONS; COMPANIES WITH A MAJORITY VOTE
STANDARD USE "AGAINST". HOWEVER, IT WILL VARY BY COMPANY AND THE PROXY
MUST BE CHECKED TO DETERMINE THE VALID OPPOSITION VOTE FOR THE PARTICULAR
COMPANY.
2 A "NEW NOMINEE" IS ANY CURRENT NOMINEE WHO HAS NOT ALREADY BEEN ELECTED BY
SHAREHOLDERS AND WHO JOINED THE BOARD AFTER THE PROBLEMATIC ACTION IN
QUESTION TRANSPIRED. IF ISS CANNOT DETERMINE WHETHER THE NOMINEE JOINED
THE BOARD BEFORE OR AFTER THE PROBLEMATIC ACTION TRANSPIRED, THE NOMINEE
WILL BE CONSIDERED A "NEW NOMINEE" IF HE OR SHE JOINED THE BOARD WITHIN
THE 12 MONTHS PRIOR TO THE UPCOMING SHAREHOLDER MEETING.
Problematic Takeover Defenses:
CLASSIFIED BOARD STRUCTURE
1.1 The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for election
- any or all appropriate nominees (except new) may be held
accountable;
1.2 The board lacks accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is
measured by one- and three-year total shareholder returns in the
bottom half of a company's four-digit GICS industry group (Russell
3000 companies only). Take into consideration the company's five-year
total shareholder return and five-year operational metrics.
Problematic provisions include but are not limited to:
o A classified board structure;
o A supermajority vote requirement;
o Either a plurality vote standard in uncontested director elections
or a majority vote standard for director elections with no plurality
carve-out for contested elections;
o The inability for shareholders to call special meetings;
o The inability for shareholders to act by written consent;
o A dual-class capital structure; and/or o A non-shareholder-approved
poison pill.
POISON PILLS:
1.3 The company's poison pill has a "dead-hand" or "modified dead-hand"
feature. Vote WITHHOLD/AGAINST every year until this feature is
removed;
1.4 The board adopts a poison pill with a term of more than 12 months
("long-term pill"), or renews any existing pill, including any
"short-term pill" (12 months or less), without shareholder approval. A
commitment or policy that puts a newly-adopted pill to a binding
shareholder vote may potentially offset an adverse vote
recommendation. Review such companies with classified boards every
year, and such companies with annually-elected boards at least once
every three years, and vote AGAINST or WITHHOLD votes from all
nominees if the company still maintains a non-shareholder-approved
poison pill. This policy applies to all companies adopting or renewing
pills after the announcement of this policy (November 19, 2009); or
1.5 The board makes a material adverse change to an existing poison pill
without shareholder approval.
Vote CASE-BY-CASE on all nominees if:
1.6 The board adopts a poison pill with a term of 12 months or less
("short-term pill") without Shareholder approval, taking into account
the following factors:
o The date of the pill's adoption relative to the date of the next
meeting of shareholders - i.e., whether the company had time to put
the pill on ballot for shareholder ratification given the
circumstances;
o The issuer's rationale;
o The issuer's governance structure and practices; and
o The issuer's track record of accountability to shareholders.
Problematic Audit-Related Practices
Generally, vote AGAINST or WITHHOLD from the members of the Audit Committee if:
1.7 The non-audit fees paid to the auditor are excessive (see discussion
under "Auditor Ratification");
1.8 The company receives an adverse opinion on the company's financial
statements from its auditor; or 1.9 There is persuasive evidence
that the audit committee entered into an inappropriate
indemnification agreement with its auditor that limits the ability of
the company, or its shareholders, to pursue legitimate legal recourse
against the audit firm.
Vote CASE-BY-CASE on members of the Audit Committee and potentially the full
board if:
1.10 Poor accounting practice are identified that rise to a level of
serious concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures. Examine the
severity, breadth, chronological sequence and duration, as well as
the company's efforts at remediation or corrective actions, in
determining whether WITHHOLD/AGAINST votes are warranted.
Problematic Compensation Practices/Pay for Performance Misalignment
In the absence of an Advisory Vote on Executive Compensation ballot item, or, in
egregious situations, vote WITHHOLD/AGAINST from the members of the Compensation
Committee and potentially the full board if:
1.11 There is a significant misalignment between CEO pay and company
performance (Pay for Performance);
1.12 The company maintains significant problematic pay practices;
1.13 The board exhibits a significant level of poor communication and
responsiveness to shareholders;
1.14 The company fails to submit one-time transfers of stock options to a
shareholder vote; or
1.15 The company fails to fulfill the terms of a burn rate commitment
made to shareholders.
Vote CASE-BY-CASE on Compensation Committee members (or, in exceptional cases,
the full board) and the Management Say-on-Pay proposal if:
1.16 The company's previous say-on-pay proposal received the support of
less than 70 percent of votes cast, taking into account;
o The company's response, including:
o Disclosure of engagement efforts with major institutional
investors regarding the issues that contributed to the low
level of support;
o Specific actions taken to address the issues that contributed
to the low level of support;
o Other recent compensation actions taken by the company.
o Whether the issues raised are recurring or isolated; o The company's
ownership structure; and
o Whether the support level was less than 50 percent, which would
warrant the highest degree of responsiveness.
