Washington, D.C. 20549
W. Scott Jardine, Esq., Secretary
Eric F. Fess, Esq.
[X] this post-effective
amendment designates a new effective date for a previously filed post-effective amendment.
Contents of Post-Effective Amendment
No. 111
STATEMENT OF ADDITIONAL
INFORMATION
Investment Company Act File
No. 811-22245
First Trust Exchange-Traded
Fund III
Preliminary Statement of
Additional Information
Dated March 9, 2020
Subject to Completion
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FUND NAME
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TICKER SYMBOL
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EXCHANGE
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First Trust Horizon Managed Volatility Small/Mid ETF
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HSMV
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NYSE Arca
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DATED ______________,
2020
This
Statement of Additional Information (“SAI”) is not a prospectus. It should be read in conjunction with the prospectus dated ___________, 2020, as it may be revised from time to time (the “Prospectus”), for First Trust Horizon Managed Volatility Small/Mid ETF (the “Fund”), a series of the First Trust Exchange-Traded Fund III (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.
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.
Table of Contents
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A-1
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General Description of the
Trust and the Fund
The Trust was
organized as a Massachusetts business trust on January 9, 2008 and is authorized to issue an unlimited number of shares in one or more series. 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 seventeen series. This SAI relates to the Fund, which is a non-diversified series.
The Fund, as a
series of the Trust, represents a beneficial interest in a separate portfolio of securities and other assets, with its own objective and policies.
The Board of
Trustees of the Trust (the “Board,” “Board of Trustees” or “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 and to any By-laws adopted by the Trust. The
Declaration provides that, except as set forth therein and authorized by the Trustees, shareholders have no rights, privileges, claims or remedies under any contract or agreement entered into by the Trust or the Fund
with any service provider or other agent to or contractor with the Trust or the Fund including, without limitation, any third party beneficiary rights.
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. In addition, the Declaration provides that actions that are derivative in nature may not be brought
directly. 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. In addition, if a court determines that a derivative action was made without reasonable cause or for an
improper purpose, or if a derivative or direct action is dismissed on the basis of a failure to comply with the procedural provisions relating to shareholder actions as set forth in the Declaration, or if a direct
action is dismissed by a court for failure to state a claim, the shareholder bringing the action may be responsible for the Fund's costs, including attorneys’ fees.
The provisions
of the Declaration provide that any direct or derivative action commenced by a shareholder must be brought only in the U.S. District Court for the District of Massachusetts (Boston Division) or if any such action may
not be brought in that court, then in the Business Litigation Session of Suffolk Superior Court in Massachusetts (the “Chosen Courts”). Except as prohibited by applicable law, if a shareholder commences an applicable action in a court other than a Chosen Court without the consent of the
Fund, then such shareholder may be obligated to reimburse the Fund and any applicable Trustee or officer of the Fund made party to such proceeding for the costs and expenses (including attorneys’ fees) incurred
in connection with any successful motion to dismiss, stay or transfer of the action. 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, 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 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,
as lead independent Trustee or as 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
Declaration further provides that no provision of the Declaration will restrict any shareholder rights expressly granted by the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended or
the 1940 Act, or any rule, regulation or order of the Securities Exchange Commission thereunder.
The Fund is
advised by First Trust Advisors L.P. (the “Advisor” or “First Trust”) and sub-advised by Horizon Investments, LLC (the “Sub-Advisor” or “Horizon”).
The shares of
the Fund list and principally trade on NYSE Arca, Inc. (“NYSE Arca” or the “Exchange”). The shares of the Fund will trade on the Exchange at market prices that may be below, at or above net asset value. The Fund offers and issues shares at net
asset value 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 securities (the “Deposit Securities”), together with the deposit of a specified cash payment (the “Cash Component”), or for cash as specified in the Prospectus. Creation Units are aggregations of 50,000 shares of a Fund.
The Trust
reserves the right to permit creations and redemptions of Fund shares to be made in whole or in part on a cash basis under certain circumstances. 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 section entitled “Creation
and Redemption of Creation Unit Aggregations.” 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 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, brokers’ 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.
The Fund is
required by the Exchange to comply with certain listing standards (which includes certain investment parameters) in order to maintain its listing on the Exchange. Compliance with these listing standards may compel the
Fund to sell securities at an inopportune time or for a price other than the security’s then-current market value. The sale of securities in such circumstances could limit the Fund's profit or require the Fund
to incur a loss, and as a result, the Fund's performance could be impacted.
Investment Objective and
Policies
The Prospectus
describes the investment objective and certain policies of the Fund. The following supplements the information contained in the Prospectus concerning the investment objective 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 (as such term is defined in the 1940 Act) of the Fund:
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(1)
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The Fund may not issue senior securities, except as permitted under the 1940 Act.
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(2)
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The Fund may not borrow money, except as permitted under the 1940 Act.
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(3)
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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.
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(4)
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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).
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(5)
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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 33⅓% of the value of the Fund's total
assets.
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(6)
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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).
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(7)
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The Fund may not invest more than 25% of its assets in securities of issuers in any one industry or group of industries. This restriction does not apply to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or securities of other investment companies.
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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 33⅓% 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%.
Except for
restriction (2) above, 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. With respect to restriction (2), if the limitations are exceeded as a result of a change in market value then the Fund will reduce the amount of borrowings within three days
thereafter to the extent necessary to comply with the limitations (not including Sundays and holidays).
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 objective and the foregoing fundamental policies of the Fund's 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 objective, policies and strategies that appears in the Prospectus.
Under normal
market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in small- and/or mid-capitalization common stocks listed and
traded on U.S. national securities exchanges that Horizon believes exhibit low future expected volatility. Fund shareholders are entitled to 60 days’ notice prior to any change in this
non‑fundamental investment policy.
Types of Investments
Depositary
Receipts. The Fund may hold securities of foreign issuers in the form of sponsored or unsponsored American depositary receipts (“ADRs”), American Depositary Shares (“ADSs”), Global Depositary Receipts (“GDRs”) and European Depositary Receipts (“EDRs”) (collectively “Depositary Receipts”). ADRs and ADSs are Depositary Receipts normally issued by a U.S. bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. GDRs and EDRs are
typically issued by foreign banks or trust companies, although they also may be issued by U.S. banks or trust companies, and evidence ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities market. Depositary Receipts in bearer form are designed for use in securities markets outside the United
States. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Ownership of unsponsored Depositary Receipts may not entitle the Fund
to financial or other reports from the issuer of the underlying security, to which it would be entitled as the owner of sponsored Depositary Receipts.
Equities. Equity securities represent an ownership position in a company. The prices of equity securities fluctuate based on, among other things, events specific to their issuers and market,
economic, and other conditions. Equity securities may include common and preferred stocks. Common stocks include the common stock of any class or series of a domestic or foreign corporation or any similar equity
interest, such as a trust or partnership interest. These investments may or may not pay dividends and may or may not carry voting rights. Common stock occupies the most junior position in a company’s capital
structure. The Fund may also invest in warrants and rights related to common stocks.
Fixed Income
Investments and Cash Equivalents: Normally, the Fund invests substantially all of their assets to meet itsinvestment objective. However, for temporary or defensive purposes, the Fund may invest in fixed income
investments and cash equivalents in order to provide income, liquidity and preserve capital.
Fixed income
investments and cash equivalents held by theFund may include, without limitation, the types of investments set forth below:
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(1)
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The Fund may invest in 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 securities include securities that are issued or guaranteed by the U.S. Treasury, by various agencies of the U.S. government, or by various instrumentalities that have
been established or sponsored by the U.S. government. U.S. Treasury securities are backed by the “full faith and credit” of the United States. 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 United States. Some of the U.S. government agencies that issue or guarantee securities include the Export-Import Bank
of the United States, the Farmers Home Administration, the Federal Housing Administration, the Maritime Administration, the Small Business Administration and The Tennessee Valley Authority. An instrumentality of the
U.S. government is a government agency organized under federal charter with government supervision. Instrumentalities issuing or guaranteeing securities include, among others, the Federal Home Loan Banks, the Federal
Land Banks, the Central Bank for Cooperatives, Federal Intermediate Credit Banks and the Federal National Mortgage Association (“Fannie Mae”). In the case of those U.S. government securities not backed by the full faith and credit of the United States, the investor must look principally to the
agency or instrumentality issuing or guaranteeing the security for ultimate repayment and may not be able to assert a claim against the United States itself in the event that the agency or instrumentality does not
meet its commitment. The U.S. government, its agencies and instrumentalities do not guarantee the market value of their securities; consequently, the value of such securities may fluctuate. In addition, the Fund may
invest in sovereign debt obligations of non‑U.S. countries. A sovereign debtor’s willingness or ability to repay principal and interest in a timely manner may be affected by a number of factors, including
its cash flow situation, the extent of its non‑U.S. reserves, the availability of sufficient non‑U.S. exchange on the date a payment is due, the relative size of the debt service burden to the economy as a
whole, the sovereign debtor’s policy toward principal international lenders and the political constraints to which it may be subject.
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(2)
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The Fund may invest in 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. Under current FDIC regulations, the maximum insurance payable as to
any one certificate of deposit is $250,000; therefore, certificates of deposit purchased by the Fund may not be fully insured. The Fund may only invest in certificates of deposit issued by U.S. banks with at least $1
billion in assets.
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(3)
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The Fund may invest in 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.
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(4)
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The Fund may invest in repurchase agreements, which involve purchases of debt securities with counterparties that are deemed by the Advisor to present acceptable credit risks. 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. 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. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. 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
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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 portfolio managers monitor the value
of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The portfolio managers do 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.
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(5)
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The Fund may invest in 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.
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(6)
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The Fund may invest in 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 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 invest in commercial paper only if it has received the highest rating from at least one nationally
recognized statistical rating organization or, if unrated, judged by First Trust to be of comparable quality.
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(7)
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The Fund may invest in shares of money market funds, as consistent with its investment objective and policies. Shares of money market funds are subject to management fees and other
expenses of those funds. Therefore, investments in money market funds will cause the Fund to bear proportionately the costs incurred by the money market funds’ operations. At the same time, the Fund will
continue to pay its own management fees and expenses with respect to all of its assets, including any portion invested in the shares of other investment companies. It is possible for the Fund to lose money by
investing in money market funds.
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Illiquid
Securities. The Fund may invest in illiquid securities (i.e., any investment that the Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly
changing the market value of the investment). For purposes of this restriction, illiquid securities may 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, and repurchase agreements with maturities in excess of seven days, among others. 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 Advisor, subject to oversight by the Board of Trustees, 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 under the Fund’s liquidity risk management
program, adopted pursuant to Rule 22e-4 under the 1940 Act.
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 Advisor will report such occurrence to the Board
of Trustees and take such steps as are deemed advisable to protect liquidity in accordance with the Fund’s liquidity risk management program.
Real Estate
Investment Trusts. Real estate investment trusts (“REITs”) are typically publicly traded corporations or trusts that invest in residential or commercial real estate. REITs generally can be divided into the following three types: (i) equity REITs
which invest the majority of their assets directly in real property and derive their income primarily from rents and capital gains or real estate appreciation; (ii) mortgage REITs which invest the majority of their
assets in real estate mortgage
loans and derive their income primarily from
interest payments; and (iii) hybrid REITs which combine the characteristics of equity REITs and mortgage REITs.
Hedging Strategies
The Fund may
engage in hedging activities and, in this regard, may utilize forward contracts, currency spot transactions and futures contracts. The use of futures is not a part of a principal investment strategy of the Fund.
Hedging or
derivative instruments on securities generally are used to hedge against price movements in one or more particular securities positions that the Fund owns or intends to acquire. Such instruments may also be used to
“lock-in” realized but unrecognized gains in the value of portfolio securities. Hedging instruments on stock indices, in contrast, generally are used to hedge against price movements in broad market
sectors in which the Fund has invested or expects to invest. Hedging strategies, if successful, can reduce the risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce the opportunity for gain by offsetting the positive effect of favorable price movements in the hedged investments. The use of hedging instruments
is subject to applicable regulations of the SEC, the several futures exchanges upon which they are traded, the Commodity Futures Trading Commission (the “CFTC”) and various state regulatory authorities. In addition, the Fund’s ability to use hedging instruments may be limited by tax considerations.
General Limitations On Derivative
Transactions
The Fund
limits its direct investments in derivative instruments to the extent necessary for the Advisor to claim the exclusion from regulation as a “commodity pool operator” with respect to the Fund under CFTC
Rule 4.5, as such rule may be amended from time to time. Under Rule 4.5 as currently in effect, the Fund limits its trading activity in certain derivative instruments (excluding activity for “bona fide hedging
purposes,” as defined by the CFTC) such that each meets one of the following tests: (i) aggregate initial margin and premiums required to establish its futures, options on futures and swap positions do not
exceed 5% of the liquidation value of the Fund’s portfolio, after taking into account unrealized profits and losses on such positions; or (ii) aggregate net notional value of the Fund’s futures, options on
futures and swap positions does not exceed 100% of the liquidation value of the Fund’s portfolio, after taking into account unrealized profits and losses on such positions.
The Advisor
has filed a notice of eligibility for exclusion from the definition of the term “commodity pool operator” with respect to the Fund with the National Futures Association, the futures industry’s
self-regulatory organization. If First Trust were no longer able to claim the exclusion for the Fund, First Trust would be required to register as a “commodity pool operator,” and the Fund and First Trust
would be subject to regulation under the Commodity Exchange Act (the “CEA”).
The foregoing
limitations are non-fundamental policies of the Fund and may be changed without shareholder approval as regulatory agencies permit.
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 portfolio turnover rate of 100% would occur, for example, if all of the portfolio securities (other than short-term securities) were replaced once during the fiscal year. A high portfolio turnover rate could result
in the payment by the Fund of increased brokerage costs, expenses and taxes.
Lending of Portfolio Securities
In order to
generate additional income, as a non-principal investment strategy, First Trust is authorized to select certain First Trust Funds, including the Fund, with notice to the Board of Trustees, to lend portfolio securities
representing up to 33⅓% of the value of its total assets to broker-dealers, banks or other institutional borrowers of securities. As with other extensions of credit, there may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, such First Trust Funds will only enter into loan arrangements with broker-dealers, banks or
other institutions which First Trust has determined are creditworthy under guidelines approved by the Board of Trustees. The First Trust Funds will pay a portion of the income earned on the lending transaction to the
placing broker and may pay administrative and custodial fees in connection with these loans. First Trust may select the First Trust Fund to participate in the securities lending program, at its discretion with notice
to the Board of Trustees.
