As filed with the Securities and Exchange Commission on March 12, 2013
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1933 Act File No. 333-
1940 Act File No. 811-21549
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __
[ ] Post-Effective Amendment No. __
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 28
First Trust Energy Income and Growth Fund
Exact Name of Registrant as Specified in Declaration of Trust
187 Danbury Road, Wilton, Connecticut 06897
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(630) 765-8000
Registrant's Telephone Number, including Area Code
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Eric F. Fess, Esq.
Chapman and Cutler LLP
111 West Monroe Street
Chicago, Illinois 60603
Approximate Date of Proposed Public Offering: From time to time after the
effective date of this Registration Statement
If any of the securities being registered on this form are offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. [X]
It is proposed that this filing will become effective (check appropriate box)
[ ] when declared effective pursuant to section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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------------------------ ---------------------- --------------------- ---------------------- ---------------------
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Offering Amount of
Being Registered Registered Per Unit(1) Price(1) Registration Fee(2)
------------------------ ---------------------- --------------------- ---------------------- ---------------------
Common Shares,
$0.01 par value 6,615,930 shares $34.94 $231,160,595 $31,531
------------------------ ---------------------- --------------------- ---------------------- ---------------------
(1) Estimated pursuant to Rule 457(c) of the Securities Act of 1933, as amended,
solely for the purpose of determining the registration fee, based upon the
average of high and low prices reported on March 5, 2013, as reported on the
NYSE MKT.
(2) Transmitted prior to filing. A registration fee amount of $11,676, which
represents that portion of the registration fee attributable to the unsold
securities under the Registrant's Registration Statement on Form N-2 (File No.
333-179878) filed March 2, 2012, is being applied to offset against the
registration fee currently due pursuant to Rule 415(a)(6) and Rule 457(p) under
the Securities Act.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
dates as the Commission, acting pursuant to said Section 8(a), may determine.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION DATED MARCH 12, 2013
BASE PROSPECTUS
FIRST TRUST ENERGY INCOME AND GROWTH FUND
UP TO 6,615,930 COMMON SHARES
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The Fund. First Trust Energy Income and Growth Fund (the "Fund") is a
non-diversified, closed-end management investment company which commenced
operations in June 2004.
Investment Objective. The Fund's investment objective is to seek a high level
of after-tax total return with an emphasis on current distributions paid to
shareholders.
Investment Strategy. The Fund seeks to provide its common shareholders with
an efficient vehicle to invest in a portfolio of cash-generating securities of
energy companies. The Fund focuses on investing in publicly traded master
limited partnerships ("MLPs") and related public entities in the energy sector,
which the Fund's Sub-Advisor (as defined below) believes offer opportunities for
income and growth. Under normal market conditions, the Fund invests at least 85%
of its Managed Assets (as defined below) (including assets obtained through
leverage) in securities of energy companies and energy sector MLPs and energy
sector MLP-related entities. As used in this prospectus, unless the context
requires otherwise, MLPs are those MLPs in the energy sector. To generate
additional income, the Fund writes (or sells) covered call options on the common
stock of energy companies held in the Fund's portfolio. See "The Fund's
Investments".
The Fund's currently outstanding common shares are, and the common shares
offered in this prospectus will be, subject to notice of issuance, listed on the
NYSE MKT (formerly the NYSE Amex) under the trading or "ticker" symbol "FEN."
The net asset value of the Fund's common shares on November 30, 2012 was $29.12
per common share, and the last sale price of the common shares on the NYSE MKT
on such date was $30.69.
The Fund may offer, on an immediate, continuous or delayed basis, up to
6,615,930 of the Fund's common shares in one or more offerings. The Fund may
offer its common shares in amounts, at prices and on terms set forth in a
prospectus supplement to this prospectus. You should read this prospectus and
the related prospectus supplement carefully before you decide to invest in any
of the common shares.
The Fund may offer the common shares directly to one or more purchasers,
through agents that the Fund or the purchasers designate from time to time, or
to or through underwriters or dealers. The prospectus supplement relating to the
particular offering will identify any agents or underwriters involved in the
sale of the common shares, and will set forth any applicable purchase price,
fee, commission or discount arrangement between the Fund and such agents or
underwriters or among the underwriters or the basis upon which such amount may
be calculated. For more information about the manner in which the Fund may offer
the common shares, see "Plan of Distribution." The common shares may not be sold
through agents, underwriters or dealers without delivery of a prospectus
supplement.
INVESTING IN COMMON SHARES INVOLVES CERTAIN RISKS. YOU COULD LOSE SOME OR ALL
OF YOUR INVESTMENT. SEE "RISKS" BEGINNING ON PAGE 40.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
(continued on the following page)
(continued from previous page)
Due to the nature of the Fund's MLP investments, under current law the Fund
is not eligible to elect to be treated as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), as
is common for most investment companies. Rather, the Fund has elected to be
treated as a regular corporation for federal income tax purposes and, as such,
unlike most investment companies, it will be subject to corporate income tax to
the extent the Fund recognizes taxable income.
Investment Advisor and Sub-Advisor. First Trust Advisors L.P. ("First Trust
Advisors" or the "Advisor") is the Fund's investment advisor, responsible for
supervising the Fund's Sub-Advisor, monitoring the Fund's investment portfolio,
managing the Fund's business affairs and providing certain clerical and
bookkeeping and other administrative services. The Advisor, in consultation with
the Sub-Advisor, is also responsible for determining the Fund's overall
investment strategy and overseeing its implementation. Energy Income Partners,
LLC ("Energy Income Partners" or the "Sub-Advisor") is the Fund's sub-advisor
and is primarily responsible for the day-to-day supervision and investment
strategy of the Fund.
First Trust Advisors serves as investment advisor or portfolio supervisor to
investment portfolios with approximately $62 billion in assets which it managed
or supervised as of November 30, 2012. Energy Income Partners serves as
investment advisor or portfolio supervisor to investment portfolios with
approximately $2.8 billion in assets, which it managed or supervised as of
November 30, 2012. See "Management of the Fund."
Use of Financial Leverage. The Fund is currently engaged in, and may in the
future engage in, the use of financial leverage to seek to enhance the level of
its current distributions to common shareholders. The Fund may use leverage
through the issuance of preferred shares ("Preferred Shares") and/or through the
issuance of commercial paper or notes and/or other borrowings ("Borrowings") by
the Fund. As of November 30, 2012, aggregate financial leverage through
Borrowings (collectively, "Financial Leverage") was approximately 26% of the
Fund's Managed Assets (as defined below) (including the proceeds of the
Financial Leverage). The term "Managed Assets" means the average daily gross
asset value of the Fund (which includes assets attributable to the Fund's
Preferred Shares, if any, and the principal amount of Borrowings), minus the sum
of the Fund's accrued and unpaid dividends on any outstanding Preferred Shares
and accrued liabilities (other than the principal amount of any Borrowings
incurred and the liquidation preference of any outstanding Preferred Shares).
The determination to use Financial Leverage is subject to the approval of the
Fund's Board of Trustees ("Board of Trustees").
You should read this prospectus and any prospectus supplement, which contains
important information about the Fund, before deciding whether to invest in the
common shares, and retain it for future reference. This prospectus, together
with any prospectus supplement, sets forth concisely the information about the
Fund that a prospective investor ought to know before investing. The Statement
of Additional Information (the "SAI"), dated , 2013, containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission and is incorporated by reference in its entirety into this
prospectus. You may request a free copy of the SAI, the table of contents of
which is on page 71 of this prospectus, annual and semi-annual reports to
shareholders, and other information about the Fund, and make shareholder
inquiries by calling (800) 988-5891, by writing to the Fund or from the Fund's
website (http://www.ftportfolios.com). Please note that the information
contained in the Fund's website, whether currently posted or posted in the
future, is not part of this prospectus or the documents incorporated by
reference in this prospectus. You also may obtain a copy of the SAI (and other
information regarding the Fund) from the Securities and Exchange Commission's
web site (http://www.sec.gov).
Shares of common stock of closed-end investment companies, like the Fund,
frequently trade at discounts to their net asset values. If the Fund's common
shares trade at a discount to net asset value, the risk of loss may increase for
purchasers in this offering, especially for those investors who expect to sell
their common shares in a relatively short period after purchasing shares in this
offering. See "Risks -- Market Discount From Net Asset Value." The Fund's common
shares do not represent a deposit or obligation of, and are not guaranteed or
endorsed by, any bank or other insured depository institution, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.
Prospectus dated , 2013
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, any accompanying prospectus supplement and the SAI,
including documents incorporated by reference, contain "forward-looking
statements." Forward-looking statements can be identified by the words "may,"
"will," "intend," "expect," "estimate," "continue," "plan," "anticipate," and
similar terms and the negative of such terms. By their nature, all
forward-looking statements involve risks and uncertainties, and actual results
could differ materially from those contemplated by the forward-looking
statements. Several factors that could materially affect the Fund's actual
results are the performance of the portfolio of securities held by the Fund, the
conditions in the U.S. and international financial, petroleum and other markets,
the price at which the Fund's common shares will trade in the public markets and
other factors discussed in the Fund's periodic filings with the Securities and
Exchange Commission (the "SEC").
Although we believe that the expectations expressed in these forward-looking
statements are reasonable, actual results could differ materially from those
projected or assumed in these forward-looking statements. The Fund's future
financial condition and results of operations, as well as any forward-looking
statements, are subject to change and are subject to inherent risks and
uncertainties, such as those disclosed in the "Risks" section of this
prospectus. All forward-looking statements contained or incorporated by
reference in this prospectus or any accompanying prospectus supplement are made
as of the date of this prospectus or the accompanying prospectus supplement, as
the case may be. We do not intend, and we undertake no obligation, to update any
forward-looking statement. The forward-looking statements contained in this
prospectus and any accompanying prospectus supplement are excluded from the safe
harbor protection provided by Section 27A of the Securities Act of 1933, as
amended (the "1933 Act").
Currently known risk factors that could cause actual results to differ
materially from the Fund's expectations include, but are not limited to, the
factors described in the "Risks" section of this prospectus. We urge you to
review carefully that section for a more detailed discussion of the risks of an
investment in the Fund's securities.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the Fund's common shares. You should carefully read the
entire prospectus, any related prospectus supplement and the SAI, including the
documents incorporated by reference, particularly the section entitled "Risks"
beginning on page 40.
THE FUND ............. First Trust Energy Income and Growth Fund is a
non-diversified, closed-end management investment
company which commenced operations in June 2004. In
March 2012, the Board of Trustees of the Fund approved a
name change for the Fund from "Energy Income and Growth
Fund" to "First Trust Energy Income and Growth Fund."
The Fund's investment objective is to seek a high level
of after-tax total return with an emphasis on current
distributions paid to common shareholders. The Fund
seeks to provide its common shareholders with an
efficient vehicle to invest in a portfolio of
cash-generating securities of energy companies. The Fund
completed its initial public offering of common shares
in June 2004, raising approximately $122 million in
equity after the payment of offering expenses. As of
November 30, 2012, the Fund had 16,534,978 common shares
outstanding and net assets applicable to common shares
of $481,549,354. The common shares of beneficial
interest offered by this prospectus are called "Common
Shares" and the holders of Common Shares are called
"Common Shareholders" in this prospectus. As used in
this prospectus, unless the context requires otherwise,
"common shares" refers to the Fund's common shares of
beneficial interest currently outstanding as well as
those Common Shares offered by this prospectus and the
holders of common shares are called "common
shareholders."
INVESTMENT ADVISOR
AND SUB-ADVISOR....... First Trust Advisors L.P. ("First Trust Advisors" or
the "Advisor") is the Fund's investment advisor,
responsible for supervising the Fund's Sub-Advisor (as
defined below), monitoring the Fund's investment
portfolio, managing the Fund's business affairs and
providing certain clerical and bookkeeping and other
administrative services. The Advisor, in consultation
with the Sub-Advisor, is also responsible for
determining the Fund's overall investment strategy and
overseeing its implementation. Energy Income Partners,
LLC ("Energy Income Partners" or the "Sub-Advisor") is
the Fund's sub-advisor and is primarily responsible for
the day-to-day supervision and investment strategy of
the Fund.
First Trust Advisors, a registered investment advisor,
is an Illinois limited partnership formed in 1991. First
Trust Advisors serves as investment advisor or portfolio
supervisor to investment portfolios with approximately
$62 billion in assets which it managed or supervised as
of November 30, 2012.
Energy Income Partners is a limited liability company
and a registered investment advisor, which provides
professional asset management services in the area of
energy-related MLPs, and other high-payout securities.
Founded in 2003, Energy Income Partners serves as
investment advisor to investment portfolios with
approximately $2.8 billion of assets which it managed as
of November 30, 2012.
THE OFFERING ......... The Fund may offer, on an immediate, continuous or
delayed basis, up to 6,615,930 Common Shares on terms to
be determined at the time of the offering. The Common
Shares will be offered at prices and on terms to be set
forth in one or more prospectus supplements to this
prospectus. Offerings of the Common Shares will be
subject to the provisions of the Investment Company Act
of 1940, as amended (the "1940 Act") which generally
require that the public offering price of common shares
of a closed-end investment company (exclusive of
distribution commissions and discounts) must equal or
exceed the net asset value per share of a company's
common stock (calculated within 48 hours of pricing),
absent shareholder approval or under certain other
circumstances. The Fund has received shareholder
approval to engage in offerings at a price less than net
asset value under certain conditions. See "Description
of Shares."
The Fund may offer the Common Shares directly to one or
more purchasers, through agents that the Fund or the
purchasers designate from time to time, or to or through
underwriters or dealers. The prospectus supplement
relating to the offering will identify any agents or
underwriters involved in the sale of the Common Shares,
and will set forth any applicable purchase price, fee,
commission or discount arrangement between us and such
agents or underwriters or among underwriters or the
basis upon which such amount may be calculated. See
"Plan of Distribution." The Common Shares may not be
sold through agents, underwriters or dealers without
delivery of a prospectus supplement describing the
method and terms of the offering of the Common Shares.
USE OF PROCEEDS ...... Unless otherwise specified in a prospectus supplement,
the Fund will use the net proceeds from the sale of the
Common Shares primarily to invest in accordance with its
investment objective and policies, or use such proceeds
for other general corporate purposes.
DISTRIBUTIONS ........ The Fund's distributions generally consist of (i) cash
and paid-in-kind distributions from MLPs or their
affiliates, dividends from common stocks, interest from
debt instruments and income from other investments held
by the Fund less (ii) current or accrued operating
expenses of the Fund, including taxes on Fund taxable
income and leverage costs. Due to the tax treatment
under current law of cash distributions made by MLPs in
which the Fund invests, a portion of the distributions
the Fund anticipates making to common shareholders may
consist of tax-deferred return of capital. To the extent
that distributions exceed the Fund's earnings and
profits, distributions are generally not treated as
taxable income for the investor. Instead, the common
shareholders will experience a reduction in the basis of
their shares, which may increase the capital gain or
reduce capital loss, realized upon the sale of such
shares. Section 19(a) of the 1940 Act and Rule 19a-1
thereunder requires the Fund to provide a written
statement accompanying payment of a distribution from
any source other than income that adequately discloses
the source or sources of payment. Thus, if the Fund's
capital was the source of a distribution and the payment
amounted to a return of capital, the Fund would be
required to provide a written notice to that effect. A
"return of capital" represents a return on a
shareholders original investment in the Fund's common
shares, and should not be confused with a dividend from
earnings and profits. Upon the sale of common shares,
common shareholders generally will recognize capital
gain or loss measured by the difference between the sale
proceeds received by the common shareholder and the
shareholder's federal income tax basis in common shares
sold, as adjusted to reflect return of capital.
Accordingly, common shareholders should carefully review
any written disclosure accompanying a distribution and
should not assume that the source of payment is the
Fund's income. The Fund intends to make quarterly
distributions to common shareholders. There is no
assurance that the Fund will continue to make regular
distributions. See "Tax Considerations" in this Summary
and "Tax Matters."
Unless a shareholder elects to receive distributions in
cash, distributions will be used to purchase additional
common shares of the Fund. See "Dividend Reinvestment
Plan."
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INVESTMENT OBJECTIVE
AND POLICIES.......... The Fund's investment objective is to seek a high level
of after-tax total return with an emphasis on current
distributions paid to common shareholders. For purposes
of the Fund's investment objective, total return
includes capital appreciation of, and all distributions
received from, securities in which the Fund invests
regardless of the tax character of the distributions.
The Fund seeks to provide its common shareholders with
an efficient vehicle to invest in a portfolio of
cash-generating securities of energy companies. The Fund
focuses on investing in MLPs and related public entities
in the energy sector which the Sub-Advisor believes
offer opportunities for income and growth. As used in
this prospectus, unless the context requires otherwise,
MLPs are those MLPs in the energy sector. There can be
no assurance that the Fund's investment objective will
be achieved. The types of MLPs in which the Fund invests
historically have made cash distributions to limited
partners or members that exceed the amount of taxable
income allocable to limited partners or members, due to
a variety of factors, including significant non cash
deductions, such as depreciation and depletion. If cash
distributions from an MLP exceeds the taxable income
reported in a particular tax year, a portion of the
excess tax distribution would not be treated as income
to the Fund in that tax year but would rather be treated
as a return of capital for federal income tax purposes
to the extent of the Fund's basis in its MLP units. The
Fund's tax basis in an MLP is the amount paid for the
interest, increased by the Fund's allocable share of net
income and gains and the MLP's debt, if any, and capital
contributions to the MLP, and decreased for any
distributions received by the Fund, by reductions in the
Fund's allocable share of the MLP's debt, if any, and by
the Fund's allocable share of net losses. Thus, although
cash in excess of taxable income and net tax losses may
create a temporary economic benefit to the Fund, they
will increase the amount of gain (or decrease the amount
of loss) on the sale of an interest in an MLP. See "Tax
Considerations" in this Summary and "Tax Matters."
The Fund's investment objective and the investment
restrictions listed in the SAI are considered
fundamental and may not be changed without approval by
holders of a majority of the outstanding voting
securities of the Fund, as defined in the 1940 Act,
which includes common shares and Preferred Shares, if
any, voting together as a single class, and the holders
of the outstanding Preferred Shares, if any, voting as a
single class. The remainder of the Fund's investment
policies, including its investment strategy, are
considered non-fundamental and may be changed by the
Board of Trustees without shareholder approval. The Fund
will provide investors with at least 60 days prior
notice of any change in the Fund's investment strategy.
Unless otherwise stated, all investment restrictions
apply at the time of purchase and the Fund will not be
required to reduce a position due solely to market
fluctuations. There can be no assurance that the Fund's
investment objective will be achieved. See "The Fund's
Investments" and "Risks" in this prospectus and
"Investment Policies and Techniques" in the Fund's SAI.
Under normal market conditions, as a non-fundamental
policy, the Fund invests at least 85% of its Managed
Assets (including assets obtained through leverage) in
securities of energy companies and energy sector MLPs
and energy sector MLP-related entities, and invests at
least 65% of its Managed Assets in equity securities of
such MLPs and MLP-related entities.
-3-
The Fund has adopted the following additional
non-fundamental investment policies:
o The Fund may invest up to 35% of its Managed Assets
in unregistered or otherwise restricted securities
(including up to 10% of its Managed Assets in
securities issued by private companies). The types
of unregistered or otherwise restricted securities
that the Fund may purchase consist of MLP common
units, MLP subordinated units and securities of
public and private energy companies.
o The Fund may invest up to 25% of its Managed Assets
in debt securities of energy companies, MLPs and
MLP-related entities, including below investment
grade securities, which are commonly referred to as
"junk bonds." Below investment grade debt securities
will be rated at least "B3" by Moody's Investors
Service, Inc. ("Moody's") and at least "B-" by
Standard & Poor's Ratings Group ("S&P") at the time
of purchase, or comparably rated by another
nationally recognized statistical rating
organization ("NRSRO") or, if unrated, determined to
be of comparable quality by the Sub-Advisor.
o The Fund will not invest more than 10% of its
Managed Assets in any single issuer.
o The Fund will not engage in short sales, except to
the extent the Fund engages in derivative
investments to seek to hedge against interest rate
risk in connection with the Fund's use of Financial
Leverage or market risks associated with the Fund's
portfolio.
o The Fund may invest up to 15% of its Managed Assets
in non-U.S. securities as well as hedge the currency
risk of the non-U.S. securities using derivative
instruments.
To generate additional income, the Fund writes (or
sells) covered call options on the common stock of
energy companies held in the Fund's portfolio. The Fund
anticipates that it will be able to invest substantially
all of the net proceeds of any offering of Common Shares
pursuant to this prospectus and applicable prospectus
supplement in securities that meet the Fund's investment
objective and policies within one month after the
completion of any such offering.
THE FUND'S
INVESTMENTS .......... The Fund's investments consist of equity and/or debt
securities issued by energy companies and energy sector
MLPs and energy sector MLP-related entities. The Fund
concentrates its investments in the following group of
industries that are part of the energy sector:
transporting, processing, storing, distributing,
marketing, exploring, developing, managing and producing
natural gas, natural gas liquids ("NGLs") (including
propane), crude oil, refined petroleum products, coal
and electricity, and supplying products and services in
support of pipelines, power transmission, petroleum and
natural gas production, transportation and storage.
The types of MLP and MLP-related entity equity
securities the Fund purchases include common units,
subordinated units and I-Shares. Unlike the holders of
common stock of a corporation, investors in MLP common
units, including the Fund, have limited control and
voting rights on matters affecting the partnership.
Investors in MLP common units are generally entitled to
minimum quarterly distributions ("MQD") from the MLP,
including arrearage rights, which must be satisfied
before any distributions are paid to subordinated unit
holders or incentive payments are made to the MLP's
general partner. MLP common units are typically listed
and traded on a U.S. securities exchange. While the Fund
-4-
anticipates that it will generally purchase MLP common
units in open market transactions, the Fund has
purchased in the past, and may purchase in the future,
MLP common units through direct placements. MLP
subordinated units provide for distributions to be made
to holders once the MQD payable to common unit holders
have been satisfied but prior to incentive payments to
the MLP's general partner. MLP subordinated units do not
provide for arrearage rights and are typically
convertible into common units after a specified period
of time or upon the achievement of specified financial
goals. As MLP subordinated units are not typically
listed or publicly traded, the Fund anticipates that it
will purchase MLP subordinated units directly from MLP
affiliates or holders of such shares. I-Shares are
similar in most respects to common units except that
distributions payable on I-Shares are in the form of
additional I-Shares rather than cash distributions. As a
result, the Fund will consider its own distribution
targets and cash holdings when making a determination as
to whether to purchase I-Shares.
The Fund may also invest in equity and debt securities
of MLP-related entities, such as general partners or
other affiliates of MLPs and equity and debt securities
of energy companies that are organized and/or taxed as
corporations.
The Fund may invest up to 35% of its Managed Assets in
equity securities issued by energy companies. The Fund
intends to purchase these equity securities in market
transactions but may also purchase securities directly
from the issuers in private placements. To generate
additional income, the Fund sells covered call options
on the common stock of energy companies held in the
Fund's portfolio.
HEDGING AND STRATEGIC
TRANSACTIONS ......... The Fund may, but is not required to, use various
hedging and strategic transactions to seek to reduce
interest rate risks arising from any use of Financial
Leverage, to facilitate portfolio management and to
mitigate risks, including interest rate, currency and
credit risks. The Fund currently writes (or sells)
covered call options on the common stock of energy
companies held in the Fund's portfolio. Call options are
contracts representing the right to purchase a common
stock at a specified price (the "strike price") at a
specified future date (the "expiration date"). The price
of the option is determined from trading activity in the
broad options market, and generally reflects the
relationship between the current market price for the
underlying common stock and the strike price, as well as
the time remaining until the expiration date. The Fund
will write call options only if they are "covered." In
the case of a call option on a common stock or other
security, the option is "covered" if the Fund owns the
security underlying the call or has an absolute and
immediate right to acquire that security without
additional cash consideration (or, if additional cash
consideration is required, cash or other assets
determined to be liquid by the Sub-Advisor (in
accordance with procedures established by the Board of
Trustees) in such amount are segregated by the Fund's
custodian) upon conversion or exchange of other
securities held by the Fund.
The Fund may purchase and sell other derivative
investments such as total return and equity swaps,
exchange-listed and over-the-counter put and call
options on securities, energy-related commodities,
equity, fixed income and interest rate indices,
currencies, and other financial instruments, purchase
and sell financial futures contracts and options
thereon, and enter into various interest rate
transactions such as swaps, caps, floors or collars or
credit transactions and credit default swaps. The Fund
also may purchase derivative investments that combine
features of these instruments. Collectively, all of the
above are referred to as "Strategic Transactions." The
Fund generally seeks to use these instruments and
-5-
transactions as a portfolio management or hedging
technique to seek to protect against possible adverse
changes in the market value of securities held in or to
be purchased for the Fund's portfolio, protect the value
of the Fund's portfolio, facilitate the sale of certain
securities for investment purposes, manage the effective
interest rate and currency exposure of the Fund, or
establish positions in the derivatives markets as a
temporary substitute for purchasing or selling
particular securities. For purposes of determining the
Fund's compliance with the investment requirements
relating to MLP and MLP-related entities, the Fund
values Strategic Transactions based upon their
respective current fair market values. In prior fiscal
years, the Fund has entered into interest rate swaps.
During the fiscal year ended November 30, 2012, the Fund
wrote covered call options on the common stocks of
energy companies held in the Fund's portfolio. The Fund
expects to continue to utilize Strategic Transactions in
a manner similar to its activity during fiscal 2012. See
"The Fund's Investments -- Investment Practices."
USE OF FINANCIAL
LEVERAGE ............. The Fund is currently engaged in, and may in the future
engage in, the use of Financial Leverage to seek to
enhance the level of its current distributions to common
shareholders. On January 28, 2005, the Fund issued $34
million principal amount of auction rate senior notes
due March 2, 2045 (the "Series A Notes") and on March
26, 2006, issued $25 million principal amount of auction
rate senior notes due March 20, 2046 (the "Series B
Notes"), which were rated "Aaa" and "AAA" by Moody's and
Fitch Ratings Services, Inc. ("Fitch"), respectively. On
March 26, 2008, the Fund entered into a $55 million
senior revolving credit facility with The Bank of Nova
Scotia (the "Credit Facility"), of which $34 million was
utilized to redeem the issued and outstanding Series A
Notes. On January 23, 2009, the Fund entered into a
commitment facility agreement with BNP Paribas Prime
Brokerage Inc. (as amended from time to time, the
"Commitment Facility"), which was used to repay in full
outstanding borrowings under the Credit Facility and, on
February 26, 2009, to deposit funds to redeem the issued
and outstanding Series B Notes. All of the issued and
outstanding Series B Notes were redeemed on March 13,
2009. As of November 30, 2012, the maximum commitment
amount was $200,000,000. As of November 30, 2012, the
principal amount of Borrowings under the Commitment
Facility was $170,400,000, representing approximately
26% of the Fund's Managed Assets. As of November 30,
2012, the Fund had $29,600,000 of unutilized funds
available for Borrowing under the Commitment Facility.
The Fund's common shares are junior in liquidation and
distribution rights to amounts owed pursuant to the
Commitment Facility. The issuance of Preferred Shares
and/or Borrowings (each a "Leverage Instrument" and
collectively, the "Leverage Instruments"), represent the
leveraging of the Fund's common shares. The issuance of
additional Common Shares offered by this prospectus will
enable the Fund to increase the aggregate amount of its
leverage. The use of Financial Leverage creates an
opportunity for increased income and capital
appreciation for common shareholders, but at the same
time, it creates special risks that may adversely affect
common shareholders. Because both the Advisor's and
Sub-Advisor's fees are based on Managed Assets
(including assets obtained through leverage), both the
Advisor's and Sub-Advisor's fees are higher when the
Fund is leveraged. There can be no assurance that a
leveraging strategy will be successful during any period
in which it is used. Leverage creates a greater risk of
loss, as well as potential for more gain, for the common
shares than if leverage is not used. The determination
to use Financial Leverage is subject to the Board of
Trustees' approval and the ability of the Fund to obtain
-6-
Financial Leverage. Leverage Instruments will have
seniority over the common shares. The use of Leverage
Instruments will leverage your investment in the Common
Shares. The Fund expects to issue additional Leverage
Instruments to the extent such Financial Leverage is
available. If the Fund uses additional Leverage
Instruments, associated costs, if any, will be borne
immediately by common shareholders and result in a
reduction of the net asset value of the common shares.
Preferred Shares, if any, may pay dividends based on
short-term rates, which may be reset frequently.
Borrowings may be at a fixed or floating rate and
generally will be based upon short-term rates. So long
as the rate of return, net of applicable Fund expenses,
on the Fund's portfolio investments purchased with
leverage exceeds the then current interest rate or
dividend rate on the Leverage Instruments, the Fund will
generate more return or income than will be needed to
pay such dividends or interest payments. In this event,
the excess will be available to pay higher distributions
to common shareholders. Conversely, if the income or
gains from the securities and investments purchased with
such proceeds does not cover the cost of leverage, the
return to the common shares will be less than if
leverage had not been used. When leverage is employed,
the net asset value and market prices of the common
shares and the yield to common shareholders will be more
volatile.
There is no assurance that the Fund will utilize
Financial Leverage in addition to the Commitment
Facility or, if additional Financial Leverage is
utilized, that it will be successful in enhancing the
level of the Fund's current distributions.
The Fund may make further use of Financial Leverage
through the issuance of notes or other senior securities
to the extent permitted by the 1940 Act. However, it is
possible that the Fund will be unable to obtain
additional Financial Leverage. In the current economic
environment, it has become more difficult for borrowers,
including the Fund, to find third parties willing to
extend credit or purchase securities that would
constitute Financial Leverage. If the Fund is unable to
increase Financial Leverage after the issuance of
additional Common Shares pursuant to this prospectus,
there could be an adverse impact on the return to common
shareholders. In addition, to the extent additional
Financial Leverage is utilized, the Fund may
consequently be subject to certain financial covenants
and restrictions that are not currently imposed on the
Fund. See "Use of Financial Leverage" and "Risks --
Leverage Risk."
TAX CONSIDERATIONS ... Fund Status. The Fund is taxed as a regular corporation
for federal income tax purposes and as such is obligated
to pay federal and applicable state and foreign
corporate taxes on its taxable income. This differs from
most investment companies, which elect to be treated as
"regulated investment companies" under the Internal
Revenue Code in order to avoid paying entity level
income taxes. Under current law, the Fund is not
eligible to elect treatment as a regulated investment
company due to its investment of a substantial portion
of its Managed Assets in MLPs invested in energy assets.
As a result, the Fund is obligated to pay taxes on its
taxable income as opposed to most other investment
companies which are not so obligated. However, as
discussed below, the Fund expects that a portion of the
distributions it receives from MLPs may be treated as a
tax-deferred return of capital, thus reducing the Fund's
current tax liability. For purposes of computing net
asset value, the Fund accrues deferred income taxes for
its future tax liability associated with that portion of
MLP distributions considered to be tax-deferred return
of capital as well as capital appreciation of its
investments. The Fund relies to some extent on
information provided by MLPs, which is usually not
-7-
timely, to estimate deferred tax liability for purposes
of financial statement reporting and determining the
Fund's net asset value. From time to time the Fund will
modify its estimates and/or assumptions regarding its
deferred tax liability as new information becomes
available. The taxation of Fund distributions is
discussed further under "Tax Matters."
Fund Assets.
o Investments in MLPs. The Fund invests primarily in
MLPs and MLP-related entities. The benefit the Fund
derives from its investment in MLPs is largely
dependent on MLPs being treated as partnerships for
federal income tax purposes. As a partnership, an
MLP has no income tax liability on MLP qualified
income at the entity level. As a limited partner in
the MLPs in which it invests, the Fund is allocated
its pro rata share of income, gains, losses,
deductions and expenses from the MLPs. A significant
portion of MLP income has historically been offset
by tax deductions. In this situation, the Fund will
incur a current tax liability on that portion of a
distribution from an MLP not offset by tax
deductions, with the remaining portion of the
distribution being treated as a tax-deferred return
of capital. The Fund's tax basis in its MLP units
would be reduced by amounts treated as tax-deferred
return of capital, which would either increase the
Fund's taxable gain or reduce the Fund's loss
recognized upon the sale of an MLP. The percentage
of an MLP's distribution which is offset by tax
deductions will fluctuate over time for various
reasons. A significant slowdown in acquisition or
investment activity by MLPs held by the Fund could
result in a reduction of accelerated depreciation or
other deductions generated by these activities,
which may result in increased current tax liability
to the Fund. Certain energy related deductions are
also not allowed for alternative minimum tax
purposes, which may cause the Fund to be subject to
the alternative minimum tax depending upon the
nature of the assets of the MLPs. A reduction in the
percentage of income offset by tax deductions or an
increase in the Fund's portfolio turnover will
reduce that portion of the Fund's distribution
treated as a tax-deferred return of capital and
increase that portion treated as income, and may
result in reduced Fund distributions and lower
after-tax distributions to the Fund's common
shareholders.
o Investments in Other Securities. The Fund may also
invest in equity and debt securities of energy
companies that are organized and/or taxed as
corporations. Interest and dividend payments
received by the Fund with respect to such securities
generally are included in the Fund's corporate
taxable income in the year in which they are
received, although the Fund may qualify for the
dividends-received deduction with respect to
dividends on certain of the equity securities owned
by the Fund.
Shareholder Tax Aspects.
o Current Distributions on Shares. Common
shareholders of the Fund hold common shares of a
Massachusetts business trust which has elected for
federal income tax purposes to be taxed as a
corporation. There is a significant difference, for
federal income tax purposes, between owning common
shares of a taxable entity treated as a corporation
for federal income tax purposes (such as the Fund)
versus owning partnership interests in the MLPs in
which the Fund invests. Common shareholders of the
Fund will be subject to potential income tax only if
-8-
the Fund pays out distributions. Depending on the
nature of the distribution made by the Fund, the tax
character of such distribution to common
shareholders will vary. Distributions made from
current and accumulated earnings and profits of the
Fund will be taxable to common shareholders as
dividend income. Dividend income generally will
qualify for treatment as "qualified dividend income"
for federal income tax purposes if holding period
and other requirements are satisfied by the common
shareholder receiving such dividend income.
Qualified dividend income received by individual
shareholders is taxed at long-term capital gains
rates, which reach a maximum of 20%. Dividends may
also be subject to a 3.8% Medicare tax.
Distributions that are in an amount greater than the
Fund's current and accumulated earnings and profits
will represent a tax-deferred return of capital to
the extent of a common shareholder's basis in its
common shares, and such distributions would
correspondingly reduce the common shareholder's
basis in its common shares. A reduction in the
common shareholder's basis would potentially
increase the common shareholder's gain (or reduce
the common shareholder's loss) recognized upon the
sale of the common shares. Additionally, excess
distributions that exceed a common shareholder's tax
basis in its common shares will generally be taxed
as gain. The past performance of MLPs indicates that
a significant portion of the Fund's distributions to
common shareholders will likely represent a
tax-deferred return of capital. However, there can
be no guarantee that the Fund's expectation
regarding the tax character of its distributions
will be realized or that the Fund will make regular
distributions. See "Distributions."
o Sale of Shares. Common shareholders generally will
recognize a gain or loss upon the sale of their
common shares. Such gain or loss is equal to the
difference between the common shareholder's federal
income tax basis in its common shares sold (as
adjusted to reflect return of capital) and the sale
proceeds received by the common shareholder upon the
disposition of common shares. As a general rule, the
sale of a capital asset, like common shares, held
for more than a year will result in a long-term
capital gain or loss. See "Tax Matters."
COMPARISON WITH
DIRECT INVESTMENTS
IN MLPS .............. The Fund seeks to provide an efficient method for
investing in MLPs, MLP-related entities and other energy
companies. Some of the benefits of investing in the Fund
as opposed to directly investing in MLPs include:
o The Fund provides, through a single investment
vehicle, an investment in a portfolio of a number of
MLPs, MLP-related entities and other energy
companies;
o Direct investors in MLPs receive a partnership
statement (a Form K-1 statement) from each MLP they
own and may be required to file income tax returns
in each state in which the MLPs operate. Common
shareholders of the Fund will receive a single Form
1099 and will only be required to file income tax
returns in states in which they would ordinarily
file;
o Direct investors in MLPs are limited in their
ability to use losses to offset other gains by the
passive activity income and loss rules, whereas
common shareholders of the Fund are not so limited;
and
o Income received by tax-exempt investors, including
employee benefit plans and IRA accounts, from MLPs
is generally treated as unrelated business taxable
income ("UBTI"), whereas distributions these
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investors receive from an entity treated for federal
income tax purposes as a corporation (such as the
Fund) will generally not be treated as UBTI, unless
the stock is debt-financed.
LISTING .............. The Fund's currently outstanding common shares are, and
the Common Shares offered in this prospectus and any
applicable prospectus supplement will be, subject to
notice of issuance, listed on the NYSE MKT under the
trading or "ticker" symbol "FEN." The net asset value of
the Fund's common shares at the close of business on
November 30, 2012 was $29.12 per common share, and the
last sale price of the common shares on the NYSE MKT on
such date was $30.69.
CORPORATE FINANCE
SERVICES AND
CONSULTING AGENT...... Wells Fargo Advisors, LLC, as successor to A.G.
Edwards, serves as corporate finance services and
consulting agent to the Advisor, pursuant to a Corporate
Finance Services and Consulting Agreement between A.G.
Edwards and the Advisor. See "Corporate Finance Services
and Consulting Fee."
CUSTODIAN,
ADMINISTRATOR
AND TRANSFER AGENT.... BNY Mellon Investment Servicing (US) Inc., formerly
known as PNC Global Investment Servicing (U.S.) Inc.,
serves as the Fund's Administrator, Fund Accountant,
Transfer Agent and Board Administrator in accordance
with certain fee arrangements. The Bank of New York
Mellon serves as the Fund's Custodian in accordance with
certain fee arrangements.
CLOSED-END
STRUCTURE ............ Closed-end funds differ from open-end management
investment companies (commonly referred to as mutual
funds) in that closed-end funds generally list their
shares for trading on a securities exchange and do not
redeem their shares at the option of the shareholder. By
comparison, mutual funds issue securities redeemable at
net asset value at the option of the shareholder and
typically engage in a continuous offering of their
shares. Mutual funds are subject to continuous asset
in-flows and out-flows that can complicate portfolio
management, whereas closed-end funds generally can stay
more fully invested in securities consistent with the
closed-end fund's investment objective and policies. In
addition, in comparison to open-end funds, closed-end
funds have greater flexibility in their ability to make
certain types of investments, including investments in
illiquid securities.
Shares of closed-end investment companies listed for
trading on a securities exchange frequently trade at a
discount from net asset value, but in some cases trade
at a premium. The market price may be affected by net
asset value, dividend or distribution levels (which are
dependent, in part, on expenses), supply of and demand
for the shares, stability of dividends or distributions,
trading volume of the shares, general market and
economic conditions and other factors beyond the control
of the closed-end fund. The foregoing factors may result
in the market price of the common shares of the Fund
being greater than, less than or equal to, net asset
value. The Board of Trustees has reviewed the structure
of the Fund in light of its investment objective and
policies and has determined that the closed-end
structure is appropriate. As described in this
prospectus, however, the Board of Trustees may review
periodically the trading range and activity of the
Fund's common shares with respect to their net asset
value and may take certain actions to seek to reduce or
eliminate any such discount. Such actions may include
open market repurchases or tender offers for the common
shares at net asset value or the possible conversion of
the Fund to an open-end investment company. There can be
no assurance that the Board of Trustees will decide to
undertake any of these actions or that, if undertaken,
such actions would result in the common shares trading
-10-
at a price equal to or close to net asset value per
common share. In addition, as noted above, the Board of
Trustees determined in connection with the initial
offering of common shares of the Fund that the
closed-end structure is desirable, given the Fund's
investment objective and policies. Investors should
assume, therefore, that it is highly unlikely that the
Board of Trustees would vote to convert the Fund to an
open-end investment company. See "Structure of the Fund;
Common Share Repurchases and Change in Fund Structure."
SPECIAL RISK
CONSIDERATIONS ....... Investment and Market Risk. An investment in the Fund's
Common Shares is subject to investment risk, including
the possible loss of the entire amount that you invest.
Your investment in Common Shares represents an indirect
investment in the securities owned by the Fund,
substantially all of which are traded on a national
securities exchange or in the over-the-counter markets.