Governance Failures
Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors
individually, committee members, or the entire board, due to:
1.17 Material failures of governance, stewardship, risk oversight or
fiduciary responsibilities at the company;
1.18 Failure to replace management as appropriate; or
1.19 Egregious actions related to a director's service on other boards
that raise substantial doubt about his or her ability to effectively
oversee management and serve the best interests of shareholders at
any company.
2. BOARD RESPONSIVENESS
Vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who
should be considered on a CASE-BY-CASE basis), if:
2.1 The board failed to act on a shareholder proposal that received
approval of a majority of the shares outstanding the previous year;
2.2 The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years;
2.3 The board failed to act on takeover offers where the majority of
shares are tendered;
2.4 At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company
has failed to address the issue(s) that caused the high withhold/
against vote; or
2.5 The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received the majority of
votes cast at the most recent shareholder meeting at which
shareholders voted on the say-on-pay frequency.
Vote CASE-BY-CASE on the entire board if:
2.6 The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received a plurality,
but not a majority, of the votes cast at the most recent shareholder
meeting at which shareholders voted on the say-on-pay frequency,
taking into account:
o The board's rationale for selecting a frequency that is different
from the frequency that received a plurality;
o The company's ownership structure and vote results;
o ISS' analysis of whether there are compensation concerns or a
history of problematic compensation practices; and
o The previous year's support level on the company's say-on-pay
proposal.
3. DIRECTOR INDEPENDENCE
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the Categorization of Directors below) when:
3.1 The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
3.2 The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
3.3 The company lacks a formal nominating committee, even if the board
attests that the independent directors fulfill the functions of such
a committee; or
3.4 The full board is less than majority independent.
4. DIRECTOR COMPETENCE
Vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who
should be considered CASE-BY-CASE), if:
4.1 The company's proxy indicated that not all directors attended 75
percent of the aggregate board and committee meetings, but fails to
provide the required disclosure of the names of the director(s)
involved.
Generally vote AGAINST or WITHHOLD from individual directors who:
4.2 Attend less than 75 percent of the board and committee meetings
(with the exception of new nominees). Acceptable reasons for
director(s) absences are generally limited to the following:
o Medical issues/illness;
o Family emergencies; and
o Missing only one meeting.
These reasons for directors' absences will only be considered by ISS
if disclosed in the proxy or another SEC filing. If the disclosure
is insufficient to determine whether a director attended at least 75
percent of board and committee meetings in aggregate, vote
AGAINST/WITHHOLD from the director.
OVERBOARDED DIRECTORS:
Vote AGAINST or WITHHOLD from individual directors who:
4.3 Sit on more than six public company boards; or
4.4 Are CEOs of public companies who sit on the boards of more than two
public companies besides their own--withhold only at their outside
boards.
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS Vote CASE BY CASE on the
election of directors in contested elections, considering the following factors:
o Long-term financial performance of the target company relative to
its industry;
o Management's track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved
(both slates);
o Stock ownership positions.
PROXY ACCESS
ISS supports proxy access as an important shareholder right, one that is
complementary to other best-practice corporate governance features. However, in
the absence of a uniform standard, proposals to enact proxy access may vary
widely; as such, ISS is not setting forth specific parameters at this time and
will take a case-by-case approach in evaluating these proposals.
Vote CASE-BY-CASE on proposals to enact proxy access, taking into account, among
other factors:
o Company-specific factors; and
o Proposal-specific factors, including:
o The ownership thresholds proposed in the resolution (i.e.,
percentage and duration);
o The maximum proportion of directors that shareholders may
nominate each year; and
o The method of determining which nominations should appear on
the ballot if multiple shareholders submit nominations.
SHAREHOLDER RIGHTS & DEFENSES:
EXCLUSIVE VENUE
Vote CASE-BY-CASE on exclusive venue proposals, taking into account:
o Whether the company has been materially harmed by shareholder
litigation outside its jurisdiction of incorporation, based on
disclosure in the company's proxy statement; and
o Whether the company has the following good governance features:
o An annually elected board;
o A majority vote standard in uncontested director elections;
and
o The absence of a poison pill, unless the pill was approved by
shareholders.
POISON PILLS - MANAGEMENT PROPOSALS TO RATIFY POISON PILL
Vote CASE BY CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limit the
ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the
board refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or
seek a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses, and any problematic governance concerns.
POISON PILLS - MANAGEMENT PROPOSALS TO RATIFY A PILL TO PRESERVE NET OPERATING
LOSSES (NOLS)
Vote AGAINST proposals to adopt a poison pill for the stated purpose of
protecting a company's net operating losses ("NOLs") if the term of the pill
would exceed the shorter of three years and the exhaustion of the NOL.