In these loan
arrangements, the First Trust Funds will receive collateral in the form of cash, U.S. government securities or bank letters of credit equal to at least 102% (for domestic securities) or 105% (for international
securities) of the market value of the securities loaned as determined at the time of loan origination. This collateral must be valued daily by First Trust or the First Trust Fund’s lending agent and, if the
market value of the loaned securities increases, the borrower must furnish additional collateral to the lending First Trust Fund. During the time portfolio securities are on loan, the borrower pays the lending First
Trust Fund any dividends or interest paid on the securities. Loans are subject to termination at any time by the lending First Trust Fund or the borrower. While a First Trust Fund does not have the right to vote
securities on loan, it would terminate the loan and regain the right to vote if that were considered important with respect to the investment. When a First Trust Fund lends portfolio securities to a borrower, payments
in lieu of dividends made by the borrower to the First Trust Fund will not constitute “qualified dividends” taxable at the same rate as long-term capital gains, even if the actual dividends would have
constituted qualified dividends had the First Trust Fund held the securities. Please see "Securities Lending Risk" below for a description of the risks associated with securities lending activities.
Investment Risks
The following
risk disclosure supplements the discussion of the Fund's investment risks that appears in the Prospectus.
Overview
An investment
in the Fund should be made with an understanding of the risks that an investment in the Fund's shares entails, including the risk that the financial condition of the issuers of the equity securities held by the Fund
or the general condition of the securities market may worsen and the value of the equity securities and therefore the value of the Fund may decline. The Fund may not be an appropriate investment for those who are
unable or unwilling to assume the risks involved generally with such an investment. The past market and earnings performance of any of the equity securities included in the Fund is not predictive of their future
performance.
Common Stock Risk
Equity
securities are especially susceptible to general market movements and to volatile increases and decreases of value as market confidence in and perceptions of the issuers change. These perceptions are based on
unpredictable factors including expectations regarding government, economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or regional political, economic or
banking crises. First Trust cannot predict the direction or scope of any of these factors. Shareholders of common stocks have rights to receive payments from the issuers of those common stocks that are generally
subordinate to those of creditors of, or holders of debt obligations or preferred stocks of, such issuers.
Shareholders
of common stocks of the type held by the Funds have a right to receive dividends only when and if, and in the amounts, declared by the issuer’s board of directors and have a right to participate in amounts
available for distribution by the issuer only after all other claims on the issuer have been paidor otherwise been settled. Common stocks do not represent an obligation of the issuer and, therefore, do not offer any
assurance of income or provide the same degree of protection of capital as do debt securities. The issuance of additional debt securities or preferred stock will create prior claims for payment of principal, interest
and dividends which could adversely affect the ability and inclination of the issuer to declare or pay dividends on its common stock or the rights of holders of common stock with respect to assets of the issuer upon
liquidation or bankruptcy. The value of common stocks is subject to market fluctuations for as long as the common stocks remain outstanding, and thus the value of the equity securities in the Funds will fluctuate over
the life of the Funds and may be more or less than the price at which they were purchased by the Funds. The equity securities held in the Funds may appreciate or depreciate in value (or pay dividends) depending on the
full range of economic and market influences affecting these securities, including the impact of the Fund's purchase and sale of the equity securities and other factors.
Holders of
common stocks incur more risk than holders of preferred stocks and debt obligations because common stockholders, as owners of the entity, have generally inferior rights to receive payments from the issuer in
comparison with the rights of creditors of, or holders of debt obligations or preferred stocks issued by, the issuer. Cumulative preferred stock dividends must be paid before common stock dividends and any cumulative
preferred stock dividend omitted is added to future dividends payable to the holders of cumulative preferred stock. Preferred stockholders are also generally entitled to rights on liquidation which are senior to those
of common stockholders.
Depositary Receipts Risk
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 a U.S. 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, and 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.
Derivatives Risk
The use of
derivatives presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. 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, the Fund is effectively leveraging its 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. Certain specific risks associated with an investment in derivatives may include: market
risk, credit risk, correlation risk, liquidity risk, legal risk and systemic or “interconnection” risk, as specified below.
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(1)
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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 objective, 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 objective.
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(2)
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Credit Risk/Counterparty 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 the Fund. Such counterparty risk is accentuated in the case of contracts with longer maturities where there is a greater risk that a
specific event may prevent or delay settlement, or where the Fund has concentrated its transactions with a single or small group of counterparties. The Fund is not restricted from dealing with any
particular counterparty or
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|
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from concentrating any or all of its transactions with one counterparty. The Fund will enter into transactions in derivative instruments only with counterparties that First Trust reasonably believes are capable of
performing under the contract.
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(3)
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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 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. In addition, the Fund’s success in using hedging
instruments is subject to the ability of the portfolio managers to correctly predict changes in relationships of such hedge instruments to the Fund’s portfolio holdings, and there can be no assurance that the
judgment of the portfolio managers in this respect will be accurate. An imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to a risk of loss.
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(4)
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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 taking
positions in derivative instruments involving obligations to third parties (i.e., instruments other than purchase options). If the Funds are 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.
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(5)
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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.
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(6)
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Volatility. The prices of many derivative instruments are highly volatile. Price movements of such instruments may be influenced by, among other things, interest rates,
changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments, and national and international political and economic events and policies. The value of such
instruments also may depend upon the price of the securities or currencies underlying them.
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(7)
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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.
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Dividends Risk
Shareholders
of common stocks have rights to receive payments from the issuers of those common stocks that are generally subordinate to those of creditors of, or holders of debt obligations or preferred stocks of, such issuers.
Shareholders of common stocks of the type held by the Fund have a right to receive dividends only when and if, and in the amounts, declared by the issuer’s board of directors and have a right to participate in
amounts available for distribution by the issuer only after all other claims on the issuer have been paid or have otherwise been settled. Common stocks do not represent an obligation of the issuer and, therefore, do
not offer any assurance of income or provide the same degree of protection of capital as do debt securities. The issuance of additional debt securities or preferred stock will create prior claims for payment of
principal, interest and dividends which could adversely affect the ability and inclination of the issuer to declare or pay dividends on its common stock or the rights of holders of common stock with respect to assets
of the issuer upon liquidation or bankruptcy. Cumulative preferred stock dividends must be paid before common stock dividends, and any cumulative preferred stock dividend omitted is added to future dividends payable
to the holders of cumulative preferred stock. Preferred stockholders are also generally entitled to rights on liquidation that are senior to those of common stockholders.
Foreign Currency Risk
The Fund may
engage in practices and strategies that will result in exposure to fluctuations in foreign exchange rates, thus subjecting the Fund to foreign currency risk. The Fund’s exposure to foreign currencies or in
securities or instruments that trade, or receive revenues, in foreign currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions,
that the U.S. dollar will decline in value relative to the currency being hedged. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including the
forces of supply and demand in the non-U.S. exchange markets, actual or perceived changes in interest rates, rates of inflation, balance of payments and governmental surpluses or deficits, intervention (or the failure
to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International Monetary Fund, or by the imposition of currency controls or other political developments in the United
States or abroad. These fluctuations may have a significant adverse impact on the value of the Fund’s portfolio and/or the level of Fund distributions made to its common shareholders. The Fund may seek to hedge
exposure to reduce the risk of loss due to fluctuations in currency exchange rates. There is no assurance, however, that these strategies will be available or will be successful and the Fund will incur costs
associated with such strategies.
Currency
transactions are subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be negatively affected by government exchange controls, blockages, and manipulations or exchange restrictions imposed by governments. These can result in losses if the
Fund is unable to deliver or receive currency or funds in settlement of obligations and could also cause hedges they have entered into to be rendered useless, resulting in full currency exposure as well as incurring
transactions costs. Currency exchange rates may fluctuate based on factors extrinsic to that country’s economy.
Liquidity Risk
Whether or not
the equity securities held by the Fund are listed on a securities exchange, the principal trading market for certain of the equity securities may be in the over-the-counter ("OTC") market. As a result, the existence of a liquid trading market for such 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 such equity securities will be maintained or that there will be sufficient liquidity of the equity securities in any
markets made. The price at which such equity securities are held by the Fund will be adversely affected if trading markets for the equity securities are limited or absent.
Listing Standards Risk
The Fund is
required by the Exchange to comply with certain listing standards (which includes certain investment parameters) in order to maintain its listing on the Exchange. Compliance with these listing standards may compel the
Fund to sell securities at an inopportune time or for a price other than the security’s then-current market value. The sale of securities in such circumstances could limit the Fund's profit or require the Fund
to incur a loss, and as a result, the Fund’s performance could be impacted.
Litigation Risk
At any time
litigation may be instituted on a variety of grounds with respect to the common stocks held by the Fund. The Fund is unable to predict whether litigation that has been or will be instituted might have a material
adverse effect on the Fund.
Market Disruption and Geopolitical
Risk
Some countries
in which the Fund invests have experienced security concerns, war or threats of war and aggression, terrorism, economic uncertainty, natural and environmental disasters and/or systemic market dislocations that have
led, and in the future may lead, to increased short term market volatility and may have adverse long term effects on the economies and markets of such countries generally, each of which may negatively impact the
Fund’s investments. For example, there have been various events throughout Europe, including Russia’s annexation of Crimea and the resulting sanctions against Russia and the ongoing tension between Russia
and Ukraine. It is possible, for instance, that the events occurring in Russia could result in, among other things, Russia withholding its natural gas supply from other European countries, which has the potential to
harm the economies and markets of such countries. The events occurring in one country or region may spread through, or otherwise affect, other countries and regions and therefore adversely impact the Fund’s
investments in such countries and regions.
Non-U.S. Securities Risk
Investing in
securities of non-U.S. issuers, which are generally denominated in non-U.S. currencies, may involve certain risks not typically associated with investing in securities of U.S. issuers. These risks include: (i) there
may be less publicly available information about non-U.S. issuers or markets due to less rigorous disclosure or accounting standards or regulatory practices, as non-U.S. companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies; (ii) non-U.S. markets may be smaller, less liquid and more volatile than the U.S. market; (iii) potential adverse effects of fluctuations
in currency exchange rates or controls on the value of the Fund’s investments; (iv) the economies of non-U.S. countries may grow at slower rates than expected or may experience a downturn or recession; (v) the
impact of economic, political, social or diplomatic events, including the risk of adverse political developments, nationalization, military unrest, social instability, war and terrorism, confiscation without fair
compensation, expropriation or confiscatory taxation, limitations on the movement of funds and other assets between different countries, or diplomatic developments; (vi) certain non-U.S. countries may impose
restrictions on the ability of non-U.S. issuers to make payments of principal and interest to investors located in the United States due to blockage of non-U.S. currency exchanges or otherwise; and (vii) withholding
and other non-U.S. taxes may decrease the Fund’s return. Action by these governments could have a significant effect on market prices of securities and dividend payments. In the event of nationalization,
expropriation or other confiscation, the Fund could lose its entire investment in non-U.S. securities. In addition to the foregoing risks, there may be difficulty in obtaining or enforcing a court judgment abroad.
These risks may be more pronounced to the extent that the Fund invests a significant amount of their assets in companies located in one region or in emerging markets (as described above).
Governments in
certain foreign countries continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Furthermore, many countries throughout the world are dependent on a
healthy U.S. economy and are adversely affected when the U.S. economy weakens or its markets decline. Additionally, many foreign country economies are heavily dependent on international trade and are adversely
affected by protective trade barriers and economic conditions of their trading partners. Protectionist trade legislation enacted by those trading partners could have a significant adverse affect on the securities
markets of those countries. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Fixed
commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions.
There is generally less government supervision and regulation of foreign securities exchanges, brokers, dealers and listed and unlisted companies than in the United States, and the legal remedies for investors may be
more limited than the remedies available in the United States. For example, there may be no comparable provisions under certain foreign laws to insider trading and similar investor protections that apply with respect
to securities transactions consummated in the United States. Mail service between the United States and foreign countries may be slower or less reliable than within the United States, thus increasing the risk of
delayed settlement of portfolio transactions or loss of certificates for portfolio securities.
Foreign
markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it
difficult to conduct
such transactions. Such delays in settlement
could result in temporary periods when some of the Fund’s assets are uninvested and no return is earned on such assets. The inability of the Fund to make intended security purchases due to settlement problems
could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value
of the portfolio securities or, if the Fund has entered into a contract to sell the securities, in possible liability to the purchaser.
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.
Real Estate Investment Trust 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.
Securities Lending Risk
Securities
lending involves exposure to certain risks, including counterparty risk, collateral risk and operational risk. Counterparty risk is the risk that the borrower may fail to return the securities in a timely manner or at
all. As a result, a First Trust Fund engaged in securities lending transactions may suffer a loss and there may be a delay in recovering the lent securities. Any delay in the return of securities on loan may restrict
the ability of the Fund to meet delivery or payment obligations. Collateral risk is the risk that the collateral received may be realized at a value lower than the value of the securities lent, whether due to
inaccurate pricing of the collateral, adverse market movements in the value of the collateral, intra-day increases in the value of the securities lent, a deterioration in the credit rating of the collateral issuer, or
the illiquidity of the market in which the collateral is traded. Securities lending also entails operational risks, such as settlement failures or delays in the settlement of instructions. Such failures or delays may
restrict the ability of the Fund to meet delivery or payment obligations. Lastly, securities lending activities may result in adverse tax consequences for the Fund and its shareholders. For instance, substitute
payments for dividends received by the Fund for securities loaned out by the Fund will not be considered qualified dividend income. The Fund could lose money if its short-term investment of the collateral declines in
value over the period of the loan.
Small and Mid Capitalization
Companies Risk
Certain of the
equity securities in the Fund may be small and/or mid capitalization company stocks. While historically such company stocks have outperformed the stocks of large companies, the former have customarily involved more
investment risk as well. Small and mid capitalization companies may have limited product lines, markets or financial resources; may lack management depth or experience; and may be more vulnerable to adverse general
market or economic developments than large companies. Some of these companies may distribute, sell or produce products which have recently been brought to market and may be dependent on key personnel.
The prices of
small and mid capitalization company securities are often more volatile than prices associated with large company issues, and can display abrupt or erratic movements at times, due to limited trading volumes and less
publicly available information. Also, because small and mid capitalization companies normally have fewer shares outstanding and these shares trade less frequently than large companies, it may be more difficult for the
Fund which contains these equity securities to
buy and sell significant amounts of such shares
without an unfavorable impact on prevailing market prices. The securities of small and mid capitalization companies are often traded OTC and may not be traded in the volumes typical of a national securities
exchange.