The value of these securities, like other market
investments, may move up or down, sometimes rapidly and
unpredictably. The value of the securities in which the
Fund invests will affect the value of the Common Shares.
Your Common Shares at any point in time may be worth
less than your original investment, even after taking
into account the reinvestment of Fund dividends and
distributions.
The Fund's performance was adversely impacted by the
weakness in the credit markets and broad stock market,
and the resulting rapid and dramatic declines in the
value of MLPs that occurred beginning in late 2008, and
may again be adversely affected due to weaknesses in the
credit and stock markets. If the Fund's net asset value
declines or remains volatile, there is an increased risk
that the Fund may be required to reduce outstanding
leverage, which could adversely affect the price of the
Fund's common shares and ability to pay distributions at
historical levels. A sustained economic slowdown may
adversely affect the ability of MLPs to sustain their
historical distribution levels, which in turn, may
adversely affect the Fund's ability to sustain
distributions at historical levels. MLPs that have
historically relied heavily on outside capital to fund
their growth have been impacted by the slowdown in the
capital markets. The recovery of the MLP sector is
dependent on several factors, including the recovery of
the financial sector, the general economy and the
commodity markets.
In response to the financial crises affecting the
banking system and financial markets, the U.S. and
foreign governments have intervened to an unprecedented
degree in the financial and credit markets. Among other
things, U.S. government regulators have encouraged, and
in some cases structured and provided financial
assistance for, banks, securities firms, insurers and
other financial companies. Additional intervention
programs have been adopted and may be proposed which
will have a further impact on the securities markets.
Many of the recently enacted or proposed government
measures are far-reaching and without historical
precedent. Furthermore, the U.S. government has stated
its willingness to implement additional measures as it
may see fit to address changes in market conditions.
There can be no assurance that any or all of these
measures will succeed in stabilizing and providing
liquidity to the U.S. financial markets, including the
extreme levels of volatility recently experienced. Such
volatility could materially and adversely affect the
financial condition of the Fund, the performance of the
Fund's investments and the trading price of the Fund's
common shares.
Market Impact Risk. The sale of the Common Shares (or
the perception that such sales may occur) may have an
adverse effect on prices in the secondary market for the
Fund's common shares by increasing the number of shares
-11-
available, which may put downward pressure on the market
price for the Fund's common shares. These sales also
might make it more difficult for the Fund to sell
additional equity securities in the future at a time and
price the Fund deems appropriate.
Management Risk. The Fund is subject to management risk
because it is an actively managed portfolio. The Advisor
and Sub-Advisor apply investment techniques and risk
analyses in making investment decisions for the Fund,
but there can be no guarantee that these will produce
the desired results.
Potential Conflicts of Interest Risk. First Trust
Advisors, Energy Income Partners and the portfolio
managers have interests which may conflict with the
interests of the Fund. In particular, First Trust
Advisors and Energy Income Partners may manage and/or
advise other investment funds or accounts with the same
investment objective and strategies as the Fund. As a
result, First Trust Advisors, Energy Income Partners and
the Fund's portfolio managers may devote unequal time
and attention to the management of the Fund and those
other funds and accounts, and may not be able to
formulate as complete a strategy or identify equally
attractive investment opportunities as might be the case
if they were to devote substantially more attention to
the management of the Fund. First Trust Advisors, Energy
Income Partners and the Fund's portfolio managers may
identify a limited investment opportunity that may be
suitable for multiple funds and accounts, and the
opportunity may be allocated among these several funds
and accounts, which may limit the Fund's ability to take
full advantage of the investment opportunity.
Additionally, transaction orders may be aggregated for
multiple accounts for purpose of execution, which may
cause the price or brokerage costs to be less favorable
to the Fund than if similar transactions were not being
executed concurrently for other accounts. At times, a
portfolio manager may determine that an investment
opportunity may be appropriate for only some of the
funds and accounts for which he or she exercises
investment responsibility, or may decide that certain of
the funds and accounts should take differing positions
with respect to a particular security. In these cases,
the portfolio manager may place separate transactions
for one or more funds or accounts which may affect the
market price of the security or the execution of the
transaction, or both, to the detriment or benefit of one
or more other funds and accounts. For example, a
portfolio manager may determine that it would be in the
interest of another account to sell a security that the
Fund holds, potentially resulting in a decrease in the
market value of the security held by the Fund.
The portfolio managers may also engage in cross trades
between funds and accounts, may select brokers or
dealers to execute securities transactions based in part
on brokerage and research services provided to First
Trust Advisors or Energy Income Partners which may not
benefit all funds and accounts equally and may receive
different amounts of financial or other benefits for
managing different funds and accounts. Finally, First
Trust Advisors or its affiliates may provide more
services to some types of funds and accounts than
others.
There is no guarantee that the policies and procedures
adopted by First Trust Advisors, Energy Income Partners
and the Fund will be able to identify or mitigate the
conflicts of interest that arise between the Fund and
any other investment funds or accounts that First Trust
Advisors and/or Energy Income Partners may manage or
advise from time to time. For further information on
potential conflicts of interest, see "Investment
Advisor" and "Sub-Advisor" in the SAI.
-12-
In addition, while the Fund is using leverage, the
amount of the fees paid to the Advisor (and by the
Advisor to the Sub-Advisor) for investment advisory and
management services are higher than if the Fund did not
use leverage because the fees paid are calculated based
on the Fund's Managed Assets, which include assets
purchased with leverage. Therefore, the Advisor and the
Sub-Advisor have a financial incentive to leverage the
Fund, which may create a conflict of interest between
the Advisor and the Sub-Advisor on the one hand and the
Common Shareholders of the Fund on the other.
Energy Sector Risk. The Fund's investments are generally
concentrated in the energy sector, with a particular
concentration in energy sector MLPs and energy sector
MLP-related entities. Certain risks inherent in
investing in the energy business of these types of
securities include the following:
o Commodity Pricing Risk. MLPs, MLP-related entities
and energy companies may be directly affected by
energy commodity prices, especially those MLPs,
MLP-related entities and energy companies which own
the underlying energy commodity. Commodity prices
fluctuate for several reasons, including changes in
market and economic conditions, the impact of
weather on demand, levels of domestic production and
imported commodities, energy conservation, domestic
and foreign governmental regulation and taxation and
the availability of local, intrastate and interstate
transportation systems. Volatility of commodity
prices which leads to a reduction in production or
supply may also impact the performance of MLPs,
MLP-related entities and energy companies that are
solely involved in the transportation, processing,
storing, distribution or marketing of commodities.
Volatility of commodity prices may also make it more
difficult for MLPs, MLP-related entities and energy
companies to raise capital to the extent the market
perceives that their performance may be directly
tied to commodity prices.
o Supply and Demand Risk. A decrease in the production
of natural gas, NGLs, crude oil, coal or other
energy commodities or a decrease in the volume of
such commodities available for transportation,
processing, storage or distribution may adversely
impact the financial performance of MLPs,
MLP-related entities and energy companies.
Production declines and volume decreases could be
caused by various factors, including catastrophic
events affecting production, depletion of resources,
labor difficulties, environmental proceedings,
increased regulations, equipment failures and
unexpected maintenance problems, import supply
disruption, increased competition from alternative
energy sources or depressed commodity prices.
Alternatively, a sustained decline in demand for
such commodities could also impact the financial
performance of MLPs, MLP-related entities and energy
companies. Factors which could lead to a decline in
demand include economic recession or other adverse
economic conditions, higher fuel taxes or
governmental regulations, increases in fuel economy,
consumer shifts to the use of alternative fuel
sources, an increase in commodity prices, or
weather. A continuation of reduced demand for energy
commodities as a result of the economic recession
may further reduce the financial performance of the
entities in which the Fund invests.
o Depletion and Exploration Risk. MLPs, MLP-related
entities and energy companies engaged in the
production (exploration, development, management or
production) of natural gas, NGLs (including
propane), crude oil, refined petroleum products or
coal are subject to the risk that their commodity
-13-
reserves naturally deplete over time. MLPs,
MLP-related entities and energy companies generally
increase reserves through expansion of their
existing business, through exploration of new
sources or development of existing sources, through
acquisitions or by securing long-term contracts to
acquire additional reserves, each of which entails
risk. The financial performance of these issuers may
be adversely affected if they are unable to acquire,
cost-effectively, additional reserves at a rate at
least equal to the rate of natural decline. A
failure to maintain or increase reserves could
reduce the amount and change the characterization of
cash distributions paid by these MLPs, MLP-related
entities and energy companies.
o Regulatory Risk. MLPs, MLP-related entities and
energy companies are subject to significant federal,
state and local government regulation in virtually
every aspect of their operations, including how
facilities are constructed, maintained and operated,
environmental and safety controls, and the prices
they may charge for products and services. Various
governmental authorities have the power to enforce
compliance with these regulations and the permits
issued under them and violators are subject to
administrative, civil and criminal penalties,
including civil fines, injunctions or both. Stricter
laws, regulations or enforcement policies could be
enacted in the future which would likely increase
compliance costs and may adversely affect the
financial performance of MLPs, MLP-related entities
and energy companies. In particular, changes to laws
and increased regulations or enforcement policies as
a result of oil spills, such as the Macondo oil
spill in the Gulf of Mexico or onshore oil pipeline
spills may adversely affect the financial
performance of MLPs and other energy companies.
Additionally, changes to laws and increased
regulation or restrictions to the use of hydraulic
fracturing may adversely impact the ability of
energy companies to economically develop oil and
natural gas resources and, in turn, reduce
production for such commodities and adversely impact
the financial performance of MLPs and midstream
energy companies.
o Interest Rate Risk. Rising interest rates could
adversely impact the financial performance of MLPs,
MLP-related entities and energy companies. Rising
interest rates may increase an MLP's, MLP-related
entity's or energy company's cost of capital, which
would increase operating costs and may reduce an
MLP's, MLP-related entity's or energy company's
ability to execute acquisitions or expansion
projects in a cost-effective manner. Rising interest
rates may also impact the price of MLP units,
MLP-related entity securities and energy company
shares as the yields on alternative investments
increase.
o Acquisition or Reinvestment Risk. The ability of
MLPs to grow and to increase distributions to
unitholders is dependent in part on their ability to
make acquisitions or find organic projects that
result in an increase in adjusted operating surplus
per unit. In the event that MLPs are unable to make
such accretive acquisitions/projects either because
they are unable to identify attractive
acquisition/project candidates or negotiate
acceptable purchase contracts or because they are
unable to raise financing on economically acceptable
terms or because they are outbid by competitors,
their future growth and ability to raise
distributions may be hindered. Furthermore, even if
MLPs do consummate acquisitions/projects that they
believe will be accretive, the acquisitions/projects
may in fact turn out to result in a decrease in
adjusted operating surplus per unit. As MLP general
-14-
partners typically receive a greater percentage of
increased cash distributions, in an effort to
increase cash distributions the general partner may
make acquisitions which, due to various factors,
including increased debt obligations as well as the
factors set forth below, may adversely affect the
MLP. Any acquisition/project involves risks,
including among other things: mistaken assumptions
about revenues and costs, including synergies; the
assumption of unknown liabilities; limitations on
rights to indemnity from the seller; the diversion
of management's attention from other business
concerns; unforeseen difficulties operating in new
product areas or new geographic areas; and customer
or key employee losses at the acquired businesses.
o Affiliated Party Risk. A few of the midstream MLPs
are dependent on their parents or sponsors for a
majority of their revenues. Any failure by the
parents or sponsors to satisfy their payments or
obligations would impact the MLPs' revenues and cash
flows and ability to make distributions.
o Catastrophe Risk. The operations of MLPs,
MLP-related entities and energy companies are
subject to many hazards inherent in transporting,
processing, storing, distributing or marketing
natural gas, NGLs, crude oil, refined petroleum
products or other hydrocarbons, or in exploring,
managing or producing such commodities or products,
including: damage to pipelines, storage tanks or
related equipment and surrounding properties caused
by hurricanes, tornadoes, floods, fires and other
natural disasters and acts of terrorism; inadvertent
damage from construction and farm equipment; leaks
of natural gas, NGLs, crude oil, refined petroleum
products or other hydrocarbons; fires and
explosions. These risks could result in substantial
losses due to personal injury and/or loss of life,
severe damage to and destruction of property and
equipment and pollution or other environmental
damage and may result in the curtailment or
suspension of their related operations. Not all
MLPs, MLP-related entities and energy companies are
fully insured against all risks inherent to their
businesses. If a significant accident or event
occurs that is not fully insured, it could adversely
affect their operations and financial condition.
o Terrorism/Market Disruption Risk. The terrorist
attacks in the United States on September 11, 2001
had a disruptive effect on the securities markets.
U.S. military and related action in Iraq is ongoing
and events in the Middle East could have significant
adverse effects on the U.S. economy and the stock
market. Uncertainty surrounding retaliatory military
strikes or a sustained military campaign may affect
energy company operations in unpredictable ways,
including disruptions of fuel supplies and markets,
and transmission and distribution facilities could
be direct targets, or indirect casualties, of an act
of terror. Since the September 11th attacks, the
U.S. government has issued warnings that energy
assets, specifically the U.S. pipeline
infrastructure, may be the future target of
terrorist organizations. In addition, changes in the
insurance markets attributable to the September 11th
attacks have made certain types of insurance more
difficult, if not impossible, to obtain and have
generally resulted in increased premium costs.
o MLP Risks. An investment in MLP units involves risks
which differ from an investment in common stock of a
corporation. Holders of MLP units have limited
control and voting rights on matters affecting the
partnership. In addition, there are certain tax
risks associated with an investment in MLP units and
-15-
conflicts of interest exist between common unit
holders and the general partner, including those
arising from incentive distribution payments.
o Industry Specific Risk. MLPs, MLP-related entities
and energy companies are also subject to risks that
are specific to the industry they serve.
o Midstream MLPs, MLP-related entities and energy
companies that provide crude oil, refined product
and natural gas services are subject to supply and
demand fluctuations in the markets they serve which
will be impacted by a wide range of factors
including, fluctuating commodity prices, weather,
increased conservation or use of alternative fuel
sources, increased governmental or environmental
regulation, depletion, rising interest rates,
declines in domestic or foreign production,
accidents or catastrophic events, and economic
conditions, among others.
o Propane MLPs and MLP-related entities are subject to
earnings variability based upon weather conditions
in the markets they serve, fluctuating commodity
prices, increased use of alternative fuels,
increased governmental or environmental regulation,
and accidents or catastrophic events, among others.
o MLPs, MLP-related entities and energy companies with
coal assets are subject to supply and demand
fluctuations in the markets they serve which will be
impacted by a wide range of factors including,
fluctuating commodity prices, the level of their
customers' coal stockpiles, weather, increased
conservation or use of alternative fuel sources,
increased governmental or environmental regulation,
depletion, rising interest rates, transportation
issues, declines in domestic or foreign production,
mining accidents or catastrophic events, health
claims and economic conditions, among others.
Cash Flow Risk. A substantial portion of the cash flow
received by the Fund is derived from its investment in
equity securities of MLPs and MLP-related entities. The
amount of cash an MLP or MLP-related entity has
available for distributions and the tax character of
such distributions is dependent upon the amount of cash
generated by the MLP's or MLP-related entity's
operations. Cash available for distribution varies from
quarter to quarter and is largely dependent on factors
affecting the MLP's or MLP-related entity's operations
and factors affecting the energy industry in general. In
addition to the risk factors described above, other
factors which may reduce the amount of cash an MLP or
MLP-related entity has available for distribution
include increased operating costs, capital expenditures,
acquisition costs, expansion, construction or
exploration costs and borrowing costs.
Tax Risk. The Fund's ability to meet its investment
objective depends on the level of taxable income and
distributions it receives from the MLP, MLP-related
entities and energy company securities in which the Fund
invests, a factor over which the Fund has no control.
The benefit the Fund derives from its investment in MLPs
is largely dependent on their being treated as
partnerships for federal income tax purposes. As a
partnership, an MLP has no income tax liability at the
entity level. If, as a result of a change in an MLP's
business, an MLP were treated as a corporation for
federal income tax purposes, such MLP would be obligated
to pay federal income tax on its income at the
applicable corporate tax rate. If an MLP was classified
as a corporation for federal income tax purposes, the
amount of cash available for distribution with respect
to its units would be reduced and any such distributions
received by the Fund would be taxed entirely as dividend
-16-
income if paid out of the earnings of the MLP.
Therefore, treatment of an MLP as a corporation for
federal income tax purposes would result in a material
reduction in the after-tax return to the Fund, likely
causing a substantial reduction in the value of the
common shares.
Tax Law Change Risk. Changes in tax laws or regulations,
or interpretations thereof in the future, could
adversely affect the Fund or the MLPs in which it
invests. Any such changes could negatively impact the
Fund and its common shareholders. For example, if, by
reason of a change in law or otherwise, an MLP in which
the Fund invests is treated as a corporation rather than
a partnership, the MLP would be subject to entity level
corporate taxation and any distributions received by the
Fund out of the earnings of the MLP would be treated as
dividend income. This would negatively impact the amount
and tax characterization of distributions received by
common shareholders.
Deferred Tax Risk. As a limited partner in the MLPs in
which it invests, the Fund is allocated its pro rata
share of income, gains, losses, deductions and expenses
from the MLPs. A significant portion of MLP income has
historically been offset by tax deductions. The Fund
will incur a current tax liability on that portion of a
distribution that is not offset by tax deductions, with
the remaining portion of the distribution being treated
as a tax-deferred return of capital. The percentage of
an MLP's distribution which is offset by tax deductions
will fluctuate over time for various reasons. A
significant slowdown in acquisition or investment
activity by MLPs held in the Fund's portfolio could
result in a reduction of accelerated depreciation or
other deductions generated by these activities, which
may result in increased current tax liability to the
Fund. A reduction in the percentage of the income from
an MLP offset by tax deductions or gains as a result of
the sale of portfolio securities will reduce that
portion, if any, of the Fund's distribution treated as a
tax-deferred return of capital and increase that portion
treated as dividend income, resulting in reduced Fund
distributions and lower after-tax distributions to the
Fund's common shareholders. For purposes of computing
net asset value, the Fund will accrue deferred income
taxes for its future tax liability associated with that
portion of MLP distributions considered to be
tax-deferred return of capital as well as capital
appreciation of its investments. The Fund will rely to
some extent on information provided by MLPs, which is
usually not timely, to estimate deferred tax liability
for purposes of financial statement reporting and
determining the Fund's net asset value. From time to
time the Fund will modify its estimates and/or
assumptions regarding its deferred tax liability as new
information becomes available.
Delay in Investing the Proceeds of this Offering.
Although the Fund currently intends to invest the
proceeds from any sale of the Common Shares as soon as
practicable following the completion of such offering,
such investments may be delayed if suitable investments
are unavailable at the time. The trading market and
volumes for MLP, MLP-related entity and energy company
shares may at times be less liquid than the market for
other securities. Prior to the time the proceeds of any
offering are invested, such proceeds may be invested in
cash, cash equivalents or other securities, pending
investment in MLP, MLP-related entity or energy company
securities. Income received by the Fund from these
securities would subject the Fund to corporate tax
before any distributions to Common Shareholders. As a
result, the return and yield on the Common Shares in the
year following any offering pursuant to this prospectus
and an applicable prospectus supplement may be lower
than when the Fund is fully invested in accordance with
its objective and policies. See "Use of Proceeds."
-17-
Equity Securities Risk. MLP units and other equity
securities are sensitive to general movements in the
stock market and a drop in the stock market may depress
the price of securities to which the Fund has exposure.
MLP units and other equity securities prices fluctuate
for several reasons including changes in the financial
condition of a particular issuer (generally measured in
terms of distributable cash flow in the case of MLPs),
investors' perceptions of MLPs and energy companies, the
general condition of the relevant stock market, such as
the current market volatility, or when political or
economic events affecting the issuers occur. In
addition, the price of MLP units and other equity
securities may be particularly sensitive to rising
interest rates, as the cost of capital rises and
borrowing costs increase.
Certain of the energy companies in which the Fund
invests and may in the future invest may have
comparatively smaller capitalizations. Investing in
securities of smaller MLPs, MLP-related entities and
energy companies presents some unique investment risks.
These companies may have limited product lines and
markets, as well as shorter operating histories, less
experienced management and more limited financial
resources than larger MLPs, MLP-related entities and
energy companies and may be more vulnerable to adverse
general market or economic developments. Stocks of
smaller MLPs, MLP-related entities and energy companies
may be less liquid than those of larger MLPs,
MLP-related entities and energy companies and may
experience greater price fluctuations than larger MLPs,
MLP-related entities and energy companies. In addition,
small-cap securities may not be widely followed by the
investment community, which may result in reduced
demand.
MLP subordinated units in which the Fund invests and may
in the future invest generally convert to common units
at a one-to-one ratio. The purchase or sale price is
generally tied to the common unit price less a discount.
The size of the discount varies depending on the
likelihood of conversion, the length of time remaining
to conversion, the size of the block purchased and other
factors.
The Fund invests, and may in the future invest, in
I-Shares which represent an indirect investment in MLP
i-units. While not precise, the price of I-Shares and
their volatility tend to be correlated to the price of
common units. I-Shares are subject to the same risks as
MLP common units.
Private Investment in a Public Entity ("PIPE")
Transaction Risk. PIPE investors purchase securities
directly from publicly traded company in a private
placement transaction, typically at a discount to the
market price of the company's common stock. Because the
sale of the securities is not registered under the 1933
Act, the securities are "restricted" and cannot be
immediately resold by the investors into the public
markets. Until the Fund can sell such securities into
the public markets, the Fund's holdings, if any, will be
less liquid and any sale will need to be made pursuant
to an exemption under the 1933 Act.
Leverage Risk. The Fund currently utilizes leverage in
the form of Borrowings under the Commitment Facility,
and may in the future use additional leverage for
investment purposes, to finance the repurchase of its
common shares, and to meet cash requirements. Although
the use of leverage by the Fund creates an opportunity
for increased return for the common shares, it also
results in additional risks and can magnify the effect
of any losses. If the income and gains earned on the
securities and investments purchased with leverage
proceeds are greater than the cost of the leverage, the
common shares' return will be greater than if leverage
had not been used. Conversely, if the income or gains
from the securities and investments purchased with such
proceeds does not cover the cost of leverage, the return
-18-
to the common shares will be less than if leverage had
not been used. There is no assurance that a leveraging
strategy will be successful. In addition, certain types
of leverage may result in the Fund being subject to
covenants relating to asset coverage and the Fund's
portfolio composition and may impose special
restrictions on the Fund's use of various investment
techniques or strategies or in its ability to pay
dividends and other distributions on common shares in
certain instances. Under the Commitment Facility, the
Fund is also required to pledge assets to the lenders.
Leverage involves risks and special considerations for
common shareholders including:
o the likelihood of greater volatility of net asset
value and market price of the common shares than a
comparable portfolio without leverage;
o the risk that fluctuations in interest rates on
borrowings and short-term debt or in the dividend
rates on any Preferred Shares that the Fund may pay
will reduce the return to the common shareholders or
will result in fluctuations in the distributions
paid on the common shares;
o the effect of leverage in a declining market, which
is likely to cause a greater decline in the net
asset value of the common shares than if the Fund
were not leveraged, which may result in a greater
decline in the market price of the common shares;
and
o when the Fund uses leverage, the investment advisory
fee payable to the Advisor, and the sub-advisory fee
payable by the Advisor to the Sub-Advisor, will be
higher than if the Fund did not use leverage.
The issuance of Leverage Instruments by the Fund, in
addition to Borrowings under the Commitment Facility,
involve offering expenses and other costs, including
interest or dividend payments, which would be borne
indirectly by the common shareholders. Increased
operating costs, including the financing cost associated
with any leverage, may reduce the Fund's total return.
Certain types of Borrowings may result in the Fund being
subject to covenants in credit agreements relating to
asset coverage and portfolio composition requirements.
The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more rating
agencies, which may issue ratings for the short-term
corporate debt securities or Preferred Shares issued by
the Fund. These guidelines may impose asset coverage or
portfolio composition requirements that are more
stringent than those imposed by the 1940 Act. In
addition, the loan documents under the Commitment
Facility include customary provisions including a
restriction on the Fund's ability to pledge its assets
and contains customary events of default including
failure of the Fund to meet the asset coverage test of
the 1940 Act. There is no assurance that the Fund will
not violate financial covenants relating to the
Commitment Facility or other Financial Leverage in the
future. In such event, the Fund may be required to repay
all outstanding Borrowings immediately. In order to
repay such amounts the Fund may be required to sell
assets quickly which could have a material adverse
effect on the Fund and could trigger negative tax
implications. In addition, the Fund would be precluded
from declaring or paying any distribution on the common
shares during the continuance of such event of default.
It is possible that the Fund will be unable to obtain
additional leverage. If the Fund is unable to increase
Financial Leverage after the issuance of additional
Common Shares, there could be an adverse impact on the
return to common shareholders.
-19-
Derivatives Risk. The Fund may enter into total return
swaps, credit default swaps or other types of swaps,
options, forwards and combinations thereof and related
derivatives for the purpose of hedging and risk
management. These transactions generally provide for the
transfer from one counterparty to another of certain
risks inherent in the ownership of a financial asset
such as a common stock or debt instrument. Such risks
include, among other things, the risk of default and
insolvency of the obligor of such asset, the risk that
the credit of the obligor or the underlying collateral
will decline or the risk that the common stock of the
underlying issuer will decline in value. The transfer of
risk pursuant to a derivative of this type may be
complete or partial, and may be for the life of the
related asset or for a shorter period. These derivatives
may be used for investment purposes or as a risk
management tool for a pool of financial assets,
providing the Fund with the opportunity to gain or
reduce exposure to one or more reference securities or
other financial assets without actually owning or
selling such assets in order, for example, to increase
or reduce a concentration risk or to diversify a
portfolio. Conversely, these derivatives may be used by
the Fund to reduce exposure to an owned asset without
selling it. Furthermore, the ability to successfully use
hedging and interest rate transactions depends on the
Sub-Advisor's ability to predict pertinent market
movements, which cannot be assured. Thus, the use of
derivatives for hedging and interest rate management
purposes may result in losses greater than if they had
not been used, may require the Fund to sell or purchase
portfolio securities at inopportune times or for prices
other than current market values, may limit the amount
of appreciation the Fund can realize on an investment,
or may cause the Fund to hold a security that it might
otherwise sell. Additionally, amounts paid by the Fund
as premiums and cash or other assets held in margin
accounts with respect to hedging and strategic
transactions are not otherwise available to the Fund for
investment purposes. As the writer of a covered call
option, the Fund forgoes, during the option's life, the
opportunity to profit from increases in the market value
of the security covering the call option above the sum
of the premium and the strike price of the call, but has
retained the risk of loss should the price of the
underlying security decline. The writer of an option has
no control over the time when it may be required to
fulfill its obligation as a writer of the option. Once
an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must
deliver the underlying security at the exercise price.
See "Risks -- Derivatives Risk."
Portfolio Turnover Risk. The Fund's annual portfolio
turnover rate may vary greatly from year to year.
Although the Fund cannot accurately predict its annual
portfolio turnover rate, it is not expected to exceed
30% under normal circumstances, but may be higher or
lower in certain periods. For the fiscal year ended
November 30, 2012, portfolio turnover was approximately
26%. Portfolio turnover rate is not considered a
limiting factor in the execution of investment decisions
for the Fund. High portfolio turnover may result in the
Fund's recognition of gains that will increase the
Fund's tax liability and thereby lower the after-tax
dividends of the Fund. A high portfolio turnover may
also increase the Fund's current and accumulated
earnings and profits, resulting in a greater portion of
the Fund's distributions being treated as a dividend to
the Fund's common shareholders. In addition, a higher
portfolio turnover rate results in correspondingly
greater brokerage commissions and other transactional
expenses that are borne by the Fund. See "The Fund's
Investments -- Investment Practices -- Portfolio
Turnover" and "Tax Matters."
-20-
Restricted Securities. The Fund invests, and may in the
future invest, in unregistered or otherwise restricted
securities. The term "restricted securities" refers to
securities that have not been registered under the 1933
Act or are held by control persons of the issuer and
securities that are subject to contractual restrictions
on their resale. As a result, restricted securities may
be more difficult to value and the Fund may have
difficulty disposing of such assets either in a timely
manner or for a reasonable price. Absent an exemption
from registration, the Fund will be required to hold the
securities until they are registered by the issuer. In
order to dispose of an unregistered security, the Fund,
where it has contractual rights to do so, may have to
cause such security to be registered. A considerable
period may elapse between the time the decision is made
to sell the security and the time the security is
registered so that the Fund could sell it. Contractual
restrictions on the resale of securities vary in length
and scope and are generally the result of a negotiation
between the issuer and acquirer of the securities. The
Fund would, in either case, bear market risks during
that period.
Liquidity Risk. Although common units of MLPs, I-Shares
of MLP-related entities, and common stock of certain
energy companies trade on the New York Stock Exchange
("NYSE"), NYSE MKT, and The NASDAQ Stock Market, certain
securities may trade less frequently, particularly those
of issuers with smaller capitalizations. Securities with
limited trading volumes may display volatile or erratic
price movements. Larger purchases or sales of these
securities by the Fund in a short period of time may
result in abnormal movements in the market price of
these securities. This may affect the timing or size of
Fund transactions and may limit the Fund's ability to
make alternative investments. If the Fund requires
significant amounts of cash on short notice in excess of
normal cash requirements or is required to post or
return collateral in connection with the Fund's
investment portfolio, derivatives transactions or
leverage restrictions, the Fund may have difficulty
selling these investments in a timely manner, be forced
to sell them for less than it otherwise would have been
able to realize, or both. The reported value of some of
the Fund's relatively illiquid types of investments and,
at times, the Fund's high quality, generally liquid
asset classes, may not necessarily reflect the lowest
current market price for the asset. If the Fund was
forced to sell certain of its assets in the current
market, there can be no assurance that the Fund will be
able to sell them for the prices at which the Fund has
recorded them and the Fund may be forced to sell them at
significantly lower prices. See "The Fund's Investments
-- Investment Philosophy and Process."
Valuation Risk. Market prices generally will not be
available for subordinated units, direct ownership of
general partner interests, restricted securities or
unregistered securities of certain MLPs, MLP-related
entities or private companies, and the value of such
investments will ordinarily be determined based on fair
valuations determined pursuant to procedures adopted by
the Board of Trustees. The value of these securities
typically requires more reliance on the judgment of the
Sub-Advisor than that required for securities for which
there is an active trading market. In addition, the Fund
will rely on information provided by the MLPs, which is
usually not timely, to calculate taxable income
allocable to the MLP units held in the Fund's portfolio
and to calculate associated deferred tax liability for
purposes of financial statement reporting and
determining the Fund's net asset value. From time to
time the Fund will modify its estimates and/or
assumptions regarding its deferred tax liability as new
information becomes available. To the extent the Fund
-21-
modifies its estimates and/or assumptions, the net asset
value of the Fund would likely fluctuate. See "Net Asset
Value."
Interest Rate Risk. Interest rate risk is the risk that
equity and debt securities will decline in value because
of changes in market interest rates. When market
interest rates rise, the market value of the securities
in which the Fund invests generally will fall. The
Fund's investment in such securities means that the net
asset value and market price of the common shares will
tend to decline if market interest rates rise. Interest
rates are at or near historic lows, and as a result,
they are likely to rise over time. Certain debt
instruments, particularly below investment grade
securities, may contain call or redemption provisions
which would allow the issuer thereof to prepay principal
prior to the debt instrument's stated maturity. This is
known as prepayment risk. Prepayment risk is greater
during a falling interest rate environment as issuers
can reduce their cost of capital by refinancing higher
yielding debt instruments with lower yielding debt
instruments. An issuer may also elect to refinance its
debt instruments with lower yielding debt instruments if
the credit standing of the issuer improves. To the
extent the Fund's debt securities are called or
redeemed, the Fund may be forced to reinvest in lower
yielding securities.
Below Investment Grade Securities. Below investment
grade debt securities are commonly referred to as "junk
bonds." Below investment grade quality securities are
considered speculative with respect to an issuer's
capacity to pay interest and repay principal. They
involve greater risk of loss, are subject to greater
price volatility and are less liquid, especially during
periods of economic uncertainty or change, than higher
rated debt instruments. Below investment grade
securities may also be more susceptible to real or
perceived adverse economic and competitive industry
conditions than higher rated debt instruments. The Fund
does not intend to invest in securities issued by a
partnership or company in bankruptcy reorganization,
subject to a public or private debt restructuring or
otherwise in default or in significant risk of default
in the payment of interest and principal ("distressed
securities"). In the event any security held by the Fund
becomes distressed, the Fund may be required to incur
extraordinary expenses in order to attempt to protect
and/or recover its investment. In such situations, there
can be no assurance as to when or if the Fund will
recover any of its investment in such distressed
securities, or the value thereof. As of November 30,
2012, the Fund did not invest in any below investment
grade debt securities.
Non-Diversification. The Fund is a non-diversified
investment company under the 1940 Act and will not be
treated as a regulated investment company under the
Internal Revenue Code. Accordingly, there are no
regulatory requirements under the 1940 Act or the
Internal Revenue Code on the minimum number or size of
securities held by the Fund. As of November 30, 2012,
there were approximately eighty-nine (89) publicly
traded MLPs, approximately 90% of which operate energy
assets. The Fund intends to select its MLP investments
from this small pool of issuers. The Fund may invest in
securities of MLP-related entities and non-MLP
securities of other energy companies, consistent with
its investment objective and policies. As of November
30, 2012 the Fund held investments in thirty (30) MLP
issuers.
Market Disruption Risk. The terrorist attacks in the
United States on September 11, 2001 had a disruptive
effect on the securities markets. U.S. military and
related action in Iraq is ongoing and events in the
Middle East, as well as the continuing threat of
terrorist attacks, could have significant adverse
effects on the U.S. economy and the stock market. The
Fund cannot predict the effects of similar events in the
future on the U.S. economy.
-22-
Anti-Takeover Provisions. The Fund's Declaration of
Trust includes provisions that could limit the ability
of other entities or persons to acquire control of the
Fund or convert the Fund to open-end status. These
provisions could have the effect of depriving the common
shareholders of opportunities to sell their common
shares at a premium over the then current market price
of the common shares. See "Certain Provisions in the
Declaration of Trust and By-Laws" and "Risks --
Anti-Takeover Provisions."
Competition Risk. There exist other alternatives to the
Fund as a vehicle for investment in a portfolio of MLPs,
including other publicly traded investment companies and
private funds. In addition, recent tax law changes or
future tax law changes may increase the ability of
regulated investment companies or other institutions to
invest in MLPs. Because of the limited number of MLP
issuers, these competitive conditions may adversely
impact the Fund's ability to make investments in the MLP
market and could adversely impact the Fund's
distributions to common shareholders.
Market Discount From Net Asset Value. The Fund's common
shares have been publicly traded since June 24, 2004 and
have traded both at a premium and at a discount relative
to net asset value. There is no assurance that any
premium of the public offering price for the Common
Shares over net asset value with respect to any offering
hereunder will continue after such offering or that the
common shares will not again trade at a discount. Shares
of closed-end investment companies frequently trade at a
discount from their net asset value. This characteristic
is a risk separate and distinct from the risk that the
Fund's net asset value could decrease as a result of its
investment activities and may be greater for investors
expecting to sell their Common Shares in a relatively
short period following completion of any offering
hereunder. Although the value of the Fund's net assets
is generally considered by market participants in
determining whether to purchase or sell shares, whether
investors will realize gains or losses upon the sale of
the common shares will depend entirely upon whether the
market price of the common shares at the time of sale is
above or below the investor's purchase price for the
common shares. Because the market price of the common
shares will be affected by factors such as net asset
value, dividend or distribution levels (which are
dependent, in part, on expenses), supply of and demand
for the common shares, stability of dividends or
distributions, trading volume of the common shares,
general market and economic conditions, and other
factors beyond the control of the Fund, the Fund cannot
predict whether the Common Shares will trade at, below
or above net asset value or at, below or above the
public offering price with respect to any offering
hereunder.
Inflation/Deflation Risk. Inflation risk is the risk
that the value of assets or income from investments will
be worth less in the future as inflation decreases the
value of money. As inflation increases, the real value
of the common shares and distributions can decline.
Common stock prices may be particularly sensitive to
rising interest rates, as the cost of capital rises and
borrowing costs increase. In addition, during any
periods of rising inflation, the dividend rates or
borrowing costs associated with the Fund's leverage
would likely increase, which would tend to further
reduce returns to common shareholders.
Deflation risk is the risk that prices throughout the
economy decline over time--the opposite of inflation.
Deflation may have an adverse effect on the
creditworthiness of issuers and may make issuer defaults
more likely, which may result in a decline in the value
of the Fund's portfolio.
-23-
Certain Affiliations. Certain broker-dealers may be
considered to be affiliated persons of the Fund, First
Trust Advisors or Energy Income Partners. Absent an
exemption from the SEC or other regulatory relief, the
Fund is generally precluded from effecting certain
principal transactions with affiliated brokers, and its
ability to utilize affiliated brokers for agency
transactions, is subject to restrictions. This could
limit the Fund's ability to engage in securities
transactions and take advantage of market opportunities.
-24-
SUMMARY OF FUND EXPENSES
The following table and example contains information about the costs and
expenses that common shareholders will bear directly or indirectly. In
accordance with SEC requirements, the table below shows the Fund's expenses,
including leverage costs, as a percentage of the Fund's net assets as of
November 30, 2012, and not as a percentage of gross assets or Managed Assets. By
showing expenses as a percentage of net assets, expenses are not expressed as a
percentage of all the assets the Fund invests. The table and example are based
on the Fund's capital structure as of November 30, 2012. As of that date, the
Fund had $170,400,000 of leverage outstanding pursuant to the Commitment
Facility. Such leverage represented 22% of total assets as of November 30, 2012.
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load (as a percentage of offering price) ................................................. -- %*
Offering Expenses Borne by the Fund (as a percentage of offering price)(1)...................... -- %*
Dividend Reinvestment Plan Fees................................................................. None(2)
Percentage of Net Assets
Attributable to Common Shares
(Assumes 22% Leverage is Outstanding)
-------------------------------------
ANNUAL EXPENSES:
Management Fees(3).............................................................................. 1.35%
Interest and Fees on Leverage(4)................................................................ 0.37%
Other Expenses (exclusive of current and deferred income tax expense (benefit))(5).............. 0.28%
-----
Annual Expenses (exclusive of current and deferred income tax expense (benefit))(5)............. 2.00%
Current Income Tax Expense...................................................................... 0.45%
Deferred Income Tax Expense..................................................................... 6.01%
-----
Total Annual Expenses (including current and deferred income tax expenses)...................... 8.46%
=====
--------------------------------------------------------------------------------
* The applicable prospectus supplement to be used in connection with any
sales of Common Shares will set forth any applicable sales load and the
estimated offering expenses borne by the Fund.
(1) The Fund will pay all offering costs other than the sales load.
(2) You will pay brokerage charges if you direct BNY Mellon Investment
Servicing (US) Inc., as agent for the Common Shareholders Dividend
Reinvestment Plan, to sell your Common Shares held in a dividend
reinvestment account.
(3) Represents the aggregate fee payable to the Advisor (and by the Advisor to
the Sub-Advisor).
(4) Interest and fees on leverage in the table reflect the cost to the Fund of
Borrowings, expressed as a percentage of the Fund's net assets as of
November 30, 2012, based on interest rates in effect as of November 30,
2012. The table assumes total Borrowings of $170.4 million, which reflects
leverage in an amount representing 22% of total assets. The Borrowings bear
interest at variable rates.
(5) Current and deferred income tax expense (benefit) varies based on the
Fund's net investment income and realized and unrealized investment gain
and losses, which cannot be predicted. Accordingly, other expenses do not
include current or deferred income tax expense (benefit). The Fund's
current and deferred income tax expense (benefit) as a percentage of
average net assets by fiscal year from inception through November 30, 2012
has been as follows:
Period June 24, 2004 (commencement of operations)
Through November 30, 2004 16.18%
Year Ended November 30, 2005 5.98%
Year Ended November 30, 2006 10.84%
Year Ended November 30, 2007 4.58%
Year Ended November 30, 2008 (24.83)%
Year Ended November 30, 2009 22.47%
Year Ended November 30, 2010 17.53%
Year Ended November 30, 2011 6.29%
Year Ended November 30, 2012 7.24%
The purpose of the tables above and the example below is to help you
understand all fees and expenses that you, as a holder of Common Shares, would
bear directly or indirectly. The expenses shown in the tables under "Other
Expenses" and "Total Net Annual Expenses" are based on estimated amounts for the
-25-
Fund's 12 months of operations after November 30, 2012 unless otherwise
indicated and assumes that the Fund has not issued any additional common shares.