Vote CASE-BY-CASE on management proposals for poison pill ratification,
considering the following factors, if the term of the pill would be the shorter
of three years (or less) and the exhaustion of the NOL:
o The ownership threshold to transfer (NOL pills generally have a
trigger slightly below 5%);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision, or commitment
to cause expiration of the pill upon exhaustion or expiration of
NOLs);
o The company's existing governance structure including: board
independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic governance
concerns; and
o Any other factors that may be applicable.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Generally vote AGAINST management and shareholder proposals to restrict or
prohibit shareholders' ability to act by written consent. Generally vote FOR
management and shareholder proposals that provide shareholders with the ability
to act by written consent, taking into account the following factors:
o Shareholders' current right to act by written consent;
o The consent threshold;
o The inclusion of exclusionary or prohibitive language;
o Investor ownership structure; and
o Shareholder support of, and management's response to, previous
shareholder proposals.
Vote CASE-BY-CASE on shareholder proposals if, in addition to the considerations
above, the company has the following governance and antitakeover provisions:
o An unfettered(3) right for shareholders to call special meetings at
a 10 percent threshold;
o A majority vote standard in uncontested director elections;
o No non-shareholder-approved pill; and
o An annually elected board.
CAPITAL/RESTRUCTURING
COMMON STOCK AUTHORIZATION
Vote FOR proposals to increase the number of authorized common shares where the
primary purpose of the increase is to issue shares in connection with a
transaction on the same ballot that warrants support.
Vote AGAINST proposals at companies with more than one class of common stock to
increase the number of authorized shares of the class of common stock that has
superior voting rights.
Vote AGAINST proposals to increase the number of authorized common shares if a
vote for a reverse stock split on the same ballot is warranted despite the fact
that the authorized shares would not be reduced proportionally.
Vote CASE-BY-CASE on all other proposals to increase the number of shares of
common stock authorized for issuance. Take into account company-specific factors
which include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized shares during the last three
years;
o The Current Request:
o Disclosure in the proxy statement of the specific reasons for
the proposed increase;
o Disclosure in the proxy statement of specific and severe risks
to shareholders of not approving the request; and
o The dilutive impact of the request as determined by an
allowable increase calculated by ISS (typically 100 percent of
existing authorized shares) that reflects the company's need
for shares and total shareholder returns.
3 "UNFETTERED" MEANS NO RESTRICTIONS ON AGENDA ITEMS, NO RESTRICTIONS ON THE
NUMBER OF SHAREHOLDERS WHO CAN GROUP TOGETHER TO REACH THE 10 PERCENT
THRESHOLD, AND ONLY REASONABLE LIMITS ON WHEN A MEETING CAN BE CALLED: NO
GREATER THAN 30 DAYS AFTER THE LAST ANNUAL MEETING AND NO GREATER THAN 90
PRIOR TO THE NEXT ANNUAL MEETING.
PREFERRED STOCK AUTHORIZATION
Vote FOR proposals to increase the number of authorized preferred shares where
the primary purpose of the increase is to issue shares in connection with a
transaction on the same ballot that warrants support.
Vote AGAINST proposals at companies with more than one class or series of
preferred stock to increase the number of authorized shares of the class or
series of preferred stock that has superior voting rights.
Vote CASE-BY-CASE on all other proposals to increase the number of shares of
preferred stock authorized for issuance. Take into account company-specific
factors that include, at a minimum, the following:
o Past Board Performance
o The company's use of authorized preferred shares during the
last three years;
o The Current Request:
o Disclosure in the proxy statement of specific reasons for the
proposed increase;
o Disclosure in the proxy statement of specific and severe risks
to shareholders of not approving the request;
o In cases where the company has existing authorized preferred
stock, the dilutive impact of the request as determined by an
allowable increase calculated by ISS (typically 100 percent of
existing authorized shares) that reflects the company's need
for shares and total shareholder returns; and
o Whether the shares requested are blank check preferred shares
that can be used for antitakeover purposes.
DUAL CLASS STRUCTURE
Generally vote AGAINST proposals to create a new class of common stock unless:
o The company discloses a compelling rationale for the dual-class
capital structure, such as:
o The company's auditor has concluded that there is substantial
doubt about the company's ability to continue as a going
concern; or
o The new class of shares will be transitory;
o The new class is intended for financing purposes with minimal or no
dilution to current shareholders in both the short term and long
term; and
o The new class is not designed to preserve or increase the voting
power of an insider or significant shareholder.
MERGERS AND ACQUISITIONS
Vote CASE-BY-CASE on mergers and acquisitions. Review and evaluate the merits
and drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors including:
o Valuation - Is the value to be received by the largest shareholders
(or paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
o Market reaction - How has the market responded to the proposed deal?
A negative market reaction should cause closer scrutiny of a deal.
o Strategic rationale - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable.
Management should also have a favorable track record of successful
integration of historical acquisitions.
o Negotiations and process - Were the terms of the transaction
negotiated at arm's-length? Was the process fair and equitable? A
fair process helps to ensure the best price for shareholders.