Management of the Fund
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 Board of Trustees. The following is a list of the Trustees and executive 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 have held during the past five years, 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. The following table identifies the
Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons below is c/o First Trust Advisors L.P., 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
Name and
Year of Birth
|
Position
and Offices
with Trust
|
Term of
Office and
Year First
Elected or
Appointed
|
Principal Occupations
During Past 5 Years
|
Number of
Portfolios
in the First
Trust Fund
Complex
Overseen
by Trustee
|
Other
Trusteeships or
Directorships
Held by
Trustee
During the
Past 5 Years
|
|
TRUSTEE WHO IS AN INTERESTED PERSON OF THE TRUST
|
James A. Bowen (1)
1955
|
Chairman of the Board and Trustee
|
• Indefinite term
• Since inception
|
Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chairman of the Board of
Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor)
|
173 Portfolios
|
None
|
|
INDEPENDENT TRUSTEES
|
Richard E. Erickson
1951
|
Trustee
|
• Indefinite term
• Since inception
|
Physician; Officer, Wheaton Orthopedics; Limited Partner, Gundersen Real Estate Limited Partnership (June
1992 to December 2016); Member, Sportsmed LLC (April 2007 to November 2015)
|
173 Portfolios
|
None
|
Thomas R. Kadlec
1957
|
Trustee
|
• Indefinite term
• Since inception
|
President, ADM Investor Services, Inc. (Futures Commission Merchant)
|
173 Portfolios
|
Director of ADM Investor Services, Inc., ADM Investor Services International, Futures Industry Association, and National Futures Association
|
Robert F. Keith
1956
|
Trustee
|
• Indefinite term
• Since inception
|
President, Hibs Enterprises (Financial and Management Consulting)
|
173 Portfolios
|
Director of Trust Company of Illinois
|
Name and
Year of Birth
|
Position
and Offices
with Trust
|
Term of
Office and
Year First
Elected or
Appointed
|
Principal Occupations
During Past 5 Years
|
Number of
Portfolios
in the First
Trust Fund
Complex
Overseen
by Trustee
|
Other
Trusteeships or
Directorships
Held by
Trustee
During the
Past 5 Years
|
|
INDEPENDENT TRUSTEES
|
Niel B. Nielson
1954
|
Trustee
|
• Indefinite term
• Since inception
|
Senior Advisor (August 2018 to present), Managing Director and Chief Operating Officer
(January 2015 to August 2018), Pelita Harapan Educational Foundation (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Servant Interactive LLC (Educational
Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services)
|
173 Portfolios
|
None
|
Name and
Year of Birth
|
Position and
Offices with Trust
|
Term of Office and
Length of Service
|
Principal Occupations
During Past 5 Years
|
|
OFFICERS OF THE TRUST
|
James M. Dykas
1966
|
President and Chief Executive Officer
|
• Indefinite term
• Since January 2016
|
Managing Director and Chief Financial Officer (January 2016 to present), Controller (January 2011 to January 2016), Senior Vice President
(April 2007 to January 2016), First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer (January 2016 to present), BondWave LLC (Software Development Company) and Stonebridge Advisors LLC
(Investment Advisor)
|
W. Scott Jardine
1960
|
Secretary and Chief Legal Officer
|
• Indefinite term
• Since inception
|
General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; and Secretary,
Stonebridge Advisors LLC
|
Daniel J. Lindquist
1970
|
Vice President
|
• Indefinite term
• Since inception
|
Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
Kristi A. Maher
1966
|
Chief Compliance Officer and Assistant Secretary
|
• Indefinite term
• Since inception
|
Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
Donald P. Swade
1972
|
Treasurer, Chief Financial Officer and Chief Accounting Officer
|
• Indefinite term
• Since January 2016
|
Senior Vice President (July 2016 to Present), Vice President (April 2012 to July 2016), First Trust Advisors L.P. and First Trust Portfolios
L.P.
|
Roger F. Testin
1966
|
Vice President
|
• Indefinite term
• Since inception
|
Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
Stan Ueland
1970
|
Vice President
|
• Indefinite term
• Since inception
|
Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
|
(1)
|
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust, investment advisor of the Fund.
|
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 and First Trust Variable Insurance Trust, open-end funds with six 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/Aberdeen Emerging Opportunity Fund, First Trust Specialty Finance and Financial Opportunities Fund, First Trust High Income Long/Short Fund, First Trust Energy Infrastructure Fund, First Trust MLP
and Energy Income Fund, First Trust Intermediate Duration Preferred & Income Fund, First Trust Dynamic Europe Equity Income Fund, First Trust New Opportunities MLP & Energy Fund and First Trust Senior Floating
Rate 2022 Target Term Fund, closed-end funds advised by First Trust; and First Trust Exchange-Traded Fund, First Trust Exchange-Traded Fund II, First Trust Exchange-Traded Fund III, First Trust Exchange-Traded Fund
IV, First Trust Exchange-Traded Fund V, First Trust Exchange-Traded Fund VI, First Trust Exchange-Traded Fund VII, First Trust Exchange-Traded Fund VIII, First Trust Exchange-Traded AlphaDEX® Fund and First Trust Exchange-Traded AlphaDEX® Fund II, exchange-traded funds with 152 portfolios advised by First Trust (each a “First Trust
Fund” and collectively, the “First Trust Fund Complex”). None of the Trustees who are not “interested persons” of the Trust, nor any of their immediate family members, has ever been a director, officer or employee of, or consultant
to, First Trust, FTP or their affiliates.
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 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 Board. The Board is composed of four Independent Trustees and one Interested Trustee. The Interested Trustee, James A. Bowen, serves as the Chairman of the Board for each fund in
the First Trust Fund Complex.
The same five
persons serve as Trustees on the 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 among the First Trust exchange-traded funds, 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, possess 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 it 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 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 three-year term or until his or her 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 Pricing and Dividend 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 three 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 and immediately preceding Lead Independent Trustee also serve 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. Kadlec, Mr. Bowen and Mr. Erickson are members of the Executive Committee.
The Nominating
and Governance Committee is responsible for appointing and nominating non-interested persons to the 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 75
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 or will turn 72 years old during the initial term. When a vacancy on the Board of Trustees occurs or is anticipated to occur 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 should 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 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 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 to counsel to the Independent Trustees.
The Valuation
Committee is responsible for the oversight of the valuation procedures of the Fund (the “Valuation Procedures”), for determining the fair value of the Fund’s securities or other assets under certain circumstances as described in the Valuation Procedures
and for evaluating the performance of any pricing service for 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 and audit process and for evaluating and appointing independent auditors (subject
also to Board approval). Messrs. Erickson, Kadlec, Keith and Nielson serve on the Audit Committee.
Executive Officers
The executive
officers of the Trust hold the same positions with each fund in the First Trust Fund Complex (representing 173 portfolios) as they hold with the Trust, except Mr. Ueland who is an executive officer of the ETFs advised
by First Trust.
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 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. 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 programs. 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 Trust. The Valuation Committee monitors valuation risk and compliance with the Fund's Valuation
Procedures and oversees the pricing services 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. For
instance, as the use of Internet technology has become more prevalent, the Fund and its service providers have become more susceptible to potential operational risks through breaches in cyber security (generally,
intentional and unintentional events that may cause the Fund or a service provider to lose proprietary information, suffer data corruption or lose operational capacity). There can be no guarantee that any risk
management systems established by the Fund, its service providers, or issuers of the securities in which the Fund invests to reduce cyber security risks will succeed, and the Fund cannot control such systems put in
place by service providers, issuers or other third parties
whose operations may affect the Fund and/or its
shareholders. 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.
Board Diversification and Trustee
Qualifications
As described
above, the Nominating and Governance Committee of the 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, vocation, 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, underwriters or other service providers,
including any affiliates of these entities.
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 in light of the Trust’s
business and structure.
Richard E.
Erickson, M.D., is an orthopedic surgeon. He also has been President of Wheaton Orthopedics, 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 and of the First Trust Funds since 1999.. Dr. Erickson has also served as the Lead Independent Trustee and on the Executive Committee (2008–2009), Chairman of the Nominating and Governance Committee (2003–2007 and 2014–2016), Chairman of the Audit Committee (2012–2013) and Chairman of the Valuation Committee (June 2006–2007 and 2010–2011) of the First Trust Funds. He currently serves as Lead Independent Trustee and on the Executive Committee (since January 1, 2017) 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. In
2014, Mr. Kadlec was elected to the board of the Futures Industry Association. Mr. Kadlec has served as a Trustee of each First Trust Fund since its inception. 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 and (2014–2016). He also served as Chairman of the Valuation Committee (2008–2009), Chairman of the Audit Committee (2010–2011) and Chairman of the Nominating and Governance Committee (2012–2013). He currently serves as Chairman of the Valuation Committee (since January 1, 2017) and on the Executive Committee (since January 1, 2014) 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 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 into 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) and Chairman of the Valuation Committee (2014–2016) of the First Trust Funds. He served as Lead Independent Trustee and on the Executive Committee (2012–2016) and currently serves as Chairman of the Audit Committee (since January 1, 2017) of the First Trust Funds.
Niel B.
Nielson, Ph.D., has been the Senior Advisor of Pelita Harapan Educational Foundation, a global provider of educational products and services since August 2018. Prior thereto, Mr. Nielson served as the Managing
Director and Chief Operating Officer of Pelita Harapan Educational Foundation for three years. Mr. Nielson formerly served as the President and Chief Executive Officer of Dew Learning LLC from June 2012 through
September 2014. 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 and 2014–2016), Chairman of the Valuation Committee (2007–2008), Chairman of the Nominating and Governance Committee (2008–2009) and Lead Independent Trustee and a member of the Executive Committee (2010–2011). He currently serves as Chairman of the Nominating and Governance Committee (since January 1, 2017) of the First Trust Funds.
James A. Bowen
is Chief Executive Officer of First Trust Advisors L.P. and First Trust Portfolios L.P. Mr. Bowen is involved in the day-to-day management of the First Trust Funds and serves on the Executive Committee. He has over 35
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.
Effective
January 1, 2020, the fixed annual retainer paid to the Independent Trustees is $255,000 per year and an annual per fund fee of $2,500 for each closed-end fund and actively managed fund, $750 for each defined outcome
fund and $250 for each index fund. The fixed annual retainer is allocated equally among each fund in the First Trust Fund Complex rather than being allocated pro rata based on each fund’s net assets.
Additionally, the Lead Independent Trustee is paid $30,000 annually, the Chairman of the Audit Committee or Valuation Committee are each paid $20,000 annually and the Chairman of the Nominating and Governance
Committee is paid $10,000 annually to serve in such capacities with compensation allocated pro rata among each fund in the First Trust Fund Complex based on its net assets.
The following
table sets forth the estimated compensation (including reimbursement for travel and out-of-pocket expenses) to be paid by the Fund for one fiscal year and the actual compensation paid by the First Trust Fund
Complex to each of the Independent Trustees for the calendar year ended December 31, 2019, 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.
|
Name of Trustee
|
Estimated Compensation
from the Fund (1)
|
Total Compensation from
the First Trust Fund Complex (2)
|
|
Richard E. Erickson
|
$4,004
|
$458,125
|
|
Thomas R. Kadlec
|
$4,004
|
$451,450
|
|
Robert F. Keith
|
$3,993
|
$454,098
|
|
Niel B. Nielson
|
$4,015
|
$440,930
|
|
(1)
|
The estimated compensation to be paid by the Fund to the Independent Trustees for one fiscal year for services to the Fund.
|
|
(2)
|
The total compensation paid to the Independent Trustees for the calendar year ended December 31, 2019 for services to the 171 portfolios, which consisted of 7 open-end mutual funds, 15 closed-end funds and 149
exchange-traded funds.
|
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 December 31, 2019:
|
Trustee
|
Dollar Range of
Equity Securities
in the Fund
(Number of Shares Held)
|
Aggregate Dollar Range of
Equity Securities in All Registered
Investment Companies
Overseen by Trustee in the
First Trust Fund Complex
|
|
Interested Trustee
|
|
James A. Bowen
|
None
|
Over $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
__________, 2020, the Independent Trustees of the Trust and their immediate family members did 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.
As of
__________, 2020, the officers and Trustees, in the aggregate, owned less than 1% of the shares of the Fund.
As of __________,
2020, 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.
Investment
Advisor. 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 to the Funds 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.
As the
Fund’s investment advisor, First Trust supervises the Sub-Advisor’s 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.
Pursuant to an
investment management agreement between First Trust and the Trust, on behalf of the Fund (the “Investment Management Agreement”), First Trust manages the investment of the Fund’s assets and is 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 unitary management fee equal to 0.80% of its average daily net assets.
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 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 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.
Sub-Advisor
The Fund and
First Trust have retained Horizon Investments, LLC, 6210 Ardrey Kell Road, Suite 300, North Carolina 28277, to serve as the Fund's investment sub-advisor pursuant to an investment sub-advisory agreement (the “Sub-Advisory Agreement”). The Sub-Advisor is responsible for the selection and ongoing monitoring of the securities in the Fund's investment portfolio. However, First
Trust is responsible for effecting all security transactions for the Fund's assets and, in placing orders for the sale and purchase of securities for the Fund, First Trust will be responsible for seeking the best
execution of such orders. Horizon was formed in 1995 and serves as investment advisor to investment portfolios with approximately $5.7 billion in assets which it managed as of December 31, 2019. Horizon provides
investment advisory services to mutual funds, collective investment trusts, other investment advisory accounts, including SMAs, UMAs and wrap platforms and ERISA and other retirement plan assets. The members of its
portfolio management team for the Fund are: Michael Dickson, PhD, Scott Ladner and Steven Clark, PhD. Each shares responsibility for the day-to-day management of each Fund’s investment portfolio.
|
•
|
Dr. Dickson serves as Director of Structured Financial Solutions for Horizon, which he joined in March 2015. He focuses on new product development and innovation, and supports Horizon’s investment process
through the development of quantitative methods and strategies. Dr. Dickson received his Ph.D. in Finance from UNC Charlotte, specializing in the areas of return predictability, portfolio optimization and factor
models. He received his BS in Chemistry from Winthrop University and his MS in Economics from UNC Charlotte.
|
|
•
|
Mr. Ladner serves as Head of Risk for Horizon, where he provides trading, risk management and quantitative expertise to several of the firm’s strategies, with a particular emphasis on building Horizon’s
Risk Management suite of products, as well as its capabilities within the alternative and absolute return investment space. Prior to Horizon, Mr. Ladner helped launch an equity index volatility and dispersion trading
unit at PEΔK6 Investments in Chicago, a proprietary listed option trading firm. Previously at First Union/Wachovia, Mr. Ladner founded and ran the equity swap and forwards portfolio while also managing equity
option and volatility portfolios. He also co-founded and managed the Risk Arbitrage and Special Situations portfolio. Mr. Ladner then managed the notional swaption and cap/floor portion of the bank’s interest
rate derivatives portfolio. Mr. Ladner received his BA in Economics and Russian Language & Literature from the University of North Carolina at Chapel Hill.
|
|
•
|
Dr. Clark serves as Managing Director of Structured Financial Solutions for Horizon. He is also an Associate Professor of Finance at UNC Charlotte, where he conducts research in the
areas of mathematical finance, derivative securities, asset pricing, and financial econometrics. His work at Horizon focuses on volatility forecasting models, dynamic factor models, and other quantitative methods. He
has a Ph.D. in Mathematical Sciences (with a concentration in applied probability and stochastic modeling) and a Ph.D. in Applied Economics (with a concentration in financial economics), both from Clemson University.
|
As of
___________, 2020, none of the portfolio managers beneficially owned shares of the Fund.
Compensation. Investment professionals of the Sub-Advisor are compensated through a combination of base salary and an annual performance-based bonus. The performance-based bonus is based on
the investment professional’s individual contribution to the performance of their given investment mandate and success of the firm. Investment managers who are also members of Horizon may also receive
periodic distributions based on the profitability of the firm.