The following examples illustrate the expenses that you would pay on a $1,000
investment in Common Shares, assuming: (i) total annual expenses before taxes of
2.00% of net assets attributable to Common Shares through year 10, (ii) a 5%
annual return and (iii) all distributions are reinvested at net asset value:(1)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$20 $63 $108 $233
--------------------------------------------------------------------------------
(1) This example does not include sales load or estimated offering costs. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. The
example assumes that the estimated "Other Expenses" set forth in the Annual
Expenses table are accurate, that all dividends and distributions are
reinvested at net asset value and that the Fund is engaged in leverage of
22% of total assets, assuming interest and fees on leverage of 0.37%. The
interest and fees on leverage is expressed as an interest rate and
represents interest and fees payable on the Commitment Facility. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, the Fund's
actual rate of return may be greater or less than the hypothetical 5%
return shown in the example.
-26-
FINANCIAL HIGHLIGHTS
The information in the following table shows selected data for a common share
outstanding throughout each period listed below. The information in this table
for the year ended November 30, 2012 and each of the prior years then ended is
derived from the Fund's financial statements audited by Deloitte & Touche LLP,
whose report on the 2012 financial statements and the financial highlights for
the five years in the period then ended is contained in the Fund's 2012 Annual
Report and is included in the SAI, both of which are available from the Fund
upon request.
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30,
2012 2011 2010 2009 2008
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 27.31 $ 25.95 $ 20.20 $ 14.68 $ 26.74
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.07) (d) (0.25) (d) (0.07) (d) (0.24) (d) (0.57)
Net realized and unrealized gain (loss) 3.70 3.45 (e) 7.51 7.43 (9.83)
-------- -------- -------- -------- --------
Total from investment operations 3.63 3.20 7.44 7.19 (10.40)
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain (1.64) (0.68) (0.27) (0.35) (1.66)
Return of capital (0.32) (1.19) (1.52) (1.41) --
-------- -------- -------- -------- --------
Total from distributions (1.96) (1.87) (1.79) (1.76) (1.66)
-------- -------- -------- -------- --------
Premiums from shares sold in common
share offering 0.14 0.03 0.10 0.09 --
-------- -------- -------- -------- --------
Net asset value, end of period $ 29.12 $ 27.31 $ 25.95 $ 20.20 $ 14.68
======== ======== ======== ======== ========
Market value, end of period $ 30.69 $ 27.45 $ 26.30 $ 22.30 $ 14.40
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (f) 14.01% 12.61%(g) 38.65% 51.03% (40.70)%
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (f) 19.50% 11.73% 27.29% 70.20% (34.74)%
======== ======== ======== ======== ========
Net assets, end of period (in 000's) $481,549 $385,326 $291,189 $136,520 $ 94,880
Portfolio turnover rate 26% 16% 20% 43% 38%
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Including current and deferred income taxes
before waiver (i) 9.49% 8.70% 20.24% 25.79% (20.03)%
Including current and deferred income taxes
after waiver (i) 9.49% 8.70% 20.24% 25.79% (20.03)%
Excluding current and deferred income taxes
before waiver 2.25% 2.41% 2.71% 3.32% 4.80%
Excluding current and deferred income taxes
after waiver 2.25% 2.41% 2.71% 3.32% 4.80%
Excluding current and deferred income taxes
and interest expense after waiver 1.79% 1.91% 1.98% 2.32% 2.55%
RATIOS OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS:
Net investment income (loss) ratio before tax
expenses (0.36)% (1.40)% (0.47)% (2.73)% (3.83)%
Net investment income (loss) ratio including
tax expenses (i) (7.59)% (7.69)% (17.99)% (24.84)% 21.00%
SENIOR SECURITIES:
Total Energy Notes outstanding ($25,000
per note) N/A N/A N/A N/A 1,000
Principal amount and market value per Energy
Note (k) N/A N/A N/A N/A $ 25,006
Asset coverage per Energy Note (l) N/A N/A N/A N/A $119,880
Total loan outstanding (in 000's) $170,400 $137,900 $ 90 000 $ 45,000 $ 5,650
Asset coverage per $1,000 senior indebtedness $ 3,826 (m) $ 3,794 (m) $ 4,235 (m) $ 4,034 (m) $ 22,218 (m)
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
2007 (a) 2006 2005 2004 (b)
------------ ------------ ------------ ------------
Net asset value, beginning of period $ 25.88 $ 22.53 $ 21.34 $ 19.10 (c)
--------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.67) (0.50) (0.34) (0.13)
Net realized and unrealized gain (loss) 3.06 5.23 2.86 2.74
--------- -------- -------- --------
Total from investment operations 2.39 4.73 2.52 2.61
--------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain (1.53) -- (0.88) --
Return of capital -- (1.38) (0.45) (0.33)
--------- -------- -------- --------
Total from distributions (1.53) (1.38) (1.33) (0.33)
--------- -------- -------- --------
Premiums from shares sold in common
share offering -- -- -- (0.04)
--------- -------- -------- --------
Net asset value, end of period $ 26.74 $ 25.88 $ 22.53 $ 21.34
======== ======== ======== ========
Market value, end of period $ 23.82 $ 24.49 $ 20.92 $ 22.12
======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (f) 9.38% 22.23% 11.96%(h) 13.53%
======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (f) 2.96% 24.57% 0.29% 12.38%
======== ======== ======== ========
Net assets, end of period (in 000's) $172,421 $166,850 $145.230 $136,993
Portfolio turnover rate 16% 17% 38% 35%
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Including current and deferred income taxes
before waiver (i) 8.52% 14.47% 8.62% 18.38% (j)
Including current and deferred income taxes
after waiver (i) 8.52% 14.29% 8.31% 18.09% (j)
Excluding current and deferred income taxes
before waiver 3.94% 3.63% 2.64% 2.20% (j)
Excluding current and deferred income taxes
after waiver 3.94% 3.45% 2.33% 1.91% (j)
Excluding current and deferred income taxes
and interest expense after waiver 1.89% 1.76% 1.57% 1.36% (j)
RATIOS OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS:
Net investment income (loss) ratio before tax
expenses (3.83)% (3.26)% (2.29)% (1.49)% (j)
Net investment income (loss) ratio including
tax expenses (i) (8.41)% (14.10)% (8.27)% (17.67)% (j)
SENIOR SECURITIES:
Total Energy Notes outstanding ($25,000
per note) 2,360 2,360 1,360 N/A
Principal amount and market value per Energy
Note (k) $ 25,004 $ 25,069 $ 25,074 N/A
Asset coverage per Energy Note (l) $ 98,060 $ 95,699 $131,786 N/A
Total loan outstanding (in 000's) $ 15,250 N/A N/A $ 30,000
Asset coverage per $1,000 senior indebtedness $ 12,306 (n) N/A N/A $ 5,566 (n)
See notes to this table on the next page.
-27-
(a) On September 14, 2007, the Fund's Board of Trustees approved an interim
sub-advisory agreement with Energy Income Partners, LLC ("EIP"), and on
September 24, 2007, the Board of Trustees voted to approve EIP as
investment sub-advisor and on January 8, 2008, the shareholders approved
new agreements.
(b) Initial seed date of June 17, 2004. The Fund commenced operations on June
24, 2004.
(c) Net of sales load of $0.90 per Common Share on initial offering.
(d) Based on average shares outstanding.
(e) Reimbursement from Sub-Advisor represents less than $0.01.
(f) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in net asset value per share for net
asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load and are not annualized for
periods less than one year. Past performance is not indicative of future
results.
(g) During the year ended November 30, 2011, the Sub-Advisor reimbursed the
Fund $74,357 in connection with a trade error. The reimbursement received
from the Sub-Advisor had no effect on the Fund's total return for Common
Shares.
(h) In 2005, the Fund received reimbursements from the Adviser and former
sub-advisor. This reimbursement had no effect on the Fund's total return.
(i) Includes current and deferred income taxes associated with each component
of the Statement of Operations.
(j) Annualized.
(k) Includes accumulated and unpaid interest.
(l) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the Energy Notes) and dividing by the
outstanding Energy Notes in 000's.
(m) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding and the Energy Notes) and
dividing by the loan outstanding in 000's. If this methodology had been
used historically, fiscal year 2007 would have been $16,175.
(n) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
outstanding in 000's.
N/A Not applicable.
-28-
SENIOR SECURITIES
The following table sets forth information about the Fund's outstanding
senior securities as of each
fiscal year ended November 30 since the Fund's inception:
Total Principal
Amount/Liquidation Asset Coverage Asset Coverage Principal Amount
Preference per $1,000 Senior per and Market Value
Year Title of Security Outstanding Indebtedness Energy Note (b) Per Energy Note (d)
---- ------------------------ ------------------ ----------------- --------------- -------------------
2004 Borrowings
Total Loan Outstanding $ 30,000,000 $ 5,566(a) ____ ____
2005 Energy Notes
Series A (1,360 Notes) $ 34,000,000 ____ $ 131,786 $ 25,074
2006 Energy Notes
Series A (1,360 Notes)
Series B (1,000 Notes) $ 59,000,000 ____ $ 95,699 $ 25,069
2007 Energy Notes
Series A (1,360
Notes)(e) $ 59,000,000 ____ $ 98,060 $ 25,004
Series B (1,000 Notes)
Borrowings
Credit Facility $ 15,250,000 $ 12,306(a) ____ ____
2008 Energy Notes
Series B (1,000 $ 25,000,000 ____ $119,880 $25,006
Notes)(f)
Borrowings $ 5,650,000 $ 22,218(c) ____ ____
Credit Facility (g)
2009 Borrowings
Credit Facility $ 45,000,000 $ 4,034(c) ____ ____
2010 Borrowings
Credit Facility $ 90,000,000 $ 4,235(c) ____ ____
2011 Borrowings
Credit Facility $ 137,900,000 $ 3,794(c) ____ ____
2012 Borrowings
Credit Facility $ 170,400,000 $ 3,826(c) ____ ____
(a) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
outstanding (in 000s).
(b) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the Energy Notes) and dividing by the
outstanding Energy Notes (in 000s).
(c) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding and the Energy Notes) and
dividing by the loan outstanding in 000's. If this methodology had been
used historically, fiscal year 2007 would have been $16,175.
(d) Includes accumulated and unpaid interest.
(e) On April 18, 2008, the Fund redeemed all of the issued and outstanding
Series A Notes.
(f) On March 13, 2009, the Fund redeemed all of the issued and outstanding
Series B Notes.
(g) On January 23, 2009, the Fund repaid in full outstanding borrowings under
the Credit Facility with borrowings under the Commitment Facility.
-29-
MARKET AND NET ASSET VALUE INFORMATION
The Fund's currently outstanding common shares are, and the Common Shares
offered by this prospectus and the applicable prospectus supplement, subject to
notice of issuance, will be, listed on NYSE MKT (formerly the NYSE Amex). The
Fund's common shares commenced trading on NYSE MKT on June 25, 2004.
The Fund's common shares have traded both at a premium and at a discount in
relation to net asset value. Shares of closed-end investment companies
frequently trade at a discount from net asset value. The Fund's issuance of the
Common Shares may have an adverse effect on prices in the secondary market for
the Fund's common shares by increasing the number of common shares available,
which may put downward pressure on the market price for the Fund's common
shares. The continued development of alternatives as vehicles for investing in a
portfolio of energy infrastructure MLPs, including other publicly traded
investment companies and private funds, may reduce or eliminate any tendency of
the Fund's common shares to trade at a premium in the future. Shares of common
stock of closed-end investment companies frequently trade at a discount from Net
Asset Value. See "Risks -- Market Discount from Net Asset Value."
The following table sets forth for each of the periods indicated the high and
low closing market prices for common shares of the Fund on NYSE MKT, the net
asset value per share and the premium or discount to net asset value per share
at which the Fund's common shares were trading. Net asset value is determined
daily as of the close of regular trading on the NYSE (normally 4:00 p.m. eastern
time). Prior to August 1, 2008, net asset value was determined on each Friday
and as of the end of each month. See "Net Asset Value" for information as to the
determination of the Fund's net asset value.
PREMIUM/(DISCOUNT)
MARKET PRICE(1) NET ASSET VALUE (2) TO NET ASSET VALUE (3)
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
September 30, 2004............................$22.20 $19.60 $20.44 $19.06 8.61% 2.83%
December 31, 2004.............................$22.98 $20.60 $21.01 $20.16 9.38% 2.18%
March 31, 2005................................$24.05 $21.50 $23.12 $21.68 4.02% (0.83)%
June 30, 2005.................................$23.69 $21.49 $22.35 $21.46 6.00% 0.14%
September 30, 2005............................$24.77 $22.74 $24.23 $24.09 2.23% (5.60)%
December 30, 2005.............................$23.85 $20.82 $23.99 $23.34 (0.58)% (10.80)%
March 31, 2006................................$22.42 $20.40 $23.01 $22.86 (2.56)% (10.76)%
June 30, 2006.................................$21.36 $20.15 $23.33 $23.16 (8.44)% (13.00)%
September 30, 2006............................$22.56 $20.50 $24.38 $23.41 (7.47)% (12.43)%
December 30, 2006.............................$25.55 $21.70 $26.39 $23.92 (3.18)% (9.28)%
March 31, 2007................................$29.26 $24.22 $28.99 $26.04 0.93% (6.99)%
June 29, 2007.................................$29.90 $27.00 $29.70 $29.82 0.67% (9.46)%
September 28, 2007............................$29.55 $22.65 $31.27 $27.01 (5.50)% (16.14)%
December 31, 2007.............................$26.45 $21.71 $27.82 $25.57 (4.92)% (15.10)%
March 31, 2008................................$24.60 $21.16 $26.18 $24.49 (6.04)% (13.60)%
June 30, 2008.................................$25.80 $22.36 $25.46 $23.91 1.34% (6.48)%
September 30, 2008............................$23.33 $18.26 $22.18 $20.71 5.18% (11.83)%
December 31, 2008.............................$20.20 $11.21 $19.14 $12.71 5.54% (11.80)%
March 31, 2009................................$19.04 $14.02 $15.89 $13.76 19.82% 1.89%
June 30, 2009.................................$20.75 $16.83 $18.04 $15.95 15.02% 5.52%
September 30, 2009............................$22.31 $18.40 $18.48 $16.95 20.73% 8.55%
December 31, 2009.............................$25.20 $21.17 $21.00 $19.69 20.00% 7.52%
March 31, 2010................................$24.59 $21.69 $22.64 $21.03 8.61% 3.14%
June 30, 2010.................................$26.25 $21.46 $23.10 $20.37 13.64% 5.35%
September 30, 2010............................$25.98 $23.63 $24.65 $22.22 5.40% 6.35%
December 31, 2010.............................$28.00 $25.68 $26.21 $25.10 6.83% 2.31%
March 31, 2011................................$29.20 $26.87 $27.48 $26.47 6.26% 1.51%
June 30, 2011.................................$30.11 $27.05 $28.05 $25.91 7.34% 4.40%
September 30, 2011............................$30.20 $22.71 $27.45 $23.41 10.02% (2.99)%
December 31, 2011.............................$28.53 $24.59 $28.53 $24.64 0.00% (0.20)%
March 31, 2012................................$31.56 $28.65 $29.64 $28.95 6.48% (1.04)%
June 30, 2012.................................$31.23 $27.91 $28.56 $26.38 9.35% 5.80%
September 30, 2012............................$32.87 $29.43 $29.09 $29.28 12.99% 0.51%
December 31, 2012.............................$31.80 $27.68 $29.20 $27.18 8.90% 1.84%
-30-
The last reported sale price, net asset value per share and percentage
premium to net asset value per share of the common shares as of November 30,
2012 were $30.69, $29.12 and 5.39%, respectively. As of November 30, 2012, the
Fund had 16,534,978 common shares outstanding and net assets of the Fund were
$481,549,354.
--------------------------------------------------------------------------------
(1) Based on high and low closing market price for the respective quarter.
(2) Based on the net asset value calculated on the day of the high and low
closing market prices, as applicable, as of the close of regular trading on
the NYSE (normally 4:00 p.m. eastern time). Prior to August 1, 2008, net
asset value was determined on each Friday and as of the end of each month.
(3) Calculated based on the information presented.
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Fund was organized as a Massachusetts
business trust on March 25, 2004, pursuant to a Declaration of Trust governed by
the laws of the Commonwealth of Massachusetts. The Fund's investment objective
is to seek a high level of after-tax total return with an emphasis on current
distributions paid to common shareholders. The Fund seeks to provide its common
shareholders with an efficient vehicle to invest in a portfolio of
cash-generating securities of energy companies. On June 29, 2004, the Fund
issued an aggregate of 6,400,000 common shares in its initial public offering.
On May 19, 2009, the Fund entered into a sales agreement with the Advisor,
Sub-Advisor, and JonesTrading Institutional Services LLC, pursuant to which
259,962 Common Shares were sold. In addition, on February 12, 2010, the Fund
entered into an underwriting agreement with the Advisor, the Sub-Advisor, RBC
Capital Markets Corporation and other underwriters named in the agreement
pursuant to which 805,000 Common Shares were sold (including 105,000 pursuant to
an overallotment option), on February 18, 2010 and February 25, 2010,
respectively. Subsequently, on April 30, 2010, the Fund entered into an
underwriting agreement with the Advisor, the Sub-Advisor, RBC Capital Markets
Corporation and other underwriters named in the agreement pursuant to which
1,955,000 Common Shares were sold (including 255,000 pursuant to an
overallotment option on May 3, 2010), on November 18, 2010, the Fund entered
into an underwriting agreement with the Advisor, the Sub-Advisor, RBC Capital
Markets, LLC and other underwriters named in the agreement pursuant to which
1,600,000 Common Shares were sold on November 24, 2010, on July 26, 2011, the
Fund entered into an underwriting agreement with the Advisor, the Sub-Advisor,
Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and RBC Capital Markets,
LLC and other underwriters named in the agreement pursuant to which 2,800,000
common shares were sold on July 29, 2011 and on July 26, 2012, the Fund entered
into an underwriting agreement with the Advisor, the Sub-Advisor, Morgan Stanley
& Co. LLC, Citigroup Global Markets Inc. and RBC Capital Markets, LLC and other
underwriters named in the agreement pursuant to which 2,400,000 common shares
were sold on July 31, 2012. Effective March 19, 2012, the Fund's Board of
Trustees approved a name change for the Fund from "Energy Income and Growth
Fund" to "First Trust Energy Income and Growth Fund." The Fund's currently
outstanding common shares are, and the Common Shares offered in this prospectus
and applicable prospectus supplement will be, listed on the NYSE MKT under the
symbol "FEN." The Fund's principal office is located at 187 Danbury Road,
Wilton, Connecticut 06897.
The following table provides information about the Fund's outstanding
securities as of November 30, 2012:
AMOUNT HELD BY
AMOUNT THE FUND OR FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
Common shares.............. Unlimited 0 16,534,978
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement, the Fund will invest
the net proceeds from any sales of Common Shares in accordance with the Fund's
investment objective and policies as stated below, or use such proceeds for
other general corporate purposes. Pending any such use, the proceeds may be
invested in cash, cash equivalents or other securities.
-31-
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high level of after-tax total
return with an emphasis on current distributions paid to common shareholders.
For purposes of the Fund's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Fund will invest regardless of the tax character of the distributions. The Fund
seeks to provide its common shareholders with an efficient vehicle to invest in
a portfolio of cash-generating securities of energy companies. The Fund focuses
on investing in publicly traded MLPs and related public entities in the energy
sector which the Fund's Sub-Advisor believes offer opportunities for income and
growth. As used in this prospectus, unless the context requires otherwise, MLPs
are those MLPs in the energy sector. Due to the tax treatment under current law
of cash distributions made by MLPs to their investors (such as the Fund), the
Fund believes that a portion of the distributions it receives from MLP
investments may be tax deferred thereby increasing cash available for
distribution by the Fund to its common shareholders. There can be no assurance
that the Fund will achieve its investment objective.
The Fund's investment objective is considered fundamental and may not be
changed without common shareholder approval. The remainder of the Fund's
investment policies, including its investment strategy, are considered
non-fundamental and may be changed by the Board of Trustees without the approval
of the holders of a "majority of the outstanding" common shares, provided that
common shareholders receive at least 60 days prior written notice of any change.
When used with respect to particular shares of the Fund, a "majority of the
outstanding" shares means (i) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the shares are present or represented by proxy,
or (ii) more than 50% of the shares, whichever is less.
The Fund seeks to achieve its investment objective by investing primarily in
securities of MLPs and MLP-related entities in the energy sector that the
Sub-Advisor believes offer attractive distribution rates and capital
appreciation potential. The Fund also may invest in other securities set forth
below if the Sub-Advisor expects to achieve the Fund's objective with such
investments.
The Fund's policy of investing at least 85% of its Managed Assets (including
assets obtained through leverage) in securities of energy companies, MLPs and
MLP-related entities in the energy sector is non-fundamental.
The Fund has adopted the following additional non-fundamental policies:
o Under normal market conditions, the Fund invests at least 65% and up to
100% of its Managed Assets in equity securities issued by energy sector
MLPs and energy sector MLP-related entities. Equity securities
currently consist of common units and subordinated units of MLPs,
I-Shares of MLP-related entities and common stock of MLP-related
entities, such as general partners or other affiliates of the MLPs.
o The Fund may invest in unregistered or otherwise restricted securities.
The types of unregistered or otherwise restricted securities that the
Fund may purchase consist of MLP common units, MLP subordinated units
and securities of public and private energy companies. The Fund will
not invest more than 35% of its Managed Assets in such restricted
securities, including up to 10% of its Managed Assets in private
companies.
o The Fund may invest up to 25% of its Managed Assets in debt securities
of energy companies, MLPs and MLP related entities, including certain
securities rated below investment grade. Below investment grade debt
securities will be rated at least "B3" by Moody's and at least "B-" by
S&P at the time of purchase, or comparably rated by another NRSRO or,
if unrated, determined to be of comparable quality by the Sub-Advisor.
o The Fund will not invest more than 10% of its Managed Assets in any
single issuer.
o The Fund will not engage in short sales, except to the extent the Fund
engages in derivative investments to seek to hedge against interest
rate risk in connection with the Fund's use of Financial Leverage or
market risks associated with the Fund's portfolio.
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o The Fund may invest up to 15% of its Managed Assets in non-U.S.
securities as well as hedge the currency risk of the non-U.S.
securities using derivative instruments.
Unless otherwise stated, all investment restrictions apply at the time of
purchase and the Fund will not be required to reduce a position due solely to
market value fluctuations.
For a more complete discussion of the Fund's portfolio composition, see
"Portfolio Composition."
INVESTMENT PHILOSOPHY AND PROCESS
Under normal market conditions, the Fund invests at least 85% of its Managed
Assets in securities of energy companies and energy sector MLPs and energy
sector MLP-related entities. The Sub-Advisor seeks securities that offer a
combination of quality, growth and yield intended to result in superior total
returns over the long run. The Sub-Advisor's securities selection process
includes a comparison of quantitative, qualitative, and relative value factors.
While the Sub-Advisor maintains an active dialogue with several research
analysts in the energy sector, the Sub-Advisor's primary emphasis is placed on
proprietary analysis and valuation models conducted and maintained by its
in-house investment analysts. To determine whether a company meets its criteria,
the Sub-Advisor generally considers, among other things, a proven track record,
a strong record of distribution or dividend growth, solid ratios of debt to cash
flow, coverage ratios with respect to distributions to unit holders, incentive
structure, and management team.
The Fund pursues its objective by investing principally in a portfolio of
equity securities issued by MLPs and MLP-related entities. MLP common units
historically have generated higher average total returns than domestic common
stock (as measured by the S&P 500) and fixed income securities. A more detailed
description of investment policies and restrictions and more detailed
information about portfolio investments is contained in the Fund's SAI.
Energy Companies. The Fund concentrates its investments in the following
group of industries that are part of the energy sector: transporting,
processing, storing, distributing, marketing, exploring, developing, managing
and producing natural gas, natural gas liquids ("NGLs") (including propane),
crude oil, refined petroleum products, coal and electricity, and supplying
products and services in support of pipelines, power transmission, petroleum and
natural gas production, transportation and storage. The Fund's investments
consist of equity and debt securities issued by energy companies and energy
sector MLPs and energy sector MLP-related entities.
Some energy companies operate as "public utilities" or "local distribution
companies," and are therefore subject to rate regulation by state or federal
utility commissions. However, other energy companies may be subject to greater
competitive factors than utility companies, including competitive pricing in the
absence of regulated tariff rates, which could cause a reduction in revenue and
which could adversely affect profitability. Most Midstream MLPs with pipeline
assets are subject to government regulation concerning the construction, pricing
and operation of pipelines. In many cases, the rules and tariffs charged by
these pipelines are monitored by the Federal Energy Regulatory Commission
("FERC") or various state regulatory agencies.
Master Limited Partnerships. MLPs are limited partnerships whose shares (or
units) are listed and traded on a U.S. securities exchange, just like common
stock. To qualify as a partnership for federal income tax purposes, an MLP must
receive at least 90% of its income from qualifying sources such as natural
resource activities. Natural resource activities include the exploration,
development, mining, production, processing, refining, transportation and
marketing of mineral or natural resources. MLPs generally have two classes of
owners, the general partner and limited partners. The general partner, which is
generally a major energy company, investment fund or the management of the MLP,
typically controls the MLP through a 2% general partner equity interest in the
MLP plus common units and subordinated units. Limited partners own the remainder
of the partnership, through ownership of common units, and have a limited role
in the partnership's operations and management.
MLPs are typically structured such that common units have first priority to
receive quarterly cash distributions up to an established MQD. Common units also
accrue arrearages in distributions to the extent the MQD is not paid. Once
common units have been paid, subordinated units receive distributions of up to
the MQD, but subordinated units do not accrue arrearages. Distributable cash in
excess of the MQD paid to both common and subordinated units is distributed to
both common and subordinated units generally on a pro rata basis. The general
partner is also eligible to receive incentive distributions if the general
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partner operates the business in a manner which maximizes value to unit holders.
As the general partner increases cash distributions to the limited partners, the
general partner receives an increasingly higher percentage of the incremental
cash distributions. A common arrangement provides that the general partner can
reach a tier where the general partner is receiving 50% of every incremental
dollar paid to common and subordinated unit holders. By providing for incentive
distributions the general partner is encouraged to streamline costs and acquire
assets in order to grow the partnership, increase the partnership's cash flow,
and raise the quarterly cash distribution in order to reach higher tiers. Such
results benefit all security holders of the MLP.
Energy MLPs in which the Fund invests can generally be classified as
Midstream MLPs, Propane MLPs and Coal MLPs.
o Midstream MLP natural gas services include the treating, gathering,
compression, processing, transmission and storage of natural gas and
the transportation, fractionation and storage of NGLs (primarily
propane, ethane, butane and natural gasoline). Midstream MLP crude oil
services include the gathering, transportation, storage and
terminalling of crude oil. Midstream MLP refined petroleum product
services include the transportation (usually via pipelines, barges,
rail cars and trucks), storage and terminalling of refined petroleum
products (primarily gasoline, diesel fuel and jet fuel) and other
hydrocarbon by-products. Midstream MLPs may also operate ancillary
businesses including the marketing of the products and logistical
services.
o Propane MLP services include the distribution of propane to homeowners
for space and water heating and to commercial, industrial and
agricultural customers. Propane serves approximately 3% of the
household energy needs in the United States, largely for homes beyond
the geographic reach of natural gas distribution pipelines. Volumes are
weather dependent and a majority of annual cash flow is earned during
the winter heating season (October through March).
o Coal MLP services include the owning, leasing, managing, production and
sale of coal and coal reserves. Electricity generation is the primary
use of coal in the United States. Demand for electricity and supply of
alternative fuels to generators are the primary drivers of coal demand.
The Fund also may invest in equity and debt securities of energy companies
that are organized and/or taxed as corporations, including Canadian income
trusts, and may invest in equity and debt securities of MLP-related entities,
such as general partners or other affiliates of MLPs, and in private companies
that operate energy assets.
PORTFOLIO COMPOSITION
The Fund's portfolio is composed principally of the following investments. A
more detailed description of the Fund's investment policies and restrictions and
more detailed information about the Fund's portfolio investments are contained
in the SAI.
Equity Securities of MLPs and MLP-Related Entities. Consistent with its
investment objective, the Fund may invest up to 100% of its Managed Assets in
equity securities issued by energy sector MLPs and energy sector MLP-related
entities, including common units and subordinated units of MLPs, I-Shares of
MLP-related entities and common stock of MLP-related entities, such as general
partners or other affiliates of the MLPs.
MLP Common Units. MLP common units represent a limited partnership interest
in the MLP. Common units are listed and traded on U.S. securities exchanges or
over-the-counter, with their value fluctuating predominantly based on the
success of an MLP. The Fund intends to purchase common units in market
transactions but may also purchase securities directly from the MLP or other
parties in private placements. Unlike owners of common stock of a corporation,
owners of common units have limited voting rights and have no ability to
annually elect directors. MLPs generally distribute all available cash flow
(cash flow from operations less maintenance capital expenditures) in the form of
a quarterly distribution. Common unit holders have first priority to receive
quarterly cash distributions up to the MQD and have arrearage rights. In the
event of liquidation, common unit holders have preference over subordinated
units, but not debt holders or preferred unit holders, to the remaining assets
of the MLP.
MLP Subordinated Units. MLP subordinated units are typically issued by MLPs
to their original sponsors, such as their founders, corporate general partners
of MLPs, entities that sell assets to the MLP, and institutional investors. The
Fund expects to purchase subordinated units directly from these persons.
Subordinated units have similar voting rights as common units and are generally
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not publicly traded. Once the MQD on the common units, including any arrearages,
has been paid, subordinated units will receive cash distributions up to the MQD
prior to any incentive payments to the MLP's general partner. Unlike common
units, subordinated units do not have arrearage rights. In the event of
liquidation, common units have priority over subordinated units. Subordinated
units are typically converted into common units on a one-to-one basis after
certain time periods and/or performance targets have been satisfied.
Subordinated units are generally valued based on the price of the common units,
discounted to reflect the timing or likelihood of their conversion to common
units.
MLP I-Shares. I-Shares represent an ownership interest issued by an
affiliated party of an MLP. The MLP affiliate uses the proceeds from the sale of
I-Shares to purchase limited partnership interests in the MLP in the form of
i-units. I-units have similar features as MLP common units in terms of voting
rights, liquidation preference and distributions. However, rather than receiving
cash, the MLP affiliate receives additional i-units in an amount equal to the
cash distributions received by MLP common units. Similarly, holders of I-Shares
will receive additional I-Shares, in the same proportion as the MLP affiliates'
receipt of i-units, rather than cash distributions. I-Shares themselves have
limited voting rights which are similar to those applicable to MLP common units.
The MLP affiliate issuing the I-Shares is structured as a corporation for
federal income tax purposes. As a result, I-Shares holders, such as the Fund,
will receive a Form 1099 rather than a Form K-1 statement. I-Shares are traded
on the NYSE and the NYSE MKT.
Equity Securities of Energy Companies. The Fund may invest up to 35% of its
Managed Assets in equity securities issued by energy companies. The Fund intends
to purchase these equity securities in market transactions but may also purchase
securities directly from the issuers in private placements.
Debt Securities. The Fund may invest up to 25% of its Managed Assets in debt
securities of energy companies, MLPs and MLP-related entities, including
securities rated below investment grade. The debt securities in which the Fund
may invest may provide for fixed or variable principal payments and various
types of interest rate and reset terms including, fixed rate, adjustable rate,
zero coupon, contingent, deferred, payment-in-kind and auction rate features.
Certain debt securities are "perpetual" in that they have no maturity date.
Certain debt securities are zero coupon bonds. A zero coupon bond is a bond that
does not pay interest either for the entire life of the obligation or for an
initial period after the issuance of the obligation. To the extent that the Fund
invests in below investment grade debt securities, such securities will be
rated, at the time of investment, at least "B-" by S&P or "B3" by Moody's or a
comparable rating by another NRSRO or, if unrated, determined to be of
comparable quality by the Sub-Advisor. If a security satisfies the Fund's
minimum rating criteria at the time of purchase and is subsequently downgraded
below such rating, the Fund will not be required to dispose of such security. If
a downgrade occurs, the Sub-Advisor will consider what action, including the
sale of such security, is in the best interest of the Fund and its common
shareholders. In light of the risks of below investment grade securities, the
Sub-Advisor, in evaluating the creditworthiness of an issue, whether rated or
unrated, will take various factors into consideration, which may include, as
applicable, the issuer's operating history, financial resources and its
sensitivity to economic conditions and trends, the market support for the
facility financed by the issue (if applicable), the perceived ability and
integrity of the issuer's management and regulatory matters.
Short-Term Debt Securities; Temporary Defensive Position; Invest-Up Period.
During the period in which the net proceeds of any offering of Common Shares
offered hereby are being invested, or during periods in which the Sub-Advisor
determines that it is temporarily unable to follow the Fund's investment
strategy or that it is impractical to do so, the Fund may deviate from its
investment strategy and invest all or any portion of its net assets in cash,
cash equivalents or other securities. The Sub-Advisor's determination that it is
temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so will generally occur only in situations in which a market
disruption event has occurred and where trading in the securities selected
through application of the Fund's investment strategy is extremely limited or
absent. In such a case, shares of the Fund may be adversely affected and the
Fund may not pursue or achieve its investment objective.
INVESTMENT PRACTICES
Covered Call Option Transactions. Call options are contracts representing the
right to purchase a common stock at a specified price (the "strike price") at a
specified future date (the "expiration date"). The price of the option is
determined from trading activity in the broad options market, and generally
reflects the relationship between the current market price for the underlying
-35-
common stock and the strike price, as well as the time remaining until the
expiration date. The Fund writes call options only if they are "covered." In the
case of a call option on a common stock or other security, the option is
"covered" if the Fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or other
assets determined to be liquid by the Sub-Advisor (in accordance with procedures
approved by the Board of Trustees) in such amount are segregated by the Fund's
custodian) upon conversion or exchange of other securities held by the Fund.
If an option written by the Fund expires unexercised, the Fund realizes on
the expiration date a capital gain equal to the premium received by the Fund at
the time the option was written. If an option purchased by the Fund expires
unexercised, the Fund realizes a capital loss equal to the premium paid at the
time the option expires. Prior to the earlier of exercise or expiration, an
exchange-traded option may be closed out by an offsetting purchase or sale of an
option of the same series (type, underlying security, exercise price, and
expiration). There can be no assurance, however, that a closing purchase or sale
transaction can be effected when the Fund desires. The Fund may sell put or call
options it has previously purchased, which could result in a net gain or loss
depending on whether the amount realized on the sale is more or less than the
premium and other transaction costs paid on the put or call option purchased.
See "Tax Matters."
Strategic Transactions. The Fund may, but is not required to, use various
hedging and strategic transactions described below to seek to reduce interest
rate risks arising from any use of Financial Leverage by the Fund, to facilitate
portfolio management and mitigate risks, including interest rate, currency and
credit risks. The Fund currently writes (or sells) covered call options on the
common stock of energy companies held in the Fund's portfolio. Hedging and
strategic transactions are generally accepted under modern portfolio management
theory and are regularly used by many investment companies and other
institutional investors. Although the Sub-Advisor seeks to use such practices to
further the Fund's investment objective, no assurance can be given that these
practices will achieve this result. In prior fiscal years, the Fund has entered
into interest rate swaps. During the fiscal year ended November 30, 2012, the
Fund wrote covered call options on the common stocks of energy companies held in
the Fund's portfolio. The Fund expects to continue to utilize Strategic
Transactions in a manner similar to its activity during fiscal 2012.
The Fund may purchase and sell derivative investments such as total return
and equity swaps, exchange-listed and over-the-counter put and call options on
currencies, securities, energy-related commodities, equity, fixed income and
interest rate indices, and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various interest
rate transactions such as swaps, caps, floors or collars or credit transactions
and credit default swaps. The Fund also may purchase derivative investments that
combine features of these instruments. Collectively, all of the above are
referred to as "Strategic Transactions." The Fund generally seeks to use
Strategic Transactions as a portfolio management or hedging technique to seek to
protect against possible adverse changes in the market value of securities held
in or to be purchased for the Fund's portfolio, protect the value of the Fund's
portfolio, facilitate the sale of certain securities for investment purposes,
manage the effective interest rate and currency exposure of the Fund, including
the effective yield paid on any Financial Leverage issued by the Fund, or
establish positions in the derivatives markets as a temporary substitute for
purchasing or selling particular securities.
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transactions or illiquidity of the derivative
investments. Furthermore, the ability to successfully use Strategic Transactions
depends on the Sub-Advisor's ability to predict pertinent market movements,
which cannot be assured. Thus, the use of Strategic Transactions may result in
losses greater than if they had not been used, may require the Fund to sell or
purchase portfolio securities at inopportune times or for prices other than
current market values, may limit the amount of appreciation the Fund can realize
on an investment, or may cause the Fund to hold a security that it might
otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or
other assets held in margin accounts with respect to Strategic Transactions are
not otherwise available to the Fund for investment purposes.
See "Risks -- Derivatives Risk" in the prospectus and "Investment Policies
and Techniques" in the Fund's SAI for a more complete discussion of Strategic
Transactions and their risks.
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Value of Derivative Instruments. For purposes of determining the Fund's
compliance with the investment requirements relating to MLP and MLP-related
entities, the Fund values Strategic Transactions based on their respective
current fair market values.
Portfolio Turnover. The Fund's annual portfolio turnover rate may vary
greatly from year to year. Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is not expected to exceed 30% under normal
circumstances, but may be higher or lower in certain periods. For the fiscal
year ended November 30, 2012, the Fund's portfolio turnover rate was
approximately 26%. However, portfolio turnover rate is not considered a limiting
factor in the execution of investment decisions for the Fund. A higher turnover
rate results in correspondingly greater brokerage commissions and other
transactional expenses that are borne by the Fund. High portfolio turnover may
result in the Fund's recognition of gains that will increase the Fund's tax
liability and thereby lower the after-tax dividends of the Fund. In addition,
high portfolio turnover may increase the Fund's current and accumulated earnings
and profits, resulting in a greater portion of the Fund's distributions being
treated as taxable dividends for federal income tax purposes. See "Tax Matters."
USE OF FINANCIAL LEVERAGE
The Fund is currently engaged in, and may in the future engage in, the use of
Financial Leverage to seek to enhance the level of its current distributions to
common shareholders. The Fund may borrow (by use of commercial paper, notes
and/or other Borrowings) an amount up to 331/3% (or such other percentage to the
extent permitted by the 1940 Act) of its Managed Assets (including the amount
borrowed) less all liabilities other than borrowings. The Fund may also issue
Preferred Shares in an amount up to 50% of the Fund's Managed Assets (including
the proceeds of the Preferred Shares and any borrowings). As of November 30,
2012, the Fund utilized leverage in an amount equal to approximately 26% of the
Fund's Managed Assets. Borrowings, commercial paper or notes and Preferred
Shares are each considered a "Leverage Instrument" and collectively, the
"Leverage Instruments." Leverage Instruments have seniority in liquidation and
distribution rights over the Fund's common shares.
On January 28, 2005, the Fund issued $34 million principal amount of auction
rate senior notes due March 2, 2045 (the "Series A Notes") and on March 26,
2006, issued $25 million principal amount of auction rate senior notes due March
20, 2046 (the "Series B Notes") each of which were rated "Aaa" and "AAA" by
Moody's and Fitch, respectively. On March 26, 2008, the Fund established a
Credit Facility with The Bank of Nova Scotia, of which $34 million was used to
redeem the issued and outstanding Series A Notes. On January 23, 2009, the Fund
entered into a commitment facility agreement with BNP Paribas Prime Brokerage
Inc. (as amended from time to time, the "Commitment Facility"), which was used
to repay in full outstanding borrowings under the Credit Facility and, on
February 26, 2009, to deposit funds to redeem the issued and outstanding Series
B Notes. All of the issued and outstanding Series B Notes were redeemed on March
13, 2009. As of November 30, 2012, the maximum commitment amount was
$200,000,000.