Significant negotiation "wins" can also signify the deal makers'
competency. The comprehensiveness of the sales process (e.g., full
auction, partial auction, no auction) can also affect shareholder
value.
o Conflicts of interest - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors
and officers of the company may be more likely to vote to approve a
merger than if they did not hold these interests. Consider whether
these interests may have influenced these directors and officers to
support or recommend the merger. The CIC figure presented in the
"ISS Transaction Summary" section of this report is an aggregate
figure that can in certain cases be a misleading indicator of the
true value transfer from shareholders to insiders. Where such figure
appears to be excessive, analyze the underlying assumptions to
determine whether a potential conflict exists.
o Governance - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is
to change for the worse, the burden is on the company to prove that
other issues (such as valuation) outweigh any deterioration in
governance.
COMPENSATION
EXECUTIVE PAY EVALUATION
Underlying all evaluations are five global principles that most investors expect
corporations to adhere to in designing and administering executive and director
compensation programs:
1. Maintain appropriate pay-for-performance alignment, with emphasis on
long-term shareholder value: This principle encompasses overall
executive pay practices, which must be designed to attract, retain
and appropriately motivate the key employees who drive shareholder
value creation over the long term. It will take into consideration,
among other factors, the link between pay and performance, the mix
between fixed and variable pay, performance goals, and equity-based
plan costs; 2. Avoid arrangements that risk "pay for failure": This
principle addresses the appropriateness of long or indefinite
contracts, excessive severance packages and guaranteed compensation;
3. Maintain an independent and effective compensation committee: This
principle promotes oversight of executive pay programs by directors
with appropriate skills, knowledge, experience and a sound process
for compensation decision-making (e.g., including access to
independent expertise and advice when needed);
4. Provide shareholders with clear, comprehensive compensation
disclosures: This principle underscores the importance of
informative and timely disclosures that enable shareholders to
evaluate executive pay practices fully and fairly;
5. Avoid inappropriate pay to non-executive directors: This principle
recognizes the interests of shareholders in ensuring that
compensation to outside directors does not compromise their
independence and ability to make appropriate judgments in overseeing
managers' pay and performance. At the market level, it may
incorporate a variety of generally accepted best practices.
ADVISORY VOTES ON EXECUTIVE COMPENSATION - MANAGEMENT PROPOSALS (SAY-ON-PAY)
Vote CASE-BY-CASE on ballot items related to executive pay and practices, as
well as certain aspects of outside director compensation.
Vote AGAINST Advisory Votes on Executive Compensation (Management Say-on-Pay -
MSOP) if:
o There is a significant misalignment between CEO pay and company
performance (pay for performance);
o The company maintains significant problematic pay practices;
o The board exhibits a significant level of poor communication and
responsiveness to shareholders.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee and
potentially the full board if:
o There is no MSOP on the ballot, and an AGAINST vote on an MSOP is
warranted due to pay for performance misalignment, problematic pay
practices or the lack of adequate responsiveness on compensation
issues raised previously, or a combination thereof;
o The board fails to respond adequately to a previous MSOP proposal
that received less than 70 percent support of votes cast;
o The company has recently practiced or approved problematic pay
practices, including option repricing or option backdating; or
o The situation is egregious.
Vote AGAINST an equity plan on the ballot if:
o A pay for performance misalignment is found, and a significant
portion of the CEO's misaligned pay is attributed to
non-performance-based equity awards, taking into consideration:
o Magnitude of pay misalignment;
o Contribution of non-performance-based equity grants to overall
pay; and
o The proportion of equity awards granted in the last three
fiscal years concentrated at the named executive officer (NEO)
level.
PRIMARY EVALUATION FACTORS FOR EXECUTIVE PAY
PAY FOR PERFORMANCE EVALUATION
ISS annually conducts a pay-for-performance analysis to identify strong or
satisfactory alignment between pay and performance over a sustained period. With
respect to companies in the Russell 3000 index, this analysis considers the
following:
1. Peer Group(4) Alignment:
o The degree of alignment between the company's TSR rank and the
CEO's total pay rank within a peer group, as measured over
one-year and three-year periods (weighted 40/60);
o The multiple of the CEO's total pay relative to the peer group
median.
2. Absolute Alignment: The absolute alignment between the trend in CEO
pay and company TSR over the prior five fiscal years - i.e., the
difference between the trend in annual pay changes and the trend in
annualized TSR during the period.
If the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of non-Russell 3000 index
companies, misaligned pay and performance are otherwise suggested, analyze the
4 THE PEER GROUP IS GENERALLY COMPRISED OF 14-24 COMPANIES THAT ARE SELECTED
USING MARKET CAP, REVENUE (OR ASSETS FOR FINANCIAL FIRMS), AND GICS
INDUSTRY GROUP, VIA A PROCESS DESIGNED TO SELECT PEERS THAT ARE CLOSEST TO
THE SUBJECT COMPANY, AND WHERE THE SUBJECT COMPANY IS CLOSE TO MEDIAN IN
REVENUE/ASSET SIZE. THE RELATIVE ALIGNMENT EVALUATION WILL CONSIDER THE
COMPANY'S RANK FOR BOTH PAY AND TSR WITHIN THE PEER GROUP (FOR ONE- AND
THREE-YEAR PERIODS) AND THE CEO'S PAY RELATIVE TO THE MEDIAN PAY LEVEL IN
THE PEER GROUP.
following qualitative factors to determine how various pay elements may work to
encourage or to undermine long-term value creation and alignment with
shareholder interests:
o The ratio of performance- to time-based equity awards;
o The ratio of performance-based compensation to overall compensation;
o The completeness of disclosure and rigor of performance goals;
o The company's peer group benchmarking practices;
o Actual results of financial/operational metrics, such as growth in
revenue, profit, cash flow, etc., both absolute and relative to
peers;
o Special circumstances related to, for example, a new CEO in the
prior fiscal year or anomalous equity grant practices (e.g.,
biennial awards); and
o Any other factors deemed relevant.