Accounts Managed By Portfolio
Managers
The portfolio
managers manage the investment vehicles (other than the Fund) with the number of accounts and assets as of December 31, 2019, set forth in the table below:
|
Portfolio Manager
|
Registered
Investment Companies
Number of Accounts
($ Assets)
|
Other Pooled
Investment Vehicles
Number of Accounts
($ Assets)
|
Other Accounts
Number of Accounts
($ Assets)
|
|
Michael Dickson
|
10 ($2,640,000,000)
|
N/A
|
39,900 ($3,020,000,000)
|
|
Scott Ladner
|
10 ($2,640,000,000)
|
N/A
|
39,900 ($3,020,000,000)
|
|
Steven Clark
|
2 ($423,000,000)
|
N/A
|
4,400 ($640,000,000)
|
None of the
accounts managed by the portfolio managers pay an advisory fee that is based upon performance of the accounts.
Conflicts of
Interest. Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with respect to more than one fund or other account. More
specifically, portfolio managers who manage multiple funds and/or other accounts may be presented with one or more of the potential conflicts described below.
The management
of multiple funds and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each fund and/or other account. The Sub-Advisor seeks to manage such competing
interests for the time and attention of a portfolio manager by having the portfolio manager focus on a particular investment discipline. Most other accounts managed by a portfolio manager are managed using a similar
investment model that is used in connection with the management of the Fund. The Funds are expected to be included as part of a broader investment program developed by the Sub-Advisor and managed by the portfolio
managers. The portfolio managers will be required to satisfy their duties to both the Fund and the accounts that invest in these broader programs. Conflicts may potentially arise when the portfolio managers attempt to
satisfy the needs of each type of customer. The Sub-Advisor has developed procedures to address these potential conflicts.
If a portfolio
manager identifies a limited investment opportunity that may be suitable for more than one fund or other account, a fund may not be able to take full advantage of that opportunity due to an allocation of filled
purchase or sale orders across all eligible funds and other accounts. To deal with these situations, the Sub-Advisor has adopted procedures
for allocating portfolio transactions across
multiple accounts. However, First Trust will be responsible for effecting all security transactions for the Fund's assets and, in placing orders for the sale and purchase of securities for the Fund, First Trust will
be responsible for seeking the best execution of such orders.
With respect
to securities transactions for the Fund, First Trust determines which broker to use to execute each order, consistent with its duty to seek best execution of the transaction. However, with respect to certain other
accounts (such as mutual funds for which the Sub-Advisor acts as sub-advisor, other pooled investment vehicles that are not registered mutual funds, and other accounts managed for organizations and individuals), the
Sub-Advisor may be limited by the client with respect to the selection of brokers or may be instructed to direct trades through a particular broker. In these cases, trades for the Fund in a particular security may be
placed separately from, rather than aggregated with, such other accounts. Having separate transactions with respect to a security may temporarily affect the market price of the security or the execution of the
transaction, or both, to the possible detriment of the Fund or other account(s) involved.
The
Sub-Advisor, the Advisor and the Fund have adopted certain compliance procedures that are designed to address these types of conflicts. However, there is no guarantee that such procedures will detect each and every
situation in which a conflict arises.
Sub-Advisory
Agreement. The Sub-Advisor, subject to the Board of Trustees’ and Advisor’s supervision, provides the Fund with discretionary investment services. Specifically, the Sub-Advisor is
responsible for managing the investments of the Fund in accordance with the Fund's investment objectives, policies and restrictions as provided in the Prospectus and this SAI, as may be subsequently changed by the
Board of Trustees and communicated to the Sub-Advisor in writing. The Sub-Advisor further agrees to conform to all applicable laws and regulations of the SEC in all material respects and to conduct its activities
under the Sub-Advisory Agreement in all material respects in accordance with applicable regulations of any governmental authority pertaining to its investment advisory services. In the performance of its duties, the
Sub-Advisor will in all material respects satisfy any applicable fiduciary duties it may have to the Fund, will monitor the Fund's investments and will comply with the provisions of the Trust’s Declaration of
Trust and By-Laws, as amended from time to time, and the stated investment objective, policies and restrictions of the Fund. First Trust is responsible for effecting all security transactions for the Fund's assets.
The Sub-Advisory Agreement provides that the Sub-Advisor shall generally not be liable for any loss suffered by the Fund or the Advisor (including, without limitation, by reason of the purchase, sale or retention of
any security) in connection with the performance of the Sub-Advisor’s duties under the Sub-Advisory Agreement, except for a loss resulting from willful misfeasance, bad faith or gross negligence on the part of
the Sub-Advisor in performance of its duties under the Sub-Advisory Agreement, or by reason of its reckless disregard of its obligations and duties under the Sub-Advisory Agreement.
Pursuant to
the Sub-Advisory Agreement, the Advisor has agreed to pay for the services and facilities provided by the Sub-Advisor through sub-advisory fees. The Sub-Advisor’s fees are paid by the Advisor out of the
Advisor’s management fee. For the Fund, the Sub-Advisor receives a sub-advisory fee equal to 50% of any remaining monthly unitary management fee paid to the Advisor after the average Fund’s expenses
accrued during the most recent twelve months are subtracted from the unitary management fee for that month. The following table sets forth the sub-advisory fees paid to the Sub-Advisor by the Advisor for the specified
periods.
The
Sub-Advisory Agreement may be terminated without the payment of any penalty by First Trust, the Board of Trustees, or a majority of the outstanding voting securities of the Funds (as defined in the 1940 Act), upon 60
days’ written notice to the Sub-Advisor.
All fees and
expenses are accrued daily and deducted before payment of dividends to investors. The Sub-Advisory Agreement has been approved by the Board of Trustees, including a majority of the Independent Trustees of the Fund,
and the initial shareholder of the Fund.
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 markups 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 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 First Trust 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.
First Trust
places portfolio transactions for other advisory accounts advised by it, and research services furnished by firms through which the Fund effect their 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.
Administrator, Fund
Accounting Agent, Transfer Agent, Custodian, Distributor and Exchange
Administrator,
Fund Accounting Agent and Transfer Agent. The Trust has appointed Brown Brothers Harriman & Co. (“BBH”), located at 50 Post Office Square, Boston, Massachusetts 02110, to serve as the Fund’s administrator, fund accounting agent and transfer agent pursuant to an administrative agency
agreement (the “Administrative Agency Agreement”). As administrator, BBH provides various administrative services set forth in the Administrative Agency Agreement. As the fund accounting agent, BBH provides transaction processing and
review, custodial reconciliation, securities pricing and investment accounting. As the Fund's transfer agent, BBH is responsible for processing the issuance and redemption of Creation Unit Aggregations, the recording
of such issuances and redemptions and other services related to the monitoring of cash collateral.
Custodian.
The Trust has also appointed BBH to serve as the Fund’s custodian pursuant to a custodian agreement (the “Custodian Agreement”). Pursuant to the terms of the Custodian Agreement, BBH is generally responsible for the safekeeping of the Fund's assets and performing various other administrative duties set forth in
the Custodian Agreement.
As set forth
in the Administrative Agency Agreement and Custodian Agreement, the Trust, on behalf of the Fund, has agreed to indemnify BBH against, and hold it harmless from, certain losses, claims, liabilities and expenses
arising out of
BBH’s performance of its obligations and
duties under the Administrative Agency Agreement and Custodian Agreement, provided that such losses, claims, liabilities and expenses did not result from BBH’s willful malfeasance, bad faith or negligence in the
performance of such obligations and duties.
As
compensation for the services provided by BBH under the Administrative Agency Agreement and Custodian Agreement, the Trust, on behalf of the Fund, has agreed to pay to BBH such compensation as is mutually agreed upon
from time to time and reimburse BBH for out-of-pocket expenses which are a normal incident of the services provided under the agreements. This fee is subject to reduction for assets over $1 billion and $2 billion.
Pursuant to the terms of the Investment Management Agreements, the Fund does not directly pay BBH for these services, as First Trust has assumed responsibility for the payment of these expenses out of the unitary
management fee it receives from the Fund.
Distributor. First Trust Portfolios L.P., an affiliate of First Trust, is 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.”
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% of their 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.
No fee is
currently paid by the Fund under the Plan, and pursuant to a contractual agreement, the Fund will not pay 12b-1 fees anytime before March 14, 2022.
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 may also 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 (which are
participants in the Continuous Net Settlement System of the National Securities Clearing Corporation) shall be DTC Participants.
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 lists the shares of the Fund and disseminates
the intra-day portfolio values of the Fund 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 net asset value of the Fund. The Exchange has no obligation or liability in connection with the administration, marketing or trading of
the Fund.
Additional Payments to
Financial Intermediaries
First Trust or
its affiliates may from time to time make payments, out of their own resources, to certain financial intermediaries that sell shares of First Trust Funds to promote the sales and retention of Fund shares by those
firms and their customers. The amounts of these payments vary by intermediary. The level of payments that First Trust is willing to provide to a particular intermediary may be affected by, among other factors, (i) the
firm’s total assets or Fund shares held in and recent net investments into First Trust Funds, (ii) the value of the assets invested in the First Trust Funds by the intermediary’s
customers, (iii) redemption rates, (iv) its
ability to attract and retain assets, (v) the intermediary’s reputation in the industry, (vi) the level and/or type of marketing assistance and educational activities provided by the intermediary, (vii) the
firm’s level of participation in First Trust Funds’ sales and marketing programs, (viii) the firm’s compensation program for its registered representatives who sell Fund shares and provide services
to Fund shareholders, and (ix) the asset class of the First Trust Funds for which these payments are provided. Such payments are generally asset-based but also may include the payment of a lump sum.
First Trust
may also make payments to certain intermediaries for certain administrative services and shareholder processing services, including record keeping and sub-accounting of shareholder accounts pursuant to a sub-transfer
agency, omnibus account service or sub-accounting agreement. All fees payable by First Trust under this category of services may be charged back to the Fund, subject to approval by the Board.
First Trust
and/or its affiliates may make payments, out of its own assets, to those firms as compensation and/or reimbursement for marketing support and/or program servicing to selected intermediaries that are registered as
holders or dealers of record for accounts invested in one or more of the First Trust Funds or that make First Trust Fund shares available through certain selected Fund no-transaction fee institutional platforms and
fee-based wrap programs at certain financial intermediaries. Program servicing payments typically apply to employee benefit plans, such as retirement plans, or fee-based advisory programs but may apply to retail sales
and assets in certain situations. The payments are based on such factors as the type and nature of services or support furnished by the intermediary and are generally asset-based. Services for which an intermediary
receives marketing support payments may include, but are not limited to, business planning assistance, advertising, educating the intermediary’s personnel about First Trust Funds in connection with shareholder
financial planning needs, placement on the intermediary’s preferred or recommended fund list, and access to sales meetings, sales representatives and management representatives of the intermediary. In addition,
intermediaries may be compensated for enabling representatives of First Trust and/or its affiliates to participate in and/or present at conferences or seminars, sales or training programs for invited registered
representatives and other employees, client and investor events and other events sponsored by the intermediary. Services for which an intermediary receives program servicing payments typically include, but are not
limited to, record keeping, reporting or transaction processing and shareholder communications and other account administration services, but may also include services rendered in connection with Fund/investment
selection and monitoring, employee enrollment and education, plan balance rollover or separation, or other similar services. An intermediary may perform program services itself or may arrange with a third party to
perform program services. These payments, if any, are in addition to the service fee and any applicable omnibus sub-accounting fees paid to these firms with respect to these services by the First Trust Funds out of
Fund assets.
From time to
time, First Trust and/or its affiliates, at its expense, may provide other compensation to intermediaries that sell or arrange for the sale of shares of the First Trust Funds, which may be in addition to marketing
support and program servicing payments described above. For example, First Trust and/or its affiliates may: (i) compensate intermediaries for National Securities Clearing Corporation networking system services (e.g., shareholder communication, account statements, trade confirmations and tax reporting) on an asset-based or per-account basis; (ii) compensate intermediaries for providing Fund
shareholder trading information; (iii) make one-time or periodic payments to reimburse selected intermediaries for items such as ticket charges (i.e., fees that an intermediary charges its representatives for effecting transactions in Fund shares) or exchange order, operational charges (e.g., fees that an intermediary charges for establishing the Fund on its trading system), and literature printing and/or distribution costs; (iv) at the direction of a retirement
plan’s sponsor, reimburse or pay direct expenses of an employee benefit plan that would otherwise be payable by the plan; and (v) provide payments to broker-dealers to help defray their technology or
infrastructure costs.
When not
provided for in a marketing support or program servicing agreement, First Trust and/or its affiliates may also pay intermediaries for enabling First Trust and/or its affiliates to participate in and/or present at
conferences or seminars, sales or training programs for invited registered representatives and other intermediary employees, client and investor events and other intermediary-sponsored events, and for travel expenses,
including lodging incurred by registered representatives and other employees in connection with prospecting, asset retention and due diligence trips. These payments may vary depending upon the nature of the event.