The Fund may, in the future, incur additional Borrowings, issue additional
series of notes or other senior securities in an amount up to 331/3% (or such
other percentage to the extent permitted by the 1940 Act) of its Managed Assets
(including the amount borrowed) less all liabilities other than Borrowings). The
Fund's common shares, including the Common Shares, are junior in liquidation and
distribution rights to Borrowings under the Commitment Facility. The issuance of
debt and Preferred Shares, including Borrowings under the Commitment Facility,
represent the leveraging of the Fund's common shares. The issuance of additional
Common Shares offered by this prospectus and an applicable prospectus supplement
will enable the Fund to increase the aggregate amount of its leverage. The use
of leverage creates an opportunity for increased income and capital appreciation
for common shareholders, but at the same time, it creates special risks that may
adversely affect common shareholders. Because both the Advisor's and
Sub-Advisor's fees are based on Managed Assets (including assets obtained
through leverage), both the Advisor's and Sub-Advisor's fees are higher when the
Fund is leveraged. There can be no assurance that a leveraging strategy will be
successful during any period in which it is used.
It is possible that the Fund will be unable to obtain additional Financial
Leverage. The capital and credit markets have recently experienced extreme
volatility and disruption. Such volatility and disruption generally reduces the
availability of credit. The availability of Financial Leverage will depend on a
variety of factors, such as market conditions, the general availability of
credit, the volume of trading activities, the overall availability of credit to
-37-
the closed-end management investment companies, the Fund's credit ratings and
credit capacity, the Fund's asset class, as well as the possibility that lenders
could develop a negative perception of the Fund's long- or short-term financial
prospects if the Fund incurs large investment losses due to a market downturn.
Similarly, the Fund's access to Financial Leverage may be impaired if regulatory
authorities or rating agencies take negative actions against the Fund. The Fund
may not be able to successfully obtain additional Financial Leverage on
favorable terms, or at all. In the current economic environment, it has become
more difficult for borrowers, including the Fund, to find third parties willing
to extend credit or purchase securities that would constitute Financial
Leverage. If the Fund is unable to increase Financial Leverage after the
issuance of additional Common Shares pursuant to this prospectus and an
applicable prospectus supplement, there could be an adverse impact on the return
to common shareholders.
Leverage creates a greater risk of loss, as well as potential for more gain,
for the common shares than if leverage is not used. The Leverage Instruments
have complete priority upon distribution of assets over common shares. The
issuance of Leverage Instruments leverages the common shares. Although based on
recommendations by the Advisor and the Sub-Advisor, the determination of whether
to utilize Financial Leverage as well as timing and other terms of the offering
of Leverage Instruments and the terms of the Leverage Instruments, would be
determined by the Fund's Board of Trustees. The Fund expects to invest the net
proceeds derived from any future Leverage Instrument offering according to the
investment program described in this prospectus. So long as the Fund's portfolio
is invested in securities that provide a higher rate of return than the dividend
rate or interest rate of the Leverage Instrument, after taking expenses into
consideration, the leverage will cause common shareholders to receive a higher
rate of income than if the Fund were not leveraged.
Leverage creates risk for holders of the common shares, including the
likelihood of greater volatility of net asset value and market price of the
common shares, and the risk that fluctuations in interest rates on borrowings
and debt or in the dividend rates on any Preferred Shares may affect the return
to the holders of the common shares or will result in fluctuations in the
dividends paid on the common shares. To the extent total return exceeds the cost
of leverage, the Fund's return will be greater than if leverage had not been
used. Conversely, if the total return derived from securities purchased with
funds received from the use of leverage is less than the cost of leverage, the
Fund's return will be less than if leverage had not been used, and therefore the
amount available for distribution to common shareholders as dividends and other
distributions will be reduced. In the latter case, the Sub-Advisor in its best
judgment nevertheless may determine to maintain the Fund's leveraged position if
it expects that the benefits to the Fund's common shareholders of maintaining
the leveraged position will outweigh the current reduced return. Under normal
market conditions, the Fund anticipates that it will be able to invest the
proceeds from leverage at a higher rate than the costs of leverage, which would
enhance returns to common shareholders. The fees paid to the Advisor and
Sub-Advisor will be calculated on the basis of the Fund's Managed Assets
including proceeds from Borrowings for leverage and the issuance of Preferred
Shares. During periods in which the Fund is utilizing Financial Leverage, the
investment advisory fee payable to the Advisor, and the sub-advisory fee payable
by the Advisor to the Sub-Advisor, will be higher than if the Fund did not
utilize a leveraged capital structure. The use of leverage creates risks and
involves special considerations. See "Risks -- Leverage Risk."
The Fund's Declaration of Trust authorizes the Fund, without prior approval
of the common shareholders, to borrow money. In this connection, the Fund may
issue notes or other evidence of indebtedness (including bank borrowings or
commercial paper) and may secure any such borrowings by mortgaging, pledging or
otherwise subjecting as security the Fund's assets. In connection with such
borrowing, the Fund may be required to maintain minimum average balances with
the lender or to pay a commitment or other fee to maintain a line of credit. Any
such requirements will increase the cost of borrowing over the stated interest
rate. Under the requirements of the 1940 Act, the Fund, immediately after any
such borrowings, must have an "asset coverage" of at least 300% (331/3% of
Managed Assets after borrowings). With respect to such borrowings, asset
coverage means the ratio which the value of the Managed Assets of the Fund, less
all liabilities and indebtedness not represented by senior securities (as
defined in the 1940 Act), bears to the aggregate amount of such borrowing
represented by senior securities issued by the Fund.
The rights of lenders to the Fund to receive interest on and repayment of
principal of any such Borrowings will be senior to those of the common
shareholders, and the terms of any such Borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
common shareholders in certain circumstances. Further, the 1940 Act does (in
certain circumstances) grant to the lenders to the Fund certain voting rights in
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the event of default in the payment of interest on or repayment of principal. In
the event that the Fund elects to be treated as a regulated investment company,
and that such provisions would impair the Fund's status as a regulated
investment company under the Internal Revenue Code, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings.
Certain types of Borrowings may result in the Fund being subject to covenants
in credit agreements including covenants relating to asset coverage and
portfolio composition requirements. The Fund may be subject to certain
restrictions on investments imposed by guidelines of one or more rating
agencies, which may issue ratings for the short-term corporate debt securities
or Preferred Shares issued by the Fund. These guidelines may impose asset
coverage or portfolio composition requirements that are more stringent than
those imposed by the 1940 Act. In addition, the loan documents under the
Commitment Facility include customary provisions including a restriction on the
Fund's ability to pledge its assets and contains customary events of default
including failure of the Fund to meet the asset coverage test of the 1940 Act
described below. There is no assurance that the Fund will not violate asset
coverage covenants relating to the Commitment Facility in the future. In such
event, the Fund may be required to repay all outstanding Borrowings immediately.
In order to repay such amounts the Fund may be required to sell assets quickly
which could have a material adverse effect on the Fund and could trigger
negative tax implications. In addition, the Fund would be precluded from
declaring or paying any distribution on the common shares during the continuance
of such event of default.
The Commitment Facility can be used by the Fund for general corporate
purposes, including for financing a portion of the Fund's investments. The
Commitment Facility is secured by a first priority perfected security interest
in the assets of the Fund. In addition, the loan documents under the Commitment
Facility restrict the Fund's ability to change its investment advisor,
sub-advisor or custodian, amend its fundamental investment policies or
fundamental investment objectives, or take on additional indebtedness without
prior consent from the provider of the Commitment Facility.
If Preferred Shares are issued they could pay adjustable rate dividends based
on shorter-term interest rates or a fixed rate. In the event the dividends are
paid at adjustable rates, the adjustment period for Preferred Shares dividends
could be as short as one day or as long as a year or more.
Under the 1940 Act, the Fund is not permitted to issue Preferred Shares
unless immediately after such issuance the value of the Fund's managed assets is
at least 200% of the liquidation value of the outstanding Preferred Shares
(i.e., the liquidation value may not exceed 50% of the Fund's Managed Assets).
In addition, the Fund is not permitted to declare any cash dividend or other
distribution on its common shares unless, at the time of such declaration, the
value of the Fund's Managed Assets is at least 200% of such liquidation value.
If Preferred Shares are issued, the Fund intends, to the extent possible, to
purchase or redeem Preferred Shares from time to time to the extent necessary in
order to maintain coverage of any Preferred Shares of at least 200%. In
addition, as a condition to obtaining ratings on the Preferred Shares, the terms
of any Preferred Shares issued are expected to include asset coverage
maintenance provisions which will require the redemption of the Preferred Shares
in the event of non-compliance by the Fund and may also prohibit dividends and
other distributions on the common shares in such circumstances. In order to meet
redemption requirements, the Fund may have to liquidate portfolio securities.
Such liquidations and redemptions would cause the Fund to incur related
transaction costs and could result in capital losses to the Fund. If the Fund
has Preferred Shares outstanding, two of the Fund's trustees will be elected by
the holders of Preferred Shares as a class. The remaining trustees of the Fund
will be elected by holders of common shares and Preferred Shares, if any, voting
together as a single class. In the event the Fund failed to pay dividends on
Preferred Shares for two years, holders of Preferred Shares would be entitled to
elect a majority of the trustees of the Fund.
The Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.
EFFECTS OF LEVERAGE
The aggregate principal amount of Borrowings under the Commitment Facility
represented approximately 26% of Managed Assets as of November 30, 2012. Asset
coverage with respect to the Borrowings under the Commitment Facility was 383%
-39-
and the Fund had $29,600,000 of unutilized funds available for Borrowing under
the Commitment Facility as of that date. Outstanding balances under the
Commitment Facility generally accrue interest at a variable annual rate equal to
the three-month LIBOR plus 0.70%. As of November 30, 2012, the rate was 0.91%.
As of November 30, 2012, the Fund had $170,400,000 outstanding under the
Commitment Facility. The Commitment Facility also has an annual unused fee of
0.80% on the unutilized funds available for borrowing. The total annual interest
and fee rate as of November 30, 2012 was 0.89%.
Assuming that the Fund's leverage costs remain as described above (at an
assumed average annual cost of 0.89%), the annual return that the Fund's
portfolio must experience (net of expenses) in order to cover its leverage costs
would be 0.27%.
The following table is furnished in response to requirements of the SEC. It
is designed to illustrate the effect of leverage on common share total return,
assuming investment portfolio total returns (comprised of income and changes in
the value of securities held in the Fund's portfolio) of (10%), (5%), 0%, 5% and
10%. These assumed investment portfolio returns are hypothetical figures and are
not necessarily indicative of the investment portfolio returns experienced or
expected to be experienced by the Fund. See "Risks."
The table further assumes leverage representing 26% of the Fund's Managed
Assets, net of expenses, and
the Fund's current annual leverage interest and fee rate of 0.89%.
Assumed Portfolio Total Return (Net of Expenses) ...... -10% -5% 0% 5% 10%
Common Share Total Return ............................. -13.91% -7.14% -0.37% 6.40% 13.17%
Common share total return is composed of two elements: the common share
dividends paid by the Fund (the amount of which is largely determined by the net
investment income of the Fund after paying dividends or interest on its Leverage
Instruments) and gains or losses on the value of the securities the Fund owns.
As required by SEC rules, the table above assumes that the Fund is more likely
to suffer capital losses than to enjoy capital appreciation. For example, to
assume a total return of 0% the Fund must assume that the distributions it
receives on its investments is entirely offset by losses in the value of those
securities.
While the Fund is using leverage, the amount of the fees paid to both the
Advisor and the Sub-Advisor for investment advisory and management services are
higher than if the Fund did not use leverage because the fees paid are
calculated based on the Fund's Managed Assets, which include assets purchased
with leverage. Therefore, the Advisor and the Sub-Advisor have a financial
incentive to leverage the Fund, which may create a conflict of interest between
the Advisor and Sub-Advisor on the one hand and the common shareholders on the
other. Because payments on any leverage would be paid by the Fund at a specified
rate, only the Fund's common shareholders would bear the Fund's management fees
and other expenses.
RISKS
GENERAL
Risk is inherent in all investing. The following discussion summarizes some
of the risks that a Common Shareholder should consider before deciding whether
to invest in the Fund. For additional information about the risks associated
with investing in the Fund, see "Additional Information About the Fund's
Investments and Investment Risks" in the Fund's SAI.
INVESTMENT AND MARKET RISK
An investment in the Fund's Common Shares is subject to investment risk,
including the possible loss of the entire principal amount that you invest. Your
investment in Common Shares represents an indirect investment in the securities
owned by the Fund, substantially all of which are traded on a national
securities exchange or in the over-the-counter markets. An investment in the
Fund's Common Shares is not intended to constitute a complete investment program
and should not be viewed as such. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
The value of the securities in which the Fund invests will affect the value of
the Common Shares. Your Common Shares at any point in time may be worth less
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than your original investment, even after taking into account the reinvestment
of Fund dividends and distributions. The Fund has been designed primarily as a
long-term investment vehicle and is not intended to be used as a short-term
trading vehicle.
The Fund's performance was adversely impacted by the weakness in the credit
markets and broad stock market, and the resulting rapid and dramatic declines in
the value of MLPs that occurred beginning in late 2008, and may again be
adversely affected due to weaknesses in the credit and stock markets. If the
Fund's net asset value declines or remains volatile, there is an increased risk
that the Fund may be required to reduce outstanding leverage, which could
adversely affect the price of the Fund's common shares and ability to pay
distributions at historical levels. A sustained economic slowdown may adversely
affect the ability of MLPs to sustain their historical distribution levels,
which in turn, may adversely affect the Fund's ability to sustain distributions
at historical levels. MLPs that have historically relied heavily on outside
capital to fund their growth have been impacted by the slowdown in the capital
markets. The sustained recovery of the MLP sector is dependent on several
factors, including the sustained recovery of the financial sector, the general
economy and the commodity markets.
In response to the financial crises affecting the banking system and
financial markets and going concern threats to investment banks and other
financial institutions, the U.S. and foreign governments have intervened to an
unprecedented degree in the financial and credit markets. Among other things,
U.S. government regulators have encouraged, and in some cases structured and
provided financial assistance for, banks, securities firms, insurers and other
financial companies. Additional intervention programs have been adopted and may
be proposed which will have a further impact on the securities markets.
Many of the recently enacted or proposed government measures are far-reaching
and without historical precedent. Furthermore, the U.S. government has stated
its willingness to implement additional measures as it may see fit to address
changes in market conditions. There can be no assurance that any or all of these
measures will succeed in stabilizing and providing liquidity to the U.S.
financial markets, including the extreme levels of volatility recently
experienced. Such volatility could materially and adversely affect the Fund's
financial condition, the performance of its investments and the trading price of
its common shares.
MARKET IMPACT RISK
The sale of the Common Shares (or the perception that such sales may
occur) may have an adverse effect on prices in the secondary market for the
Fund's common shares by increasing the number of shares available, which may put
downward pressure on the market price for the Fund's common shares. These sales
also might make it more difficult for us to sell additional equity securities in
the future at a time and price the Fund deems appropriate.
MANAGEMENT RISK
The Fund is subject to management risk because it is an actively managed
portfolio. The Advisor and Sub-Advisor will apply investment techniques and risk
analyses in making investment decisions for the Fund, but there can be no
guarantee that these will produce the desired results.
POTENTIAL CONFLICTS OF INTEREST RISK
First Trust Advisors, Energy Income Partners and the portfolio managers
have interests which may conflict with the interests of the Fund. In particular,
First Trust Advisors and Energy Income Partners may manage and/or advise other
investment funds or accounts with the same investment objective and strategies
as the Fund. As a result, First Trust Advisors, Energy Income Partners and the
Fund's portfolio managers may devote unequal time and attention to the
management of the Fund and those other funds and accounts, and may not be able
to formulate as complete a strategy or identify equally attractive investment
opportunities as might be the case if they were to devote substantially more
attention to the management of the Fund. First Trust Advisors, Energy Income
Partners and the Fund's portfolio managers may identify a limited investment
opportunity that may be suitable for multiple funds and accounts, and the
opportunity may be allocated among these several funds and accounts, which may
limit the Fund's ability to take full advantage of the investment opportunity.
Additionally, transaction orders may be aggregated for multiple accounts for
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purpose of execution, which may cause the price or brokerage costs to be less
favorable to the Fund than if similar transactions were not being executed
concurrently for other accounts. At times, a portfolio manager may determine
that an investment opportunity may be appropriate for only some of the funds and
accounts for which he or she exercises investment responsibility, or may decide
that certain of the funds and accounts should take differing positions with
respect to a particular security. In these cases, the portfolio manager may
place separate transactions for one or more funds or accounts which may affect
the market price of the security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds and accounts. For
example, a portfolio manager may determine that it would be in the interest of
another account to sell a security that the Fund holds, potentially resulting in
a decrease in the market value of the security held by the Fund.
The portfolio managers may also engage in cross trades between funds and
accounts, may select brokers or dealers to execute securities transactions based
in part on brokerage and research services provided to First Trust Advisors or
Energy Income Partners which may not benefit all funds and accounts equally and
may receive different amounts of financial or other benefits for managing
different funds and accounts. Finally, First Trust Advisors or its affiliates
may provide more services to some types of funds and accounts than others.
There is no guarantee that the policies and procedures adopted by First
Trust Advisors, Energy Income Partners and the Fund will be able to identify or
mitigate the conflicts of interest that arise between the Fund and any other
investment funds or accounts that First Trust Advisors and/or Energy Income
Partners may manage or advise from time to time. For further information on
potential conflicts of interest, see "Investment Advisor" and "Sub-Advisor" in
the SAI.
In addition, while the Fund is using leverage, the amount of the fees paid to
the Advisor (and by the Advisor to the Sub-Advisor) for investment advisory and
management services are higher than if the Fund did not use leverage because the
fees paid are calculated based on the Fund's Managed Assets, which include
assets purchased with leverage. Therefore, the Advisor and the Sub-Advisor have
a financial incentive to leverage the Fund, which may create a conflict of
interest between the Advisor and the Sub-Advisor on the one hand and the Common
Shareholders of the Fund on the other.
ENERGY SECTOR RISK
The Fund's investments will generally be concentrated in the energy sector,
with a particular concentration in energy sector MLPs and energy sector
MLP-related entities. Certain risks inherent in investing in the energy business
of these types of securities include the following:
o Commodity Pricing Risk. MLPs, MLP-related entities and energy
companies may be directly affected by energy commodity prices,
especially those energy companies who own the underlying energy
commodity. Commodity prices fluctuate for several reasons including,
changes in market and economic conditions, the impact of weather on
demand, levels of domestic production and imported commodities,
energy conservation, domestic and foreign governmental regulation
and taxation and the availability of local, intrastate and
interstate transportation systems. Volatility of commodity prices
which leads to a reduction in production or supply may also impact
the performance of MLPs, MLP-related entities and energy companies
that are solely involved in the transportation, processing, storing,
distribution or marketing of commodities. Volatility of commodity
price may also make it more difficult for MLPs, MLP-related entities
and energy companies to raise capital to the extent the market
perceives that their performance may be directly tied to commodity
prices.
o Supply and Demand Risk. A decrease in the production of natural gas,
NGLs, crude oil, coal or other energy commodities or a decrease in
the volume of such commodities available for transportation,
processing, storage or distribution may adversely impact the
financial performance of MLPs, MLP-related entities and energy
companies. Production declines and volume decreases could be caused
by various factors including, catastrophic events affecting
production, depletion of resources, labor difficulties,
environmental proceedings, increased regulations, equipment failures
and unexpected maintenance problems, import supply disruption,
increased competition from alternative energy sources or depressed
commodity prices. Alternatively, a sustained decline in demand for
such commodities could also impact the financial performance of
MLPs, MLP-related entities and energy companies. Factors which could
lead to a decline in demand include economic recession or other
-42-
adverse economic conditions, higher fuel taxes or governmental
regulations, increases in fuel economy, consumer shifts to the use
of alternative fuel sources, an increase in commodity prices, or
weather. A continuation of reduced demand for energy commodities as
a result of the economic recession may further reduce the financial
performance of the entities in which the Fund invests.
o Depletion and Exploration Risk. MLPs, MLP-related entities and
energy companies engaged in the production (exploration,
development, management or production) of natural gas, NGLs
(including propane), crude oil, refined petroleum products or coal
are subject to the risk that their commodity reserves naturally
deplete over time. MLPs, MLP-related entities and energy companies
generally increase reserves through expansion of their existing
business, through exploration of new sources or development of
existing sources, through acquisitions or by securing long-term
contracts to acquire additional reserves, each of which entails
risk. The financial performance of these issuers may be adversely
affected if they are unable to acquire, cost-effectively, additional
reserves at a rate at least equal to the rate of natural decline. A
failure to maintain or increase reserves could reduce the amount and
change the characterization of cash distributions paid by these
MLPs, MLP-related entities and energy companies.
o Regulatory Risk. MLPs, MLP-related entities and energy companies are
subject to significant federal, state and local government
regulation in virtually every aspect of their operations, including
how facilities are constructed, maintained and operated,
environmental and safety controls, and the prices they may charge
for products and services. Various governmental authorities have the
power to enforce compliance with these regulations and the permits
issued under them and violators are subject to administrative, civil
and criminal penalties, including civil fines, injunctions or both.
Stricter laws, regulations or enforcement policies could be enacted
in the future which would likely increase compliance costs and may
adversely affect the financial performance of MLPs, MLP-related
entities and energy companies. In particular, changes to laws and
increased regulations or enforcement policies as a result of oil
spills, such as the Macondo oil spill in the Gulf of Mexico or
onshore oil pipeline spills may adversely affect the financial
performance of MLPs and other energy companies. Additionally,
changes to laws and increased regulation or restrictions to the use
of hydraulic fracturing may adversely impact the ability of energy
companies to economically develop oil and natural gas resources and,
in turn, reduce production for such commodities and adversely impact
the financial performance of MLPs and midstream energy companies.
o Interest Rate Risk. Rising interest rates could adversely impact the
financial performance of MLPs, MLP-related entities and energy
companies. Rising interest rates may increase an MLP's, MLP-related
entity's or energy company's cost of capital, which would increase
operating costs and may reduce an MLP's, MLP-related entity's or
energy company's ability to execute acquisitions or expansion
projects in a cost-effective manner. Rising interest rates may also
impact the price of MLP units, MLP-related entity securities and
energy company shares as the yields on alternative investments
increase.
o Acquisition or Reinvestment Risk. The ability of MLPs to grow and to
increase distributions to unitholders is dependent in part on their
ability to make acquisitions or find organic projects that result in
an increase in adjusted operating surplus per unit. In the event
that MLPs are unable to make such accretive acquisitions/projects
either because they are unable to identify attractive
acquisition/project candidates or negotiate acceptable purchase
contracts or because they are unable to raise financing on
economically acceptable terms or because they are outbid by
competitors, their future growth and ability to raise distributions
may be hindered. Furthermore, even if MLPs do consummate
acquisitions/projects that they believe will be accretive, the
acquisitions/projects may in fact turn out to result in a decrease
in adjusted operating surplus per unit. As MLP general partners
typically receive a greater percentage of increased cash
distributions, in an effort to increase cash distributions the
general partner may make acquisitions/projects which, due to various
factors, including increased debt obligations as well as the factors
set forth below, may adversely affect the MLP. Any
acquisition/project involves risks, including among other things:
mistaken assumptions about revenues and costs, including synergies;
the assumption of unknown liabilities; limitations on rights to
indemnity from the seller; the diversion of management's attention
from other business concerns; unforeseen difficulties operating in
new product areas or new geographic areas; and customer or key
employee losses at the acquired businesses.
-43-
o Affiliated Party Risk. A few of the Midstream MLPs are dependent on
their parents or sponsors for a majority of their revenues. Any
failure by the parents or sponsors to satisfy their payments or
obligations would impact the MLPs' revenues and cash flows and
ability to make distributions.
o Catastrophe Risk. The operations of MLPs, MLP-related entities and
energy companies are subject to many hazards inherent in
transporting, processing, storing, distributing or marketing natural
gas, NGLs, crude oil, refined petroleum products or other
hydrocarbons, or in the exploring, managing or producing of such
commodities, including: damage to pipelines, storage tanks or
related equipment and surrounding properties caused by hurricanes,
tornadoes, floods, fires and other natural disasters and acts of
terrorism; inadvertent damage from construction and farm equipment;
leaks of natural gas, NGLs, crude oil, refined petroleum products or
other hydrocarbons; fires and explosions. These risks could result
in substantial losses due to personal injury and/or loss of life,
severe damage to and destruction of property and equipment and
pollution or other environmental damage and may result in the
curtailment or suspension of their related operations. Not all MLPs,
MLP-related entities and energy companies are fully insured against
all risks inherent to their businesses. If a significant accident or
event occurs that is not fully insured, it could adversely affect
their operations and financial condition.
o Terrorism/Market Disruption Risk. The terrorist attacks in the
United States on September 11, 2001 had a disruptive effect on the
securities markets. U.S. military and related action in Iraq is
ongoing and events in the Middle East could have significant adverse
effects on the U.S. economy and the stock market. Uncertainty
surrounding retaliatory military strikes or a sustained military
campaign may affect energy company operations in unpredictable ways,
including disruptions of fuel supplies and markets, and transmission
and distributions facilities could be direct targets, or indirect
casualties, of an act of terror. Since the September 11th attacks,
the U.S. government has issued warnings that energy assets,
specifically the U.S. pipeline infrastructure, may be the future
target of terrorist organizations. In addition, changes in the
insurance markets attributable to the September 11th attacks have
made certain types of insurance more difficult, if not impossible,
to obtain and have generally resulted in increased premium costs.
o MLP Risks. An investment in MLP units involves risks which differ
from an investment in common stock of a corporation. Holders of MLP
units have limited control and voting rights on matters affecting
the partnership. In addition, there are certain tax risks associated
with an investment in MLP units and conflicts of interest exist
between common unit holders and the general partner, including those
arising from incentive distribution payments.
INDUSTRY SPECIFIC RISK
MLPs, MLP-related entities and energy companies are also subject to risks
that are specific to the industry they serve.
o Midstream MLPs, MLP-related entities and energy companies that
provide crude oil, refined product and natural gas services are
subject to supply and demand fluctuations in the markets they serve
which will be impacted by a wide range of factors including,
fluctuating commodity prices, weather, increased conservation or use
of alternative fuel sources, increased governmental or environmental
regulation, depletion, rising interest rates, declines in domestic
or foreign production, accidents or catastrophic events, and
economic conditions, among others.
o Propane MLPs and MLP-related entities are subject to earnings
variability based upon weather conditions in the markets they serve,
fluctuating commodity prices, increased use of alternative fuels,
increased governmental or environmental regulation, and accidents or
catastrophic events, among others.
o MLPs, MLP-related entities and energy companies with coal assets are
subject to supply and demand fluctuations in the markets they serve
which will be impacted by a wide range of factors including,
fluctuating commodity prices, the level of their customers' coal
stockpiles, weather, increased conservation or use of alternative
fuel sources, increased governmental or environmental regulation,
depletion, rising interest rates, transportation issues, declines in
domestic or foreign production, mining accidents or catastrophic
events, health claims and economic conditions, among others.
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CASH FLOW RISK
A substantial portion of the cash flow received by the Fund is derived from
its investment in equity securities of MLPs and MLP-related entities. The amount
of cash an MLP or MLP-related entity has available for distributions and the tax
character of such distributions is dependent upon the amount of cash generated
by the MLP's or MLP-related entity's operations. Cash available for distribution
will vary from quarter to quarter and is largely dependent on factors affecting
the MLP's or MLP-related entity's operations and factors affecting the energy
industry in general. In addition to the risk factors described above, other
factors which may reduce the amount of cash an MLP or MLP-related entity has
available for distribution include increased operating costs, capital
expenditures, acquisition costs, expansion, construction or exploration costs
and borrowing costs.
TAX RISK
The Fund's ability to meet its investment objective depends on the level of
taxable income and distributions it receives from the MLP, MLP-related entities
and energy company securities in which the Fund invests, a factor over which the
Fund has no control. The benefit the Fund derives from its investment in MLPs is
largely dependent on their being treated as partnerships for federal income tax
purposes. As a partnership, an MLP has no income tax liability at the entity
level. If, as a result of a change in an MLP's business, an MLP were treated as
a corporation for federal income tax purposes, such MLP would be obligated to
pay federal income tax on its income at the applicable corporate tax rate. If an
MLP was classified as a corporation for federal income tax purposes, the amount
of cash available for distribution with respect to the units would be reduced
and any such distributions received by the Fund would be taxed entirely as
dividend income if paid out of the earnings of the MLP. Therefore, treatment of
an MLP as a corporation for federal income tax purposes would result in a
material reduction in the after-tax return to the Fund, likely causing a
substantial reduction in the value of the common shares.
TAX LAW CHANGE RISK
Changes in tax laws or regulations, or interpretations thereof in the future,
could adversely affect the Fund or the MLPs in which it invests. Any such
changes could negatively impact the Fund and its common shareholders. For
example, if, by reason of a change in law or otherwise, an MLP in which the Fund
invests is treated as a corporation rather than a partnership, the MLP would be
subject to entity level corporate taxation and any distributions received by the
Fund out of the earnings of the MLP would be treated as dividend income. This
would negatively impact the amount and tax characterization of distributions
received by common shareholders.
DEFERRED TAX RISK
As a limited partner in the MLPs in which it invests, the Fund is allocated
its pro rata share of income, gains, losses, deductions and expenses from the
MLPs. A significant portion of MLP income has historically been offset by tax
deductions. The Fund will incur a current tax liability on that portion of an
MLP's income that is not offset by tax deductions, with the remaining portion of
the distribution being treated as a tax-deferred return of capital. The
percentage of an MLP's income which is offset by tax deductions will fluctuate
over time for various reasons. A significant slowdown in acquisition or
investment activity by MLPs held in the Fund's portfolio could result in a
reduction of accelerated depreciation or other deductions generated by these
activities, which may result in increased current tax liability to the Fund. A
reduction in the percentage of income offset by tax deductions or gains as a
result of the sale of portfolio securities will reduce that portion of the
Fund's distribution treated as a tax-deferred return of capital and increase
that portion treated as dividend income, resulting in reduced Fund distributions
and lower after-tax distributions to the Fund's common shareholders. For
purposes of computing net asset value, the Fund will accrue deferred income
taxes for its future tax liability associated with that portion of MLP
distributions considered to be tax-deferred return of capital as well as capital
appreciation of its investments. The Fund will rely to some extent on
information provided by MLPs, which is usually not timely, to estimate deferred
tax liability for purposes of financial statement reporting and determining the
Fund's net asset value. From time to time the Fund will modify its estimates
and/or assumptions regarding its deferred tax liability as new information
becomes available.
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DELAY IN INVESTING THE PROCEEDS OF THIS OFFERING
Although the Fund currently intends to invest the proceeds of any sales of
Common Shares as soon as practicable following the completion of the offering,
such investments may be delayed if suitable investments are unavailable at the
time or if the Fund is unable to secure firm commitments for direct placements.
The trading market and volumes for MLP, MLP-related entity and energy company
shares may at times be less liquid than the market for other securities. As a
result, it is not anticipated that the Fund will be fully invested immediately
after the completion of the offering and it may take a period of time before the
Fund is able to accumulate positions in certain securities. Prior to the time
the proceeds of this offering are fully invested, such proceeds may be invested
in cash, cash equivalents or other securities, pending investment in MLP,
MLP-related entity or energy company securities. Income received by the Fund
from these securities would subject the Fund to corporate tax before any
distributions to Common Shareholders. As a result, the return and yield on the
Common Shares in the period following any offering pursuant to this prospectus
and applicable prospectus supplement may be lower than when the Fund is fully
invested in accordance with its objective and policies. See "Use of Proceeds."
EQUITY SECURITIES RISK
MLP common units and other equity securities are sensitive to general
movements in the stock market and a drop in the stock market may depress the
price of securities to which the Fund has exposure. MLP units and other equity
securities prices fluctuate for several reasons including changes in the
financial condition of a particular issuer (generally measured in terms of
distributable cash flow in the case of MLPs), investors' perceptions of MLPs and
energy companies, the general condition of the relevant stock market, such as
the current market volatility, or when political or economic events affecting
the issuers occur. In addition, the price of MLP units and other equity
securities may be particularly sensitive to rising interest rates given their
yield-based nature.
Certain of the MLPs, MLP-related entity and other energy companies in which
the Fund may invest may have comparatively smaller capitalizations than other
companies. Investing in securities of smaller MLPs, MLP-related entities and
energy companies presents some unique investment risks. These MLPs, MLP-related
entities and energy companies may have limited product lines and markets, as
well as shorter operating histories, less experienced management and more
limited financial resources than larger MLPs, MLP-related entities and energy
companies and may be more vulnerable to adverse general market or economic
developments. Stocks of smaller MLPs, MLP-related entities and energy companies
may be less liquid than those of larger MLPs, MLP-related entities and energy
companies and may experience greater price fluctuations than larger energy
companies. In addition, small-cap securities may not be widely followed by the
investment community, which may result in reduced demand.
A few of the Midstream MLPs are dependent on their parents or sponsors for a
majority of their revenues. Any failure by the parents or sponsors to satisfy
their payments or obligations would impact the MLPs' revenues and cash flows and
ability to make distributions.
MLP subordinated units in which the Fund will invest generally convert to
common units at a one-to-one ratio. The purchase or sale price of subordinated
units is generally tied to the common unit price less a discount. The size of
the discount varies depending on the likelihood of conversion, the length of
time remaining to conversion, the size of the block purchased and other factors.
The Fund invests, and may in the future invest, in I-Shares which represent
an indirect investment in MLP i-units. While not precise, the price of I-Shares
and their volatility tend to be correlated to the price of common units.
I-Shares are subject to the same risks as MLP common units.
PIPE TRANSACTION RISK
PIPE investors purchase securities directly from publicly traded company in a
private placement transaction, typically at a discount to the market price of
the company's common stock. Because the sale of the securities is not registered
under the 1933 Act, the securities are "restricted" and cannot be immediately
resold by the investors into the public markets. Until the Fund can sell such
securities into the public markets, the Fund's holdings, if any, will be less
liquid and any sale will need to be made pursuant to an exemption under the 1933
Act.
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LEVERAGE RISK
The Fund may borrow an amount up to 331/3% (or such other percentage to the
extent permitted by the 1940 Act) of its Managed Assets (including the amount
borrowed) less all liabilities other than borrowings. The Fund may also issue
Preferred Shares in an amount up to 50% of the Fund's Managed Assets (including
the proceeds of the Preferred Shares and any borrowings). As of November 30,
2012, the principal amount of Borrowings under the Commitment Facility
represented approximately 26% of the Fund's Managed Assets. As of November 30,
2012, the Fund had $29.6 million of unutilized funds available for Borrowing
under the Commitment Facility. Such Borrowings and the issuance of Preferred
Shares are referred to in this prospectus collectively as "leverage." The
successful use of leverage depends on the Sub-Advisor's ability to predict or
hedge correctly interest rate and market movements. Although the use of leverage
by the Fund may create an opportunity for increased returns for the common
shares, it also results in additional risks and can magnify the effect of any
losses. If the income and gains earned on the securities and investments
purchased with leverage proceeds are greater than the cost of the leverage, the
common shares' return will be greater than if leverage had not been used.
Conversely, if the income or gains from the securities and investments purchased
with such proceeds does not cover the cost of leverage, the return to the common
shares will be less than if leverage had not been used. There is no assurance
that a leveraging strategy will continue to be used or will be successful.
Leverage involves risks and special considerations for common shareholders
including:
o the likelihood of greater volatility of net asset value and market
price of the common shares than a comparable portfolio without
leverage;
o the risk that fluctuations in interest rates on borrowings and
short-term debt or in the dividend rates on any Preferred Shares
that the Fund may pay will reduce the return to the common
shareholders or will result in fluctuations in the dividends paid on
the common shares;
o the effect of leverage in a declining market, which is likely to
cause a greater decline in the net asset value of the common shares
than if the Fund were not leveraged, which may result in a greater
decline in the market price of the common shares; and
o when the Fund uses financial leverage, the investment advisory fee
payable to the Advisor, and the sub-advisory fee payable by the
Advisor to the Sub-Advisor, will be higher than if the Fund did not
use leverage.
The issuance of Leverage Instruments by the Fund, in addition to Borrowings
under the Commitment Facility, would involve offering expenses and other costs,
including interest or dividend payments, which would be borne indirectly by the
common shareholders. Increased operating costs, including the financing cost
associated with any leverage, may reduce the Fund's total return.
The Board of Trustees, in its judgment, nevertheless may determine to
continue to use leverage if it expects that the benefits to the Fund's common
shareholders of maintaining the leveraged position will outweigh the current
reduced return.
The funds borrowed pursuant to a borrowing program (such as a credit line or
commercial paper program), or obtained through the issuance of Preferred Shares,
constitute a substantial lien and burden by reason of their prior claim against
the income of the Fund and against the net assets of the Fund in liquidation.
The rights of lenders to receive payments of interest on and repayments of
principal of any borrowings made by the Fund under a borrowing program are
senior to the rights of holders of common shares and the holders of Preferred
Shares, with respect to the payment of dividends or upon liquidation. The Fund
may not be permitted to declare dividends or other distributions, including
dividends and distributions with respect to common shares or Preferred Shares or
purchase common shares or Preferred Shares unless at the time thereof, the Fund
meets certain asset coverage requirements and no event of default exists under
any borrowing program. In addition, the Fund may not be permitted to pay
dividends on common shares unless all dividends on the Preferred Shares and/or
accrued interest on borrowings have been paid, or set aside for payment. In an
event of default under a borrowing program, the lenders have the right to cause
a liquidation of collateral (i.e., sell MLP units and other assets of the Fund)
and, if any such default is not cured, the lenders may be able to control the
liquidation as well. Certain types of leverage may result in the Fund being
subject to covenants relating to asset coverage and the Fund's portfolio
composition and may impose special restrictions on the Fund's use of various
-47-
investment techniques or strategies or in its ability to pay dividends and other
distributions on common shares in certain instances. The Fund may be subject to
certain restrictions on investments imposed by guidelines of one or more rating
agencies, which may issue ratings for the Preferred Shares or other leverage
securities issued by the Fund. These guidelines may impose asset coverage or
Fund composition requirements that are more stringent than those imposed by the
1940 Act. The Sub-Advisor does not believe that these covenants or guidelines
will impede it from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the common
shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to common shareholders relative to the
circumstance if the Fund had not reduced leverage. The Fund may decide that this
risk outweighs the likelihood of achieving the desired reduction to volatility
in income and common share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.
In addition, recent turmoil in the credit markets have adversely impacted
borrowing availability and costs. These market developments have increased, and
may continue to increase, the financing costs of the Fund. Because common
shareholders indirectly bear the cost of leverage, an increase in interest and
dividend obligations on the Fund's Financial Leverage may reduce the total
return to common shareholders.
Certain types of Borrowings may result in the Fund being subject to covenants
in credit agreements relating to asset coverage and portfolio composition
requirements. The Fund may be subject to certain restrictions on investments
imposed by guidelines of one or more rating agencies, which may issue ratings
for the short-term corporate debt securities or Preferred Shares issued by the
Fund. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. In
addition, the loan documents under the Commitment Facility include customary
provisions including a restriction on the Fund's ability to pledge its assets
and contains customary events of default including failure of the Fund to meet
the asset coverage test of the 1940 Act described below. There is no assurance
that the Fund will not violate financial covenants relating to the Commitment
Facility or other Financial Leverage in the future. In such event, the Fund may
be required to repay all outstanding Borrowings immediately. In order to repay
such amounts the Fund may be required to sell assets quickly which could have a
material adverse effect on the Fund and could trigger negative tax implications.
In addition, the Fund would be precluded from declaring or paying any
distribution on the common shares during the continuance of such event of
default.
It is possible that the Fund will be unable to obtain additional Financial
Leverage. The capital and credit markets have recently experienced extreme
volatility and disruption. The availability of Financial Leverage will depend on
a variety of factors, such as market conditions, the general availability of
credit, the volume of trading activities, the overall availability of credit to
the closed-end management investment companies, the Fund's credit ratings and
credit capacity, the Fund's asset class, as well as the possibility that lenders
could develop a negative perception of the Fund's long- or short-term financial
prospects if the Fund incurs large investment losses due to a market downturn.
Similarly, the Fund's access to Financial Leverage may be impaired if regulatory
authorities or rating agencies take negative actions against the Fund. The Fund
may not be able to successfully obtain additional Financial Leverage on
favorable terms, or at all. In the current economic environment, it has become
more difficult for borrowers, including the Fund, to find third parties willing
to extend credit or purchase securities that would constitute Financial
Leverage. If the Fund is unable to increase Financial Leverage after the
issuance of additional Common Shares pursuant to this prospectus and applicable
prospectus supplement, there could be an adverse impact on the return to common
shareholders.