PROBLEMATIC PAY PRACTICES
The focus is on executive compensation practices that contravene the global pay
principles, including:
o Problematic practices related to non-performance-based compensation
elements;
o Incentives that may motivate excessive risk-taking; and
o Options backdating.
PROBLEMATIC PAY PRACTICES RELATED TO NON-PERFORMANCE-BASED COMPENSATION ELEMENTS
Pay elements that are not directly based on performance are generally evaluated
CASE-BY-CASE considering the context of a company's overall pay program and
demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation
FAQ document for detail on specific pay practices that have been identified as
potentially problematic and may lead to negative recommendations if they are
deemed to be inappropriate or unjustified relative to executive pay best
practices. The list below highlights the problematic practices that carry
significant weight in this overall consideration and may result in adverse vote
recommendations:
o Repricing or replacing of underwater stock options/SARS without
prior shareholder approval (including cash buyouts and voluntary
surrender of underwater options);
o Excessive perquisites or tax gross-ups, including any gross-up
related to a secular trust or restricted stock vesting;
o New or extended agreements that provide for:
o CIC payments exceeding 3 times base salary and
average/target/most recent bonus;
o CIC severance payments without involuntary job loss or
substantial diminution of duties ("single" or "modified
single" triggers);
o CIC payments with excise tax gross-ups (including "modified"
gross-ups).
INCENTIVES THAT MAY MOTIVATE EXCESSIVE RISK-TAKING
o Multi-year guaranteed bonuses;
o A single performance metric used for short- and long-term plans;
o Lucrative severance packages;
o High pay opportunities relative to industry peers;
o Disproportionate supplemental pensions; or
o Mega annual equity grants that provide unlimited upside with no
downside risk.
Factors that potentially mitigate the impact of risky incentives include
rigorous claw-back provisions and robust stock ownership/holding guidelines.
OPTIONS BACKDATING
The following factors should be examined CASE-BY-CASE to allow for distinctions
to be made between "sloppy" plan administration versus deliberate action or
fraud:
o Reason and motive for the options backdating issue, such as
inadvertent vs. deliberate grant changes;
o Duration of options backdating;
o Size of restatement due to options backdating;
o Corrective actions taken by the board or compensation committee,
such as canceling or re-pricing backdated options, the recouping of
option gains on backdated grants; and
o Adoption of a grant policy that prohibits backdating and creates a
fixed grant schedule or window period for equity grants in the
future.
BOARD COMMUNICATIONS AND RESPONSIVENESS
Consider the following factors CASE-BY-CASE when evaluating ballot items related
to executive pay.
o Failure to respond to majority-supported shareholder proposals on
executive pay topics; or
o Failure to adequately respond to the company's previous say-on-pay
proposal that received the support of less than 70 percent of votes
cast, taking into account:
o The company's response, including:
o Disclosure of engagement efforts with major
institutional investors regarding the issues that
contributed to the low level of support;
o Specific actions taken to address the issues that
contributed to the low level of support;
o Other recent compensation actions taken by the company.
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which
would warrant the highest degree of responsiveness.
FREQUENCY OF ADVISORY VOTE ON EXECUTIVE COMPENSATION (MANAGEMENT "SAY ON PAY")
Vote FOR annual advisory votes on compensation, which provide the most
consistent and clear communication channel for shareholder concerns about
companies' executive pay programs.
VOTING ON GOLDEN PARACHUTES IN AN ACQUISITION, MERGER, CONSOLIDATION OR PROPOSED
SALE
Vote CASE-BY-CASE on proposals to approve the company's golden parachute
compensation, consistent with ISS' policies on problematic pay practices related
to severance packages. Features that may lead to a vote AGAINST include:
o Recently adopted or materially amended agreements that include
excise tax gross-up provisions (since prior annual meeting);
o Recently adopted or materially amended agreements that include
modified single triggers (since prior annual meeting);
o Single trigger payments that will happen immediately upon a change
in control, including cash payment and such items as the
acceleration of performance-based equity despite the failure to
achieve performance measures;
o Single trigger vesting of equity based on a definition of change in
control that requires only shareholder approval of the transaction
(rather than consummation);
o Potentially excessive severance payments;
o Recent amendments or other changes that may make packages so
attractive as to influence merger agreements that may not be in the
best interests of shareholders;
o In the case of a substantial gross-up from
pre-existing/grandfathered contract: the element that triggered the
gross-up (i.e., option mega-grants at low point in stock price,
unusual or outsized payments in cash or equity made or negotiated
prior to the merger); or
o The company's assertion that a proposed transaction is conditioned
on shareholder approval of the golden parachute advisory vote. ISS
would view this as problematic from a corporate governance
perspective.