First Trust and/or its affiliates make payments for such events as it deems appropriate, subject to its internal guidelines and applicable law.
First Trust
and/or its affiliates occasionally sponsor due diligence meetings for registered representatives during which they receive updates on various First Trust Funds and are afforded the opportunity to speak with portfolio
managers. Although invitations to these meetings are not conditioned on selling a specific number of shares, those who have shown an interest
in First Trust Funds are more likely to be
considered. To the extent permitted by their firm’s policies and procedures, all or a portion of registered representatives’ expenses in attending these meetings may be covered by First Trust and/or its
affiliates.
The amounts of
payments referenced above made by First Trust and/or its affiliates could be significant and may create an incentive for an intermediary or its representatives to recommend or offer shares of the First Trust Funds to
its customers. The intermediary may elevate the prominence or profile of the First Trust Funds within the intermediary’s organization by, for example, placing the First Trust Funds on a list of preferred or
recommended funds and/or granting First Trust and/or its affiliates preferential or enhanced opportunities to promote the First Trust Funds in various ways within the intermediary’s organization. These payments
are made pursuant to negotiated agreements with intermediaries. The payments do not change the price paid by investors for the purchase of a share or the amount the Fund will receive as proceeds from such sales.
Furthermore, many of these payments are not reflected in the fees and expenses listed in the fee table section of the Fund's Prospectus because they are not paid by the Fund. The types of payments described herein are
not mutually exclusive, and a single intermediary may receive some or all types of payments as described.
Other
compensation may be offered to the extent not prohibited by state laws or any self-regulatory agency, such as FINRA. Investors can ask their intermediaries for information about any payments they receive from First
Trust and/or its affiliates and the services it provides for those payments. Investors may wish to take intermediary payment arrangements into account when considering and evaluating any recommendations relating to
Fund shares.
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 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 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 the Sub-Advisor and
consequently result in intra-day portfolio values (“IPV”) that may vary. Furthermore, in calculating the intra-day portfolio values of the Fund’s shares, the exchange rates used throughout the day (9:00 a.m. to 4:15 p.m., Eastern Time)
shall be those that are deemed to be most appropriate.
Policy Regarding
Investment in Other Investment Companies. The Fund will not rely on Sections 12(d)(1)(F) or 12(d)(1)(G) of the 1940 Act to invest in other investment companies.
Proxy Voting Policies and
Procedures
The Trust has
adopted a proxy voting policy that seeks to ensure that proxies for securities held by the Funds are voted consistently in the best interests of the Funds.
The Board has
delegated to First Trust the proxy voting responsibilities for the Funds and has directed First Trust to vote proxies consistent with the Funds’ best interests. First Trust has engaged the services of
Institutional Shareholder Services, Inc. (“ISS”) to make recommendations to First Trust on the voting of proxies relating to securities held by the Funds. If First Trust manages the assets of a company or its
pension plan and any of Funds 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.
First Trust
has adopted the ISS Proxy Voting Guidelines. While these guidelines are not intended to be all inclusive, they do provide guidance on First Trust’s general voting policies. The ISS Proxy Voting Guidelines are
attached hereto as Exhibit A.
Information
regarding how the Funds voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available upon request and without charge on the Funds' website at
www.ftportfolios.com, by calling (800) 621-1675 or by accessing the SEC’s website at www.sec.gov.
Portfolio
Schedule. The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings
information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters
of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. A semi-annual or annual report for the Fund will become available to
investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Policy Regarding
Disclosure of Portfolio Holdings. The Trust has adopted a policy regarding the disclosure of information about each Fund’s portfolio holdings. The Board of Trustees must approve all material amendments to this
policy. Each 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 a Fund. Each Fund’s portfolio holdings are also available on the Funds’ website at www.ftportfolios.com. The Trust, First Trust,
FTP, Horizon and BBH will not disseminate non-public information concerning the Trust.
Codes of
Ethics. In order to mitigate the possibility that the Funds will be adversely affected by personal trading, the Trust, First Trust, Horizon and FTP 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 Funds; however, the Codes of Ethics require that each transaction in such securities be reviewed by the CCO or his or her 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 net asset values 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, 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 securities determined by First Trust—the “Deposit Securities”—per each Creation Unit Aggregation 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 net asset value per Creation Unit Aggregation and the Deposit
Amount (as defined below). The Cash Component is an amount equal to the difference between (i) the net asset value of Fund shares (per Creation Unit Aggregation) and (ii) 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 net asset value 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 net asset value per Creation Unit Aggregation is less than the Deposit Amount), the creator will receive the Cash Component.
The Custodian,
through the NSCC makes available on each Business Day, prior to the opening of business on the Exchange (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 applicable adjustments, 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 change as corporate action events are reflected within the Fund from time to time by First Trust with a view to the investment
objective 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, that may not be available in sufficient quantity for delivery or that 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 Trust also reserves the right to permit or require, under certain circumstances, the
substitution of a different security in lieu of depositing some or all of the Deposit Securities. 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 NSCC, also makes available on each Business Day, the estimated Cash Component, for
the current day as well as the Cash Component for the previous Business Day, per outstanding Creation Unit Aggregation of a 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 section entitled
“Book Entry Only System”), must have executed an agreement with the Distributor and transfer agent, with respect to creations and redemptions of Creation Unit Aggregations (“Participant Agreement”), and must 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 standard
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 the creation of Creation Unit Aggregations to be effected
based on the net asset value of shares of the Fund as next determined on such date after receipt of the order in proper form. Subject to the provisions of the applicable Participant Agreement, in the case of custom
orders, the order must generally 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. Severe economic or market disruptions or changes, or telephone or other communications failure may impede the ability to
reach the transfer agent or an Authorized Participant.
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,
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.
Deposit
Securities must be delivered to the Trust through DTC or NSCC, subject to and in accordance with the applicable provisions set forth in the Participant Agreement and Deposit Securities that 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 all in accordance with the terms of the
Participant Agreement. 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 the Fund are customarily traded. Any excess funds will be returned following settlement of the issue of the Creation Unit Aggregation.
Issuance of
Creation Unit Aggregations. A Creation Unit Aggregation will generally not be issued until the transfer of good title to the Trust of the portfolio of Deposit Securities and the payment of the Cash Component, the
payment of the Creation Transaction Fee (as defined below) and the payment of any other required cash amounts have been completed. When the required Deposit Securities which are U.S. securities have been delivered to
the Trust through DTC or NSCC, 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 relevant
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.
In the event
that an order for a Creation Unit is incomplete 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 (described below) with respect to the undelivered Deposit
Securities. 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. 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 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) circumstances outside the control of the Trust or the Fund make it impossible to process creation orders for all
practical purposes. 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; 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; and similar extraordinary events. 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 $800. 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 net asset value 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.
As discussed
above, 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 Unit Aggregations. Fund shares may be redeemed only in Creation Unit Aggregations at their net asset value 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 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”), although the Fund have the right to make redemption payments in cash, in-kind or a combination of each. 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 Exchange (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 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 (as discussed below), 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 net asset value 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 net asset value 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 net asset value is not reasonably
practicable; or (iv) in such other circumstances as are permitted by the SEC.
Redemption
Transaction Fee. Parties redeeming Creation Units must pay a redemption transaction fee (the “Redemption Transaction Fee”) that is currently $800. The Redemption Transaction Fee is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the 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. Investors will also bear the costs of
transferring the Fund Securities from the Trust to their account or on their order and may also be assessed an amount to cover other costs 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 securities. 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 an 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 and must comply with the applicable provisions of
such Participant Agreement. Investors other than APs 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 BBH (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 BBH; and (iii) all other procedures set forth in the Participant
Agreement are properly followed.
Deliveries of
Fund Securities to investors are generally expected to be made within two business days. Due to the schedule of holidays in certain countries, however, the delivery of in-kind redemption proceeds for the Fund may take
longer than two 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. Under the 1940 Act, the Fund would generally be required to make payment of redemption proceeds within seven days
after a security is tendered for 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, pursuant to an exemptive order on which the Fund may rely, the Fund’s in-kind redemption proceeds must be paid within the maximum number of calendar days required for such payment or
satisfaction in the principal local markets where transactions in portfolio securities customarily clear and settle, but generally no later than twelve calendar days following tender of a Creation Unit Aggregation.
In connection
with taking delivery of shares of non-U.S. Fund Securities upon redemption of shares of the Fund, a redeeming Beneficial Owner, or AP 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 a Participant 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 may nonetheless accept the redemption request in reliance on the undertaking by the Authorized Participant to deliver the missing shares as soon as possible. Such
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 BBH and marked to
market daily, and that the fees of BBH and any sub-custodians in respect of the delivery, maintenance and redelivery of the cash collateral shall be payable by the Authorized Participant. If the Participant Agreement
provides for collateralization, it will permit the Trust, on behalf of the affected Fund, to purchase the missing 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 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 BBH according to the procedures set forth in this SAI under “Determination
of Net Asset Value” 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 BBH by a DTC Participant not later
than Closing Time on the Transmittal Date, and the requisite number of shares of the Fund are delivered to BBH prior to the specified time, then the value of the Fund Securities and the Cash Redemption Amount to be
delivered will be determined by BBH on such Transmittal Date. If, however, a redemption order is submitted to BBH 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 specified 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 Fund are delivered through DTC to BBH by the specified 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 the 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 net asset
value of its Fund shares based on the net asset value 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 net asset value.
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 that are otherwise not Business Days for the Fund, shareholders may not be able to
redeem their shares of the Fund, or purchase and sell shares of the Fund on the listing exchange for the Fund, on days when the net asset value 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 two 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 two 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 Trust to effect in-kind creations and redemptions within two 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 the normal settlement
period.
The longest
redemption cycle for the Fund is a function of the longest redemption cycle among the countries whose securities comprise the Fund. The securities delivery cycles currently practicable for transferring Portfolio
Securities to redeeming investors, coupled with non-U.S. market holiday schedules, will require a delivery process longer than seven calendar days for the Fund in certain circumstances. It is not expected, however,
that the Fund will take more than twelve calendar days from the date of the tender to deliver the redemption proceeds. The holidays applicable to the Fund during such periods are listed below. Certain holidays may
occur on different dates in subsequent years. 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 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 March 2020 through February 2021 of the below-listed countries are as follows:
|
Argentina
|
Australia
|
Austria
|
Belgium
|
Brazil
|
Canada
|
Chile
|
March 4
March 5
April 2
April 9
April 10
May 1
June 17
June 20
July 8
July 9
August 17
October 12
November 23
December 8
December 25
January 1
|
April 10
April 13
June 8
December 25
December 28
January 1
January 26
|
April 10
April 13
May 1
June 1
October 26
December 8
December 25
January 1
|
April 13
May 1
May 21
November 11
December 25
January 1
|
April 10
April 21
May 1
June 11
July 9
September 7
October 12
November 2
November 20
December 24
December 25
December 31
January 1
February 15
February 16
February 17
|
April 10
May 18
July 1
August 3
September 7
October 12
November 11
December 24
December 25
December 28
January 1
February 15
|
April 10
April 11
May 1
May 21
July 16
August 15
September 18
October 12
December 8
December 25
January 1
|
|
China
|
Denmark
|
Finland
|
France
|
Germany
|
Greece
|
Hong Kong
|
May 1
April 6
June 25
October 1
October 2
October 5
October 6
October 7
January 1
February 11
February 12
February 15
February 16
February 17
|
April 9
April 10
April 13
May 8
May 21
May 22
June 1
June 5
December 24
December 25
December 31
January 1
|
April 10
April 13
May 1
May 21
June 19
December 24
December 25
December 31
January 1
|
April 10
April 22
May 1
December 24
December 25
December 31
January 1
|
April 10
April 13
May 1
May 8
May 21
June 1
December 24
December 25
December 31
January 1
|
March 2
March 25
April 10
April 13
April 17
April 20
May 1
June 8
October 28
December 24
December 25
December 31
January 1
January 6
|
April 5
April 19
April 22
May 1
May 13
June 7
July 1
October 1
October 7
December 25
December 26
January 1
February 12
February 15
|
|
India
|
Ireland
|
Israel
|
Italy
|
Japan
|
Malaysia
|
Mexico
|
March 9
April 2
April 6
April 10
April 14
May 1
July 31
August 20
August 28
October 2
November 16
November 30
December 25
January 26
|
April 10
April 13
May 1
December 24
December 25
December 31
January 1
|
March 10
April 8
April 9
April 12
April 13
April 14
April 15
April 28
April 29
May 28
May 29
July 30
September 20
September 27
September 28
October 4
October 5
October 6
October 7
|
April 10
April 13
May 1
December 24
December 25
December 31
January 1
|
March 20
April 29
May 4
May 5
May 6
July 23
July 24
August 10
September 21
September 22
November 3
November 23
December 31
January 1
January 2
January 3
January 11
February 11
February 23
|
May 1
May 7
May 11
May 25
June 6
July 31
August 20
August 31
September 16
October 29
November 14
December 25
January 1
February 1
February 12
|
March 16
April 9
April 10
May 1
September 16
November 16
November 20
December 25
January 1
February 1
February 5
|
|
New Zealand
|
Netherlands
|
Norway
|
Portugal
|
Singapore
|
South Africa
|
South Korea
|
April 10
April 13
April 27
June 1
October 26
December 24
December 25
December 28
December 31
January 1
January 4
February 8
|
April 10
April 13
May 1
May 21
June 1
August 3
December 24
December 25
December 31
January 1
|
April 9
April 10
April 13
May 1
May 21
June 1
June 17
August 3
December 24
December 25
December 31
January 1
|
April 10
April 13
May 1
December 24
December 25
December 31
January 1
|
April 10
May 1
May 7
May 25
July 31
August 10
November 14
December 25
January 1
|
March 21
April 10
April 13
April 27
May 1
June 16
August 9
September 24
December 16
December 25
December 26
January 1
|
April 30
May 1
May 5
June 6
September 30
October 1
October 2
October 9
December 25
December 31
January 1
|
|
Spain
|
Sweden
|
Switzerland
|
Taiwan
|
Thailand
|
United Kingdom
|
United States
|
April 10
April 13
April 22
May 1
December 24
December 25
December 31
January 1
|
April 10
April 13
May 1
May 21
June 19
December 24
December 25
December 31
January 1
|
April 10
April 13
May 1
May 21
June 1
December 24
December 25
December 31
January 1
|
April 3
April 4
May 1
June 25
October 1
October 9
October 10
January 1
February 11
February 12
February 15
February 16
|
April 6
April 13
April 14
April 15
May 1
May 4
May 6
June 3
July 6
July 28
August 12
October 13
October 23
December 7
December 10
December 31
January 1
|
April 10
April 13
May 8
May 25
August 31
December 24
December 25
December 31
January 1
|
April 10
May 25
July 3
September 7
November 26
December 25
January 1
January 18
February 15
|
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 SAI. 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, (i) 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; (ii) diversify its holdings so that, at the end of each quarter of the taxable year, (a) 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 (b) 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
(iii) 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 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 fails to qualify as a regulated investment company or fails 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. The Fund will provide notice to its shareholders of the 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.