With respect to a borrowing program instituted by the Fund, the credit
agreements governing such a program, including the Commitment Facility, includes
usual and customary covenants for this type of transaction, including, but not
limited to, limits on the Fund's ability to: (i) issue Preferred Shares; (ii)
incur liens or pledge portfolio securities or investments; (iii) change its
investment objective or fundamental investment restrictions without the approval
-48-
of lenders; (iv) make changes in any of its business objectives, purposes or
operations that could result in a material adverse effect; (v) make any changes
in its capital structure; (vi) amend the Fund documents in a manner which could
adversely affect the rights, interests or obligations of any of the lenders;
(vii) engage in any business other than the business currently engaged in;
(viii) create, incur, assume or permit to exist certain debt except for certain
specific types of debt; and (ix) permit any of its Employee Retirement Income
Security Act ("ERISA") affiliates to cause or permit to occur an event that
could result in the imposition of a lien under the Internal Revenue Code or
ERISA. In addition, the Commitment Facility does not permit the Fund's asset
coverage ratio (as defined in the Commitment Facility) to fall below 300% at any
time.
Under the requirements of the 1940 Act, the Fund must have asset coverage of
at least 300% immediately after any borrowing, including borrowing under any
borrowing program the Fund implements. For this purpose, asset coverage means
the ratio which the value of the total assets of the Fund, less liabilities and
indebtedness not represented by senior securities, bears to the aggregate amount
of borrowings represented by senior securities issued by the Fund. The
Commitment Facility limits the Fund's ability to pay dividends or make other
distributions on the Fund's common shares unless the Fund complies with the 300%
asset coverage test. In addition, the Commitment Facility does not permit the
Fund to declare dividends or other distributions or purchase or redeem common
shares or Preferred Shares: (i) at any time that any event of default under the
Commitment Facility has occurred and is continuing; or (ii) if, after giving
effect to such declaration, the Fund would not meet the Commitment Facility's
300% asset coverage test set forth in the credit agreements governing the
Commitment Facility. To the extent necessary, the Fund intends to repay
indebtedness to maintain the required asset coverage. Doing so may require the
Fund to liquidate portfolio securities at a time when it would not otherwise be
desirable to do so.
DERIVATIVES RISK
The Fund may enter into total return swaps, credit default swaps or other
types of swaps, options, forwards and combinations thereof and related
derivatives for the purpose of hedging and risk management. These transactions
generally provide for the transfer from one counterparty to another of certain
risks inherent in the ownership of a financial asset such as a common stock or
debt instrument. Such risks include, among other things, the risk of default and
insolvency of the obligor of such asset, the risk that the credit of the obligor
or the underlying collateral will decline or the risk that the common stock of
the underlying issuer will decline in value. The transfer of risk pursuant to a
derivative of this type may be complete or partial, and may be for the life of
the related asset or for a shorter period. These derivatives may be used for
investment purposes or as a risk management tool for a pool of financial assets,
providing the Fund with the opportunity to gain or reduce exposure to one or
more reference securities or other financial assets without actually owning or
selling such assets in order, for example, to increase or reduce a concentration
risk or to diversify a portfolio. Conversely, these derivatives may be used by
the Fund to reduce exposure to an owned asset without selling it. Furthermore,
the ability to successfully use Strategic Transactions depends on the
Sub-Advisor's ability to predict pertinent market movements, which cannot be
assured. Thus, the use of Strategic Transactions may result in losses greater
than if they had not been used, may require the Fund to sell or purchase
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment or may cause the Fund to hold a security that it might otherwise
sell. Additionally, amounts paid by the Fund as premiums and cash or other
assets held in margin accounts with respect to Strategic Transactions are not
otherwise available to the Fund for investment purposes.
There are several risks associated with transactions in options on
securities. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. As
the writer of a covered call option, the Fund forgoes, during the option's life,
the opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the strike price of
the call but has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying security at the exercise price.
-49-
There are several risks associated with the use of futures contracts and
futures options. The purchase or sale of a futures contract may result in losses
in excess of the amount invested in the futures contract. While the Fund may
enter into futures contracts and options on futures contracts for hedging
purposes, the use of futures contracts and options on futures contracts might
result in a poorer overall performance for the Fund than if it had not engaged
in any such transactions. There may be an imperfect correlation between the
Fund's portfolio holdings and futures contracts or options on futures contracts
entered into by the Fund, which may prevent the Fund from achieving the intended
hedge or expose the Fund to risk of loss. The degree of imperfection of
correlation depends on circumstances such as variations in market demand for
futures, options on futures and their related securities, including technical
influences in futures and futures options trading, and differences between the
securities markets and the securities underlying the standard contracts
available for trading. Further, the Fund's use of futures contracts and options
on futures contracts to reduce risk involves costs and will be subject to the
Sub-Advisor's ability to predict correctly changes in interest rate
relationships or other factors.
Depending on whether the Fund would be entitled to receive net payments from
the counterparty on a swap or cap, which in turn would depend on the general
state of short-term interest rates at that point in time, a default by a
counterparty could negatively impact the performance of the common shares. In
addition, at the time an interest rate or commodity swap or cap transaction
reaches its scheduled termination date, there is a risk that the Fund would not
be able to obtain a replacement transaction or that the terms of the replacement
would not be as favorable as on the expiring transaction. If this occurs, it
could have a negative impact on the performance of the common shares. If the
Fund fails to maintain any required asset coverage ratios in connection with any
use by the Fund of Financial Leverage, the Fund may be required to redeem or
prepay some or all of the Financial Leverage. Such redemption or prepayment
would likely result in the Fund seeking to terminate early all or a portion of
any swap or cap transactions. Early termination of a swap could result in a
termination payment by or to the Fund. Early termination of a cap could result
in a termination payment to the Fund. The Fund intends to maintain, in a
segregated account, cash or liquid securities having a value at least equal to
the Fund's net payment obligations under any swap transaction, marked to market
daily. The Fund will not enter into interest rate swap or cap transactions
having a notional amount that exceeds the outstanding amount of the Fund's
leverage.
The Fund may enter into currency exchange transactions to hedge the Fund's
exposure to foreign currency exchange rate risk to the extent the Fund invests
in non-U.S. dollar denominated securities of non-U.S. issuers. The Fund's
currency transactions will be limited to portfolio hedging involving portfolio
positions. Portfolio hedging is the use of a forward contract with respect to a
portfolio security position denominated or quoted in a particular currency. A
forward contract is an agreement to purchase or sell a specified currency at a
specified future date (or within a specified time period) and price set at the
time of the contract. Forward contracts are usually entered into with banks,
foreign exchange dealers or broker-dealers, are not exchange-traded, and are
usually for less than one year, but may be renewed.
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
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prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
The use of interest rate and commodity swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. Depending on market
conditions in general, the Fund's use of swaps or caps could enhance or harm the
overall performance of the common shares. For example, the Fund may utilize
interest rate swaps and caps in connection with the Fund's use of Financial
Leverage. To the extent there is a decline in interest rates, the value of the
interest rate swap or cap could decline, and could result in a decline in the
net asset value of the common shares. In addition, if short-term interest rates
are lower than the Fund's fixed rate of payment on the interest rate swap, the
swap will reduce common share net earnings. If, on the other hand, short-term
interest rates are higher than the fixed rate of payment on the interest rate
swap, the swap will enhance common share net earnings. Buying interest rate caps
could enhance the performance of the common shares by providing a maximum
leverage expense. Buying interest rate caps could also decrease the net earnings
of the common shares in the event that the premium paid by the Fund to the
counterparty exceeds the additional amount the Fund would have been required to
pay had it not entered into the cap agreement.
Interest rate and commodity swaps and caps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate and commodity swaps is limited to the net
amount of interest payments that the Fund is contractually obligated to make. If
the counterparty defaults, the Fund would not be able to use the anticipated net
receipts under the swap or cap to offset any declines in the value of the Fund's
portfolio assets being hedged or the increase in the Fund's cost of Financial
Leverage. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of the market rates at that point in time, such a default
could negatively impact the performance of the common shares.
PORTFOLIO TURNOVER RISK
The Fund's annual portfolio turnover rate may vary greatly from year to year.
Although the Fund cannot accurately predict its annual portfolio turnover rate,
it is not expected to exceed 30% under normal circumstances, but may be higher
or lower in certain periods. For the fiscal year ended November 30, 2012,
portfolio turnover was approximately 26%. Portfolio turnover rate is not
considered a limiting factor in the execution of investment decisions for the
Fund. High portfolio turnover may result in the Fund's recognition of gains that
will increase the Fund's tax liability and thereby lower the after-tax dividends
of the Fund. A high portfolio turnover may also increase the Fund's current and
accumulated earnings and profits, resulting in a greater portion of the Fund's
distributions being treated as a dividend to the Fund's common shareholders. In
addition, a higher portfolio turnover rate results in correspondingly greater
brokerage commissions and other transactional expenses that are borne by the
Fund. See "The Fund's Investments -- Investment Practices -- Portfolio Turnover"
and "Tax Matters."
RESTRICTED SECURITIES
The Fund invests, and may in the future invest, in unregistered or otherwise
restricted securities. The term "restricted securities" refers to securities
that have not been registered under the 1933 Act or are held by control persons
of the issuer and securities that are subject to contractual restrictions on
their resale. As a result, restricted securities may be more difficult to value
and the Fund may have difficulty disposing of such assets either in a timely
manner or for a reasonable price. Absent an exemption from registration, the
Fund will be required to hold the securities until they are registered by the
-51-
issuer. In order to dispose of an unregistered security, the Fund, where it has
contractual rights to do so, may have to cause such security to be registered. A
considerable period may elapse between the time the decision is made to sell the
security and the time the security is registered so that the Fund could sell it.
Contractual restrictions on the resale of securities vary in length and scope
and are generally the result of a negotiation between the issuer and acquiror of
the securities. The Fund would, in either case, bear market risks during that
period.
LIQUIDITY RISK
Although common units of MLPs, I-Shares of MLP-related entities and common
stocks of certain energy companies trade on the NYSE, NYSE MKT and The NASDAQ
Stock Market, certain securities may trade less frequently, particularly those
with smaller capitalizations. Securities with limited trading volumes may
display volatile or erratic price movements. Larger purchases or sales of these
securities by the Fund in a short period of time may result in abnormal
movements in the market price of these securities. This may affect the timing or
size of Fund transactions and may limit the Fund's ability to make alternative
investments.
If the Fund requires significant amounts of cash on short notice in excess of
normal cash requirements or is required to post or return collateral in
connection with the Fund's investment portfolio, derivatives transactions or
leverage restrictions, the Fund may have difficulty selling these investments in
a timely manner, be forced to sell them for less than the Fund otherwise would
have been able to realize, or both. The reported value of some of the Fund's
relatively illiquid types of investments and, at times, the Fund's high quality,
generally liquid asset classes, may not necessarily reflect the lowest current
market price for the asset. If the Fund was forced to sell certain of its assets
in the current market, there can be no assurance that the Fund will be able to
sell them for the prices at which the Fund has recorded them and the Fund may be
forced to sell them at significantly lower prices.
VALUATION RISK
Market prices may not be readily available for subordinated units, direct
ownership of general partner interests, restricted securities or unregistered
securities of certain MLPs, MLP-related entities or private companies, and the
value of such investments will ordinarily be determined based on fair valuations
determined pursuant to procedures adopted by the Board of Trustees. The value of
these securities typically requires more reliance on the judgment of the
Sub-Advisor than that required for securities for which there is an active
trading market. In addition, the Fund will rely to some extent on information
provided by the MLPs, which is usually not timely, to estimate taxable income
allocable to the MLP units held in the Fund's portfolio and to estimate
associated deferred tax liability for purposes of financial statement reporting
and determining the Fund's net asset value. From time to time the Fund will
modify its estimates and/or assumptions regarding its deferred tax liability as
new information becomes available. To the extent the Fund modifies its estimates
and/or assumptions, the net asset value of the Fund would likely fluctuate. See
"Net Asset Value."
INTEREST RATE RISK
Interest rate risk is the risk that equity and debt securities will decline
in value because of changes in market interest rates. The Fund's investment in
such securities means that the net asset value and market price of the common
shares will tend to decline if market interest rates rise. Interest rates are at
or near historic lows, and as a result, they are likely to rise over time.
Certain debt instruments, particularly below investment grade securities, may
contain call or redemption provisions which would allow the issuer thereof to
prepay principal prior to the debt instrument's stated maturity. This is known
as prepayment risk. Prepayment risk is greater during a falling interest rate
environment as issuers can reduce their cost of capital by refinancing higher
yielding debt instruments with lower yielding debt instruments. An issuer may
also elect to refinance their debt instruments with lower yielding debt
instruments if the credit standing of the issuer improves. To the extent the
Fund's debt securities are called or redeemed, the Fund may be forced to
reinvest in lower yielding securities.
-52-
BELOW INVESTMENT GRADE SECURITIES RISK
Below investment grade securities are rated "Ba1" or lower by Moody's, "BB+"
or lower by S&P, or comparably rated by another NRSRO or, if unrated, determined
to be of comparable quality by the Sub-Advisor. As of November 30, 2012, the
Fund did not invest in any below investment grade securities. Below investment
grade securities, also sometimes referred to as "junk bonds," generally pay a
premium above the yields of U.S. government securities or debt securities of
investment grade issuers because they are subject to greater risks than these
securities. These risks, which reflect their speculative character, include the
following:
o greater yield and price volatility;
o greater credit risk and risk of default;
o potentially greater sensitivity to general economic or industry
conditions;
o potential lack of attractive resale opportunities (illiquidity); and
o additional expenses to seek recovery from issuers who default.
In addition, the prices of these below investment grade securities are more
sensitive to negative developments, such as a decline in the issuer's revenues,
downturns in profitability in the energy industry or a general economic
downturn, than are the prices of higher grade securities. Below investment grade
securities tend to be less liquid than investment grade securities and the
market for below investment grade securities could contract further under
adverse market or economic conditions. In such a scenario, it may be more
difficult for the Fund to sell these securities in a timely manner or for as
high a price as could be realized if such securities were more widely traded.
The market value of below investment grade securities may be more volatile than
the market value of investment grade securities and generally tends to reflect
the market's perception of the creditworthiness of the issuer and short-term
market developments to a greater extent than investment grade securities, which
primarily reflect fluctuations in general levels of interest rates. In the event
of a default by a below investment grade security held in the Fund's portfolio
in the payment of principal or interest, the Fund may incur additional expense
to the extent it is required to seek recovery of such principal or interest.
Ratings are relative and subjective and not absolute standards of quality.
Securities ratings are based largely on an issuer's historical financial
condition and the rating agencies' analyses at the time of rating. Consequently,
the rating assigned to any particular security or instrument is not necessarily
a reflection of an issuer's current financial condition. Subsequent to its
purchase by the Fund, the security or instrument may cease to be rated or its
rating may be reduced. In addition, it is possible that NRSROs might not change
their ratings of a particular security or instrument to reflect subsequent
events on a timely basis. Moreover, such ratings do not assess the risk of a
decline in market value. None of these events will require the sale of such
securities or instruments by the Fund, although the Sub-Advisor will consider
these events in determining whether the Fund should continue to hold the
securities.
The market for below investment grade and comparable unrated securities has
experienced periods of significantly adverse price and liquidity several times,
particularly at or around times of economic recession. Past market recessions
have adversely affected the value of such securities as well as the ability of
certain issuers of such securities to repay principal and pay interest thereon
or to refinance such securities. The market for these securities may react in a
similar fashion in the future.
For a further description of below investment grade securities and the risks
associated therewith, see "Other Investment Policies and Techniques" in the SAI.
For a description of the ratings categories of certain NRSROs, see Appendix A to
the SAI.
NON-DIVERSIFICATION
The Fund is a non-diversified, closed-end management investment company under
the 1940 Act and will not be treated as a regulated investment company under the
Internal Revenue Code. Accordingly, there are no regulatory requirements under
the 1940 Act or the Internal Revenue Code on the minimum number or size of
securities held by the Fund. As of November 30, 2012, there were approximately
eighty-nine (89) publicly traded MLPs, approximately 90% of which operate energy
assets. The Fund intends to select its MLP investments from this small pool of
issuers. The Fund may invest in securities of MLP-related entities and non-MLP
securities issued by energy companies, consistent with its investment objective
-53-
and policies. As of November 30, 2012, the Fund held investments in thirty (30)
MLP issuers.
MARKET DISRUPTION RISK
The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. U.S. military and related action in
Iraq is ongoing and events in the Middle East could have significant adverse
effects on the U.S. economy and the stock market. The Fund cannot predict the
effects of similar events in the future on the U.S. economy.
ANTI-TAKEOVER PROVISIONS
The Fund's Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or convert the Fund to
open-end status. These provisions could have the effect of depriving the common
shareholders of opportunities to sell their common shares at a premium over the
then current market price of the common shares. See "Certain Provisions in the
Declaration of Trust and By-Laws."
COMPETITION RISK
There exist other alternatives to the Fund as a vehicle for investment in a
portfolio of MLPs, including other publicly traded investment companies and
private funds. In addition, recent tax law changes or future tax law changes may
increase the ability of regulated investment companies or other institutions to
invest in MLPs. Because of the limited number of MLP issuers, these competitive
conditions may adversely impact the Fund's ability to make investments in the
MLP market and could adversely impact the Fund's distributions to common
shareholders.
POTENTIAL TAX CHANGES
The Fund has no way of knowing whether changes to the Internal Revenue Code
might occur in the future or, if enacted, what effect such changes might have on
the Fund's common shareholders or the MLPs and MLP-related entities in which the
Fund invests.
MARKET DISCOUNT FROM NET ASSET VALUE
The Fund's common shares have been publicly traded since June 24, 2004 and
have traded both at a premium and at a discount relative to net asset value.
There is no assurance that any premium of the public offering price for the
Common Shares in any offering made hereby will continue after such offering or
that the common shares will not again trade at a discount. Shares of closed-end
investment companies frequently trade at a discount from their net asset value.
This characteristic is a risk separate and distinct from the risk that the
Fund's net asset value could decrease as a result of its investment activities
and may be greater for investors expecting to sell their Common Shares in a
relatively short period following completion of this offering. Although the
value of the Fund's net assets is generally considered by market participants in
determining whether to purchase or sell shares, whether investors will realize
gains or losses upon the sale of the common shares will depend entirely upon
whether the market price of the common shares at the time of sale is above or
below the investor's purchase price for the common shares. Because the market
price of the common shares will be affected by factors such as net asset value,
dividend or distribution levels (which are dependent, in part, on expenses),
supply of and demand for the common shares, stability of dividends or
distributions, trading volume of the common shares, general market and economic
conditions, and other factors beyond the control of the Fund, the Fund cannot
predict whether the Common Shares will trade at, below or above net asset value
or at, below or above the price at which shares may be offered in any offering
pursuant to this prospectus.
INFLATION/DEFLATION RISK
Inflation risk is the risk that the value of assets or income from
investments will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the common shares and
-54-
distributions can decline. Common stock prices may be particularly sensitive to
rising interest rates, as the cost of capital rises and borrowing costs
increase. In addition, during any periods of rising inflation, the dividend
rates or borrowing costs associated with the Fund's leverage would likely
increase, which would tend to further reduce returns to common shareholders.
Deflation risk is the risk that prices throughout the economy decline over
time--the opposite of inflation. Deflation may have an adverse effect on the
creditworthiness of issuers and may make issuer defaults more likely, which may
result in a decline in the value of the Fund's portfolio.
CERTAIN AFFILIATIONS
Certain broker-dealers may be considered to be affiliated persons of the
Fund, First Trust Advisors or Energy Income Partners. Absent an exemption from
the SEC or other regulatory relief, the Fund is generally precluded from
effecting certain principal transactions with affiliated brokers, and its
ability to utilize affiliated brokers for agency transactions, is subject to
restrictions. This could limit the Fund's ability to engage in securities
transactions and take advantage of market opportunities. In addition, until the
underwriting syndicate is broken in connection with any public offering of the
Common Shares offered by this prospectus, the Fund will be precluded from
effecting principal transactions with brokers who are members of the syndicate.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general supervision of the
duties performed by the Advisor and the Sub-Advisor. The names and business
addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the SAI.
INVESTMENT ADVISOR
First Trust Advisors, 120 East Liberty Drive, Suite 400, Wheaton, Illinois
60187, is the investment advisor to the Fund and is responsible for supervising
the Sub-Advisor. First Trust Advisors serves as investment advisor or portfolio
supervisor to investment portfolios with approximately $62 billion in assets
which it managed or supervised as of November 30, 2012.
First Trust Advisors is also responsible for the ongoing monitoring of the
Fund's investment portfolio, managing the Fund's business affairs and providing
certain clerical, bookkeeping and other administrative services.
First Trust Advisors is an Illinois limited partnership formed in 1991 and an
investment advisor registered with the SEC under the Investment Advisers Act of
1940, as amended. First Trust Advisors is a limited partnership with one limited
partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one general
partner, The Charger Corporation. Grace Partners is a limited partnership with
one general partner, The Charger Corporation, and a number of limited partners.
Grace Partners' and The Charger Corporation's primary business is investment
advisory and broker/dealer services through their interests. The Charger
Corporation is an Illinois corporation controlled by James A. Bowen, Chief
Executive Officer of the Advisor. First Trust Advisors is controlled by Grace
Partners and The Charger Corporation.
For additional information concerning First Trust Advisors, including a
description of the services provided, see the SAI under "Investment Advisor."
SUB-ADVISOR
Energy Income Partners serves as the Fund's Sub-Advisor. In this capacity,
Energy Income Partners is responsible for the selection and on-going monitoring
of the securities in the Fund's investment portfolio.
Energy Income Partners, located at 49 Riverside Avenue, Westport, Connecticut
06880, is a registered investment advisor and serves as investment advisor to
investment portfolios with approximately $2.8 billion of assets as of November
30, 2012.
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Energy Income Partners is a Delaware limited liability company and an
SEC-registered investment advisor, founded in October 2003 by James J. Murchie
to provide professional asset management services in the area of energy related
MLPs and other high payout securities in the energy sector. In addition to
serving as sub-advisor to the Fund, Energy Income Partners serves as the
investment manager to three unregistered investment companies and one private
registered investment company for high net worth individuals and institutions.
Energy Income Partners mainly focuses on portfolio companies that operate
infrastructure assets such as pipelines, storage and terminals that receive
fee-based or regulated income from their customers.
First Trust Capital Partners, LLC, an affiliate of the Advisor, purchased,
through a wholly-owned subsidiary, a 15% ownership interest in each of the
Sub-Advisor and EIP Partners, LLC, a Delaware limited liability company and
affiliate of the Sub-Advisor.
James J. Murchie is the Founder, Chief Executive Officer, co-portfolio
manager and a Principal of Energy Income Partners. After founding Energy Income
Partners in October 2003, Mr. Murchie and the Energy Income Partners investment
team joined Pequot Capital Management Inc. ("Pequot Capital") in December 2004.
In August 2006, Mr. Murchie and the Energy Income Partners investment team left
Pequot Capital and re-established Energy Income Partners. Prior to founding
Energy Income Partners, Mr. Murchie was a Portfolio Manager at Lawhill Capital
Partners, LLC ("Lawhill Capital"), a long/short equity hedge fund investing in
commodities and equities in the energy and basic industry sectors. Before
Lawhill Capital, Mr. Murchie was a Managing Director at Tiger Management, LLC,
where his primary responsibility was managing a portfolio of investments in
commodities and related equities. Mr. Murchie was also a Principal at Sanford C.
Bernstein. He began his career at British Petroleum, PLC. Mr. Murchie holds a BA
from Rice University and an MA from Harvard University.
Eva Pao is a Principal of Energy Income Partners and is co-portfolio manager
for all its funds. She has been with EIP since inception in 2003. From 2005 to
mid-2006, Ms. Pao joined Pequot Capital Management during EIP's affiliation with
Pequot. Prior to Harvard Business School, Ms. Pao was a Manager at Enron Corp
where she managed a portfolio in Canadian oil and gas equities for Enron's
internal hedge fund that specialized in energy-related equities and managed a
natural gas trading book. Ms. Pao holds degrees from Rice University and Harvard
Business School.
Linda Longville is the Research Director and a Principal of Energy Income
Partners. Ms. Longville has been with Energy Income Partners since its inception
in 2003, including the time the Energy Income Partners investment team spent at
Pequot Capital between December 2004 and July 2006. From April 2001 through
September 2003, she was a research analyst for Lawhill Capital. Prior to Lawhill
Capital, Ms. Longville held positions in finance and business development at
British Petroleum, PLC and Advanced Satellite Communications, Inc. She has a BAS
from Miami University (Ohio) and an MA from Case Western Reserve University.
Saul Ballesteros is the Head of Trading and a Principal of Energy Income
Partners. Mr. Ballesteros joined Energy Income Partners in 2006 after six years
as a proprietary trader at FPL Group and Mirant Corp. From 1994 through 1999, he
was with Enron's internal hedge fund in various positions of increased
responsibility, and, from 1991 through 1994, Mr. Ballesteros was a manager of
financial planning at IBM. Mr. Ballesteros holds a BS from Duke University and
an MBA from Northwestern University.
For additional information concerning Energy Income Partners, including a
description of the services provided and additional information about the Fund's
portfolio managers, including the portfolio managers' compensation, other
accounts managed by the portfolio managers and the portfolio managers' ownership
of Fund shares, see "Sub-Advisor" in the SAI.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement (the "Investment Management
Agreement") between First Trust Advisors and the Fund, the Fund has agreed to
pay for the services and facilities provided by First Trust Advisors an annual
management fee, payable on a monthly basis, equal to 1.00% of the Fund's Managed
Assets.
For purposes of calculation of the management fee, the Fund's "Managed
Assets" means the average daily gross asset value of the Fund (which includes
assets attributable to the Fund's Preferred Shares, if any, and the principal
amount of Borrowings), minus the sum of the Fund's accrued and unpaid dividends
on any outstanding Preferred Shares and accrued liabilities (other than the
principal amount of any Borrowings incurred and the liquidation preference of
any outstanding Preferred Shares).
-56-
In addition to the management fee of First Trust Advisors, the Fund pays all
other costs and expenses of its operations, including compensation of its
trustees (other than those affiliated with First Trust Advisors), custodian,
transfer agency, administrative, accounting and dividend disbursing expenses,
legal fees, leverage expenses, expenses of independent auditors, expenses of
repurchasing shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.
The Sub-Advisor receives a portfolio management fee equal to 0.50% of the
Fund's Managed Assets. The Sub-Advisor's fee is paid by the Advisor out of the
Advisor's management fee.
Because the fee paid to the Advisor (and by the Advisor to the Sub-Advisor)
will be calculated on the basis of the Fund's Managed Assets, which include the
proceeds of leverage, the dollar amount of the Advisor's fees from the Fund (and
Sub-Advisor's fees from the Advisor) will be higher (and the Advisor and
Sub-Advisor will be benefited to that extent) when leverage is utilized. In this
regard, if the Fund uses leverage in the amount equal to 26% of the Fund's
Managed Assets (after their issuance), the Fund's management fee would be 1.35%
of net assets attributable to common shares. See "Summary of Fund Expenses."
A discussion regarding the basis for approval by the Board of Trustees of the
Fund's Investment Management Agreement with the Advisor is available in the
Fund's Annual Report to Shareholders for the fiscal year ended November 30,
2012.
NET ASSET VALUE
The Fund determines the net asset value of its common shares daily as of the
close of regular session trading on the NYSE (normally 4:00 p.m. eastern time).
Net asset value is computed by dividing the value of all assets of the Fund
(including option premiums, accrued interest and dividends), less all Fund
liabilities (including accrued expenses, dividends payable, current and deferred
income taxes, any borrowings of the Fund and the market value of written call
options) and the liquidation value of any outstanding Preferred Shares, by the
total number of shares outstanding. The Fund will rely to some extent on
information provided by the MLPs, which is usually not timely, to estimate
taxable income allocable to the MLP units held in the Fund's portfolio and to
estimate the associated deferred tax liability. From time to time the Fund will
modify its estimates and/or assumptions regarding its deferred tax liability as
new information becomes available. To the extent the Fund modifies its estimates
and/ or assumptions, the net asset value of the Fund would likely fluctuate.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on any exchange other than The Nasdaq
Stock Market are valued, except as indicated below, at the last sale price on
the business day as of which such value is being determined. If there has been
no sale on such day, the securities are valued at the mean of the most recent
bid and asked prices on such day. Securities admitted to trade on The Nasdaq
Stock Market are valued at the NASDAQ Official Closing Price as determined by
NASDAQ. Portfolio securities traded on more than one securities exchange are
valued at the last sale price 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.
Equity securities traded in the over-the-counter market, but excluding
securities admitted to trading on The Nasdaq Stock Market, are valued at the
closing bid prices. Fixed income securities with a remaining maturity of 60 days
or more will be valued by the Fund using a pricing service. When price quotes
are not available, fair market value is based on prices of comparable
securities. Fixed income securities maturing within 60 days are valued by the
Fund on an amortized cost basis. The value of any portfolio security held by the
Fund for which reliable market quotations are not readily available, including
illiquid securities, or if a valuation is deemed inappropriate, will be
determined under procedures adopted by the Board of Trustees in a manner that
reflects fair market value of the security on the valuation date.
Any derivative transaction that the Fund enters into may, depending on the
applicable market environment, have a positive or negative value for purposes of
calculating net asset value. Any option transaction that the Fund enters into
may, depending on the applicable market environment, have no value or a positive
value. Exchange traded options and futures contracts are valued at the closing
price in the market where such contracts are principally traded.
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DISTRIBUTIONS
The Fund intends to make quarterly distributions to common shareholders. Fund
distributions will generally consist of (i) cash or paid-in-kind distributions
from MLPs or their affiliates, interest payments received on debt securities
owned by the Fund and dividend or other payments on equity securities owned by
the Fund, less (ii) current or accrued operating expenses of the Fund, including
taxes on Fund taxable income and leverage costs. The Fund anticipates that, due
to the tax treatment under current law of cash distributions made by MLPs in
which the Fund will invest, a portion of distributions the Fund makes to common
shareholders may consist of a tax-deferred return of capital. Distributions to
Common Shareholders are recorded on the ex-date and are determined based on U.S.
generally accepted accounting principles, which may differ from their ultimate
characterization for federal income tax purposes.
Distributions made from current and accumulated earnings and profits of the
Fund will be taxable to shareholders as dividend income. Distributions that are
in an amount greater than the Fund's current and accumulated earnings and
profits will represent a tax-deferred return of capital to the extent of a
shareholder's basis in the Common Shares, and such distributions will
correspondingly increase the realized gain (or decrease the realized loss) upon
the sale of the Common Shares. Additionally, distributions not paid from current
and accumulated earnings and profits that exceed a shareholder's tax basis in
the Common Shares will be taxed as a capital gain. Unless you elect to receive
cash distributions, your distributions of net investment income will
automatically be reinvested into additional common shares pursuant to the Fund's
Dividend Reinvestment Plan. You will be taxed upon the reinvested amounts as if
you actually received the distribution in cash and then reinvested it in common
shares.
Distributions by the Fund, whether paid in cash or in additional common
shares, will be taken into account in measuring the performance of the Fund with
respect to its investment objective.
DIVIDEND REINVESTMENT PLAN
If your common shares are registered directly with the Fund or if you hold
your common shares with a brokerage firm that participates in the Fund's
Dividend Reinvestment Plan, unless you elect to receive cash distributions, all
dividends and distributions on your common shares will be automatically
reinvested by the Plan Agent, BNY Mellon Investment Servicing (US) Inc., as
successor to PNC Global Investment Servicing (U.S.) Inc., in additional common
shares under the Dividend Reinvestment Plan (the "Plan"). If you elect to
receive cash distributions, you will receive all distributions in cash paid by
check mailed directly to you by BNY Mellon Investment Servicing (US) Inc., as
successor to PNC Global Investment Servicing (U.S.) Inc., as dividend paying
agent.
You are automatically enrolled in the Plan when you become a shareholder of
the Fund. As a participant in the Plan, the number of common shares you will
receive will be determined as follows:
(1) If the common shares are trading at or above net asset value at the time
of valuation, the Fund will issue new shares at a price equal to the greater of
(i) net asset value per common share on that date or (ii) 95% of the market
price on that date.
(2) If common shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash and
will purchase common shares in the open market, on the NYSE MKT or elsewhere,
for the participants' accounts. It is possible that the market price for the
common shares may increase before the Plan Agent has completed its purchases.
Therefore, the average purchase price per share paid by the Plan Agent may
exceed the market price at the time of valuation, resulting in the purchase of
fewer shares than if the dividend or distribution had been paid in common shares
issued by the Fund. The Plan Agent will use all dividends and distributions
received in cash to purchase common shares in the open market within 30 days of
the valuation date except where temporary curtailment or suspension of purchases
is necessary to comply with federal securities laws. Interest will not be paid
on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
-58-
The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all common shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or
distributions in common shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that you
do not have to pay income taxes due upon receiving dividends and distributions.
See "Tax Matters."
If you hold your common shares with a brokerage firm that does not
participate in the Plan, you will not be able to participate in the Plan and any
dividend reinvestment may be effected on different terms than those described
above. Consult your financial advisor for more information.
The Fund reserves the right to amend or terminate the Plan if in the judgment
of the Board of Trustees the change is warranted. There is no direct service
charge to participants in the Plan; however, the Fund reserves the right to
amend the Plan to include a service charge payable by the participants.
Additional information about the Plan may be obtained from BNY Mellon Investment
Servicing (US) Inc., as successor to PNC Global Investment Servicing (U.S.)
Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PLAN OF DISTRIBUTION
The Fund may sell the Common Shares being offered under this prospectus in
any one or more of the following ways:
o directly to purchasers;
o through agents;
o to or through underwriters; or
o through dealers.
The Fund may distribute the Common Shares from time to time in one or more
transactions at:
o a fixed price or prices, which may be changed;
o market prices prevailing at the time of sale;
o prices related to prevailing market prices; or
o negotiated prices.
The Fund may directly solicit offers to purchase Common Shares, or the Fund
may designate agents to solicit such offers. The Fund will, in a prospectus
supplement relating to such offering, name any agent that could be viewed as an
underwriter under the Securities Act of 1933 and describe any commissions the
Fund must pay. Any such agent will be acting on a best efforts basis for the
period of its appointment or, if indicated in the applicable prospectus
supplement or other offering materials, on a firm commitment basis. Agents,
dealers and underwriters may be customers of, engage in transactions with, or
perform services for the Fund in the ordinary course of business.
If any underwriters or agents are utilized in the sale of Common Shares in
respect of which this prospectus is delivered, the Fund will enter into an
underwriting agreement or other agreement with them at the time of sale to them,
and the Fund will set forth in the prospectus supplement relating to such
offering their names and the terms of the Fund's agreement with them.
If a dealer is utilized in the sale of Common Shares in respect of which this
prospectus is delivered, the Fund will sell such Common Shares to the dealer, as
principal. The dealer may then resell such Common Shares to the public at
varying prices to be determined by such dealer at the time of resale.
The Fund may engage in at-the-market offerings to or through a market maker
or into an existing trading market, on an exchange or otherwise, in accordance
with Rule 415(a)(4). An at-the-market offering may be through an underwriter or
underwriters acting as principal or agent for the Fund.
-59-
Agents, underwriters and dealers may be entitled under agreements which they
may enter into with the Fund to indemnification by the Fund against certain
civil liabilities, including liabilities under the Securities Act, and may be
customers of, engage in transactions with or perform services for the Fund in
the ordinary course of business.
In order to facilitate the offering of the Common Shares, any underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Shares or any other Common Shares the prices of which may be
used to determine payments on the Common Shares. Specifically, any underwriters
may over-allot in connection with the offering, creating a short position for
their own accounts. In addition, to cover over-allotments or to stabilize the
price of the Common Shares or of any such other Common Shares, the underwriters
may bid for, and purchase, the Common Shares or any such other Common Shares in
the open market. Finally, in any offering of the Common Shares through a
syndicate of underwriters, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Shares in the offering if the syndicate repurchases previously distributed
Common Shares in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Shares above independent market
levels. Any such underwriters are not required to engage in these activities and
may end any of these activities at any time.
The Fund may enter into derivative transactions with third parties, or sell
Common Shares not covered by this prospectus to third parties in privately
negotiated transactions. If the applicable prospectus supplement indicates, in
connection with those derivatives, the third parties may sell Common Shares
covered by this prospectus and the applicable prospectus supplement or other
offering materials, including in short sale transactions. If so, the third
parties may use Common Shares pledged by the Fund or borrowed from the Fund or
others to settle those sales or to close out any related open borrowings of
stock, and may use Common Shares received from the Fund in settlement of those
derivatives to close out any related open borrowings of stock. The third parties
in such sale transactions will be underwriters and, if not identified in this
prospectus, will be identified in the applicable prospectus supplement or other
offering materials (or a post-effective amendment).
The Fund or one of the Fund's affiliates may loan or pledge Common Shares to
a financial institution or other third party that in turn may sell the Common
Shares using this prospectus. Such financial institution or third party may
transfer its short position to investors in our Common Shares or in connection
with a simultaneous offering of other Common Shares offered by this prospectus
or otherwise.
The maximum commission or discount to be received by any member of the
Financial Industry Regulatory Authority will not be greater than eight percent
of the initial gross proceeds from the sale of any security being sold.
Any underwriter, agent or dealer utilized in the initial offering of Common
Shares will not confirm sales to accounts over which it exercises discretionary
authority without the prior specific written approval of its customer.
DESCRIPTION OF SHARES
COMMON SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
common shares. The Common Shares being offered in this offering have a par value
of $0.01 per share and, subject to the rights of holders of Preferred Shares, if
any, have equal rights to the payment of dividends and the distribution of
assets upon liquidation. As of November 30, 2012, the Fund had 16,534,978 common
shares outstanding. The Common Shares being offered by this prospectus will,
when issued, be fully paid and, subject to matters discussed in "Certain
Provisions in the Declaration of Trust and By-Laws," non-assessable, and
currently have no preemptive or conversion rights (except as may otherwise be
determined by the Trustees in their sole discretion) or rights to cumulative
voting.
The Fund's currently outstanding common shares are, and the Common Shares
offered in this prospectus will be, subject to notice of issuance, listed on the
NYSE MKT (formerly the NYSE Amex) under the trading or "ticker" symbol "FEN."
Section 23(b) of the 1940 Act, in relevant part, provides that a
registered closed-end fund may not sell any of its common stock at a price below
the current net asset value of such stock, exclusive of any distribution
commission or discount, except with the consent of a majority of its common
stockholders, or under certain other circumstances. At a special meeting of
shareholders of the Fund held on January 8, 2008, the Fund obtained authority
from its shareholders to issue and sell common shares at a net price less than
its then-current net asset value per share, subject to the following conditions:
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o The per share offering price, before the deduction of underwriting
fees, commissions and offering expenses, will not be less than the
net asset value per share of the Fund's common shares, as determined
at any time within two business days prior to the pricing of the
common shares to be sold in the offering.
o Immediately following each offering of such common shares, after
deducting underwriting fees, commissions and offering expenses, the
net asset value per share of the Fund's common shares, as determined
at any time within two business days prior to the pricing of the
common shares to be sold, would not have been diluted by greater
than a total of 1% of the net asset value per share of all of the
Fund's outstanding common shares. The Fund will not be subject to a
maximum number of common shares that can be sold or a defined
minimum sales price per share in any offering so long as for each
offering the number of common shares offered and the price at which
such common shares are sold together would not result in dilution of
the net asset value per share of the Fund's common shares in excess
of the 1% limitation described above.
o A majority of the Trustees who are not officers or employees of
First Trust, any sub-advisor or any of their affiliates makes a
determination, based on information and a recommendation from the
Advisor, that they reasonably expect that the investments to be made
with the net proceeds of such issuance will lead to a long-term
increase in the Fund's net asset value or a long-term increase in
the level of the Fund's distributions to shareholders.
In connection with any sale of Common Shares below net asset value as
described above, the Advisor and Sub-Advisor have committed to waive a portion
of their investment advisory fees and sub-advisory fees following any such
offering of Common Shares in the following manner:
o the Advisor and Sub-Advisor will waive all investment advisory fees
and sub-advisory fees with respect to the Fund's assets attributable
to such newly issued Common Shares (including any assets
attributable to associated financial leverage) for the first
three-month period following any offering of Common Shares; and
o the Advisor and Sub-Advisor will waive 50% of investment advisory
fees and sub-advisory fees with respect to the Fund's assets
attributable to such newly issued Common Shares (including such
assets attributable to associated financial leverage) for the second
three-month period following such offering of Common Shares.