In cases where the golden parachute vote is incorporated into a company's
separate advisory vote on compensation ("management "say on pay"), ISS will
evaluate the "say on pay" proposal in accordance with these guidelines, which
may give higher weight to that component of the overall evaluation.
EQUITY-BASED AND OTHER INCENTIVE PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits the repricing;
o A pay-for-performance misalignment is found;
o The company's three-year burn rate exceeds the burn rate cap of its
industry group;
o The plan has a liberal change-of-control definition; or
o The plan is a vehicle for poor pay practices.
SOCIAL/ENVIRONMENTAL ISSUES
OVERALL APPROACH
When evaluating social and environmental shareholder proposals, ISS considers
the following factors:
o Whether adoption of the proposal is likely to enhance or protect
shareholder value;
o Whether the information requested concerns business issues that
relate to a meaningful percentage of the company's business as
measured by sales, assets and earnings;
o The degree to which the company's stated position on the issues
raised in the proposal could affect its reputation or sales, or
leave it vulnerable to a boycott or selective purchasing;
o Whether the issues presented are more appropriately/effectively
dealt with through governmental or company-specific action;
o Whether the company has already responded in some appropriate manner
to the request embodied in the proposal;
o Whether the company's analysis and voting recommendation to
shareholders are persuasive;
o What other companies have done in response to the issue addressed in
the proposal;
o Whether the proposal itself is well framed and the cost of preparing
the report is reasonable;
o Whether implementation of the proposal's request would achieve the
proposal's objectives;
o Whether the subject of the proposal is best left to the discretion
of the board;
o Whether the requested information is available to shareholders
either from the company or from a publicly available source; and
o Whether providing this information would reveal proprietary or
confidential information that would place the company at a
competitive disadvantage.
POLITICAL SPENDING & LOBBYING ACTIVITIES
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
o There are no recent, significant controversies, fines or litigation
regarding the company's political contributions or trade association
spending; and
o The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees
(PACs) are strictly voluntary and prohibits coercion.
Vote AGAINST proposals to publish in newspapers and other media the company's
political contributions. Such publications could present significant cost to the
company without providing commensurate value to shareholders.
Generally vote FOR proposals requesting greater disclosure of a company's
political contributions and trade association spending policies and activities.
However, the following will be considered:
o The company's current disclosure of policies and oversight
mechanisms related to its direct political contributions and
payments to trade associations or other groups that may be used for
political purposes, including information on the types of
organizations supported and the business rationale for supporting
these organizations; and
o Recent significant controversies, fines or litigation related to the
company's political contributions or political activities.
Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state and local level;
barring political contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals asking for list of company executives, directors,
consultants, legal counsels, lobbyists or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
activities, including direct lobbying as well as grassroots lobbying activities,
considering:
o The company's current disclosure of relevant policies and oversight
mechanisms;
o Recent significant controversies, fines or litigation related to the
company's public policy activities; and
o The impact that the policy issues may have on the company's business
operations.
HYDRAULIC FRACTURING
Generally vote FOR proposals requesting greater disclosure of a company's
(natural gas) hydraulic fracturing operations, including measures the company
has taken to manage and mitigate the potential community and environmental
impacts of those operations, considering:
o The company's current level of disclosure of relevant policies and
oversight mechanisms;
o The company's current level of such disclosure relative to its
industry peers;
o Potential relevant local, state or national regulatory developments;
and
o Controversies, fines or litigation related to the company's
hydraulic fracturing operations.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF NOVEMBER 30, 2013
PORTFOLIO MANAGEMENT TEAM
EQUITIES AND OPTIONS - CHARTWELL INVESTMENT PARTNERS, L.P.
Chartwell Investment Partners, L.P. ("Chartwell" or the "Sub-Adviser"), founded
in 1997, is an employee-owned investment firm focusing on institutional,
sub-advisory and private client relationships. The firm is a research-based
equity and fixed-income manager with a disciplined, team-oriented investment
process. The Chartwell Portfolio Management Team consists of the following:
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Schaffer is a founding partner of Chartwell and has 39 years of investment
industry experience. He serves as senior portfolio manager for Chartwell's
closed-end fund and hedged large-cap equity strategies. As the lead portfolio
manager for the Fund since 2007, he focuses on securities in the Energy,
Financials and Consumer Staples sectors. He was employed as a Senior Portfolio
Manager at Delaware Investment Advisers from 1990 to 1997, managing closed-end
equity income funds that utilized option strategies to generate portfolio gains.
Mr. Schaffer earned a Bachelor's degree in Economics from Villanova University
and an MBA from the University of Pennsylvania's Wharton School.
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 16 years of investment industry experience. His areas of
focus include the Consumer Discretionary, Industrials, Materials and Technology
sectors of the market. He has been a portfolio manager for the Fund since 2007.
From 1993 to 2003, he held several positions at Morgan Stanley Investment
Management (Miller Anderson & Sherrerd) the last of which was Senior Associate
and Analyst for the Large Cap Value team. Mr. Kugler is a member of the CFA
(Chartered Financial Analysts) Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. Mr. Kugler earned a
Bachelor's degree in Accounting from the University of Delaware.