Income from
the Fund may also be subject to a 3.8% “Medicare tax.” This tax generally applies 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 tax 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 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 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 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 (i) 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 (ii) 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.
Investments in Certain Foreign
Corporations
If the Fund
holds an equity interest in any “passive foreign investment companies” (“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 are not 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 fail to make
required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. 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 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 or the institution is resident in a jurisdiction that has entered into such an agreement with the U.S. Treasury. 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 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. This withholding tax is also
scheduled to apply to the gross proceeds from
the disposition of securities that produce U.S. source interest or dividends after December 31, 2018. However, proposed regulations may eliminate the requirement to withhold on payments of gross proceeds from
dispositions.
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) 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. This withholding tax is
also scheduled to apply to the gross proceeds from the disposition of securities that produce U.S. source interest or dividends after December 31, 2018. However, proposed regulations may eliminate the requirement to
withhold on payments of gross proceeds from dispositions.
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. Distributions from the Fund that are properly reported by the Fund as an
interest-related dividend attributable to certain interest income received by the Fund or as a short-term capital gain dividend attributable to certain net short-term capital gain income received by the Fund may not
be subject to U.S. federal income taxes, including withholding taxes when received by certain non-U.S. investors, provided that the Fund makes certain elections and certain other conditions are met. In addition,
capital gain distributions attributable to gains from U.S. real property interests (including certain U.S. real property holding corporations) will generally be subject to United States withholding tax and will give
rise to an obligation on the part of the foreign shareholder to file a United States tax return.
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.
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 Net Asset
Value
The following
information supplements and should be read in conjunction with the section in the Prospectus entitled “Net Asset Value.”
The per share
net asset value 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 net asset value will utilize the last closing sale price of each security held by the Fund at the close of the market on which such security is
principally listed. In determining net asset
value, 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 The Nasdaq Stock Exchange LLC ("Nasdaq") and the London Stock Exchange Alternative Investment Market (“AIM”) will be valued at the last sale price on the exchange on which they are principally traded, or the official closing price for Nasdaq and AIM securities. 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.
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|
(2)
|
Shares of open-end mutual funds are valued at fair value which is based on NAV per share.
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|
(3)
|
Securities traded in the OTC market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price.
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(4)
|
Exchange-traded options and futures contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, they will be fair valued at the mean of
their most recent bid and asked price, if available, and otherwise at their closing bid price. OTC options and futures contracts are fair valued at the mean of their most recent bid and asked price, if available, and
otherwise at their closing bid price.
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|
(5)
|
Forward foreign currency contracts are fair valued at the current day’s interpolated foreign exchange rate, as calculated using the current day’s spot rate, and the 30-,
60-, 90- and 180-day forward rates provided by an independent pricing service or by certain independent dealers in such contracts.
|
In addition, the
following types of securities will be fair valued by the Fund accounting agent as follows:
|
(1)
|
Fixed-income securities, convertible securities, interest rate swaps, credit default swaps, total return swaps, currency swaps, currency-linked notes, credit-linked notes and other similar instruments will be fair
valued using a pricing service.
|
|
(2)
|
Fixed-income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of
discounts (amortized cost), provided the Advisor’s Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer specific conditions existing
at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following:
|
|
(i)
|
the credit conditions in the relevant market and changes thereto;
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(ii)
|
the liquidity conditions in the relevant market and changes thereto;
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|
(iii)
|
the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates);
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|
(iv)
|
issuer-specific conditions (such as significant credit deterioration); and
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|
(v)
|
any other market-based data the Advisor’s Pricing Committee considers relevant. In this regard, the Advisor’s Pricing Committee may use last-obtained market-based data to
assist it when valuing portfolio securities using amortized cost.
|
|
(3)
|
Repurchase agreements will be valued as follows. Overnight repurchase agreements will be fair valued at amortized cost when it represents the best estimate of fair value. Term repurchase agreements (i.e., those whose maturity exceeds seven days) will be fair valued by the Advisor’s Pricing Committee at the average of the bid quotations obtained daily from at least two
recognized dealers.
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If the
Advisor’s Pricing Committee has reason to question the accuracy or reliability of a price supplied or the use of the amortized cost methodology, the Advisor’s Pricing Committee shall determine if "it needs
to fair value" such portfolio security pursuant to established valuation procedures. From time to time, the Advisor’s Pricing Committee will request that the Fund accounting agent submit price challenges
to a pricing service, usually in response to any updated broker prices received.
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, the Advisor’s Pricing Committee, at fair value. These
securities generally include, but are not limited to, restricted securities (securities that 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 or fair value 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 net asset value (as may be the case in foreign markets on which the security is primarily
traded) or is likely to 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. Fair
value prices represent any prices not considered market value prices and are either obtained from a pricing service or are determined by the Advisor’s Pricing Committee. Market value prices represent last
sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from pricing services. If no market price or official close price is available from either a pricing service or no
quotations are available from one or more brokers or if the Advisor’s Pricing Committee has reason to question the reliability or accuracy of a price supplied or the use of amortized cost, the value of any
portfolio security held by a Fund for which reliable market prices/quotations are not readily available will be determined by the Advisor’s Pricing Committee in a manner that most appropriately reflects fair
market value of the security on the valuation date, based on a consideration of all available information. When fair value prices are used, generally they will differ from market quotations or official closing
prices on the applicable exchange.
Because
foreign markets may be open on different days than the days during which a shareholder may buy or sell shares of the Fund, the value of the Fund's investments may change on the days when shareholders are not able to
buy or sell shares of the Fund. For foreign securities, if an extraordinary market event occurs between the time the last "current" market quotation is available for a security in a Fund’s portfolio and the time
the Fund’s net asset value is determined and calls into doubt whether that earlier market quotation represents fair value at the time the Fund’s net asset value is determined, the Fund accounting agent
will immediately notify the Advisor’s Pricing Committee and the Advisor’s Pricing Committee shall determine the fair valuation. For foreign securities, the Advisor’s Pricing Committee may seek
to determine the "fair value" of such securities by retaining a pricing service to determine the value of the securities.
Foreign
securities, currencies and other assets denominated in foreign currencies are translated into U.S. dollars at the exchange rate of such currencies against the U.S. dollar as provided by a pricing service. All
assets denominated in foreign currencies will be converted into U.S. dollars at the exchange rates in effect at the time of valuation.
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 quarterly. 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 South 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.
Exhibit A—Proxy Voting Guidelines
UNITED STATES
Concise Proxy Voting Guidelines
Benchmark Policy
Recommendations
Effective for Meetings on or after
February 1, 2020
Published December 11, 2019
ISSGOVERNANCE.COM
© 2019 | Institutional Shareholder Services
and/or its affiliates
U.S. Concise Proxy Voting Guidelines
The policies contained herein are
a sampling only of selected key ISS U.S. proxy voting guidelines,
and are not intended to be exhaustive. The complete guidelines can be found at:
https://www.issgovernance.com/policy-gateway/voting-policies/
BOARD OF DIRECTORS
Voting on Director Nominees in
Uncontested Elections
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➤
|
General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1 considered on case-by-case basis):
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Independence
Vote against2 or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per ISS’
Classification of Directors) when:
|
➤
|
Independent directors comprise 50 percent or less of the board;
|
|
➤
|
The non-independent director serves on the audit, compensation, or nominating committee;
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|
➤
|
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or
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|
➤
|
The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee.
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Composition
Attendance at
Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they
served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
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➤
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Medical issues/illness;
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|
➤
|
Family emergencies; and
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|
➤
|
Missing only one meeting (when the total of all meetings is three or fewer).
|
In cases of
chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote against or withhold from appropriate members of the nominating/governance
committees or the full board.
If the proxy
disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold
from the director(s) in question.
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1
|
A "new nominee" is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending
on the timing of their appointment and the problematic governance issue in question.
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|
2
|
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 contrary vote option for the particular company.
|
|
3
|
Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.
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U.S. Concise Proxy Voting Guidelines
Overboarded
Directors: Generally vote against or withhold from individual directors who:
|
➤
|
Sit on more than five public company boards; or
|
|
➤
|
Are CEOs of public companies who sit on the boards of more than two public companies besides their own— withhold only at their outside boards4.
|
Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at
companies when there are no women on the company's board. Mitigating factors include:
|
➤
|
Until Feb. 1, 2021, a firm commitment, as stated in the proxy statement, to appoint at least one woman to the board within a year;
|
|
➤
|
The presence of a woman on the board at the preceding annual meeting and a firm commitment to appoint at least one woman to the board within a year; or
|
|
➤
|
Other relevant factors as applicable.
|
Responsiveness
Vote
case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
|
➤
|
The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw
provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are:
|
|
➤
|
Disclosed outreach efforts by the board to shareholders in the wake of the vote;
|
|
➤
|
Rationale provided in the proxy statement for the level of implementation;
|
|
➤
|
The subject matter of the proposal;
|
|
➤
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The level of support for and opposition to the resolution in past meetings;
|
|
➤
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Actions taken by the board in response to the majority vote and its engagement with shareholders;
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|
➤
|
The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and
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|
➤
|
Other factors as appropriate.
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|
➤
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The board failed to act on takeover offers where the majority of shares are tendered;
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|
➤
|
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.
|
Vote case-by-case
on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
|
➤
|
The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be considered are:
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|
➤
|
The company's response, including:
|
|
➤
|
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated);
|
|
➤
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Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
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|
➤
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Disclosure of specific and meaningful actions taken to address shareholders' concerns;
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|
➤
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Other recent compensation actions taken by the company;
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|
➤
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Whether the issues raised are recurring or isolated;
|
|
4
|
Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the
controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.
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U.S. Concise Proxy Voting Guidelines
|
➤
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The company's ownership structure; and
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|
➤
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Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
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|
➤
|
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the plurality of votes cast.
|
Accountability
Problematic
Takeover Defenses/Governance Structure
Poison Pills: Vote against or withhold from all nominees (except new nominees1, who should be considered case-by-case) if:
|
➤
|
The company has a poison pill that was not approved by shareholders5. However, vote case-by-case on nominees if the board adopts an initial pill with a term of one year or less, depending on
the disclosed rationale for the adoption, and other factors as relevant (such as a commitment to put any renewal to a shareholder vote).
|
|
➤
|
The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or lowering the trigger, without shareholder approval.
|
Classified Board
Structure: 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. All appropriate nominees (except new) may be held accountable.
Removal of
Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.
Director
Performance Evaluation: The board lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and
five-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 operational metrics and other
factors as warranted. Problematic provisions include but are not limited to:
|
➤
|
A
classified board structure;
|
|
➤
|
A
supermajority vote requirement;
|
|
➤
|
Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;
|
|
➤
|
The inability of shareholders to call special meetings;
|
|
➤
|
The inability of shareholders to act by written consent;
|
|
➤
|
A
multi-class capital structure; and/or
|
|
➤
|
A
non-shareholder-approved poison pill.
|
Unilateral
Bylaw/Charter Amendments and Problematic Capital Structures: Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if the board amends the
company's bylaws or charter without shareholder approval1 in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders, considering the
following factors:
|
➤
|
The board's rationale for adopting the bylaw/charter amendment without shareholder ratification;
|
|
➤
|
Disclosure by the company of any significant engagement with shareholders regarding the amendment;
|
|
➤
|
The level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter;
|
|
➤
|
The board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
|
|
➤
|
The company's ownership structure;
|
|
5
|
Public shareholders only, approval prior to a company’s becoming public is insufficient.
|
U.S. Concise Proxy Voting Guidelines
|
➤
|
The company's existing governance provisions;
|
|
➤
|
The timing of the board's amendment to the bylaws/charter in connection with a significant business development; and,
|
|
➤
|
Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
|
Unless the
adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees1, who should be considered case-by-case) if the directors:
|
➤
|
Classified the board;
|
|
➤
|
Adopted supermajority vote requirements to amend the bylaws or charter; or
|
|
➤
|
Eliminated shareholders' ability to amend bylaws.
|
Problematic
Capital Structure – Newly Public Companies: For newly public companies6 , generally vote against or withhold from the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the company or its
board implemented a multi-class capital structure in which the classes have unequal voting rights without subjecting the multi-class capital structure to a reasonable time-based sunset. In assessing the reasonableness
of a time-based sunset provision, consideration will be given to the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the sunset period selected. No sunset
period of more than seven years from the date of the IPO will be considered to be reasonable.
Continue to vote
against or withhold from incumbent directors in subsequent years, unless the problematic capital structure is reversed or removed.
Problematic
Governance Structure – Newly Public Companies: For newly public companies6, generally vote against or withhold from directors individually, committee members, or the entire board (except new
nominees1, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the company or its
board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:
|
➤
|
Supermajority vote requirements to amend the bylaws or charter;
|
|
➤
|
A
classified board structure; or
|
|
➤
|
Other egregious provisions.
|
A reasonable
sunset provision will be considered a mitigating factor.
Unless the
adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.
Management
Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions
considering the following factors:
|
➤
|
The presence of a shareholder proposal addressing the same issue on the same ballot;
|
|
➤
|
The board's rationale for seeking ratification;
|
|
➤
|
Disclosure of actions to be taken by the board should the ratification proposal fail;
|
|
➤
|
Disclosure of shareholder engagement regarding the board’s ratification request;
|
|
➤
|
The level of impairment to shareholders' rights caused by the existing provision;
|
|
➤
|
The history of management and shareholder proposals on the provision at the company’s past meetings;
|
|
➤
|
Whether the current provision was adopted in response to the shareholder proposal;
|
|
➤
|
The company's ownership structure; and
|
|
➤
|
Previous use of ratification proposals to exclude shareholder proposals.
|
6 Newly-public companies generally include companies that emerge from bankruptcy, spin-offs, direct listings, and those who complete a traditional initial public offering.