See "Management of the Fund -- Investment Management Agreement" for a
description of the investment advisory and sub-advisory fees payable to the
Advisor and the Sub-Advisor.
The Fund will not issue and sell Common Shares at a price less than its
then-current net asset value per share in accordance with the above conditions
unless set forth in a prospectus supplement to this prospectus.
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional common shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade on
an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund have during some periods traded at prices
higher than net asset value and during other periods have traded at prices lower
than net asset value. Because the market value of the common shares may be
influenced by such factors as dividend levels (which are in turn affected by
expenses), dividend stability, portfolio credit quality, net asset value,
relative demand for and supply of such shares in the market, general market and
economic conditions, and other factors beyond the control of the Fund, the Fund
cannot assure you that the common shares will trade at a price equal to or
higher than net asset value in the future. The common shares are designed
primarily for long-term investors, and investors in the common shares should not
view the Fund as a vehicle for trading purposes. See "Structure of the Fund;
Common Share Repurchases and Change in Fund Structure."
PREFERRED SHARES
The Declaration of Trust provides that the Fund's Board of Trustees may
authorize and issue Preferred Shares with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the holders
of the common shareholders. Holders of common shares have no preemptive right to
purchase any Preferred Shares that might be issued.
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The Fund may elect to issue Preferred Shares as part of its leverage
strategy. The Board of Trustees also reserves the right to issue Preferred
Shares to the extent permitted by the 1940 Act, which currently limits the
aggregate liquidation preference of all outstanding Preferred Shares to 50% of
the value of the Fund's Managed Assets less liabilities and indebtedness of the
Fund. The Fund cannot assure you, however, that any Preferred Shares will be
issued. Although the terms of any Preferred Shares, including dividend rate,
liquidation preference and redemption provisions, will be determined by the
Board of Trustees, subject to applicable law and the Declaration of Trust, it is
likely that the Preferred Shares will be structured to carry a relatively
short-term dividend rate reflecting interest rates on short-term bonds, by
providing for the periodic redetermination of the dividend rate at relatively
short intervals through an auction, remarketing or other procedure. The Fund
also believes that it is likely that the liquidation preference, voting rights
and redemption provisions of the Preferred Shares will be similar to those
stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of Preferred
Shares will be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per Preferred Share plus
accrued and unpaid dividends, whether or not declared, before any distribution
of assets is made to holders of common shares. After payment of the full amount
of the liquidating distribution to which they are entitled, the holders of
Preferred Shares will not be entitled to any further participation in any
distribution of assets by the Fund.
Voting Rights. The 1940 Act requires that the holders of any Preferred
Shares, voting separately as a single class, have the right to elect at least
two trustees at all times. The remaining trustees will be elected by holders of
common shares and Preferred Shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class
of senior securities outstanding, the holders of any Preferred Shares have the
right to elect a majority of the trustees of the Fund at any time two years'
dividends on any Preferred Shares are unpaid. The 1940 Act also requires that,
in addition to any approval by shareholders that might otherwise be required,
the approval of the holders of a majority of any outstanding Preferred Shares,
voting separately as a class, would be required to (1) adopt any plan of
reorganization that would adversely affect the Preferred Shares, and (2) take
any action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, changes in the Fund's subclassification as a
closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Declaration of Trust and By-Laws."
As a result of these voting rights, the Fund's ability to take any such actions
may be impeded to the extent that there are any Preferred Shares outstanding.
The Board of Trustees presently intends that, except as otherwise indicated in
this prospectus and except as otherwise required by applicable law, holders of
Preferred Shares will have equal voting rights with holders of common shares
(one vote per share, unless otherwise required by the 1940 Act) and will vote
together with holders of common shares as a single class.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each case
be in addition to any other vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Fund. The terms of
any Preferred Shares issued are expected to provide that (1) they are redeemable
by the Fund in whole or in part at the original purchase price per share plus
accrued dividends per share, (2) the Fund may tender for or purchase Preferred
Shares and (3) the Fund may subsequently resell any shares so tendered for or
purchased. Any redemption or purchase of Preferred Shares by the Fund will
reduce the leverage applicable to the common shares, while any resale of shares
by the Fund will increase that leverage.
The discussion above describes the possible offering of Preferred Shares by
the Fund. If the Board of Trustees determines to proceed with such an offering,
the terms of the Preferred Shares may be the same as, or different from, the
terms described above, subject to applicable law and the Fund's Declaration of
Trust. The Board of Trustees, without the approval of the holders of common
shares, may authorize an offering of Preferred Shares or may determine not to
authorize such an offering, and may fix the terms of the Preferred Shares to be
offered.
DESCRIPTION OF BORROWINGS
The Fund's Declaration of Trust authorizes the Fund, without prior approval
of the common shareholders, to borrow money. In this connection, the Fund may
issue notes or other evidence of indebtedness (including bank borrowings or
commercial paper) and may secure any such borrowings by mortgaging, pledging or
otherwise subjecting as security the Fund's assets. In connection with such
borrowing, the Fund may be required to maintain minimum average balances with
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the lender or to pay a commitment or other fee to maintain a line of credit. Any
such requirements will increase the cost of borrowing over the stated interest
rate. Under the requirements of the 1940 Act, the Fund, immediately after any
such borrowings, must have an "asset coverage" of at least 300% (331/3% of
Managed Assets after borrowings). With respect to such borrowing, asset coverage
means the ratio which the value of the Managed Assets of the Fund, less all
liabilities and indebtedness not represented by senior securities (as defined in
the 1940 Act), bears to the aggregate amount of such borrowing represented by
senior securities issued by the Fund.
The rights of lenders to the Fund to receive interest on and repayment of
principal of any such borrowings will be senior to those of the common
shareholders, and the terms of any such borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
common shareholders in certain circumstances. Further, the 1940 Act does (in
certain circumstances) grant to the lenders to the Fund certain voting rights in
the event of default in the payment of interest on or repayment of principal. In
the event that the Fund elects to be treated as a regulated investment company,
and that such provisions would impair the Fund's status as a regulated
investment company under the Internal Revenue Code, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings. Any borrowing will likely be ranked equal to all other existing and
future borrowings of the Fund.
Certain types of borrowings may result in the Fund being subject to covenants
in credit agreements relating to asset coverage and portfolio composition
requirements. The Fund may be subject to certain restrictions on investments
imposed by guidelines of one or more rating agencies, which may issue ratings
for the short-term corporate debt securities or Preferred Shares issued by the
Fund. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. It is
not anticipated that these covenants or guidelines will impede the Sub-Advisor
from managing the Fund's portfolio in accordance with the Fund's investment
objective and policies.
The Commitment Facility can be used by the Fund for general corporate
purposes, including for financing a portion of the Fund's investments. The
Commitment Facility is secured by a first priority perfected security interest
in the assets of the Fund. In addition, the loan documents under the Commitment
Facility restrict the Fund's ability to change its investment advisor,
sub-advisor or custodian, amend its fundamental investment policies or
investment objective, or take on additional indebtedness without prior consent
from the provider of the Commitment Facility.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS
Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
of Trust contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Board of Trustees. The Declaration of Trust further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Fund believes that the likelihood of such circumstances is remote.
The Declaration of Trust and By-Laws include provisions that could limit the
ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status. The number of trustees is currently five,
but by action of two-thirds of the trustees, the Board of Trustees may from time
to time be increased or decreased. The Board of Trustees is divided into three
classes of trustees serving staggered three-year terms, with the terms of one
class expiring at each annual meeting of shareholders. If the Fund issues
Preferred Shares, the Fund may establish a separate class for the trustees
elected by the holders of the Preferred Shares. Subject to applicable provisions
of the 1940 Act, vacancies on the Board of Trustees may be filled by a majority
action of the remaining trustees. Such provisions may work to delay a change in
the majority of the Board of Trustees. The provisions of the Declaration of
Trust relating to the election and removal of trustees may be amended only by a
vote of two-thirds of the trustees then in office. Generally, the Declaration of
Trust requires a vote by holders of at least two-thirds of the common shares and
Preferred Shares, if any, voting together as a single class, except as described
below and in the Declaration of Trust, to authorize: (1) a conversion of the
Fund from a closed-end to an open-end investment company; (2) a merger or
consolidation of the Fund with any corporation, association, trust or other
organization, including a series or class of such other organization (subject to
a limited exception if the acquiring fund is not an operating entity immediately
prior to the transaction); (3) a sale, lease or exchange of all or substantially
all of the Fund's assets (other than in the regular course of the Fund's
investment activities, in connection with the termination of the Fund, and other
limited circumstances set forth in the Declaration of Trust); (4) in certain
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circumstances, a termination of the Fund; (5) a removal of trustees by common
shareholders; or (6) certain transactions in which a Principal Shareholder (as
defined in the Declaration of Trust) is a party to the transaction. However,
with respect to (1) above, if there are Preferred Shares outstanding, the
affirmative vote of the holders of two-thirds of the Preferred Shares voting as
a separate class shall also be required. With respect to (2) above, except as
otherwise may be required, if the transaction constitutes a plan of
reorganization which adversely affects Preferred Shares, if any, then an
affirmative vote of two-thirds of the Preferred Shares voting together as a
separate class is required as well. With respect to (1) through (3), if such
transaction has already been authorized by the affirmative vote of two-thirds of
the trustees, then the affirmative vote of the majority of the outstanding
voting securities, as defined in the 1940 Act (a "Majority Shareholder Vote"),
is required, provided that when only a particular class is affected (or, in the
case of removing a trustee, when the trustee has been elected by only one
class), only the required vote of the particular class will be required. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the Fund's shares otherwise required by law or any agreement between
the Fund and any national securities exchange. Approval of Fund shareholders is
not required, however, for any transaction, whether deemed a merger,
consolidation, reorganization, exchange of shares or otherwise whereby the Fund
issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions in the Declaration of Trust may be amended
except by the vote of at least two-thirds of the common shares and Preferred
Shares, if any, outstanding and entitled to vote. Only the Board of Trustees may
amend the By-Laws. See the SAI under "Certain Provisions in the Declaration of
Trust and By-Laws."
The provisions of the Declaration of Trust and By-Laws described above could
have the effect of depriving the common shareholders of opportunities to sell
their common shares at a premium over the then current market price of the
common shares by discouraging a third party from seeking to obtain control of
the Fund in a tender offer or similar transaction. The overall effect of these
provisions is to render more difficult the accomplishment of a merger or the
assumption of control by a third party. They provide, however, the advantage of
potentially requiring persons seeking control of the Fund to negotiate with its
management regarding the price to be paid and facilitating the continuity of the
Fund's investment objective and policies. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are in
the best interests of the Fund and its common shareholders.
Reference should be made to the Declaration of Trust on file with the SEC for
the full text of these provisions.
STRUCTURE OF THE FUND; COMMON SHARE REPURCHASES
AND CHANGE IN FUND STRUCTURE
CLOSED-END STRUCTURE
Closed-end funds differ from open-end management investment companies
(commonly referred to as mutual funds) in that closed-end funds generally list
their shares for trading on a securities exchange and do not redeem their shares
at the option of the shareholder. By comparison, mutual funds issue securities
redeemable at net asset value at the option of the shareholder and typically
engage in a continuous offering of their shares. Mutual funds are subject to
continuous asset in-flows and out-flows that can complicate portfolio
management, whereas closed-end funds generally can stay more fully invested in
securities consistent with the closed-end fund's investment objective and
policies. In addition, in comparison to open-end funds, closed-end funds have
greater flexibility in their ability to make certain types of investments,
including investments in illiquid securities.
However, shares of closed-end investment companies listed for trading on a
securities exchange frequently trade at a discount from net asset value, but in
some cases trade at a premium. The market price may be affected by trading
volume of the shares, general market and economic conditions and other factors
beyond the control of the closed-end fund. The foregoing factors may result in
the market price of the common shares being greater than, less than or equal to
net asset value. The Board of Trustees has reviewed the structure of the Fund in
light of its investment objective and policies and has determined that the
closed-end structure is in the best interests of the shareholders. As described
below, however, the Board of Trustees will review periodically the trading range
and activity of the Fund's shares with respect to its net asset value and the
Board may take certain actions to seek to reduce or eliminate any such discount.
Such actions may include open market repurchases or tender offers for the common
shares at net asset value or the possible conversion of the Fund to an open-end
fund. There can be no assurance that the Board will decide to undertake any of
these actions or that, if undertaken, such actions would result in the common
shares trading at a price equal to or close to net asset value per common share.
In addition, as noted above, the Board of Trustees determined in connection with
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the initial offering of common shares of the Fund that the closed-end structure
is desirable, given the Fund's investment objective and policies. Investors
should assume, therefore, that it is highly unlikely that the Board of Trustees
would vote to convert the Fund to an open-end investment company.
REPURCHASE OF COMMON SHARES AND TENDER OFFERS
In recognition of the possibility that the common shares might trade at a
discount to net asset value and that any such discount may not be in the
interest of shareholders, the Fund's Board of Trustees, in consultation with the
Advisor, Sub-Advisor and the corporate finance services and consulting agent
that the Advisor has retained, from time to time will review possible actions to
reduce any such discount. The Board of Trustees of the Fund will consider from
time to time open market repurchases of and/or tender offers for common shares
to seek to reduce any market discount from net asset value that may develop. In
connection with its consideration from time to time of open-end repurchases of
and/or tender offers for common shares, the Board of Trustees of the Fund will
consider whether to commence a tender offer or share-repurchase program at the
first quarterly board meeting following a calendar year in which the Fund's
common shares have traded at an average weekly discount from net asset value of
more than 10% in the last 12 weeks of that calendar year. After any
consideration of potential actions to seek to reduce any significant market
discount, the Board may, subject to its fiduciary obligations and compliance
with applicable state and federal laws, authorize the commencement of a
share-repurchase program or tender offer. The size and timing of any such share
repurchase program or tender offer will be determined by the Board of Trustees
in light of the market discount of the common shares, trading volume of the
common shares, information presented to the Board of Trustees regarding the
potential impact of any such share repurchase program or tender offer, and
general market and economic conditions. There can be no assurance that the Fund
will in fact effect repurchases of or tender offers for any of its common
shares. The Fund may, subject to its investment limitation with respect to
borrowings and limitations on seniority within the Fund's capital structure if
the Fund has other borrowings outstanding at such time, incur debt to finance
such repurchases or a tender offer or for other valid purposes. Interest on any
such borrowings would increase the Fund's expenses and reduce the Fund's net
income.
There can be no assurance that repurchases of common shares or tender offers,
if any, will cause the common shares to trade at a price equal to or in excess
of their net asset value. Nevertheless, the possibility that a portion of the
Fund's outstanding common shares may be the subject of repurchases or tender
offers may reduce the spread between market price and net asset value that might
otherwise exist. In the opinion of the Fund, sellers may be less inclined to
accept a significant discount in the sale of their common shares if they have a
reasonable expectation of being able to receive a price of net asset value for a
portion of their common shares in conjunction with an announced repurchase
program or tender offer for the common shares.
Although the Board of Trustees believes that repurchases or tender offers
generally would have a favorable effect on the market price of the common
shares, the acquisition of common shares by the Fund will decrease the Managed
Assets of the Fund and therefore will have the effect of increasing the Fund's
expense ratio and decreasing the asset coverage with respect to any Preferred
Shares outstanding. Because of the nature of the Fund's investment objective,
policies and portfolio, the Advisor and the Sub-Advisor do not anticipate that
repurchases of common shares or tender offers should interfere with the ability
of the Fund to manage its investments in order to seek its investment objective,
and does not anticipate any material difficulty in borrowing money or disposing
of portfolio securities to consummate repurchases of or tender offers for common
shares, although no assurance can be given that this will be the case.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time if
approved by the holders of two-thirds of the Fund's common shares outstanding
and entitled to vote; provided, however, that such vote shall be by Majority
Shareholder Vote if the action in question was previously approved by the
affirmative vote of two-thirds of the Trustees. Such affirmative vote or consent
shall be in addition to the vote or consent of the holders of the shares
otherwise required by law or any agreement between the Fund and any national
securities exchange. In the event of conversion, the common shares would cease
to be listed on the NYSE MKT or other national securities exchange or market
system. Any Preferred Shares would need to be redeemed and any Borrowings may
need to be repaid upon conversion to an open-end investment company.
Additionally, the 1940 Act imposes limitations on open-end funds' investments in
illiquid securities, which could restrict the Fund's ability to invest in
certain securities discussed in this prospectus to the extent discussed herein.
Such limitations could adversely affect distributions to Fund common
shareholders in the event of conversion to an open-end fund. The Board of
Trustees believes, however, that the closed-end structure is desirable, given
the Fund's investment objective and policies. Investors should assume,
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therefore, that it is unlikely that the Board of Trustees would vote to convert
the Fund to an open-end investment company. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. The Fund would expect to pay all such
redemption requests in cash, but intends to reserve the right to pay redemption
requests in a combination of cash or securities. If such partial payment in
securities were made, investors may incur brokerage costs in converting such
securities to cash. If the Fund were converted to an open-end fund, it is likely
that new common shares would be sold at net asset value plus a sales load.
TAX MATTERS
The following discussion of federal income tax matters is based on the advice
of Chapman and Cutler LLP, counsel to the Fund.
MATTERS ADDRESSED
This section and the discussion in the SAI provide a general summary of the
material U.S. federal income tax consequences to the persons who purchase, own
and dispose of the common shares. It does not address all federal income tax
consequences that may apply to investment in the common shares. Unless otherwise
indicated, this discussion is limited to taxpayers who are U.S. persons, as
defined herein. The discussion that follows is based on the provisions of the
Internal Revenue Code, on Treasury regulations promulgated thereunder as in
effect on the date hereof and on existing judicial and administrative
interpretations thereof. These authorities are subject to change and to
differing interpretations, which could apply retroactively. Potential investors
should consult their own tax advisors in determining the federal, state, local,
foreign and any other tax consequences to them of the purchase, ownership and
disposition of the common shares. This discussion does not address all tax
consequences that may be applicable to a U.S. person that is a beneficial owner
of common shares, nor does it address, unless specifically indicated, the tax
consequences to, among others, (i) persons that may be subject to special
treatment under U.S. federal income tax law, including, but not limited to,
banks, insurance companies, thrift institutions, regulated investment companies,
real estate investment trusts, tax-exempt organizations and dealers in
securities or currencies, (ii) persons that will hold common shares as part of a
position in a "straddle" or as part of a "hedging," "conversion" or other
integrated investment transaction for U.S. federal income tax purposes, (iii)
persons whose functional currency is not the U.S. dollar or (iv) persons that do
not hold common shares as capital assets within the meaning of Section 1221 of
the Internal Revenue Code.
For purposes of this discussion, a "U.S. person" is (i) an individual citizen
or resident of the United States, (ii) a corporation or partnership organized in
or under the laws of the United States or any state thereof or the District of
Columbia (other than a partnership that is not treated as a U.S. person under
any applicable Treasury regulations), (iii) an estate the income of which is
subject to U.S. federal income taxation regardless of its source, or (iv) a
trust if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more U.S. persons
have the authority to control all the substantial decisions of such trust.
Notwithstanding clause (iv) above, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as U.S. persons prior
to such date that elect to continue to be so treated also shall be considered
U.S. persons.
TAX CHARACTERIZATION OF THE FUND FOR U.S. FEDERAL INCOME TAX PURPOSES
The Fund has elected to be treated as a regular C corporation for U.S.
federal income tax purposes. Thus, the Fund is subject to U.S. corporate income
tax on its U.S. taxable income. Such taxable income would generally include all
of the Fund's net income from the MLPs. The current U.S. federal maximum
graduated income tax rate for corporations is 35%. In addition, the United
States also imposes a 20% alternative minimum tax on the recalculated
alternative minimum taxable income of an entity treated as a corporation. Any
such U.S. corporate income tax or alternative minimum tax could materially
reduce cash available to make payments on the common shares. The Fund will also
be obligated to pay state income tax on its taxable income, either because the
states follow the federal election or because the states separately impose a tax
on the Fund.
The MLPs in which the Fund intends to invest are generally treated as
partnerships for U.S. federal income tax purposes. As a partner in the MLPs, the
Fund will be required to report its allocable share of MLP income, gain, loss,
deduction and expense, whether or not any cash is distributed from the MLPs.
The Fund intends to invest in energy MLPs, so the Fund anticipates that the
majority of the Fund's items of income, gain, loss, deduction and expense will
be related to energy ventures. However, some items are likely to relate to the
temporary investment of the Fund's capital, which may be unrelated to energy
ventures.
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Although the Fund intends to hold the interests in the MLPs for investment,
the Fund is likely to sell interests in a particular MLP from time to time. On
any such sale, the Fund generally will recognize gain or loss based upon the
difference between the consideration received for tax purposes on the sale and
the Fund's tax basis in the interest sold. The consideration received is
generally the amount paid by the purchaser plus any debt of the MLP allocated to
the Fund that will shift to the purchaser on the sale. The Fund's tax basis in
an MLP is the amount paid for the interest, increased by the Fund's allocable
share of net income and gains and the MLP's debt, if any, and capital
contributions to the MLP, and decreased for any distributions received by the
Fund, by reductions in the Fund's allocable share of the MLP's debt, if any, and
by the Fund's allocable share of net losses. Thus, although cash in excess of
taxable income and net tax losses may create a temporary economic benefit to the
Fund, they will increase the amount of gain (or decrease the amount of loss) on
the sale of an interest in an MLP. No favorable federal income tax rate applies
to long-term capital gains for entities treated as corporations for federal
income tax purposes, such as the Fund. Thus, the Fund will be subject to federal
income tax on its long-term capital gains, like ordinary income, at rates of up
to 35%.
In calculating the Fund's alternative minimum taxable income, certain
percentage depletion deductions and intangible drilling costs may be treated as
items of tax preference. Items of tax preference increase alternative minimum
taxable income and increase the likelihood that the Fund may be subject to the
alternative minimum tax.
The Fund is not treated as a regulated investment company for federal income
tax purposes. In order to qualify as a regulated investment company, the income
and assets of the company must meet certain minimum threshold tests. Because the
Fund invests a substantial portion of its Managed Assets in MLPs that invest in
energy ventures, the Fund does not meet such tests under current law. In
contrast to the tax rules that will apply to the Fund, a regulated investment
company generally does not pay corporate income tax. Thus, the regulated
investment company taxation rules have no application to the Fund or common
shareholders of the Fund.
TAXATION OF THE SHAREHOLDERS
Distributions. The Fund's distributions will be treated as dividends to
common shareholders to the extent of the Fund's current or accumulated earnings
and profits as determined for federal income tax purposes.
The portion of the Fund's distributions treated as a dividend for federal
income tax purposes should be treated as qualified dividend income for federal
income tax purposes, subject to certain holding period and other requirements.
The maximum federal income tax rate for individuals on qualified dividend income
is currently generally 20%. Dividends may also be subject to a 3.8% Medicare
tax. Corporations are generally subject to tax on dividends at a maximum 35%
rate, but corporations may be eligible to exclude 70% of the dividends if
certain holding period requirements are met.
If a Fund distribution exceeds the Fund's current and accumulated earnings
and profits, the distribution will be treated as a non-taxable adjustment to the
basis of the common shares to the extent of such basis, and then as capital gain
to the extent of the excess distribution. Such gain will be long-term capital
gain if the holding period for the common shares is more than one year.
Individuals are currently subject to a maximum tax rate of 20% on long-term
capital gains. Gains may also be subject to a 3.8% Medicare tax. Corporations
are taxed on capital gains at their ordinary graduated rates.
A corporation's earnings and profits are generally calculated by making
certain adjustments to the corporation's reported taxable income. Based upon the
historic performance of similar MLPs, the Fund anticipates that the distributed
cash from the MLPs in its portfolio will exceed the Fund's earnings and profits.
Thus, the Fund anticipates that only a portion of its distributions will be
treated as dividends to its common shareholders for federal income tax purposes.
Special rules apply to the calculation of earnings and profits for
corporations invested in energy ventures. The Fund's earnings and profits will
be calculated using (i) straight-line depreciation rather than a percentage
depletion method and (ii) five-year and ten-year amortization of drilling costs
and exploration and development costs, respectively. Thus, these deductions may
be significantly lower for purposes of calculating earnings and profits than
they are for purposes of calculating taxable income. Because of these
differences, the Fund may make distributions out of earnings and profits,
treated as dividends, in years in which Fund distributions exceed the Fund's
taxable income.
A common shareholder participating in the Fund's automatic dividend
reinvestment plan will be taxed upon the reinvested amount as if actually
received by the participating common shareholder and the participating common
shareholder reinvested such amount in additional Fund common shares.
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The Fund will notify common shareholders annually as to the federal income
tax status of Fund distributions to them.
Distributions from the Fund after December 31, 2013 may be subject to a U.S.
withholding tax of 30% in the case of distributions to (i) certain non-U.S.
financial institutions that have not entered into an agreement with the U.S.
Treasury to collect and disclose certain information and are not resident in a
jurisdiction that has entered into such an agreement with the U.S. Treasury and
(ii) certain other non-U.S. entities that do not provide certain certifications
and information about the entity's U.S. owners.
Sale of Shares. Upon the sale of common shares, a common shareholder will
generally recognize capital gain or loss measured by the difference between the
amount received on the sale and the common shareholder's tax basis of common
shares sold. As discussed above, such tax basis may be less than the price paid
for the common shares as a result of Fund distributions in excess of the Fund's
earnings and profits. Such capital gain or loss will generally be long-term
capital gain or loss, if such common shares were capital assets held for more
than one year. The federal income tax treatment of long-term capital gains is
described above. The deductibility of capital losses is subject to limitations.
In addition, the gross proceeds from dispositions of interests in the Fund
occurring after December 31, 2016 may be subject to a U.S. withholding tax of
30% in the case of payments to (i) certain non-U.S. financial institutions that
have not entered into an agreement with the U.S. Treasury to collect and
disclose certain information and are not resident in a jurisdiction that has
entered into such an agreement with the U.S. Treasury and (ii) certain other
non-U.S. entities that do not provide certain certifications and information
about the entity's U.S. owners.
Medicare Tax. Under the "Health Care and Education Reconciliation Act of
2010," income from the Fund may also be subject to a new 3.8% "Medicare tax"
imposed for taxable years beginning after 2012 This tax will generally apply to
the net investment income of a shareholder who is an individual, trust or estate
if such shareholder's adjusted gross income exceeds certain threshold amounts,
which are $250,000 in the case of a married couple filing joint returns and
$200,000 in the case of single individuals.
Information Reporting and Withholding. The Fund will be required to report
annually to the Internal Revenue Service (the "IRS"), and to each common
shareholder, the amount of distributions and consideration paid in redemptions,
and the amount withheld for federal income taxes, if any, for each calendar
year, except as to exempt holders (including certain corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, and individual
retirement accounts). Each common shareholder (other than common shareholders
who are not subject to the reporting requirements without supplying any
documentation) that is a U.S. person will be required to provide the Fund, under
penalties of perjury, an IRS Form W-9 or an equivalent form containing the
common shareholder's name, address, correct federal taxpayer identification
number and a statement that the common shareholder is not subject to backup
withholding. Should a non-exempt common shareholder fail to provide the required
certification, backup withholding will apply. The current backup withholding
rate is 28%. Backup withholding is not an additional tax. Any such withholding
will be allowed as a credit against the common shareholder's federal income tax
liability provided the required information is timely furnished to the IRS.
TAX CONSEQUENCES OF CERTAIN INVESTMENTS
Federal Income Taxation of MLPs. MLPs are generally intended to be taxed as
partnerships for federal income tax purposes. As a partnership, an MLP is
treated as a pass-through entity for federal income tax purposes. This means
that the federal income items of the MLP, though calculated and determined at
the partnership level, are allocated among the partners in the MLP and are
included directly in the calculation of the taxable income of the partners
whether or not cash flow is distributed from the MLP. The MLP files an
information return, but normally pays no federal income tax.
MLPs are often publicly traded. Publicly traded partnerships are generally
treated as corporations for federal income tax purposes. However, if an MLP
satisfies certain income character requirements, the MLP will generally continue
to be treated as partnership for federal income tax purposes. Under these
requirements, an MLP must receive at least 90% of its gross income from certain
"qualifying income" sources.
Qualifying income for this purpose generally includes interest, dividends,
real property rents, real property gains, and income and gain from the
exploration, development, mining or production, processing, refining,
transportation or marketing of any mineral or natural resource (including
fertilizer, geothermal energy, and timber). As discussed above, the Fund
currently invests in energy MLPs that derive income from such sources, so the
income of the MLPs should qualify as qualifying income.
-68-
As discussed above, the tax items of an MLP are allocated through to the
partners of the MLP whether or not an MLP makes any distributions of cash. In
part because estimated tax payments are payable quarterly, partnerships often
make quarterly cash distributions. A distribution from a partnership will
generally be treated as a non-taxable adjustment to the basis of the Fund's
interest in the partnership to the extent of such basis, and then as gain to the
extent of the excess distribution. The gain will generally be capital gain, but
a variety of rules could potentially recharacterize the gain as ordinary income.
The Fund's initial tax basis is the price paid for the MLP interest plus any
debt of the MLP allocated to the Fund. The tax basis is decreased for
distributions received by the Fund, by reductions in the Fund's allocable share
of the MLP's debt, if any, and by the Fund's allocable share of net losses, and
increased for capital contributions and the Fund's allocable share of net income
and gains.
When interests in a partnership are sold, the difference between (i) the sum
of the sales price and the Fund's share of debt of the partnership that will be
allocated to the purchaser and (ii) the Fund's adjusted tax basis will be
taxable gain or loss, as the case may be.
The Fund should receive a Form K-1 from each MLP, showing its share of each
item of MLP income, gain, loss, deductions and expense. The Fund will use that
information to calculate its taxable income and its earnings and profits.
Because the Fund has elected to be taxed as a corporation, the Fund will
report the tax items of the MLPs and any gain or loss on the sale of interests
in the MLPs. The Fund's common shareholders will be viewed for federal income
tax purposes as having income or loss on their investment in the Fund rather
than in the underlying MLPs. Common shareholders will receive a Form 1099 from
the Fund based upon the distributions made (or deemed to have been made) rather
than based upon the income, gain, loss or deductions of the MLPs in which the
Fund invests.
Other Investments. The Fund has in the past, and may in the future, attempt
to generate premiums from the sale of call options. These premiums typically
will result in short-term capital gains to the Fund. Transactions involving the
disposition of the Fund's underlying securities (whether pursuant to the
exercise of a call option, put option or otherwise) will give rise to capital
gains or losses. Because the Fund does not have control over the exercise of the
call options it writes, such exercises or other required sales of the underlying
stocks may cause the Fund to realize capital gains or losses at inopportune
times.
Certain of the Fund's investment practices may be 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 an ordinary loss or a deduction into a capital loss
(the deductibility of which is more limited) or (iii) cause the Fund to
recognize income or gain without a corresponding receipt of cash. The Fund will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these provisions, if possible.
CORPORATE FINANCE SERVICES AND CONSULTING FEE
First Trust Advisors (and not the Fund) has entered into a Corporate Finance
Services and Consulting Agreement with Wells Fargo Advisors, LLC, as successor
to A.G. Edwards (the "Consultant"), and has agreed to pay from its own assets a
fee to the Consultant. This fee was payable quarterly at the annual rate of
0.10% of the Fund's Managed Assets through June 29, 2006 and is payable
quarterly at the annual rate of 0.15% of the Fund's Managed Assets after June
29, 2006 and will be payable only so long as the Investment Management Agreement
remains in effect between the Fund and First Trust Advisors or any successor in
interest or affiliate of First Trust Advisors, as and to the extent that such
Investment Management Agreement is renewed or continued periodically in
accordance with the 1940 Act. Pursuant to the Corporate Finance Services and
Consulting Agreement, the Consultant will: (i) provide relevant information,
studies or reports regarding closed-end investment companies with similar
investment objectives and/or strategies as the Fund as well as general trends in
the closed-end investment company and asset management industries, and consult
with representatives of First Trust Advisors in connection therewith; (ii) at
the request of First Trust Advisors, provide certain economic research and
statistical information and reports on behalf of First Trust Advisors or the
Fund and consult with representatives of First Trust Advisors or the Fund,
and/or Trustees of the Fund in connection therewith, which information and
reports shall include: (a) statistical and financial market information with
respect to the Fund's market performance; and (b) comparative information
regarding the Fund and other closed-end management investment companies with
respect to (x) the net asset value of their respective shares (as made publicly
available by the Fund and such investment companies), (y) the respective market
performance of the Fund and such other companies, and (z) other relevant
performance indicators; and (iii) provide First Trust Advisors with such other
services in connection with the Common Shares relating to the trading price and
market price thereof upon which First Trust Advisors and the Consultant shall,
from time to time, agree, including after-market services designed to maintain
the visibility of the Fund in the market. The incremental additional amounts
paid as service fees applicable to daily assets of the Fund attributable to the
common shares initially offered by the Fund will not exceed 4.461% of the
offering price of such common shares.
-69-
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
The custodian of the assets of the Fund is The Bank of New York Mellon
("Custodian"), 1 Wall Street, New York, New York 10286. The Fund's transfer,
shareholder services and dividend paying agent is BNY Mellon Investment
Servicing (US) Inc., as successor to PNC Global Investment Servicing (U.S.)
Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809. Pursuant to an
Administration and Accounting Services Agreement, BNY Mellon Investment
Servicing (US) Inc., as successor to PNC Global Investment Servicing (U.S.) Inc.
also provides certain administrative and accounting services to the Fund,
including maintaining the Fund's books of account, records of the Fund's
securities transactions, and certain other books and records; acting as liaison
with the Fund's independent registered public accounting firm providing such
independent registered public accounting firm with various audit-related
information with respect to the Fund; and providing other continuous accounting
and administrative services. As compensation for accounting and administrative
services, the Fund has agreed to pay BNY Mellon Investment Servicing (US) Inc.,
as successor to PNC Global Investment Servicing (U.S.) Inc. an annual fee,
calculated daily and payable on a monthly basis, of 0.095% of the Fund's first
$200 million of average Managed Assets, subject to decrease with respect to
additional Fund Managed Assets.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Chapman and Cutler LLP, Chicago, Illinois. Chapman and
Cutler LLP may rely as to certain matters of Massachusetts law on the opinion of
Bingham McCutchen LLP. If certain legal matters in connection with an offering
of Common Shares are passed upon by counsel for the underwriters or sales agent
of such offering, such counsel will be named in a prospectus supplement.
-70-
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
PAGE
Use of Proceeds ........................................................... 1
Investment Objective ...................................................... 1
Investment Restrictions ................................................... 2
Investment Policies and Techniques ........................................ 4
Additional Information About the Fund's Investments and Investment Risks... 6
Other Investment Policies and Techniques .................................. 25
Management of the Fund .................................................... 34
Investment Advisor ........................................................ 45
Sub-Advisor ............................................................... 48
Portfolio Transactions and Brokerage ...................................... 51
Certain Provisions in the Declaration of Trust and By-Laws................. 53
Repurchase of Fund Shares; Conversion to Open-End Fund .................... 55
Net Asset Value ........................................................... 57
Tax Matters ............................................................... 60
Performance Related and Comparative Information ........................... 66
Experts ................................................................... 68
Custodian, Administrator and Transfer Agent ............................... 68
Additional Information .................................................... 69
Financial Statements and Report of Independent Registered Public
Accounting Firm......................................................... F-1
Appendix A -- Ratings of Investments....................................... A-1
Appendix B -- Energy Income Partners, LLC Proxy Voting Policy.............. B-1
-71-
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary.............................................................1
Summary of Fund Expenses......................................................25
Financial Highlights..........................................................27
Senior Securities.............................................................29
Market and Net Asset Value Information........................................30
The Fund......................................................................31
Use of Proceeds...............................................................31
The Fund's Investments........................................................32
Use of Financial Leverage.....................................................37
Risks.........................................................................40
Management of the Fund........................................................55
Net Asset Value...............................................................57
Distributions.................................................................58
Dividend Reinvestment Plan....................................................58
Plan of Distribution..........................................................59
Description of Shares.........................................................60
Certain Provisions in the Declaration of Trust and By-Laws....................63
Structure of the Fund; Common Share Repurchases and Change in
Fund Structure.............................................................64
Tax Matters...................................................................66
Corporate Finance Services and Consulting Fee.................................69
Custodian, Administrator and Transfer Agent...................................70
Legal Opinions................................................................70
--------------------------------------------------------------------------------
-72-
FIRST TRUST ENERGY INCOME AND GROWTH FUND
UP TO 6,615,930 COMMON SHARES
--------------------------------------------------------------------------------
PROSPECTUS
--------------------------------------------------------------------------------
, 2013
Preliminary Statement of Additional Information
Dated March 12, 2013
Subject to Completion
FIRST TRUST ENERGY INCOME AND GROWTH FUND STATEMENT OF
ADDITIONAL INFORMATION
First Trust Energy Income and Growth Fund (the "Fund") is a
non-diversified closed-end management investment company which commenced
operations in June 2004.
This Statement of Additional Information relates to the offering, on an
immediate, continuous or delayed basis, of up to 6,615,930 common shares of
beneficial interest in the Fund in one or more offerings (the "Common Shares").
This Statement of Additional Information does not constitute a prospectus, but
should be read in conjunction with the Fund's prospectus dated , 2013 (the
"Prospectus") and any related prospectus supplement. The Fund's currently
outstanding common shares are, and the Common Shares offered by the Prospectus
and any prospectus supplement will be, subject to notice of issuance, listed on
the NYSE MKT under the symbol "FEN."
This Statement of Additional Information does not include all information
that a prospective investor should consider before purchasing Common Shares.
Investors should obtain and read the Fund's Prospectus and any prospectus
supplement prior to purchasing such shares. A copy of the Fund's Prospectus and
any prospectus supplement may be obtained without charge by calling (800)
988-5891 or on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the Prospectus
and any prospectus supplement.
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 OR SALE IS NOT PERMITTED.
This Statement of Additional Information is dated , 2013.
TABLE OF CONTENTS
PAGE
USE OF PROCEEDS................................................................1
INVESTMENT OBJECTIVE...........................................................1
INVESTMENT RESTRICTIONS........................................................2
INVESTMENT POLICIES AND TECHNIQUES.............................................4
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS AND INVESTMENT RISKS.......6
OTHER INVESTMENT POLICIES AND TECHNIQUES......................................25
MANAGEMENT OF THE FUND........................................................34
INVESTMENT ADVISOR............................................................45
SUB-ADVISOR...................................................................48
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................51
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS....................53
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND........................55
NET ASSET VALUE...............................................................57
TAX MATTERS...................................................................60
PERFORMANCE RELATED AND COMPARATIVE INFORMATION...............................66
EXPERTS.......................................................................68
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT...................................68
ADDITIONAL INFORMATION........................................................69
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM....................................................F-1
APPENDIX A -- Ratings of Investments..................................A-1
APPENDIX B -- Energy Income Partners, LLC Proxy Voting Policy.........B-1
- ii -
USE OF PROCEEDS
The Fund will invest substantially all of the net proceeds from any sales
of Common Shares pursuant to the Prospectus and any prospectus supplement in
accordance with the Fund's investment objective and policies as stated below, to
repay indebtedness or for other general corporate purposes.
Pending investment in securities that meet the Fund's investment objective
and policies, the net proceeds of this offering will be invested in cash or cash
equivalents.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek a high level of after-tax total
return with an emphasis on current distributions paid to shareholders. For
purposes of the Fund's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Fund invests regardless of the tax character of the distributions. The Fund
seeks to provide its common shareholders with an efficient vehicle to invest in
a portfolio of cash generating securities of energy companies. The Fund focuses
on investing in publicly traded master limited partnerships ("MLPs") and related
public entities in the energy sector which the Fund's sub-advisor, Energy Income
Partners, LLC ("Energy Income Partners" or the "Sub-Advisor"), believes offer
opportunities for income and growth. As used in this Statement of Additional
Information, unless the context requires otherwise, MLPs are MLPs in the energy
sector. Due to the tax treatment under current law of cash distributions made by
MLPs to their investors (such as the Fund), the Fund believes that a portion of
its income may be tax deferred, thereby increasing cash available for
distribution by the Fund to its shareholders. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund's investment objective is considered fundamental and may not be
changed without shareholder approval. The remainder of the Fund's investment
policies, including its investment strategy, are considered non-fundamental and
may be changed by the Board of Trustees of the Fund (the "Board of Trustees")
without shareholder approval, provided that shareholders receive at least 60
days prior written notice of any change.