PETER M. SCHOFIELD, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
Mr. Schofield is a Senior Portfolio Manager on Chartwell's large-cap equity
portfolio management team and has 28 years of investment industry experience.
His areas of focus include Consumer Staples, Health Care and Information
Technology. From 2005 to 2010, he was a Co-Chief Investment Officer at Knott
Capital. From 1996 to 2005, he was a Portfolio Manager at Sovereign Asset
Management. Prior to Sovereign Asset Management, he was a portfolio manager at
Geewax, Terker & Company. Mr. Schofield holds the Chartered Financial Analyst
designation and is a member of the CFA (Chartered Financial Analysts) Institute
and the CFA Society of Philadelphia. Mr. Schofield earned a Bachelor's degree in
History from the University of Pennsylvania.
The investment team for the First Trust Enhanced Equity Income Fund consists of
three portfolio managers with an average of 30 years of investment experience.
All team members conduct fundamental research and meet with company management.
Purchase and sale decisions are made by the portfolio managers. The day-to-day
work and the management of the Fund is divided evenly among the portfolio
managers.
SENIOR LOANS AND LEVERAGE - FIRST TRUST ADVISORS, L.P.
William Housey is the Senior Portfolio Manager for the Leveraged Finance
Investment Team of First Trust Advisors L.P. ("First Trust") and has primary
responsibility for investment decisions. Scott Fries assists Mr. Housey and is
also a Senior Credit Analyst assigned to certain industries. The portfolio
managers are supported in their portfolio management activities by a team of
credit analysts, a designated trader and operations personnel. Senior Credit
Analysts are assigned industries and Associate Credit Analysts support the
Senior Credit Analysts.
WILLIAM HOUSEY, CFA
SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
Mr. Housey joined First Trust in June 2010 as Senior Portfolio Manager in the
Leveraged Finance Investment Team and has nearly 16 years of investment
experience. 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 BS in Finance from Eastern Illinois University and an MBA in
Finance as well as Management and Strategy from Northwestern University's
Kellogg School of Business. Mr. Housey holds the Chartered Financial Analyst
("CFA") designation.
SCOTT D. FRIES, CFA
VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Fries joined First Trust in June 2010 as Portfolio Manager in the Leveraged
Finance Investment Team and has over 16 years of investment industry experience.
Prior to joining First Trust, Mr. Fries spent 15 years and served as
Co-Portfolio Manager of Institutional Separately Managed Accounts for Morgan
Stanley/Van Kampen Funds, Inc. Mr. Fries received a BA in International Business
from Illinois Wesleyan University and an MBA in Finance from DePaul University.
Mr. Fries holds the Chartered Financial Analyst designation.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER AND POTENTIAL CONFLICTS OF
INTEREST
INFORMATION PROVIDED AS OF NOVEMBER 30, 2011
# of Accounts Total Assets
Managed for for which
Total # of which Advisory Advisory Fee is
Name of Portfolio Manager Accounts Total Fee is Based on Based on
or Team Member Type of Accounts Managed Assets Performance Performance
Bernard P. Schaffer Registered Investment 1 $301.6 0 $0
Companies:
Other Pooled Investment 1 $.5 0 $0
Vehicles:
Other Accounts: $344.9
10 Million 0 $0
Douglas W. Kugler Registered Investment 1 $301.6 0 $0
Companies:
Other Pooled Investment 1 $.5 0 $0
Vehicles:
Other Accounts: $344.9
10 Million 0 $0
Peter M. Schofield Registered Investment 1 $301.6 0 $0
Companies:
Other Pooled Investment 1 $.5 0 $0
Vehicles:
Other Accounts: $344.9 0 $0
10 Million
William Housey Registered Investment
Companies: 5 $944 0 $0
Other Pooled Investment
Vehicles: 0 $0 0 $0
Other Accounts: $133.5
1 Million 0 $0
Scott Fries Registered Investment
Companies: 5 $944 0 $0
Other Pooled Investment
Vehicles: 0 $0 0 $0
Other Accounts: $133.5
1 Million 0 $0
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POTENTIAL CONFLICTS OF INTERESTS
CHARTWELL INVESTMENT PARTNERS, L.P.
The portfolio managers manage other accounts for Chartwell including
institutional portfolios of similar investment styles. None of these portfolio
managers manage any hedge funds nor any accounts with performance-based fees.
When registered funds and investment accounts are managed side-by-side, firm
personnel must strictly follow the policies and procedures outlined in our Trade
Allocation Policy to ensure that accounts are treated in a fair and equitable
manner, and that no client or account is favored over another. When registered
funds and investment accounts are trading under the same investment product, and
thus trading the same securities, shares are allocated on a pro-rata basis based
on market value, and all portfolios obtain the same average price.