U.S. Concise Proxy Voting Guidelines
Restrictions on
Shareholders’ Rights
Restricting Binding
Shareholder Proposals: Generally vote against or withhold from the members of the governance committee if:
|
➤
|
The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include but are not limited to: outright prohibition on the submission of
binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis.
|
Submission of
management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders' rights.
Generally continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for
shareholder approval.
Problematic
Audit-Related Practices
Generally vote
against or withhold from the members of the Audit Committee if:
|
➤
|
The non-audit fees paid to the auditor are excessive;
|
|
➤
|
The company receives an adverse opinion on the company’s financial statements from its auditor; or
|
|
➤
|
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:
|
➤
|
Poor accounting practices 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
In the absence of
an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:
|
➤
|
There is an unmitigated misalignment between CEO pay and company performance (pay for performance);
|
|
➤
|
The company maintains significant problematic pay practices; or
|
|
➤
|
The board exhibits a significant level of poor communication and responsiveness to shareholders.
|
Generally vote
against or withhold from the Compensation Committee chair, other committee members, or potentially the full board if:
|
➤
|
The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared frequency of say on pay; or
|
|
➤
|
The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.
|
Generally vote
against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation
without disclosing a compelling rationale or other mitigating factors.
Problematic
Pledging of Company Stock:
Vote against the
members of the committee that oversees risks related to pledging, or the full board, where a significant level of pledged company stock by executives or directors raises concerns. The following factors will be
considered:
U.S. Concise Proxy Voting Guidelines
|
➤
|
The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;
|
|
➤
|
The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume;
|
|
➤
|
Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
|
|
➤
|
Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and
|
|
➤
|
Any other relevant factors.
|
Governance
Failures
Under
extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
|
➤
|
Material failures of governance, stewardship, risk oversight7, or fiduciary responsibilities at the company;
|
|
➤
|
Failure to replace management as appropriate; or
|
|
➤
|
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.
|
Voting on Director Nominees in
Contested Elections
Vote-No Campaigns
|
➤
|
General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting
on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information.
|
Proxy Contests/Proxy Access — Voting for Director Nominees in Contested Elections
|
➤
|
General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:
|
|
➤
|
Long-term financial performance of the company relative to its industry;
|
|
➤
|
Management’s track record;
|
|
➤
|
Background to the contested election;
|
|
➤
|
Nominee qualifications and any compensatory arrangements;
|
|
➤
|
Strategic plan of dissident slate and quality of the critique against management;
|
|
➤
|
Likelihood that the proposed goals and objectives can be achieved (both slates); and
|
|
➤
|
Stock ownership positions.
|
In the case of
candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the
nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).
|
7
|
Examples of failure of risk oversight include but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlement; or hedging of company
stock.
|
U.S. Concise Proxy Voting Guidelines
Independent Board Chair
|
➤
|
General Recommendation: Generally vote for shareholder proposals requiring that the chair position be filled by an independent director, taking into consideration the following:
|
|
➤
|
The scope and rationale of the proposal;
|
|
➤
|
The company's current board leadership structure;
|
|
➤
|
The company's governance structure and practices;
|
|
➤
|
Company performance; and
|
|
➤
|
Any other relevant factors that may be applicable.
|
The following
factors will increase the likelihood of a “for” recommendation:
|
➤
|
A
majority non-independent board and/or the presence of non-independent directors on key board committees;
|
|
➤
|
A
weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;
|
|
➤
|
The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair;
|
|
➤
|
Evidence that the board has failed to oversee and address material risks facing the company;
|
|
➤
|
A
material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or
|
|
➤
|
Evidence that the board has failed to intervene when management’s interests are contrary to shareholders' interests.
|
Proxy Access
|
➤
|
General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:
|
|
➤
|
Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
|
|
➤
|
Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;
|
|
➤
|
Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group;
|
|
➤
|
Cap: cap on nominees of generally twenty-five percent (25%) of the board.
|
Review for
reasonableness any other restrictions on the right of proxy access.
Generally vote
against proposals that are more restrictive than these guidelines.
Shareholder Rights &
Defenses
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
|
➤
|
General Recommendation: Generally vote against management proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best
practice.
|
In addition,
voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
|
➤
|
The presence of a shareholder proposal addressing the same issue on the same ballot;
|
|
➤
|
The board's rationale for seeking ratification;
|
|
➤
|
Disclosure of actions to be taken by the board should the ratification proposal fail;
|
|
➤
|
Disclosure of shareholder engagement regarding the board’s ratification request;
|
U.S. Concise Proxy Voting Guidelines
|
➤
|
The level of impairment to shareholders' rights caused by the existing provision;
|
|
➤
|
The history of management and shareholder proposals on the provision at the company’s past meetings;
|
|
➤
|
Whether the current provision was adopted in response to the shareholder proposal;
|
|
➤
|
The company's ownership structure; and
|
|
➤
|
Previous use of ratification proposals to exclude shareholder proposals.
|
CAPITAL/RESTRUCTURING
Common Stock Authorization
|
➤
|
General Recommendation: 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 that include, at a minimum, the following:
|
➤
|
Past Board Performance:
|
|
➤
|
The company's use of authorized shares during the last three years
|
|
➤
|
Disclosure in the proxy statement of the specific purposes of the proposed increase;
|
|
➤
|
Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request; and
|
|
➤
|
The dilutive impact of the request as determined relative to 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.
|
ISS will apply
the relevant allowable increase below to requests to increase common stock that are for general corporate purposes (or to the general corporate purposes portion of a request that also includes a specific need):
|
A.
|
Most companies: 100 percent of existing authorized shares.
|
|
B.
|
Companies with less than 50 percent of existing authorized shares either outstanding or reserved for issuance: 50 percent of existing authorized shares.
|
|
C.
|
Companies with one- and three-year total shareholder returns (TSRs) in the bottom 10 percent of the U.S. market as of the end of the calendar quarter that is closest to their most recent fiscal year end: 50 percent of existing authorized shares.
|
|
D.
|
Companies at which both conditions (B and C) above are both present: 25 percent of existing authorized shares.
|
If there is an
acquisition, private placement, or similar transaction on the ballot (not including equity incentive plans) that ISS is recommending FOR, the allowable increase will be the greater of (i) twice the amount needed to
support the transactions on the ballot, and (ii) the allowable increase as calculated above.
U.S. Concise Proxy Voting Guidelines
Share Repurchase Programs
|
➤
|
General Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute
open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns
regarding:
|
|
➤
|
Greenmail,
|
|
➤
|
The use of buybacks to inappropriately manipulate incentive compensation metrics,
|
|
➤
|
Threats to the company's long-term viability, or
|
|
➤
|
Other company-specific factors as warranted.
|
Vote
case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from
insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
|
➤
|
General Recommendation: Generally vote against shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will
be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks.
|
|
➤
|
Financial issues – company’s financial situation; degree of need of capital; use of proceeds; effect of the financing on the company’s cost of capital;
|
|
➤
|
Management efforts to pursue other alternatives;
|
|
➤
|
Control issues – change in management; change in control, guaranteed board and committee seats; standstill provisions; voting agreements; veto power over certain corporate actions; and
|
|
➤
|
Conflict of interest – arm’s length transaction, managerial incentives.
|
Vote for the debt
restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
Mergers and Acquisitions
|
➤
|
General Recommendation: 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:
|
|
➤
|
Valuation - Is the value to be received by the target 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.
|
|
➤
|
Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.
|
|
➤
|
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.
|
|
➤
|
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.
|
U.S. Concise Proxy Voting Guidelines
|
➤
|
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.
|
|
➤
|
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 is reasonable and 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)
|
➤
|
General Recommendation: 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 (Say-on-Pay or “SOP”) if:
|
|
➤
|
There is an unmitigated misalignment between CEO pay and company performance (pay for performance);
|
|
➤
|
The company maintains significant problematic pay practices;
|
|
➤
|
The board exhibits a significant level of poor communication and responsiveness to shareholders.
|
U.S. Concise Proxy Voting Guidelines
Vote against or
withhold from the members of the Compensation Committee and potentially the full board if:
|
➤
|
There is no SOP on the ballot, and an against vote on an SOP would otherwise be 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;
|
|
➤
|
The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast;
|
|
➤
|
The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or
|
|
➤
|
The situation is egregious.
|
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 S&P1500, Russell 3000, or Russell 3000E
Indices8, this analysis considers the following:
|
1.
|
Peer Group9 Alignment:
|
|
➤
|
The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period.
|
|
➤
|
The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year period.
|
|
➤
|
The multiple of the CEO's total pay relative to the peer group median in the most recent fiscal year.
|
|
2.
|
Absolute Alignment10– 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 companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our
analysis may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder
interests:
|
➤
|
The ratio of performance- to time-based incentive awards;
|
|
➤
|
The overall ratio of performance-based compensation to fixed or discretionary pay;
|
|
➤
|
The rigor of performance goals;
|
|
➤
|
The complexity and risks around pay program design;
|
|
➤
|
The transparency and clarity of disclosure;
|
|
➤
|
The company's peer group benchmarking practices;
|
|
➤
|
Financial/operational results, both absolute and relative to peers;
|
|
➤
|
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards);
|
|
8
|
The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.
|
|
9
|
The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company's selected peers' GICS industry
group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of the
company's. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
|
|
10
|
Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
|
U.S. Concise Proxy Voting Guidelines
|
➤
|
Realizable pay11 compared to grant pay; and
|
|
➤
|
Any other factors deemed relevant.
|
|
➤
|
Any other factors deemed relevant.
|
Problematic Pay Practices
The focus is on
executive compensation practices that contravene the global pay principles, including:
|
➤
|
Problematic practices related to non-performance-based compensation elements;
|
|
➤
|
Incentives that may motivate excessive risk-taking or present a windfall risk; and
|
|
➤
|
Pay decisions that circumvent pay-for-performance, such as options backdating or waiving performance requirements.
|
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' U.S.
Compensation Policies 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:
|
➤
|
Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
|
|
➤
|
Extraordinary perquisites or tax gross-ups;
|
|
➤
|
New or materially amended agreements that provide for:
|
|
➤
|
Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent bonus);
|
|
➤
|
CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers) or in connection with a problematic Good Reason definition;
|
|
➤
|
CIC excise tax gross-up entitlements (including "modified" gross-ups);
|
|
➤
|
Multi-year guaranteed awards that are not at risk due to rigorous performance conditions;
|
|
➤
|
Liberal CIC definition combined with any single-trigger CIC benefits;
|
|
➤
|
Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible;
|
|
➤
|
Any other provision or practice deemed to be egregious and present a significant risk to investors.
|
Compensation Committee
Communications and Responsiveness
Consider the
following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
|
➤
|
Failure to respond to majority-supported shareholder proposals on executive pay topics; or
|
|
➤
|
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:
|
|
➤
|
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated);
|
|
➤
|
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
|
|
➤
|
Disclosure of specific and meaningful actions taken to address shareholders’ concerns;
|
|
➤
|
Other recent compensation actions taken by the company;
|
|
11
|
ISS research reports include realizable pay for S&P1500 companies.
|
U.S. Concise Proxy Voting Guidelines
|
➤
|
Whether the issues raised are recurring or isolated;
|
|
➤
|
The company's ownership structure; and
|
|
➤
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Equity-Based and Other Incentive
Plans
Please refer to
ISS' U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
|
➤
|
General Recommendation: Vote case-by-case on certain equity-based compensation plans12 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance
negative factors, and vice versa, as evaluated using an "Equity Plan Scorecard" (EPSC) approach with three pillars:
|
|
➤
|
Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (SVT) in relation to
peers and considering both:
|
|
➤
|
SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and
|
|
➤
|
SVT based only on new shares requested plus shares remaining for future grants.
|
|
➤
|
Quality of disclosure around vesting upon a change in control (CIC);
|
|
➤
|
Discretionary vesting authority;
|
|
➤
|
Liberal share recycling on various award types;
|
|
➤
|
Lack of minimum vesting period for grants made under the plan;
|
|
➤
|
Dividends payable prior to award vesting.
|
|
➤
|
The company’s three-year burn rate relative to its industry/market cap peers;
|
|
➤
|
Vesting requirements in CEO's recent equity grants (3-year look-back);
|
|
➤
|
The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years);
|
|
➤
|
The proportion of the CEO's most recent equity grants/awards subject to performance conditions;
|
|
➤
|
Whether the company maintains a sufficient claw-back policy;
|
|
➤
|
Whether the company maintains sufficient post-exercise/vesting share-holding requirements.
|
Generally vote
against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders' interests, or if any of the following egregious factors ("overriding factors") apply:
|
➤
|
Awards may vest in connection with a liberal change-of-control definition;
|
|
➤
|
The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it—for NYSE and Nasdaq listed companies—or by not prohibiting it when the company has a history of repricing—for non-listed companies);
|
|
➤
|
The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances;
|
|
➤
|
The plan is excessively dilutive to shareholders' holdings;
|
|
➤
|
The plan contains an evergreen (automatic share replenishment) feature; or
|
|
➤
|
Any other plan features are determined to have a significant negative impact on shareholder interests.
|
|
21
|
Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees
and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case.
|
U.S. Concise Proxy Voting Guidelines
SOCIAL AND ENVIRONMENTAL ISSUES
Global Approach
Issues covered
under the policy include a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a
variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
|
➤
|
General Recommendation: Generally vote case-by-case, examining primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors will be
considered:
|
|
➤
|
If the issues presented in the proposal are more appropriately or effectively dealt with through legislation or government regulation;
|
|
➤
|
If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
|
|
➤
|
Whether the proposal's request is unduly burdensome (scope or timeframe) or overly prescriptive;
|
|
➤
|
The company's approach compared with any industry standard practices for addressing the issue(s) raised by the proposal;
|
|
➤
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company's environmental or social practices;
|
|
➤
|
If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources;
and
|
|
➤
|
If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage.
|
Climate Change/Greenhouse Gas (GHG) Emissions
|
➤
|
General Recommendation: Generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its
operations and investments or on how the company identifies, measures, and manages such risks, considering:
|
|
➤
|
Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks
and/or opportunities;
|
|
➤
|
The company’s level of disclosure compared to industry peers; and
|
|
➤
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate change-related performance.
|
Generally vote
for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:
|
➤
|
The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or
opportunities;
|
|
➤
|
The company's level of disclosure is comparable to that of industry peers; and
|
|
➤
|
There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions.