The Fund seeks to achieve its investment objective by investing primarily
in securities of MLPs and MLP-related entities in the energy sector that the
Sub-Advisor believes offer attractive distribution rates and capital
appreciation potential. The Fund also may invest in other securities set forth
below if the Sub-Advisor expects to achieve the Fund's objective with such
investments.
- 1 -
INVESTMENT RESTRICTIONS
NON-FUNDAMENTAL POLICIES
The Fund has adopted the following non-fundamental policies:
o Under normal market conditions, the Fund invests at least 85% of its
Managed Assets (including assets obtained through leverage) in
securities of energy companies, energy sector MLPs and MLP-related
entities.
o Under normal market conditions, the Fund invests at least 65% and up
to 100% of its Managed Assets in equity securities of MLPs and
MLP-related entities. MLP and MLP-related entity equity securities
currently consist of common units, subordinated units and I-Shares.
The Fund also may invest in equity securities of MLP-related
entities, such as general partners or other affiliates of MLPs.
o The Fund may invest up to 35% of its Managed Assets in unregistered
or otherwise restricted securities (including up to 10% of its
Managed Assets in securities issued by private companies). The types
of unregistered or otherwise restricted securities that the Fund may
purchase consist of MLP common units, MLP subordinated units and
securities of public and private energy companies.
o The Fund may invest up to 25% of its Managed Assets in debt
securities of energy companies, MLPs and MLP-related entities,
including below investment grade securities, which are commonly
referred to as "junk bonds." Below investment grade debt securities
will be rated at least "B3" by Moody's and at least "B-" by Standard
& Poor's Ratings Group ("S&P") at the time of purchase, or
comparably rated by another nationally recognized statistical rating
organization ("NRSRO") or, if unrated, determined to be of
comparable quality by the Sub-Advisor.
o The Fund will not invest more than 10% of its Managed Assets in any
single issuer.
o The Fund will not engage in short sales, except to the extent the
Fund engages in derivative investments to seek to hedge against
interest rate risk in connection with the Fund's use of Financial
Leverage or market risks associated with the Fund's portfolio.
o The Fund may invest up to 15% of its Managed Assets in non-U.S.
securities as well as hedge the currency risk of the non-U.S.
securities using derivative instruments.
To generate additional income, the Fund writes (or sells) covered call
options on the common stock of energy companies held in the Fund's portfolio.
- 2 -
FUNDAMENTAL POLICIES
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of its outstanding common
shares and Preferred Shares, if any, voting together as a single class, and of
the holders of the outstanding Preferred Shares voting as a single class:
(1) Issue senior securities, as defined in the 1940 Act, other than
(i) preferred shares which immediately after issuance will have asset
coverage of at least 200%, (ii) indebtedness which immediately after
issuance will have asset coverage of at least 300%, or (iii) the
borrowings permitted by investment restriction (2) set forth below;
(2) Borrow money, except as permitted by the 1940 Act;
For a further discussion of the limitations imposed on borrowing by the
1940 Act, please see the section entitled "Use of Financial Leverage" in
the Fund's Prospectus;
(3) Act as underwriter of another issuer's securities, except to
the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended ("Securities Act"), in
connection with the purchase and sale of portfolio securities;
(4) Purchase or sell real estate, but this shall not prevent the
Fund from investing in securities of companies that deal in real estate or
are engaged in the real estate business, including real estate investment
trusts, and securities secured by real estate or interests therein and the
Fund may hold and sell real estate or mortgages on real estate acquired
through default, liquidation, or other distributions of an interest in
real estate as a result of the Fund's ownership of such securities;
(5) 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,
derivative instruments or from investing in securities or other
instruments backed by physical commodities); or
(6) Make loans of funds or other assets, other than by entering
into repurchase agreements, lending portfolio securities and through the
purchase of securities in accordance with its investment objective,
policies and limitations.
As set forth in the Prospectus, the Fund concentrates its investments in
the following group of industries that are part of the energy sector:
transporting, processing, storing, distributing, marketing, exploring,
developing, managing and producing natural gas, natural gas liquids (including
propane), crude oil, refined petroleum products, coal and electricity, and
supplying products and services in support of pipelines, power transmission,
petroleum and natural gas production, transportation and storage. The foregoing
fundamental investment policies, together with the investment objective of the
Fund, cannot be changed without approval by holders of a majority of the
outstanding voting securities of the Fund, as defined in the 1940 Act, which
- 3 -
includes common shares and Preferred Shares, if any, voting together as a single
class, and of the holders of the outstanding Preferred Shares voting as a single
class. Under the 1940 Act a "majority of the outstanding voting securities"
means the vote of: (1) 67% or more of the Fund's shares present at a meeting, if
the holders of more than 50% of the Fund's shares are present or represented by
proxy; or (2) more than 50% of the Fund's shares, whichever is less.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objective, policies and techniques that are described in the Fund's
Prospectus.
Temporary Investments and Defensive Position. During the period where the
net proceeds of this offering of Common Shares, the issuance of Preferred
Shares, if any, commercial paper or notes and/or Borrowings are being invested
or during periods in which the Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so, the Fund may deviate from its investment strategy and invest all or any
portion of its net assets in cash, cash equivalents or other securities. The
Sub-Advisor's determination that it is temporarily unable to follow the Fund's
investment strategy or that it is impracticable to do so generally will occur
only in situations in which a market disruption event has occurred and where
trading in the securities selected through application of the Fund's investment
strategy is extremely limited or absent. In such a case, the Fund may not pursue
or achieve its investment objective.
Cash and cash equivalents are defined to include, without limitation, the
following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by: (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United
States; (b) the Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Tennessee Valley Authority, whose securities are supported
by the right of the agency to borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association; and (d) the Student Loan Marketing
Association, whose securities are supported only by its credit. While the
U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be
given that it always will do so since it is not so obligated by law. The
U.S. government, its agencies, and instrumentalities do not guarantee the
market value of their securities. Consequently, the value of such
securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a
bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the
- 4 -
amount deposited plus interest to the bearer of the certificate on the
date specified thereon. Under current Federal Deposit Insurance
Corporation ("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.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver
such securities to the seller, who also simultaneously agrees to buy back
the securities 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. Pursuant to the Fund's policies and
procedures, 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 default, the repurchase
agreement provides that the Fund is entitled to sell the underlying
collateral. 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 Sub-Advisor
monitors 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
Sub-Advisor does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon repurchase price to be
paid to the Fund. If the seller were to be subject to a federal bankruptcy
proceeding, the ability of the Fund to liquidate the collateral could be
delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of 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 such notes. However, they are redeemable by the
Fund at any time. The Sub-Advisor will consider the financial condition of
the corporation (e.g., earning power, cash flow, and other liquidity
measures) and will continuously monitor the corporation's ability to meet
all its financial obligations, because the Fund's liquidity might be
impaired if the corporation were unable to pay principal and interest on
demand. Investments in commercial paper will be limited to commercial
paper rated in the highest categories by a nationally recognized
statistical rating organization ("NRSRO") and which mature within one year
of the date of purchase or carry a variable or floating rate of interest.
(5) 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,
- 5 -
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.
(6) 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.
(7) The Fund may invest in shares of money market funds in
accordance with the provisions of the 1940 Act.
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS AND INVESTMENT RISKS
ENERGY COMPANIES
For purposes of the Fund's policy of investing 85% of its Managed Assets
(including assets obtained through leverage) in securities of energy companies,
energy sector MLPs and MLP-related entities, an energy company is one that
derives its revenues from transporting, processing, storing, distributing or
marketing natural gas, natural gas liquids ("NGLs"), crude oil, refined
petroleum products, coal or electricity, or exploring, developing, managing or
producing such commodities or products, or in supplying energy-related products
and services.
Energy sector MLPs are limited partnerships that derive at least 90% of
their income from energy operations. The business of energy sector MLPs is
affected by supply and demand for energy commodities because most MLPs derive
revenue and income based upon the volume of the underlying commodity
transported, processed, distributed, and/or marketed. Specifically, MLPs that
provide natural gas services and coal MLPs may be directly affected by energy
commodity prices. Propane MLPs own the underlying energy commodity, and
therefore have direct exposure to energy commodity prices, although the
Sub-Advisor seeks high quality MLPs that are able to mitigate or manage direct
margin exposure to commodity prices. The MLP sector in general could be hurt by
market perception that MLPs' performance and valuation are directly tied to
commodity prices.
Some energy companies operate as "public utilities" or "local distribution
companies," and therefore are subject to rate regulation by state or federal
utility commissions. However, energy companies may be subject to greater
competitive factors than utility companies, including competitive pricing in the
absence of regulated tariff rates, which could cause a reduction in revenue and
which could adversely affect profitability. Most Midstream MLPs with pipeline
assets are subject to government regulation concerning the construction, pricing
and operation of pipelines. In many cases, the rates and tariffs charged by
these pipelines are monitored by the Federal Energy Regulatory Commission
("FERC") or various state regulatory agencies.
Energy MLPs in which the Fund invests generally can be classified as
Midstream MLPs, Propane MLPs and Coal MLPs.
- 6 -
Midstream MLP natural gas services include treating, gathering,
compression, processing, transmission and storage of natural gas and the
transportation, fractionation and storage of NGLs (primarily propane, ethane,
butane and natural gasoline). Midstream MLP crude oil services include
gathering, transportation, storage and terminalling of crude oil. Midstream MLP
refined petroleum product services include the transportation (usually via
pipelines, barges, rail cars and trucks), storage and terminalling of refined
petroleum products (primarily gasoline, diesel fuel and jet fuel) and other
hydrocarbon by-products. Midstream MLPs also may operate ancillary businesses,
including the marketing of the products and logistical services.
Propane MLP services include the distribution of propane to homeowners for
space and water heating and to commercial, industrial and agriculture customers.
Propane serves approximately 3% of the household energy needs in the United
States, largely for homes beyond the geographic reach of natural gas
distribution pipelines. Volumes are weather dependent and a majority of annual
cash flow is earned during the winter heating season (October through March).
Coal MLP services include the owning, leasing, managing, production and
sale of coal and coal reserves. Electricity generation is the primary use of
coal in the United States. Demand for electricity and supply of alternative
fuels to generators are the primary drivers of coal demand.
MLPs and MLP-related entities typically achieve distribution growth by
internal and external means. MLPs and MLP-related entities achieve growth
internally by experiencing higher commodity volume driven by the economy and
population, and through the expansion of existing operations, including
increasing the use of underutilized capacity, pursuing projects that can
leverage and gain synergies with existing assets and pursuing so called
"greenfield projects." External growth is achieved by making accretive
acquisitions.
MLPs and MLP-related entities are subject to various federal, state and
local environmental laws and health and safety laws as well as laws and
regulations specific to their particular activities. Such laws and regulations
address: health and safety standards for the operation of facilities,
transportation systems and the handling of materials; air and water pollution
requirements and standards; solid waste disposal requirements; land reclamation
requirements; and requirements relating to the handling and disposition of
hazardous materials. Energy MLPs and MLP-related entities are directly or
indirectly subject to the costs of compliance with such laws applicable to them,
and changes in such laws and regulations may adversely affect their results of
operations.
MLPs and MLP-related entities operating interstate pipelines and storage
facilities are subject to substantial regulation by the FERC, which regulates
interstate transportation rates, services and other matters regarding natural
gas pipelines including: the establishment of rates for service; regulation of
pipeline storage and liquefied natural gas facility construction; issuing
certificates of need for companies intending to provide energy services or
constructing and operating interstate pipeline and storage facilities; and
certain other matters. FERC also regulates the interstate transportation of
crude oil, including: regulation of rates and practices of oil pipeline
- 7 -
companies; establishing equal service conditions to provide shippers with equal
access to pipeline transportation; and establishment of reasonable rates for
transporting petroleum and petroleum products by pipeline.
Energy sector MLPs and MLP-related entities may be subject to liability
relating to the release of substances into the environment, including liability
under federal "SuperFund" and similar state laws for investigation and
remediation of releases and threatened releases of hazardous materials, as well
as liability for injury and property damage for accidental events, such as
explosions or discharges of materials causing personal injury and damage to
property. Such potential liabilities could have a material adverse effect upon
the financial condition and results of operations of energy sector MLPs and
MLP-related entities.
Energy sector MLPs and MLP-related entities are subject to numerous
business related risks, including: deterioration of business fundamentals
reducing profitability due to development of alternative energy sources,
changing demographics in the markets served, unexpectedly prolonged and
precipitous changes in commodity prices and increased competition which takes
market share; reliance on growth through acquisitions; disruptions in
transportation systems; the dependence of certain MLPs and MLP-related entities
upon the energy exploration and development activities of unrelated third
parties; availability of capital for expansion and construction of needed
facilities; a significant decrease in natural gas production due to depressed
commodity prices or otherwise; the inability of MLPs and MLP-related entities to
successfully integrate recent or future acquisitions; and the general level of
the economy.
The energy industry and particular energy companies may be adversely
affected by possible terrorist attacks, such as the attacks that occurred on
September 11, 2001. It is possible that facilities of energy companies, due to
the critical nature of their energy businesses to the United States, could be
direct targets of terrorist attacks or be indirectly affected by attacks on
others. They may have to incur significant additional costs in the future to
safeguard their assets. In addition, changes in the insurance markets after
September 11, 2001 may make certain types of insurance more difficult to obtain
or obtainable only at significant additional cost. To the extent terrorism
results in a lower level of economic activity, energy consumption could be
adversely affected, which would reduce revenues and impede growth. Terrorist or
war related disruption of the capital markets could also affect the ability of
energy companies to raise needed capital.
MASTER LIMITED PARTNERSHIPS
Under normal circumstances the Fund will invest at least 65% of its
Managed Assets in equity securities of energy sector MLPs and MLP-related
entities. An MLP is a limited partnership, the interests in which (known as
units) are traded on securities exchanges or over-the-counter. Qualification as
a partnership for federal income tax purposes eliminates tax on MLP income at
the entity level.
An MLP has one or more general partners (who may be individuals,
corporations, or other partnerships) which manage the partnership, and limited
partners, which provide capital to the partnership but have no role in its
- 8 -
management. Typically, the general partner is owned by company management or
another publicly traded sponsoring corporation. When an investor buys units in a
MLP, he or she becomes a limited partner.
MLPs are formed in several ways. A nontraded partnership may decide to go
public. Several nontraded partnerships may roll up into a single MLP. A
corporation may spin-off a group of assets or part of its business into a MLP of
which it is the general partner in order to realize the assets' full value on
the marketplace by selling the assets and using the cash proceeds received from
the MLP to address debt obligations or to invest in higher growth opportunities,
while retaining control of the MLP. A corporation may fully convert to a MLP,
although since 1986 the tax consequences have made this an unappealing option
for most corporations. Also, a newly formed company may operate as a MLP from
its inception.
The sponsor or general partner of an MLP, other energy companies, and
utilities may sell assets to MLPs in order to generate cash to fund expansion
projects or repay debt. The MLP structure essentially transfers cash flows
generated from these acquired assets directly to MLP limited partner unit
holders.
In the case of an MLP buying assets from its sponsor or general partner
the transaction is intended to be based upon comparable terms in the acquisition
market for similar assets. To help insure that appropriate protections are in
place, the board of the MLP generally creates an independent committee to review
and approve the terms of the transaction. The committee often obtains a fairness
opinion and can retain counsel or other experts to assist its evaluation. Since
both parties normally have a significant equity stake in the MLP, both parties
generally have an incentive to see that the transaction is accretive and fair to
the MLP.
MLPs tend to pay relatively higher distributions than other types of
companies and the Fund intends to use these MLP distributions in an effort to
meet its investment objective.
As a motivation for the general partner to manage the MLP successfully and
increase cash flows, the terms of MLPs typically provide that the general
partner receives a larger portion of the net income as distributions reach
higher target levels. As cash flow grows, the general partner receives a greater
interest in the incremental income compared to the interest of limited partners.
Although the percentages vary among MLPs, the general partner's marginal
interest in distributions generally increases from 2% to 15% at the first
designated distribution target level moving up to 25% and ultimately 50% as
pre-established distribution per unit thresholds are met. Nevertheless, the
aggregate amount distributed to limited partners will increase as MLP
distributions reach higher target levels. Given this incentive structure, the
general partner has an incentive to streamline operations and undertake
acquisitions and growth projects in order to increase distributions to all
partners.
Because the MLP itself does not pay tax on MLP income, its income or loss
is allocated to its investors, irrespective of whether the investors receive any
cash payment from the MLP. An MLP typically makes quarterly cash distributions.
Although they resemble corporate dividends, MLP distributions are treated
differently for tax purposes. The MLP distribution is treated as a tax-deferred
return of capital to the extent of the investor's basis in his MLP interest and,
to the extent the distribution exceeds the investor's basis in the MLP, capital
- 9 -
gain. The investor's original basis is the price paid for the units plus such
investor's allocable share of the MLP's debt, if any. The basis is adjusted
downwards with each distribution and allocation of deductions (such as
depreciation) and losses, and upwards with each capital contribution and
allocation of taxable income.
For a further discussion and a description of MLP tax matters, see the
section entitled "Tax Matters."
THE FUND'S INVESTMENTS
The types of securities in which the Fund may invest include, but are not
limited to, the following:
Equity Securities of MLPs and MLP-Related Entities. Consistent with its
investment objective, the Fund may invest up to 100% of its Managed Assets in
equity securities issued by energy sector MLPs. Equity securities currently
consist of common units, subordinated units and I-Shares (each discussed below).
The Fund also may invest in equity securities of MLP-related entities, such as
general partners or other affiliates of the MLPs. The Fund also may invest up to
15% of Managed Assets in equity or debt securities of non-MLPs or energy
companies.
The value of equity securities will be affected by changes in the stock
markets, which may be the result of domestic or international political or
economic news, changes in interest rates or changing investor sentiment. At
times, stock markets can be volatile and stock prices can change substantially.
Equity securities risk will affect the Fund's net asset value per share, which
will fluctuate as the value of the securities held by the Fund change. Not all
stock prices change uniformly or at the same time, and not all stock markets
move in the same direction at the same time. Other factors affect a particular
stock's price, such as poor earnings reports by an issuer, loss of major
customers, major litigation against an issuer or changes in governmental
regulations affecting an industry. Adverse news affecting one company can
sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.
Certain of the energy companies in which the Fund invests and may in the
future invest may have comparatively smaller capitalizations. Investing in
securities of smaller MLPs, MLP-related entities and energy companies may
involve greater risk than is associated with investing in more established MLPs,
MLP-related entities and energy companies. Smaller capitalization MLPs,
MLP-related entities and energy 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
larger more established MLPs, MLP-related entities and energy companies.
MLP Common Units. MLP common units represent a limited partnership
interest in the MLP. Common units are listed and traded on U.S. securities
exchanges or over-the-counter with their value fluctuating predominantly based
on the success of the MLP. The Fund intends to purchase common units in market
transactions but may also purchase securities directly from the MLP or other
parties in private placements. Unlike owners of common stock of a corporation,
owners of common units have limited voting rights and have no ability to
annually elect directors. MLPs generally distribute all available cash flow
(cash flow from operations less maintenance capital expenditures) in the form of
a quarterly distribution. Common unit holders have first priority to receive
quarterly cash distributions up to the MQD and have arrearage rights. In the
event of liquidation, common unit holders have preference over subordinated
units, but not debt holders or preferred unit holders, to the remaining assets
of the MLP.
MLP Subordinated Units. MLP subordinated units typically are issued by
MLPs to their original sponsors, such as their founders, corporate general
partners of MLPs, entities that sell assets to the MLP, and institutional
investors. The Fund may purchase subordinated units directly from these persons.
Subordinated units have similar voting rights as common units and are generally
not publicly traded. Once the MQD on the common units, including arrearage, has
been paid, subordinated units will receive cash distributions up to the MQD
prior to any incentive payments to the MLP's general partner. Unlike common
- 10 -
units, subordinated units do not have arrearage rights. In the event of
liquidation, common units have priority over subordinated units. Subordinated
units are typically converted into common units on a one-to-one basis after
certain time periods and/or performance targets have been satisfied.
Subordinated units are generally valued based on the price of the common units,
discounted to reflect the timing or likelihood of their conversion to common
units.
MLP I-Shares. I-Shares represent an ownership interest issued by an
affiliated party of an MLP. The MLP affiliate uses the proceeds from the sale of
I-Shares to purchase limited partnership interests in the MLP in the form of
I-Units. I-Units have features similar to MLP common units in terms of voting
rights, liquidation preference and distributions. However, rather than receiving
cash, the MLP affiliate receives additional I-Units in an amount equal to the
cash distributions received by MLP common units. Similarly, holders of I-Shares
will receive additional I-Shares, in the same proportion as the MLP affiliate's
receipt of I-Units, rather than cash distributions. I-Shares themselves have
limited voting rights similar to those applicable to MLP common units. The MLP
affiliate issuing the I-Shares is structured as a corporation for federal income
tax purposes. As a result, I-Shares holders, such as the Fund, will receive a
Form 1099 rather than a Form K-1 statement. I-Shares are traded on the New York
Stock Exchange.
Equity Securities of Energy Companies. The Fund does not intend to invest
more than 35% of its Managed Assets in equity securities issued by energy
companies which are not MLPs. The Fund intends to purchase these equity
securities in market transactions but also may purchase securities directly from
the issuers in private placements. To generate additional income, the Fund may
write (or sell), covered call options on the common stock of energy companies
held in the Fund's portfolio.
Debt Securities. The Fund may invest up to 25% of its Managed Assets in
debt securities of energy companies, MLPs and MLP-related entities, including
securities rated below investment grade. The debt securities in which the Fund
may invest may provide for fixed or variable principal payments and various
types of interest rate and reset terms, including fixed rate, adjustable rate,
zero coupon, contingent, deferred, payment-in-kind and auction rate features.
Certain debt securities are "perpetual" in that they have no maturity date.
Certain debt securities are zero coupon bonds. A zero coupon bond is a bond that
does not pay interest either for the entire life of the obligations or for an
initial period after the issuance of the obligation. To the extent that the Fund
- 11 -
invests in below investment grade debt securities, such securities will be
rated, at the time of investment, at least "B-" by S&P's or "B3" by Moody's or a
comparable rating by at least one other rating agency or, if unrated, determined
by the Sub-Advisor to be of comparable quality. If a security satisfies the
Fund's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Sub-Advisor will consider what action,
including the sale of such security, is in the best interest of the Fund and its
shareholders. In light of the risks of below investment grade securities, the
Sub-Advisor, in evaluating the creditworthiness of an issue, whether rated or
unrated, will take various factors into consideration, which may include, as
applicable, the issuer's operating history, financial resources and its
sensitivity to economic conditions and trends, the market support for the
facility financed by the issue (if applicable), the perceived ability and
integrity of the issuer's management and regulatory matters.
Below Investment Grade Debt Securities. The Fund may invest up to 25% of
its Managed Assets in below investment grade securities. The below investment
grade debt securities in which the Fund invests are rated from "B3" to Bal by
Moody's, from "B-" to "BB+" by S&P's, are comparably rated by another nationally
recognized rating agency or are unrated but determined by the Sub-Advisor to be
of comparable quality.
Investment in below investment grade securities involves substantial risk
of loss. Below investment grade debt securities or comparable unrated securities
are commonly referred to as "junk bonds" and are considered predominantly
speculative with respect to the issuer's ability to pay interest and principal
and are susceptible to default or decline in market value due to adverse
economic and business developments. The market values for high yield securities
tend to be very volatile, and these securities are less liquid than investment
grade debt securities. For these reasons, to the extent the Fund invests in
below investment grade securities, your investment in the Fund is subject to the
following specific risks:
o increased price sensitivity to changing interest rates and to a
deteriorating economic environment;
o greater risk of loss due to default or declining credit quality;
o adverse company specific events are more likely to render the issuer
unable to make interest and/or principal payments; and
o if a negative perception of the below investment grade debt market
develops, the price and liquidity of below investment grade debt
securities may be depressed. This negative perception could last for
a significant period of time.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a below investment grade debt issuer to make principal
payments and interest payments than an investment grade issuer. The principal
amount of below investment grade securities outstanding has proliferated in the
past decade as an increasing number of issuers have used below investment grade
securities for corporate financing. An economic downturn could severely affect
- 12 -
the ability of highly leveraged issuers to service their debt obligations or to
repay their obligations upon maturity. Similarly, down-turns in profitability in
specific industries, such as the energy industry, could adversely affect the
ability of below investment grade debt issuers in that industry to meet their
obligations. The market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. Factors having an adverse impact on the market value of lower
quality securities may have an adverse effect on the Fund's net asset value and
the market value of its common shares. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings. In certain
circumstances, the Fund may be required to foreclose on an issuer's assets and
take possession of its property or operations. In such circumstances, the Fund
would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
The secondary market for below investment grade securities may not be as
liquid as the secondary market for more highly rated securities, a factor which
may have an adverse effect on the Fund's ability to dispose of a particular
security when necessary to meet its liquidity needs. There are fewer dealers in
the market for below investment grade securities than investment grade
obligations. The prices quoted by different dealers may vary significantly and
the spread between the bid and asked price is generally much larger than higher
quality instruments. Under adverse market or economic conditions, the secondary
market for below investment grade securities could contract further, independent
of any specific adverse changes in the conditions of a particular issuer, and
these instruments may become illiquid. As a result, the Fund could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded.
Because investors generally perceive that there are greater risks
associated with lower quality debt securities of the type in which the Fund may
invest a portion of its assets, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the debt securities market, changes in perceptions of an
issuer's creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
The Fund will not invest in distressed, below investment grade securities
(those that are in default or the issuers of which are in bankruptcy). If a debt
security becomes distressed while held by the Fund, the Fund may be required to
bear certain extraordinary expenses in order to protect and recover its
investments if it is recoverable at all.
See Appendix A to this Statement of Additional Information for a
description of Moody's and S&P's ratings.
Restricted Securities. The Fund may invest in unregistered or otherwise
restricted securities. The term "restricted securities" refers to securities
that are unregistered or are held by control persons of the issuer and
securities that are subject to contractual restrictions on their resale. As a
result, restricted securities may be more difficult to value and the Fund may
- 13 -
have difficulty disposing of such assets either in a timely manner or for a
reasonable price. Absent an exemption from registration, the Fund will be
required to hold the securities until they are registered by the issuer. In
order to dispose of an unregistered security, the Fund, where it has contractual
rights to do so, may have to cause such security to be registered. A
considerable period may elapse between the time the decision is made to sell the
security and the time the security is registered so that the Fund could sell it.
Contractual restrictions on the resale of securities vary in length and scope
and are generally the result of a negotiation between the issuer and acquirer of
the securities. The Fund would, in either case, bear market risks during that
period.
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act, or in a registered public offering. The Sub-Advisor has the ability to deem
restricted securities as liquid. To enable the Fund to sell its holdings of a
restricted security not registered for public sale, the Fund may have to cause
those securities to be registered. In situations in which the Fund must arrange
registration because the Fund wishes to sell the security, a considerable period
may elapse between the time the decision is made to sell the security and the
time the security is registered so that the Fund could sell it. The Fund would
bear the risks of any downward price fluctuation during that period.
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration, such as Rule 144A transactions.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the Securities Act establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. Institutional markets for
restricted securities that exist or may develop as a result of Rule 144A may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment. An insufficient number of qualified
institutional buyers interested in purchasing Rule 144A-eligible securities held
by the Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at reasonable prices.
Thinly-Traded Securities. The Fund also may invest in securities that may
not be restricted, but are thinly-traded. Although common units of MLPs,
I-Shares of MLP-related entities and common stock of certain energy companies
trade on the New York Stock Exchange, The Nasdaq National Market or other
securities exchanges or markets, such securities may trade less than those of
larger companies due to their relatively smaller capitalizations. Such
securities may be difficult to dispose of at a fair price during times when the
- 14 -
Fund believes it is desirable to do so. Thinly-traded securities also are more
difficult to value and the Sub-Advisor's judgment as to value will often be
given greater weight than market quotations, if any exist. If market quotations
are not available, thinly-traded securities will be valued in accordance with
procedures established by the Board. Investment of the Fund's capital in
thinly-traded securities may restrict the Fund's ability to take advantage of
market opportunities. The risks associated with thinly-traded securities may be
particularly acute in situations in which the Fund's operations require cash and
could result in the Fund borrowing to meet its short term needs or incurring
losses on the sale of thinly-traded securities.
Margin Borrowing. Although it does not currently intend to, the Fund may
in the future use margin borrowing of up to 33-1/3% of total Managed Assets for
investment purposes when the Sub-Advisor believes it will enhance returns.
Margin borrowings by the Fund create certain additional risks. For example,
should the securities that are pledged to brokers to secure margin accounts
decline in value, or should brokers from which the Fund has borrowed increase
their maintenance margin requirements (i.e., reduce the percentage of a position
that can be financed), then the Fund could be subject to a "margin call,"
pursuant to which it must either deposit additional funds with the broker or
suffer mandatory liquidation of the pledged securities to compensate for the
decline in value. In the event of a precipitous drop in the value of the assets
of the Fund, it might not be able to liquidate assets quickly enough to pay off
the margin debt and might suffer mandatory liquidation of positions in a
declining market at relatively low prices, thereby incurring substantial losses.
For these reasons, the use of borrowings for investment purposes is considered a
speculative investment practice.
COVERED CALL OPTION TRANSACTIONS
Call options are contracts representing the right to purchase a common
stock at a specified price (the "strike price") at a specified future date (the
"expiration date"). The price of the option is determined from trading activity
in the broad options market, and generally reflects the relationship between the
current market price for the underlying common stock and the strike price, as
well as the time remaining until the expiration date. The Fund will write call
options only if they are "covered." In the case of a call option on a common
stock or other security, the option is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, cash or other assets determined to be liquid by the
Sub-Advisor (in accordance with procedures approved by the Board of Trustees) in
such amount are segregated by the Fund's custodian) upon conversion or exchange
of other securities held by the Fund.
If an option written by the Fund expires unexercised, the Fund realizes on
the expiration date a capital gain equal to the premium received by the Fund at
the time the option was written. If an option purchased by the Fund expires
unexercised, the Fund realizes a capital loss equal to the premium paid at the
time the option expires. Prior to the earlier of exercise or expiration, an
exchange-traded option may be closed out by an offsetting purchase or sale of an
option of the same series (type, underlying security, exercise price, and
expiration). There can be no assurance, however, that a closing purchase or sale
transaction can be effected when the Fund desires. The Fund may sell put or call
- 15 -
options it has previously purchased, which could result in a net gain or loss
depending on whether the amount realized on the sale is more or less than the
premium and other transaction costs paid on the put or call option purchased.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, enter into various hedging and
strategic transactions to seek to reduce interest rate risks arising from the
use of Financial Leverage by the Fund, to facilitate portfolio management and
mitigate risks, including interest rate, currency and credit risks. The Fund
writes (or sells), covered call options on the common stock of energy companies
held in the Fund's portfolio. Certain of these hedging and strategic
transactions involve derivative instruments. A derivative is a financial
instrument whose performance is derived at least in part from the performance of
an underlying index, security or asset. The values of certain derivatives can be
affected dramatically by even small market movements, sometimes in ways that are
difficult to predict. There are many different types of derivatives, with many
different uses. The Fund may purchase and sell derivative instruments such as
total return and equity swaps, exchange-listed and over-the-counter put and call
options on currencies, securities, energy-related commodities, equity, fixed
income and interest rate indices, and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors, collars or credit
transactions and credit default swaps. The Fund also may purchase derivative
instruments that combine features of these instruments. Collectively, all of the
above are referred to as "Strategic Transactions." The Fund generally seeks to
use Strategic Transactions as a portfolio management or hedging technique to
seek to protect against possible adverse changes in the market value of
securities held in or to be purchased for the Fund's portfolio, protect the
value of the Fund's portfolio, facilitate the sale of certain securities for
investment purposes, manage the effective interest rate and currency exposure of
the Fund, including the effective yield paid on any Financial Leverage issued by
the Fund, or establish positions in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. Market conditions
will determine whether and in what circumstances the Fund would employ any of
the hedging and strategic techniques described below. The Fund will incur
brokerage and other costs in connection with its hedging transactions.
Options on Securities and Securities Indices. The Fund may purchase and
write (sell) call and put options on any securities and securities indices.
These options may be listed on national domestic securities exchanges or foreign
securities exchanges or traded in the over-the-counter market. The Fund may
write covered put and call options and purchase put and call options as a
substitute for the purchase or sale of securities or to protect against declines
in the value of the portfolio securities and against increases in the cost of
securities to be acquired.
Writing Covered Options. The Fund writes (or sells), covered call options
on the common stock of energy companies held in the Fund's portfolio. A call
option on securities written by the Fund obligates the Fund to sell specified
securities to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option on securities
written by the Fund obligates the Fund to purchase specified securities from the
option holder at a specified price if the option is exercised at any time before
the expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
- 16 -
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive the Fund of the opportunity to profit from an increase in the market
price of the securities in its portfolio. Writing covered put options may
deprive the Fund of the opportunity to profit from a decrease in the market
price of the securities to be acquired for its portfolio.
All call and put options written by the Fund are covered. A written call
option or put option may be covered by (1) maintaining cash or liquid securities
in a segregated account with a value at least equal to the Fund's obligation
under the option, (2) entering into an offsetting forward commitment and/or (3)
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position. A written call option on securities is typically covered by
maintaining the securities that are subject to the option in a segregated
account. The Fund may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index.
The Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities or currency at a specified price
during the option period. The Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities or currency exceeded the sum of the exercise price, the premium paid
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the
premium paid, to sell specified securities at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities. Put
options may also be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. The
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities decreased below the exercise price sufficiently to
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
- 17 -
The Fund's options transactions will be subject to limitations established
by each of the exchanges, boards of trade or other trading facilities on which
such options are traded. These limitations govern the maximum number of options
in each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Sub-Advisor. An exchange, board of trade or other trading facility may order
the liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (4) unusual or unforeseen circumstances may interrupt normal operations
on an exchange; (5) the facilities of an exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or (6) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited
than with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Sub-Advisor will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Board of Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Sub-Advisor's ability to predict future price
fluctuations and, for hedging transactions, the degree of correlation between
the options and securities or currency markets.
- 18 -
Futures Contracts and Options on Futures Contracts. The Fund may purchase
and sell futures contracts based on various securities (such as U.S. government
securities) and securities indices, and any other financial instruments and
indices and purchase and write call and put options on these futures contracts.
The Fund may also enter into closing purchase and sale transactions with respect
to any of these contracts and options. All futures contracts entered into by the
Fund are traded on U.S. or foreign exchanges or boards of trade that are
licensed, regulated or approved by the Commodity Futures Trading Commission
("CFTC").
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
The Fund may, for example, take a "short" position in the futures market
by selling futures contracts in an attempt to hedge against an anticipated
decline in market prices that would adversely affect the value of the Fund's
portfolio securities. Such futures contracts may include contracts for the
future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund's portfolio securities.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire or the
exchange rate of currencies in which the portfolio securities are quoted or
denominated. When securities prices are falling, the Fund can seek to offset a
decline in the value of its current portfolio securities through the sale of
futures contracts. When securities prices are rising, the Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases.
If, in the opinion of the Sub-Advisor, there is a sufficient degree of
correlation between price trends for the Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in the
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Sub-Advisor will attempt to estimate the extent of this
volatility difference based on historical patterns and compensate for any
differential by having the Fund enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price changes
affecting the Fund's portfolio securities.
- 19 -
When a short hedging position is successful, any depreciation in the value
of portfolio securities will be substantially offset by appreciation in the
value of the futures position. On the other hand, any unanticipated appreciation
in the value of the Fund's portfolio securities would be substantially offset by
a decline in the value of the futures position. On other occasions, the Fund may
take a "long" position by purchasing futures contracts.
Options on Futures Contracts. The purchase of put and call options on
futures contracts will give the Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss in the event of
an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Fund's assets. By
writing a call option, the Fund becomes obligated, in exchange for the premium
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that the Fund intends to
purchase. However, the Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. The loss incurred by the Fund in writing options
on futures is potentially unlimited and may exceed the amount of the premium
received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging or for other purposes as permitted by
the CFTC. These purposes may include using futures and options on futures as a
substitute for the purchase or sale of securities to increase or reduce exposure
to particular markets. To the extent that the Fund is using futures and related
options for hedging purposes, futures contracts will be sold to protect against
a decline in the price of securities that the Fund owns or futures contracts
will be purchased to protect the Fund against an increase in the price of
securities it intends to purchase. The Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or securities or instruments which it expects to purchase. As evidence
of its hedging intent, the Fund expects that on occasions on which it takes a
long futures or option position (involving the purchase of futures contracts),
the Fund generally will have purchased, or will be in the process of purchasing,
equivalent amounts of related securities in the cash market at the time when the
futures or option position is closed out. However, in particular cases, when it
is economically advantageous for the Fund to do so, a long futures position may
be terminated or an option may expire without the corresponding purchase of
securities or other assets.
- 20 -
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish a
segregated account consisting of cash or liquid securities in an amount equal to
the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates or securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio
positions will be impossible to achieve. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit trading in a futures contract or related
option, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges also may establish daily limits on the amount that
the price of a futures contract or related option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Currency Exchange Transactions. The Fund may enter into currency exchange
transactions to hedge the Fund's exposure to foreign currency exchange rate risk
to the extent the Fund invests in non-U.S. denominated securities of non-U.S.
issuers. The Fund's currency transactions will be limited to portfolio hedging
involving portfolio positions. Portfolio hedging is the use of a forward
contract with respect to a portfolio security position denominated or quoted in
a particular currency. A forward contract is an agreement to purchase or sell a
specified currency at a specified future date (or within a specified time
period) and price set at the time of the contract. Forward contracts are usually
entered into with banks, foreign exchange dealers or broker-dealers, are not
exchange-traded, and are usually for less than one year, but may be renewed.
At the maturity of a forward contract to deliver a particular currency,
the Fund may either sell the portfolio security related to such contract and
make delivery of the currency, or it may retain the security and either acquire
the currency on the spot market or terminate its contractual obligation to
deliver the currency by purchasing an offsetting contract with the same currency
trader obligating it to purchase on the same maturity date the same amount of
the currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
- 21 -
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
Equity Swaps and Interest Rate or Commodity Swaps, Collars, Caps and
Floors. In order to hedge the value of the Fund's portfolio against fluctuations
in the market value of equity securities, interest rates or commodity prices or
to enhance the Fund's income, the Fund may, but is not required to, enter into
equity swaps and various interest rate or commodity transactions such as
interest rate or commodity swaps and the purchase or sale of interest rate or
commodity caps and floors. To the extent that the Fund enters into these
transactions, the Fund expects to do so primarily to preserve a return or spread
on a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date, to protect against increasing commodity prices or to manage the Fund's
interest rate exposure on any debt securities, including the Notes, or preferred
shares issued by the Fund for leverage purposes. The Fund intends to use these
transactions primarily as a hedge. However, the Fund also may invest in equity
and interest rate or commodity swaps to enhance income or to increase the Fund's
yield, for example, during periods of steep interest rate yield curves (i.e.,
wide differences between short-term and long-term interest rates). The Fund is
not required to hedge its portfolio and may choose not to do so. The Fund cannot
guarantee that any hedging strategies it uses will work.
In an equity swap, the cash flows exchanged by the Fund and the
counterparty are based on the total return on some stock market index and an
interest rate (either a fixed rate or a floating rate). In an interest rate
- 22 -
swap, the Fund exchanges with another party their respective commitments to pay
or receive interest (e.g., an exchange of fixed rate payments for floating rate
payments). For example, if the Fund holds a debt instrument with an interest
rate that is reset only once each year, it may swap the right to receive
interest at this fixed rate for the right to receive interest at a rate that is
reset every week. This would enable the Fund to offset a decline in the value of
the debt instrument due to rising interest rates but would also limit its
ability to benefit from falling interest rates. Conversely, if the Fund holds a
debt instrument with an interest rate that is reset every week and it would like
to lock in what it believes to be a high interest rate for one year, it may swap
the right to receive interest at this variable weekly rate for the right to
receive interest at a rate that is fixed for one year. Such a swap would protect
the Fund from a reduction in yield due to falling interest rates and may permit
the Fund to enhance its income through the positive differential between one
week and one year interest rates, but would preclude it from taking full
advantage of rising interest rates.