On a monthly basis, Jon Caffey, a member of Chartwell's Compliance Group,
oversees the performance calculation process handled in Operations, and
completes a spreadsheet of monthly portfolio returns by client. Caffey provides
this spreadsheet to the CEO, CCO and various investment personnel for their
review. Any performance dispersion noted by anyone on the distribution list is
investigated by Caffey by reviewing the underlying transactional detail,
holdings & security weightings by portfolio. This monthly process ensures that
all portfolios that are managed under the same investment product are treated
fairly, and traded in accordance with firm policy.
FIRST TRUST ADVISORS, L.P.
Potential conflicts of interest may arise when a portfolio manager of the
Registrant has day-to-day management responsibilities with respect to one or
more other funds or other accounts. The First Trust Leveraged Finance Investment
Team adheres to its trade allocation policy utilizing a pro-rata methodology to
address this conflict.
First Trust and its affiliate, First Trust Portfolios L.P. ("FTP"), have in
place a joint Code of Ethics and Insider Trading Policies and Procedures that
are designed to (a) prevent First Trust personnel from trading securities based
upon material inside information in the possession of such personnel and (b)
ensure that First Trust personnel avoid actual or potential conflicts of
interest or abuse of their positions of trust and responsibility that could
occur through such activities as front running securities trades for the
Registrant. Personnel are required to have duplicate confirmations and account
statements delivered to First Trust and FTP compliance personnel who then
compare such trades to trading activity to detect any potential conflict
situations. In addition to the personal trading restrictions specified in the
Code of Ethics and Insider Trading Policies and Procedures, employees in the
Leveraged Finance Investment Team currently are prohibited from buying or
selling equity securities (including derivative instruments such as options,
warrants and futures) and corporate bonds for their personal account and in any
accounts over which they exercise control. Employees in the Leveraged Finance
Investment Team are also prohibited from engaging in any personal transaction
while in possession of material non-public information regarding the security or
the issuer of the security. First Trust and FTP also maintain a confidential
watch list of all issuers for which the Leveraged Finance Investment Team has
material non-public information in its possession.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF NOVEMBER 30, 2013.
CHARTWELL INVESTMENT PARTNERS, L.P.
The compensation paid to a Chartwell portfolio manager and analyst consists of
base salary, annual bonus, ownership distribution, and an annual profit-sharing
contribution to the firm's retirement plan.
A portfolio manager's and analyst's base salary is determined by Chartwell's
Compensation Committee and is reviewed at least annually. A portfolio manager's
and analyst's experience, historical performance, and role in firm or product
team management are the primary considerations in determining the base salary.
Industry benchmarking is utilized by the Compensation Committee on an annual
basis.
Annual bonuses are determined by the Compensation Committee based on a number of
factors. The primary factor is a performance-based compensation schedule that is
applied to all accounts managed by a portfolio manager within a particular
investment product, and is not specific to any one account. The bonus is
calibrated based on the gross composite performance of such accounts versus the
appropriate benchmark and peer group rankings. Portfolio construction, sector
and security weighting, and performance are reviewed by the Compliance Committee
and Compensation Committee to prevent a manager from taking undue risks.
Additional factors used to determine the annual bonus include the portfolio
manager's contribution as an analyst, product team management, and contribution
to the strategic planning and development of the investment group as well as the
firm.
Ownership distributions are paid to a portfolio manager and analyst based on the
portfolio manager's and analyst's level and type of ownership interest(s). There
are currently three types of equity: (1) straight limited partnership interests,
(2) Class B share interests, and (3) phantom stock interests. In all cases, the
annual ownership distributions are paid to employees based on their respective
percentage equity interest(s) multiplied by total net cash distributions paid
during the year.
Chartwell also provides a profit sharing and 401(k) plan for all employees. The
annual profit sharing contribution and/or matching contribution from Chartwell
is discretionary and based solely on the profitability of the firm.
Annual bonuses are determined by the Compensation Committee based on a number of
factors. The primary factor is a performance-based compensation schedule that is
applied to all accounts managed by a portfolio manager within a particular
investment product, and is not specific to any one account. The bonus is
calibrated based on the gross composite performance of such accounts versus the
appropriate benchmark and peer group rankings. Portfolio construction, sector
and security weighting, and performance are reviewed by the Compliance Committee
and Compensation Committee to prevent a manager from taking undue risks.
Additional factors used to determine the annual bonus include the portfolio
manager's contribution as an analyst, product team management, and contribution
to the strategic planning and development of the investment group as well as the
firm.
FIRST TRUST ADVISORS L.P.
The compensation structure for the First Trust Advisors Leveraged Finance
Investment Team is based upon a fixed salary as well as a discretionary bonus
determined by the management of First Trust.
Salaries are determined by management and are based upon an individual's
position and overall value to the firm. Bonuses are also determined by
management and are based upon an individual's overall contribution to the
success of the firm and the profitability of the firm. Salaries and bonuses for
members of the First Trust Advisors Leveraged Finance Investment Team are not
based upon criteria such as performance of the Registrant and are not directly
tied to the value of assets of the Fund.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF NOVEMBER 30, 2013
Dollar Range of Registrant
Name Shares Beneficially Owned
Bernard P. Schaffer $0
Douglas W. Kugler $0
Peter M. Schofield $0
William Housey $0
Scott Fries $0
(B) Not applicable.
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ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.