|
Vote case-by-case
on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
|
➤
|
Whether the company provides disclosure of year-over-year GHG emissions performance data;
|
|
➤
|
Whether company disclosure lags behind industry peers;
|
U.S. Concise Proxy Voting Guidelines
|
➤
|
The company's actual GHG emissions performance;
|
|
➤
|
The company's current GHG emission policies, oversight mechanisms, and related initiatives; and
|
|
➤
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.
|
Board Diversity
|
➤
|
General Recommendation: Generally vote for requests for reports on a company's efforts to diversify the board, unless:
|
|
➤
|
The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and
|
|
➤
|
The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.
|
Vote case-by-case
on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
|
➤
|
The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
|
|
➤
|
The level of gender and racial minority representation that exists at the company’s industry peers;
|
|
➤
|
The company’s established process for addressing gender and racial minority board representation;
|
|
➤
|
Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
|
|
➤
|
The independence of the company’s nominating committee;
|
|
➤
|
Whether the company uses an outside search firm to identify potential director nominees; and
|
|
➤
|
Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.
|
Gender, Race, or Ethnicity Pay Gap
|
➤
|
General Recommendation: Generally vote case-by-case on requests for reports on a company's pay data by gender, race, or ethnicity, or a report on a company’s policies and goals to reduce any
gender, race, or ethnicity pay gap, taking into account:
|
|
➤
|
The company's current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices;
|
|
➤
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race, or ethnicity pay gap issues; and
|
|
➤
|
Whether the company's reporting regarding gender, race, or ethnicity pay gap policies or initiatives is lagging its peers.
|
Sustainability Reporting
|
➤
|
General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental
sustainability, unless:
|
|
➤
|
The company already discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report;
or
|
|
➤
|
The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame.
|
U.S. Concise Proxy Voting Guidelines
Lobbying
|
➤
|
General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures,
considering:
|
|
➤
|
The company’s current disclosure of relevant lobbying policies, and management and board oversight;
|
|
➤
|
The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and
|
|
➤
|
Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities.
|
Political Contributions
|
➤
|
General Recommendation: Generally vote for proposals requesting greater disclosure of a company's political contributions and trade association spending policies and activities, considering:
|
|
➤
|
The company's policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes;
|
|
➤
|
The company's disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and
|
|
➤
|
Recent significant controversies, fines, or litigation related to the company's political contributions or political activities.
|
Vote against
proposals barring a 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 to publish in newspapers and other media a company's political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
U.S. Concise Proxy Voting Guidelines
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services, events, and editorial content for institutional investors, globally. ISS’ solutions include objective governance research and recommendations; responsible investment data, analytics, and research;
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subsidiaries, or, in some cases third party suppliers.
The
Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a
solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any
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© 2019 | Institutional
Shareholder Services and/or its affiliates
First
Trust Exchange-Traded Fund III
Part C – Other Information
Exhibit No. Description
|
|
(a)
|
(1) Amended and Restated Declaration of Trust. (8)
|
(2) Amended
and Restated Establishment and Designation of Series. (13)
|
|
(b)
|
By-Laws of the Registrant. (1)
|
|
|
(d)
|
(1) Investment Management Agreement by and between First Trust Advisors L.P. and Registrant. (5)
|
(2) Amended
Schedule A to Investment Management Agreement. (14)
(3) Investment
Sub-Advisory Agreement by and between First Trust Advisors L.P., Horizon Investments, LLC and Registrant. (14)
|
|
(e)
|
(1) Distribution Agreement. (1)
|
(2) Exhibit
A to Distribution Agreement. (14)
|
|
(g)
|
(1) Custodian Agreement between the Registrant and Brown Brothers Harriman & Co. (1)
|
(2) Schedule
A to the Custodian Agreement between the Registrant and Brown Brothers Harriman & Co. (14)
|
|
(h)
|
(1) Administrative Agency Agreement between the Registrant and Brown Brothers Harriman & Co.
(1)
|
(2) Appendix
A to Administrative Agency Agreement between the Registrant and Brown Brothers Harriman & Co. (14)
(3) Form of
Participant Agreement. (7)
(4) Form of
Subscription Agreement. (1)
|
|
(i)
|
(1) Opinion and Consent of
Morgan, Lewis & Bockius LLP. (14)
|
(2) Opinion and
Consent of Chapman and Cutler LLP. (14)
|
|
(m)
|
(1) 12b-1 Service Plan. (1)
|
(2) Exhibit
A to 12b-1 Service Plan. (14)
|
|
(p)
|
(1) First Trust Advisors L.P., First Trust Portfolios L.P. Code of Ethics, amended on July 1, 2013.
(3)
|
(2) First Trust
Funds Code of Ethics, amended on October 30, 2013. (3)
|
|
(q)
|
Powers of Attorney for Messrs. Bowen, Erickson, Kadlec, Keith and Nielson authorizing James
A. Bowen, W. Scott Jardine, James M. Dykas, Kristi A. Maher and Eric F. Fess to execute the Registration Statement. (4)
|
__________________
|
|
(1)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on January 31, 2013.
|
|
|
(2)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on October 10, 2014.
|
|
|
(3)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on February 20, 2015.
|
|
|
(4)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on January 7, 2016.
|
|
|
(5)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on April 14, 2016.
|
|
|
(6)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on August 22, 2016.
|
|
|
(7)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on February 28, 2017.
|
|
|
(8)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on June 16, 2017.
|
|
|
(9)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on October 26, 2017.
|
|
|
(10)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on November 1, 2018.
|
|
|
(11)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on November 28, 2018.
|
|
|
(12)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on November 27, 2019.
|
|
|
(13)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-176976) filed on January 31, 2020.
|
|
|
(14)
|
To be filed by Amendment.
|
|
|
Item 29.
|
Persons Controlled by or under Common Control with Registrant
|
Not applicable.
Section 5.3
of the Registrant’s Declaration of Trust provides as follows:
Section 5.3.
Mandatory Indemnification. (a) Subject to the exceptions and limitations contained in paragraph (b) below:
(i) every person who is
or has been a Trustee or officer of the Trust (hereinafter referred to as a “Covered Person”) shall be indemnified
by the Trust against all liability and against all expenses reasonably incurred or paid by him or her in connection with any claim,
action, suit or proceeding in which that individual becomes involved as a party or otherwise by virtue of being or having been
a Trustee or officer and against amounts paid or incurred by that individual in the settlement thereof;
(ii) the words “claim,”
“action,” “suit” or “proceeding” shall apply to all claims, actions, suits or proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and the words “liability” and “expenses”
shall include, without limitation, attorneys’ fees, costs, judgments, amounts paid in settlement or compromise, fines, penalties
and other liabilities.
(b) No indemnification shall
be provided hereunder to a Covered Person:
(i) against any liability
to the Trust or the Shareholders by reason of a final adjudication by the court or other body before which the proceeding was brought
that the Covered Person engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved
in the conduct of that individual’s office;
(ii) with respect to any
matter as to which the Covered Person shall have been finally adjudicated not to have acted in good faith in the reasonable belief
that that individual’s action was in the best interest of the Trust; or
(iii) in the event of a
settlement involving a payment by a Trustee or officer or other disposition not involving a final adjudication as provided in paragraph (b)(i)
or (b)(ii) above resulting in a payment by a Covered Person, unless there has been either a determination that such Covered
Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct
of that individual’s office by the court or other body approving the settlement or other disposition or by a reasonable determination,
based upon a review of readily available facts (as opposed to a full trial-type inquiry) that that individual did not engage in
such conduct:
(A) by vote of a majority
of the Disinterested Trustees (as defined below) acting on the matter (provided that a majority of the Disinterested Trustees then
in office act on the matter); or
(B) by written opinion of
(i) the then-current legal counsel to the Trustees who are not Interested Persons of the Trust or (ii) other legal counsel
chosen by a majority of the Disinterested Trustees (or if there are no Disinterested Trustees with respect to the matter in question,
by a majority of the Trustees who are not Interested Persons of the Trust) and determined by them in their reasonable judgment
to be independent.
(c) 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 a Covered Person
and shall inure to the benefit of the heirs, executors and administrators of such person. Nothing contained herein shall limit
the Trust from entering into other insurance arrangements or affect any rights to indemnification to which Trust personnel, including
Covered Persons, may be entitled by contract or otherwise under law.
(d) Expenses of preparation and
presentation of a defense to any claim, action, suit, or proceeding of the character described in paragraph (a) of this Section 5.3
shall be advanced by the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf of the Covered
Person to repay such amount if it is ultimately determined that the Covered Person is not entitled to indemnification under this
Section 5.3, provided that either:
(i) such undertaking is
secured by a surety bond or some other appropriate security or the Trust shall be insured against losses arising out of any such
advances; or
(ii) a majority of the
Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter)
or legal counsel meeting the requirement in Section 5.3(b)(iii)(B) above in a written opinion, shall determine, based upon
a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
As used in this
Section 5.3 a “Disinterested Trustee” is one (i) who is not an “Interested Person” of the Trust
(including anyone who has been exempted from being an “Interested Person” by any rule, regulation or order of the Commission),
and (ii) against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the
same or similar grounds is then or had been pending.
(e) With respect to any such
determination or opinion referred to in clause (b)(iii) above or clause (d)(ii) above, a rebuttable presumption shall
be afforded that the Covered Person has not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such Covered Person’s office in accordance with pronouncements of the Commission.
|
|
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 sub-adviser to various other open-end and
closed-end management investment companies and is the portfolio supervisor of certain unit investment trusts. 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”). The principal address for all these investment
companies, First Trust, FTP and the persons below is 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
A description of
any business, profession, vocation or employment of a substantial nature in which the officers of First Trust who serve as officers
or trustees of the Registrant have engaged during the last two years for his or her account or in the capacity of director, officer,
employee, partner or trustee appears under “Management of the Fund” in the Statement of Additional Information. Such
information for the remaining senior officers of First Trust appears below:
|
Name and Position with First Trust
|
Employment During Past Two Years
|
|
Andrew S. Roggensack, President
|
Managing Director and President, First Trust
|
|
R. Scott Hall, Managing Director
|
Managing Director, First Trust
|
|
Ronald D. McAlister, Managing Director
|
Managing Director, First Trust
|
|
David G. McGarel, Chief Investment Officer, Chief Operating Officer and Managing Director
|
Managing Director; Senior Vice President, First Trust
|
|
Kathleen Brown, Chief Compliance Officer and Senior Vice President
|
Chief Compliance Officer and Senior Vice President, First Trust
|
|
Brian Wesbury, Chief Economist and Senior Vice President
|
Chief Economist and Senior Vice President, First Trust
|
|
|
Item 32.
|
Principal Underwriter
|
(a) FTP serves as principal underwriter
of the shares of the Registrant, First Trust Exchange-Traded Fund, First Trust Exchange-Traded Fund II, First Trust Exchange-Traded
Fund IV, First Trust Exchange-Traded Fund V, First Trust Exchange Traded Fund VI, First Trust Exchange-Traded Fund VII, First Trust
Exchange-Traded Fund VIII, First Trust Exchange-Traded AlphaDEX® Fund, First Trust Exchange-Traded AlphaDEX®
Fund II, First Trust Variable Insurance Trust and First Trust Series
Fund. 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.
(b) Positions and Offices
with Underwriter.
Name and Principal
Business Address*
|
Positions and Offices
with Underwriter
|
Positions and
Offices with Fund
|
|
The Charger Corporation
|
General Partner
|
None
|
|
Grace Partners of DuPage L.P.
|
Limited Partner
|
None
|
|
James A. Bowen
|
Chief Executive Officer and Managing Director
|
Trustee and Chairman of the Board
|
|
James M. Dykas
|
Chief Financial Officer
|
President and Chief Executive Officer
|
|
Frank L. Fichera
|
Managing Director
|
None
|
|
R. Scott Hall
|
Managing Director
|
None
|
|
W. Scott Jardine
|
General Counsel, Secretary and Managing Director
|
Secretary
|
|
Daniel J. Lindquist
|
Managing Director
|
Vice President
|
|
Ronald D. McAlister
|
Managing Director
|
None
|
|
David G. McGarel
|
Chief Investment Officer, Chief Operating Officer and Managing Director
|
None
|
|
Richard A. Olson
|
Managing Director
|
None
|
|
Marisa Bowen
|
Managing Director
|
None
|
|
Andrew S. Roggensack
|
President and Managing Director
|
None
|
|
Kristi A. Maher
|
Deputy General Counsel
|
Chief Compliance Officer and Assistant Secretary
|
|
* All addresses are 120 East Liberty Drive, Wheaton, Illinois
60187.
|
|
|
(c) Not Applicable.
|
|
Item 33.
|
Location of Accounts and Records
|
First Trust,
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, maintains the Registrant’s organizational documents, minutes
of meetings, contracts of the Registrant and all advisory material of the investment adviser.
Brown Brothers
Harriman & Co., 50 Post Office Square, Boston, Massachusetts 02110 (“BBH”) maintains all general and subsidiary
ledgers, journals, trial balances, records of all portfolio purchases and sales, and all other requirement records not maintained
by First Trust.
BBH also maintains
all the required records in its capacity as transfer, accounting, dividend payment and interest holder service agent for the Registrant.
|
|
Item 34.
|
Management Services
|
Not Applicable
Not Applicable
Signatures
Pursuant to the requirements
of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements
for effectiveness of this Registration Statement under Rule 485(b) under the Securities Act of 1933 and 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
9th day of March, 2020.
|
|
First Trust
Exchange-Traded Fund III
|
|
|
By:
|
/s/ James M. Dykas
|
|
|
|
James M. Dykas, 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/ James M. Dykas
|
President and Chief Executive
Officer
|
March 9, 2020
|
|
James M. Dykas
|
|
|
|
|
/s/ Donald P. Swade
|
Treasurer, Chief Financial Officer
and Chief Accounting Officer
|
March 9, 2020
|
|
Donald P. Swade
|
|
|
|
|
James A. Bowen*
|
)
Trustee )
|
|
|
|
|
)
|
|
|
|
Richard E. Erickson*
|
)
Trustee )
|
|
|
|
|
)
|
|
|
|
Thomas R. Kadlec*
|
)
Trustee )
|
|
|
|
|
)
|
By:
|
/s/ W. Scott Jardine
|
|
Robert F. Keith*
|
)
Trustee )
|
|
W. Scott Jardine
Attorney-In-Fact
|
|
|
)
|
|
March 9, 2020
|
|
Niel B. Nielson *
|
)
Trustee )
|
|
|
|
|
)
|
|
|
|
|
*
|
Original powers of attorney authorizing James A. Bowen, W. Scott Jardine,
James M. Dykas, 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.
|
Index to Exhibits