The Fund usually will enter into equity and interest rate or commodity
swaps on a net basis (i.e., the two payment streams are netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments). The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap contract will be accrued on a daily
basis, and an amount of cash or liquid instruments having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account by the Fund's custodian. If the swap transaction is entered into on
other than a net basis, the full amount of the Fund's obligations will be
accrued on a daily basis, and the full amount of the Fund's obligations will be
maintained in a segregated account by the Fund's custodian.
The Fund also may engage in interest rate or commodity transactions in the
form of purchasing or selling interest rate or commodity caps or floors. The
Fund will not sell interest rate or commodity caps or floors that it does not
own. The purchase of an interest rate or commodity cap entitles the purchaser,
to the extent that a specified index exceeds a predetermined interest rate or
commodity price, to receive payments equal to the difference of the index and
the predetermined rate on a notional principal amount (i.e., the reference
amount with respect to which interest obligations are determined although no
actual exchange of principal occurs) from the party selling such interest rate
or commodity cap. The purchase of an interest rate or commodity floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate or commodity price, to receive payments at the difference of the
index and the predetermined rate on a notional principal amount from the party
selling such interest rate or commodity floor.
Typically, the parties with which the Fund will enter into equity and
interest rate or commodity transactions will be broker-dealers and other
financial institutions. The Fund will not enter into any equity swap, interest
rate or commodity swap, cap or floor transaction unless the unsecured senior
debt or the claims-paying ability of the other party thereto is rated investment
grade quality by at least one NRSRO at the time of entering into such
transaction or whose creditworthiness is believed by the Sub-Advisor to be
equivalent to such rating. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
- 23 -
the swap market has become relatively liquid in comparison with other similar
instruments traded in the interbank market. Caps and floors, however, are less
liquid than swaps.
Credit Default Swap Agreements. The Fund may enter into credit default
swap agreements. The "buyer" in a credit default contract is obligated to pay
the "seller" a periodic stream of payments over the term of the contract
provided that no event of default on an underlying reference obligation has
occurred. If an event of default occurs, the seller must pay the buyer the "par
value" (full notional value) of the reference obligation in exchange for the
reference obligation. The Fund may be either the buyer or seller in the
transaction. If the Fund is a buyer and no event of default occurs, the Fund
loses its investment and recovers nothing. However, if an event of default
occurs, the buyer receives full notional value for a reference obligation that
may have little or no value. As a seller, the Fund receives a fixed rate of
income throughout the term of the contract, which typically is between six
months and three years, provided that there is no default event. If an event of
default occurs, the seller must pay the buyer the full notional value of the
reference obligation.
Credit default swaps involve greater risks than if the Fund had invested
in the reference obligation directly. In addition to general market risks,
credit default swaps are subject to illiquidity risk, counterparty risk and
credit risks. The Fund will enter into swap agreements only with counterparties
who are rated investment grade quality by at least one NRSRO at the time of
entering into such transaction or whose creditworthiness is believed by the
Sub-Advisor to be equivalent to such rating. A buyer also will lose its
investment and recover nothing should no event of default occur. If an event of
default were to occur, the value of the reference obligation received by the
seller, coupled with the periodic payments previously received, may be less than
the full notional value it pays to the buyer, resulting in a loss of value to
the Fund. When the Fund acts as a seller of a credit default swap agreement it
is exposed to the risks of leverage since if an event of default occurs the
seller must pay the buyer the full notional value of the reference obligation.
The Fund may in the future employ new or additional investment strategies
and hedging instruments if those strategies and instruments are consistent with
the Fund's investment objective and are permissible under applicable regulations
governing the Fund.
OVER-THE-COUNTER MARKET RISK
The Fund may invest in over-the-counter securities. In contrast to the
securities exchanges, the over-the-counter market is not a centralized facility
that limits trading activity to securities of companies which initially satisfy
certain defined standards. Generally, the volume of trading in an unlisted or
over-the-counter security is less than the volume of trading in a listed
security. This means that the depth of market liquidity of some securities in
which the Fund invests may not be as great as that of other securities and, if
the Fund were to dispose of such a security, it might have to offer the
securities at a discount from recent prices, or sell the securities in small
lots over an extended period of time.
- 24 -
LEGISLATION RISK
At any time after the date of this Statement of Additional Information,
legislation may be enacted that could negatively affect the assets of the Fund
or the issuers of such assets. Changing approaches to regulation may have a
negative impact on entities in which the Fund invests. There can be no assurance
that future legislation, regulation or deregulation will not have a material
adverse effect on the Fund or will not impair the ability of the issuers of the
assets held in the Fund to achieve their business goals, and hence, for the Fund
to achieve its investment objective.
OTHER INVESTMENT POLICIES AND TECHNIQUES
HEDGING STRATEGIES
General Description of Hedging Strategies. As more fully described above,
the Fund may use derivatives or other transactions for the purpose of hedging
the Fund's exposure to an increase in the price of a security prior to its
anticipated purchase or a decrease in the price of a security prior to its
anticipated sale, to seek to reduce interest rate risks arising from the use of
any leverage by the Fund and to mitigate risks. The specific derivative
instruments to be used, or other transactions to be entered into, for such
hedging purposes may include options on common equities, energy-related
commodities, equity, fixed income and interest rate indices, futures contracts
(hereinafter referred to as "Futures" or "Futures Contracts"), swap agreements
and related instruments.
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" recognized but unrealized gains in the value of portfolio securities.
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 also can 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 Securities and Exchange Commission (the
"Commission"), the several options and futures exchanges upon which they are
traded, the CFTC and various state regulatory authorities.
General Limitations on Futures and Options Transactions. The CFTC has
recently adopted rule amendments which require operators of registered
investment companies to either limit such investment companies' use of futures,
options on futures and swaps or submit to dual regulation by the CFTC and the
SEC. The status of the amended rule is unclear because of pending litigation
against the CFTC challenging the amendments. These amendments limit transactions
in commodity futures, commodity option contracts and swaps for non-hedging
purposes by either (a) limiting the aggregate initial margin and premiums
required to establish non-hedging commodities positions to not more than 5% of
the liquidation value of the Fund's portfolio after taking into account
unrealized profits and losses on any such contract or (b) limiting the aggregate
net notional value of non-hedging commodities positions to not more than 100% of
- 25 -
the liquidation value of the Fund's portfolio after taking into account
unrealized profits and losses on such positions. In the event that the Fund's
investments in such instruments exceed one of these thresholds, the Advisor
and/or the Sub-Advisor may be required to register as a commodity pool operator
("CPO") and/or commodity trading advisor ("CTA") with the CFTC. In the event the
Advisor or the Sub-Advisor is required to register with the CFTC, it will become
subject to additional recordkeeping and reporting requirements with respect to
the Fund and the Fund may incur additional expenses as a result of the CFTC's
regulatory requirements.
The Advisor has claimed an exclusion from the definition of CPO with
respect to the Fund under these amended rules. The Sub-Advisor has also relied
on an exclusion from the definition of CTA with respect to the Fund. If, in the
future, the Advisor or the Sub-Advisor is not able to rely on an exclusion from
the definition of CPO or CTA, as applicable, it will register as a CPO or CTA,
as applicable, with respect to the Fund. The Fund reserves the right to engage
in transactions involving futures, options thereon and swaps to the extent
allowed by CFTC regulations in effect from time to time and in accordance with
the Fund's policies.
Asset Coverage for Futures and Options Positions. The Fund will comply
with the regulatory requirements of the Commission and the CFTC with respect to
coverage of options and futures positions by registered investment companies
and, if the guidelines so require, will set aside cash, U.S. government
securities, high grade liquid debt securities and/or other liquid assets
permitted by the Commission and CFTC in a segregated custodial account in the
amount prescribed. Securities held in a segregated account cannot be sold while
the futures or options position is outstanding, unless replaced with other
permissible assets, and will be marked-to-market daily.
Options. As an anticipatory hedge, the Fund may purchase put and call
options on stock or other securities. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option holder
an underlying security or its equivalent at a specified price at any time during
the option period. In contrast, a call option gives the purchaser the right to
buy the underlying security covered by the option or its equivalent from the
writer of the option at the stated exercise price.
As a holder of a put option, the Fund will have the right to sell the
securities underlying the option and as the holder of a call option, the Fund
will have the right to purchase the securities underlying the option, in each
case at their exercise price at any time prior to the option's expiration date.
The Fund may seek to terminate its option positions prior to their expiration by
entering into closing transactions. The ability of the Fund to enter into a
closing sale transaction depends on the existence of a liquid secondary market.
There can be no assurance that a closing purchase or sale transaction can be
effected when the Fund so desires.
Certain Considerations Regarding Options. The hours of trading for options
may not conform to the hours during which the underlying securities are traded.
To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the options markets. The
purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
- 26 -
securities transactions. The purchase of options involves the risk that the
premium and transaction costs paid by the Fund in purchasing an option will be
lost as a result of unanticipated movements in prices of the securities on which
the option is based. Imperfect correlation between the options and securities
markets may detract from the effectiveness of attempted hedging. Options
transactions may result in significantly higher transaction costs and portfolio
turnover for the Fund.
Some, but not all, of the derivative instruments may be traded and listed
on an exchange. There is no assurance that a liquid secondary market on an
options exchange will exist for any particular option, or at any particular
time, and for some options no secondary market on an exchange or elsewhere may
exist. If the Fund is unable to effect a closing sale transaction with respect
to options on securities that it has purchased, it would have to exercise the
option in order to realize any profit and would incur transaction costs upon the
purchase and sale of the underlying securities.
Futures Contracts. The Fund may enter into securities-related Futures
Contracts, including security futures contracts as an anticipatory hedge. The
Fund's hedging may include sales of Futures as an offset against the effect of
expected declines in securities prices and purchases of Futures as an offset
against the effect of expected increases in securities prices. The Fund will not
enter into Futures Contracts which are prohibited under the CEA and will, to the
extent required by regulatory authorities, enter only into Futures Contracts
that are traded on exchanges and are standardized as to maturity date and
underlying financial instrument. A security futures contract is a legally
binding agreement between two parties to purchase or sell in the future a
specific quantity of shares of a security or of the component securities of a
narrow-based security index, at a certain price. A person who buys a security
Futures Contract enters into a contract to purchase an underlying security and
is said to be "long" the contract. A person who sells a security futures contact
enters into a contract to sell the underlying security and is said to be "short"
the contract. The price at which the contract trades (the "contract price") is
determined by relative buying and selling interest on a regulated exchange.
Transaction costs are incurred when a Futures Contract is bought or sold
and margin deposits must be maintained. In order to enter into a Futures
Contract, the Fund must deposit funds with its custodian in the name of the
futures commodities merchant equal to a specified percentage of the current
market value of the contract as a performance bond. Moreover, all security
futures contracts are marked-to-market at least daily, usually after the close
of trading. At that time, the account of each buyer and seller reflects the
amount of any gain or loss on the security futures contract based on the
contract price established at the end of the day for settlement purposes.
An open position, either a long or short position, is closed or liquidated
by entering into an offsetting transaction (i.e., an equal and opposite
transaction to the one that opened the position) prior to the contract
expiration. Traditionally, most Futures Contracts are liquidated prior to
expiration through an offsetting transaction and, thus, holders do not incur a
settlement obligation. If the offsetting purchase price is less than the
original sale price, a gain will be realized. Conversely, if the offsetting sale
price is more than the original purchase price, a gain will be realized; if it
is less, a loss will be realized. The transaction costs must also be included in
- 27 -
these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
Futures Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract and the Fund may not be able to realize
a gain in the value of its future position or prevent losses from mounting. This
inability to liquidate could occur, for example, if trading is halted due to
unusual trading activity in either the security futures contract or the
underlying security; if trading is halted due to recent news events involving
the issuer of the underlying security; if systems failures occur on an exchange
or at the firm carrying the position; or, if the position is on an illiquid
market. Even if the Fund can liquidate its position, it may be forced to do so
at a price that involves a large loss.
Under certain market conditions, it may also be difficult or impossible to
manage the risk from open security futures positions by entering into an
equivalent but opposite position in another contract month, on another market,
or in the underlying security. This inability to take positions to limit the
risk could occur, for example, if trading is halted across markets due to
unusual trading activity in the security futures contract or the underlying
security or due to recent news events involving the issuer of the underlying
security.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a Futures Contract position. The Fund would continue
to be required to meet margin requirements until the position is closed,
possibly resulting in a decline in the Fund's NAV. In addition, many of the
contracts discussed above are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active secondary
market will develop or continue to exist.
Security futures contracts that are not liquidated prior to expiration
must be settled in accordance with the terms of the contract. Some security
futures contracts are settled by physical delivery of the underlying security.
At the expiration of a security futures contract that is settled through
physical delivery, a person who is long the contract must pay the final
settlement price set by the regulated exchange or the clearing organization and
take delivery of the underlying shares. Conversely, a person who is short the
contract must make delivery of the underlying shares in exchange for the final
settlement price. Settlement with physical delivery may involve additional
costs.
Other security futures contracts are settled through cash settlement. In
this case, the underlying security is not delivered. Instead, any positions in
such security futures contracts that are open at the end of the last trading day
are settled through a final cash payment based on a final settlement price
determined by the exchange or clearing organization. Once this payment is made,
neither party has any further obligations on the contract.
As noted above, margin is the amount of funds that must be deposited by
the Fund in order to initiate futures trading and to maintain the Fund's open
positions in Futures Contracts. A margin deposit is intended to ensure the
Fund's performance of the Futures Contract. The margin required for a particular
Futures Contract is set by the exchange on which the Futures Contract is traded
and may be significantly modified from time to time by the exchange during the
term of the Futures Contract.
- 28 -
If the price of an open futures contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the respective Fund. In computing daily NAV, the
Fund will mark to market the current value of its open futures contract. The
Fund expects to earn interest income on its margin deposits.
Because of the low margin deposits required, Futures Contracts trading
involves an extremely high degree of leverage. As a result, a relatively small
price movement in a Futures Contract may result in immediate and substantial
loss, as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the Futures Contract is deposited as margin, a subsequent
10% decrease in the value of the Futures Contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Futures Contracts were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess of
the amount initially invested in the Futures Contract. However, the Fund would
presumably have sustained comparable losses if, instead of the Futures Contract,
it had invested in the underlying financial instrument and sold it after the
decline.
In addition to the foregoing, imperfect correlation between the Futures
Contracts and the underlying securities may prevent the Fund from achieving the
intended hedge or expose the Fund to risk of loss. Under certain market
conditions, the prices of security futures contracts may not maintain their
customary or anticipated relationships to the prices of the underlying security
or index. These pricing disparities could occur, for example, when the market
for the security futures contract is illiquid, when the primary market for the
underlying security is closed, or when the reporting of transactions in the
underlying security has been delayed.
In addition, the value of a position in Futures Contracts could be
affected if trading is halted in either the security futures contract or the
underlying security. In certain circumstances, regulated exchanges are required
by law to halt trading in security futures contracts. For example, trading on a
particular security futures contract must be halted if trading is halted on the
listed market for the underlying security as a result of pending news,
regulatory concerns, or market volatility. Similarly, trading of a security
futures contract on a narrow-based security index must be halted under
circumstances such as where trading is halted on securities accounting for at
least 50% of the market capitalization of the index. In addition, regulated
exchanges are required to halt trading in all security futures contracts for a
specified period of time when the Dow Jones Industrial Average ("DJIA")
experiences one-day declines of 10%, 20% and 30%. The regulated exchanges may
also have discretion under their rules to halt trading in other circumstances -
such as when the exchange determines that the halt would be advisable in
maintaining a fair and orderly market.
A trading halt, either by a regulated exchange that trades security
futures or an exchange trading the underlying security or instrument, could
prevent the Fund from liquidating a position in security futures contracts in a
timely manner, which could expose the Fund to a loss.
- 29 -
Each regulated exchange trading a security futures contract may also open
and close for trading at different times than other regulated exchanges trading
security futures contracts or markets trading the underlying security or
securities. Trading in security futures contracts prior to the opening or after
the close of the primary market for the underlying security may be less liquid
than trading during regular market hours.
Risks and Special Considerations Concerning Derivatives. In addition to
the foregoing, the use of derivative instruments involves certain general risks
and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of the
underlying assets may go up or down. Adverse movements in the value of an
underlying asset can expose the Fund to losses. Market risk is the primary
risk associated with derivative transactions. 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 Sub-Advisor's ability to predict
correctly changes in the relationships of such hedge instruments to the
Fund's portfolio holdings, and there can be no assurance the Sub-Advisor's
judgment in this respect will be accurate. Consequently, the use of
derivatives for hedging purposes might result in a poorer overall
performance for the Fund, whether or not adjusted for risk, than if the
Fund had not hedged its portfolio holdings.
(2) Credit Risk. Credit risk is the risk that a loss is 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 derivatives, since generally a clearing agency, which is
the issuer or counterparty to each exchange-traded instrument, provides a
guarantee of performance. For privately-negotiated instruments, there is
no similar clearing agency guarantee. In all transactions, the Fund will
bear the risk that the counterparty will default, and this could result in
a loss of the expected benefit of the derivative transactions and possibly
other losses to the Fund. The Fund will enter into transactions in
derivative instruments only with counterparties that the Sub-Advisor
reasonably believes are capable of performing under the contract.
(3) Correlation Risk. Correlation risk is the risk that there might
be an imperfect correlation, or even no correlation, between price
movements of a derivative instrument and price movements of investments
being hedged. When a derivative transaction is used to completely hedge
another position, changes in the market value of the combined position
(the derivative instrument plus the position being hedged) result from an
imperfect correlation between the price movements of the two instruments.
With a perfect hedge, the value of the combined position remains unchanged
with any change in the price of the underlying asset. With an imperfect
hedge, the value of the derivative instrument and its hedge are not
perfectly correlated. For example, if the value of a derivative instrument
used in a short hedge (such as buying a put option or selling a futures
contract) increased by less than the decline in value of the hedged
- 30 -
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 Sub-Advisor's ability to correctly predict
changes in relationships of such hedge instruments to the Fund's portfolio
holdings, and there can be no assurance that the Sub-Advisor's judgment 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.
(4) Liquidity Risk. Liquidity risk is the risk that a derivative
instrument cannot be sold, closed out, or replaced quickly at or very
close to its fundamental value. Generally, exchange contracts are liquid
because the exchange clearinghouse is the counterparty of every contract.
OTC transactions are less liquid than exchange-traded derivatives since
they often can only be closed out with the other party to the transaction.
The Fund might be required by applicable regulatory requirements to
maintain assets as "cover," maintain segregated accounts and/or make
margin payments when it takes positions in derivative instruments
involving obligations to third parties (i.e., instruments other than
purchase options). If the Fund is unable to close out its positions in
such instruments, it might be required to continue to maintain such
accounts or make such payments until the position expires, matures, or is
closed out. These requirements might impair the Fund's ability to sell a
security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at
a disadvantageous time. The Fund's ability to sell or close out a position
in an instrument prior to expiration or maturity depends upon the
existence of a liquid secondary market or, in the absence of such a
market, the ability and willingness of the counterparty to enter into a
transaction closing out the position. Due to liquidity risk, there is no
assurance that any derivatives position can be sold or closed out at a
time and price that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the
unenforceability of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside in
exchange for downside protection, the party taking the risk is looking for
a positive payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative transaction may try to
avoid payment by exploiting various legal uncertainties about certain
derivative products.
(6) Systemic or "Interconnection" Risk. Systemic or interconnection
risk is the risk that a disruption in the financial markets will cause
difficulties for all market participants. In other words, a disruption in
one market will spill over into other markets, perhaps creating a chain
reaction. Much of the OTC derivatives market takes place among the OTC
dealers themselves, thus creating a large interconnected web of financial
obligations. This interconnectedness raises the possibility that a default
by one large dealer could create losses for other dealers and destabilize
the entire market for OTC derivative instruments.
- 31 -
SWAP AGREEMENTS
For hedging or investment purposes, the Fund may enter into swap
agreements. A swap is a financial instrument that typically involves the
exchange of cash flows between two parties on specified dates (settlement
dates), where the cash flows are based on agreed-upon prices, rates, indices,
etc. The nominal amount on which the cash flows are calculated is called the
notional amount. Swaps are individually negotiated and structured to include
exposure to a variety of different types of investments or market factors, such
as interest rates, commodity prices, non-U.S. currency rates, mortgage
securities, corporate borrowing rates, security prices, indexes or inflation
rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the Fund and its share price. The performance of swap agreements
may be affected by a change in the specific interest rate, currency, or other
factors that determine the amounts of payments due to and from the Fund. If a
swap agreement calls for payments by the Fund, the Fund must be prepared to make
such payments when due. In addition, if the counterparty's creditworthiness
declines, the value of a swap agreement would be likely to decline, potentially
resulting in losses.
Generally, swap agreements have fixed maturity dates that are agreed upon
by the parties to the swap. The agreement can be terminated before the maturity
date only under limited circumstances, such as default by one of the parties or
insolvency, among others, and can be transferred by a party only with the prior
written consent of the other party. The Fund may be able to eliminate its
exposure under a swap agreement either by assignment or by other disposition, or
by entering into an offsetting swap agreement with the same party or a similarly
creditworthy party. If the counterparty is unable to meet its obligations under
the contract, declares bankruptcy, defaults or becomes insolvent, the Fund may
not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify the Fund's
gains or losses. In order to reduce the risk associated with leveraging, the
Fund may cover its current obligations under swap agreements according to
guidelines established by the Commission. If the Fund enters into a swap
agreement on a net basis, it will be required to segregate assets with a daily
value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to receive
under the agreement. If the Fund enters into a swap agreement on other than a
net basis, it will be required to segregate assets with a value equal to the
full amount of the Fund's accrued obligations under the agreement.
Total Return Swaps. Total return swap agreements are contracts in which
one party agrees to make periodic payments to another party based on the change
in market value of the assets underlying the contract, which may include a
specified security, basket of securities or securities indices during the
specified period, in return for periodic payments based on a fixed or variable
interest rate or the total return from other underlying assets. Total return
swap agreements may be used to obtain exposure to a security or market without
owning or taking physical custody of such security or investing directly in such
market.
Equity Swaps. In a typical equity swap, one party agrees to pay another
party the return on a security, security index or basket of securities in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to securities making up the index
of securities without actually purchasing those securities. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the interest that the Fund will
be committed to pay under the swap.
- 32 -
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell securities on a when-issued or delayed delivery
basis, making payment or taking delivery at a later date, normally within 15-45
days of the trade date. On such transactions, the payment obligation and the
interest rate are fixed at the time the buyer enters into the commitment.
Beginning on the date the Fund enters into a commitment to purchase securities
on a when-issued or delayed delivery basis, the Fund is required under rules of
the Commission to maintain in a separate account liquid assets, consisting of
cash, cash equivalents or liquid securities having a market value at all times
of at least equal to the amount of the commitment. Income generated by any such
assets which provide taxable income for U.S. federal income tax purposes is
includable in the taxable income of the Fund. The Fund may enter into contracts
to purchase securities on a forward basis (i.e., where settlement will occur
more than 60 days from the date of the transaction) only to the extent that the
Fund specifically collateralizes such obligations with a security that is
expected to be called or mature within sixty days before or after the settlement
date of the forward transaction. The commitment to purchase securities on a
when-issued, delayed delivery or forward basis may involve an element of risk
because at the time of delivery the market value may be less than cost.
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
agrees to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed-upon repurchase price determines the
yield during the Fund's holding period. Repurchase agreements are considered to
be loans collateralized by the underlying security that is the subject of the
repurchase contract. The Fund will only enter into repurchase agreements with
registered securities dealers or domestic banks that, in the opinion of the
Sub-Advisor, present minimal credit risk. The risk to the Fund is limited to the
ability of the issuer to pay the agreed-upon repurchase price on the delivery
date; however, although the value of the underlying collateral at the time the
transaction is entered into always equals or exceeds the agreed-upon repurchase
price, if the value of the collateral declines there is a risk of loss of both
principal and interest. In the event of default, the collateral may be sold, but
the Fund may incur a loss if the value of the collateral declines, and may incur
disposition costs or experience delays in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization upon the collateral by the Fund may be
delayed or limited. The Sub-Advisor will monitor the value of the collateral at
the time the transaction is entered into and at all times subsequent during the
term of the repurchase agreement in an effort to determine that such value
always equals or exceeds the agreed-upon repurchase price. In the event the
value of the collateral declines below the repurchase price, the Fund will
demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.
LENDING OF PORTFOLIO SECURITIES
Although it is not the Fund's current intention, the Fund may lend its
portfolio securities to broker-dealers and banks. Any such loan must be
- 33 -
continuously secured by collateral in cash or cash equivalents maintained on a
current basis in an amount at least equal to the market value of the securities
loaned by the Fund. The Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned, and would
also receive an additional return that may be in the form of a fixed fee or a
percentage of the collateral. The Fund may pay reasonable fees for services in
arranging these loans. The Fund would have the right to call the loan and obtain
the securities loaned at any time on notice of not more than five business days.
The Fund would not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the securities, if, in the
Sub-Advisor's judgment, a material event requiring a shareholder vote would
otherwise occur before the loan was repaid. In the event of bankruptcy or other
default of the borrower, the Fund could experience both delays in liquidating
the loan collateral or recovering the loaned securities and losses, including
(a) possible decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to enforce its rights
thereto, (b) possible subnormal levels of income and lack of access to income
during this period, and (c) expenses of enforcing its rights.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading will be undertaken as determined by the Fund's
Sub-Advisor. There are no limits on the rate of portfolio turnover. For the
fiscal year ended November 30, 2012, the Fund's portfolio turnover rate was
approximately 26%. A higher portfolio turnover rate results in correspondingly
greater brokerage commissions and other transactional expenses that are borne by
the Fund. High portfolio turnover may also result in the Fund's recognition of
gains that will increase the Fund's tax liability and thereby lower the
after-tax dividends of the Fund. A high portfolio turnover may also increase the
Fund's current and accumulated earnings and profits, resulting in a greater
portion of the Fund's distributions being treated as a dividend to the Fund's
common shareholders. See "Tax Matters" in the Fund's Prospectus and in this
Statement of Additional Information.
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 Fund (each, a "Trustee", or collectively, the
"Trustees"), one of whom is an "interested person" (as the term is defined in
the 1940 Act) ("Interested Trustee") and four of whom are Trustees who are not
officers or employees of First Trust Advisors L.P., which is the investment
advisor to the Fund ("First Trust Advisors" or the "Advisor"), or any of its
affiliates ("Independent Trustees"). The Trustees set broad policies for the
Fund, choose the Fund's officers and hire the Fund's investment advisor and
other service providers. The Board of Trustees is divided into three classes:
Class I, Class II and Class III. In connection with the organization of the
Fund, each Trustee was elected for one initial term, the length of which depends
on the class, as more fully described below. Subsequently, the Trustees in each
class are elected to serve for a term expiring at the third succeeding annual
shareholder meeting subsequent to their election at an annual meeting, in each
case until their respective successors are duly elected and qualified, as
- 34 -
described below. Mr. Bowen is an Interested Trustee due to his position as Chief
Executive Officer of First Trust Advisors. The officers of the Fund manage the
day-to-day operations and are responsible to the Board of Trustees. The officers
of the Fund serve indefinite terms. The following is a list of the Trustees and
executive officers of the Fund and a statement of their present positions and
principal occupations during the past five years, the number of portfolios each
Trustee oversees and the other directorships they hold, if applicable.
OTHER
TERM OF DIRECTORSHIPS
OF OFFICE(2) PRINCIPAL THE FIRST TRUST HELD BY
POSITION AND AND YEAR FIRST OCCUPATIONS FUND COMPLEX TRUSTEE DURING
NAME, ADDRESS AND DATE OF OFFICES ELECTED OR DURING THE PAST 5 OVERSEEN BY THE PAST 5
BIRTH WITH FUND APPOINTED YEARS TRUSTEE YEARS
Trustee who is an Interested
Person of the Fund
----------------------------
James A. Bowen(1) Chairman of the o Class III (3) Chief Executive Officer 98 None
120 East Liberty Drive, Board and Trustee (December 2010 to Portfolios
Suite 400 o 2004 Present), President
Wheaton, IL 60187 (until December 2010),
D.O.B.: 09/55 First Trust Advisors
L.P. and First Trust
Portfolios L.P.;
Chairman of the Board
of Directors, BondWave
LLC (Software
Development
Company/Investment
Advisor) and
Stonebridge Advisors
LLC (Investment
Advisor)
Independent Trustees
----------------------------
Richard E. Erickson Trustee o Class II (3) Physician; President, 98 None
c/o First Trust Advisors L.P. Wheaton Orthopedics; Portfolios
120 East Liberty Drive, o 2004 Co-owner and
Suite 400 Co-Director (January
Wheaton, IL 60187 1996 to May 2007),
D.O.B.: 04/51 Sports Med Center for
Fitness; Limited
Partner, Gundersen Real
Estate Limited
Partnership; Member,
Sportsmed LLC
Thomas R. Kadlec Trustee o Class II (3) President (March 2010 98 Director of ADM
c/o First Trust Advisors L.P. to Present), Senior Portfolios Investor
120 East Liberty Drive, o 2004 Vice President and Services, Inc.
Suite 400 Chief Financial and ADM Investor
Wheaton, IL 60187 Officer (May 2007 Services
D.O.B.: 11/57 to March 2010), International
Vice President
and Chief Financial
Officer (1990 to
May 2007), ADM
Investor Services, Inc.
(Futures Commission
Merchant)
- 35 -
OTHER
TERM OF DIRECTORSHIPS
OF OFFICE(2) PRINCIPAL THE FIRST TRUST HELD BY
POSITION AND AND YEAR FIRST OCCUPATIONS FUND COMPLEX TRUSTEE DURING
NAME, ADDRESS AND DATE OF OFFICES ELECTED OR DURING THE PAST 5 OVERSEEN BY THE PAST 5
BIRTH WITH FUND APPOINTED YEARS TRUSTEE YEARS
Robert F. Keith Trustee o Class I (3) President (2003 to 98 Director of Trust
c/o First Trust Advisors L.P. Present), Hibs Portfolios Company of
120 East Liberty Drive, o 2006 Enterprises (Financial Illinois
Suite 400 and Management
Wheaton, IL 60187 Consulting)
D.O.B.: 11/56
Niel B. Nielson Trustee o Class III (3) President and Chief 98 Director of
c/o First Trust Advisors L.P. Executive Officer (July Portfolios Covenant
120 East Liberty Drive, o 2004 2012 to Present), Dew Transport Inc.
Suite 400 Learning LLC
Wheaton, IL 60187 (Educational Products
D.O.B.: 03/54 and Services);
President (June 2002 to
June 2012), Covenant
College
Officers of the Fund
----------------------------
Mark R. Bradley President and Chief o Indefinite term Chief Financial N/A N/A
120 East Liberty Drive, Executive Officer Officer, Chief
Suite 400 Operating Officer
Wheaton, IL 60187 o January 2012 (December 2010 to
D.O.B.: 11/57 Present), First Trust
Advisors L.P. and First
Trust Portfolios L.P.;
Chief Financial
Officer, BondWave LLC
(Software Development
Company/Investment
Advisor) and
Stonebridge Advisors
LLC (Investment
Advisor)
James M. Dykas Treasurer, Chief o Indefinite term Controller (January N/A N/A
120 East Liberty Drive Financial Officer 2011 to Present),
Suite 400 and Chief o January 2012 Senior Vice President
Wheaton, IL 60187 Accounting Officer (April 2007 to
D.O.B.: 01/66 Present), First Trust
Advisors L.P. and First
Trust Portfolios L.P.
W. Scott Jardine Secretary and Chief o Indefinite term General Counsel, First N/A N/A
120 East Liberty Drive Legal Officer Trust Advisors L.P. and
Suite 400 o 2004 First Trust Portfolios
Wheaton, IL 60187 L.P.; Secretary,
D.O.B.: 05/60 BondWave LLC (Software
Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC
(Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite term Senior Vice President N/A N/A
120 East Liberty Drive (September 2005 to
Suite 400 o 2005 Present) First Trust
Wheaton, IL 60187 Advisors L.P. and First
D.O.B.: 02/70 Trust Portfolios L.P.
- 36 -
OTHER
TERM OF DIRECTORSHIPS
OF OFFICE(2) PRINCIPAL THE FIRST TRUST HELD BY
POSITION AND AND YEAR FIRST OCCUPATIONS FUND COMPLEX TRUSTEE DURING
NAME, ADDRESS AND DATE OF OFFICES ELECTED OR DURING THE PAST 5 OVERSEEN BY THE PAST 5
BIRTH WITH FUND APPOINTED YEARS TRUSTEE YEARS
Kristi A. Maher Assistant Secretary o Indefinite term Deputy General Counsel N/A N/A
120 East Liberty Drive and Chief (May 2007 to Present),
Suite 400 Compliance Officer o 2011 First Trust Advisors
Wheaton, IL 60187 L.P. and First Trust
D.O.B.: 12/66 Portfolios L.P.
--------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors, investment advisor of
the Fund.
(2) Officer positions with the Fund have an indefinite term. Effective January
23, 2012, Mr. Bowen resigned from his position as the President and Chief
Executive Officer of the Fund. He will continue as a Trustee, the Chairman
of the Board and member of the Executive Committee. The Board elected Mr.
Bradley to serve as the President and Chief Executive Officer and Mr.
Dykas to serve as the Treasurer, Chief Financial Officer and Chief
Accounting Officer of the Fund. Mr. Bradley previously served as
Treasurer, Chief Financial Officer and Chief Accounting Officer and Mr.
Dykas previously served as Assistant Treasurer, each since 2004.
(3) Currently, Robert F. Keith, as a Class I Trustee, is serving a term until
the Fund's 2014 annual meeting. Richard E. Erickson and Thomas R. Kadlec,
as Class II Trustees, are each serving a term until the Fund's 2015 annual
meeting. James A. Bowen and Niel B. Nielson, as Class III Trustees, are
each serving a term until the Fund's 2013 annual meeting.
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 the
Fund; First Trust Series Fund, First Trust Variable Insurance Trust and First
Defined Portfolio Fund, LLC, open-end funds with twelve portfolios advised by
First Trust Advisors; First Trust Senior Floating Rate Income Fund II,
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund,
First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity
Income Fund, First Trust Mortgage Income Fund, First Trust Strategic High Income
Fund II, First Trust/Aberdeen Emerging Opportunity Fund, First Trust Specialty
Finance and Financial Opportunities Fund, First Trust Active Dividend Income
Fund and First Trust High Income Long/Short Fund, First Trust Energy
Infrastructure Fund and First Trust MLP and Energy Income Fund, closed-end funds
advised by First Trust Advisors; and First Trust Exchange-Traded Fund, First
Trust Exchange-Traded Fund II, First Trust Exchange-Traded Fund IV, First Trust
Exchange-Traded Fund VI, First Trust Exchange-Traded AlphaDEX(R) Fund and First
Trust Exchange-Traded AlphaDEX(R) Fund II, exchange-traded funds with 73
portfolios advised by First Trust Advisors (each a "First Trust Fund" and
collectively, the "First Trust Fund Complex"). None of the Trustees who are not
"interested persons" of the Fund, nor any of their immediate family members, has
ever been a director, officer or employee of, or consultant to, First Trust
Advisors, First Trust Portfolios L.P. or their affiliates. Mr. Bowen serves as
the Chairman of the Board of each Fund in the First Trust Fund Complex. The
officers of the Fund listed above hold the same positions with the other funds
in the First Trust Fund Complex as they hold with the Fund.
The same five persons serve as Trustees on the Fund's Board of Trustees
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
- 37 -
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. In addition, all of the First Trust closed-end funds
are managed by the Advisor and employ common service providers for custody, fund
accounting, administration and transfer agency that provide substantially
similar services to these closed-end funds pursuant to substantially similar
contractual arrangements. Because of the similar and often overlapping issues
facing the First Trust Funds, including the Fund, the Board of the First Trust
Funds believes that maintaining a unitary board structure promotes efficiency
and consistency in the governance and oversight of all First Trust Funds and
reduces the costs, administrative burdens and possible conflicts that may result
from having multiple boards. In adopting a unitary board structure, the Trustees
seek to provide effective governance through establishing a board, the overall
composition of which, as a body, possesses the appropriate skills, diversity,
independence and experience to oversee the business of the First Trust Funds.
Annually, the Board of Trustees reviews its governance structure and the
committee structures, their performance and functions and any processes that
would enhance Board governance over the business of the First Trust Funds. The
Board of Trustees 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 of Trustees 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 service providers of the
First Trust Funds, 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 currently serves
a two-year term or until his successor is selected. Commencing January 1, 2014,
the Lead Independent Trustee will serve a three-year term. Robert F. Keith
currently serves as the Lead Independent Trustee.
The Board of Trustees has established four standing committees (as
described below) and has delegated certain of its responsibilities to those
committees. The Board of Trustees and its committees meet frequently throughout
the year to oversee the activities of the First Trust Funds, review contractual
arrangements with and performance of service providers, oversee compliance with
regulatory requirements, and review the performance of the First Trust Funds.
The Independent Trustees are represented by independent legal counsel at all
Board and committee meetings (other than meetings of the Executive Committee).
Generally, the Board of Trustees acts by majority vote of all the Trustees,
including a majority vote of the Independent Trustees if required by applicable
law.
- 38 -
The three committee Chairmen and the Lead Independent Trustee currently
rotate every two years in serving as Chairmen of the Audit Committee, the
Nominating and Governance Committee or the Valuation Committee, or as Lead
Independent Trustee. Commencing January 1, 2014, the three committee Chairmen
and the Lead Independent Trustee will rotate every three years. The Lead
Independent Trustee also serves on the Executive Committee with the Interested
Trustee.
The four standing committees of the Board of Trustees 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 Fund's Declaration of Trust and By-Laws. The members of the
Executive Committee also serve as a special committee of the Board of Trustees
known as the Pricing and Dividend Committee, which is authorized to exercise all
of the powers and authority of the Board of Trustees in respect of the issuance
and sale, through an underwritten public offering, of the Common Shares of the
Fund and all other such matters relating to such financing, including
determining the price at which such Common Shares are to be sold, approval of
the final terms of the underwriting agreement, and approval of the members of
the underwriting syndicate. Such committee is also responsible for the
declaration and setting of dividends. Mr. Keith and Mr. Bowen are members of the
Executive Committee. During the last fiscal year, the Executive Committee held
five meetings.
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, and each is an Independent Trustee who is also an "independent
director" within the meaning of the listing standards of the NYSE MKT. The
Nominating and Governance Committee operates under a written charter adopted and
approved by the Board, a copy of which is available on the Fund's website at
http://www.ftportfolios.com. If there is no vacancy on the Board of Trustees,
the Board of Trustees will not actively seek recommendations from other parties,
including shareholders. The Board of Trustees adopted a mandatory retirement age
of 72 for Trustees, beyond which age Trustees are ineligible to serve. The
Nominating and Governance Committee will not consider new trustee candidates who
are 72 years of age or older. When a vacancy on the Board of Trustees of a First
Trust Fund occurs and nominations are sought to fill such vacancy, the
Nominating and Governance Committee may seek nominations from those sources it
deems appropriate in its discretion, including shareholders of the applicable
First Trust Fund. To submit a recommendation for nomination as a candidate for a
position on the Board of Trustees, shareholders of the Fund shall mail such
recommendation to W. Scott Jardine, Secretary, at the Fund's address, 120 East
Liberty Drive, Suite 400, Wheaton, Illinois 60187. Such recommendation shall
include the following information: (i) evidence of Fund ownership of the person
or entity recommending the candidate (if a Fund shareholder); (ii) a full
description of the proposed candidate's background, including their education,
experience, current employment and date of birth; (iii) names and addresses of
at least three professional references for the candidate; (iv) information as to
whether the candidate is an "interested person" in relation to the Fund, as such
term is defined in the 1940 Act, and such other information that may be
considered to impair the candidate's independence; and (v) any other information
that may be helpful to the Nominating and Governance Committee in evaluating the
- 39 -
candidate. If a recommendation is received with satisfactorily completed
information regarding a candidate during a time when a vacancy exists on the
Board of Trustees or during such other time as the Nominating and Governance
Committee is accepting recommendations, the recommendation will be forwarded to
the Chairman of the Nominating and Governance Committee and the counsel to the
Independent Trustees. Recommendations received at any other time will be kept on
file until such time as the Nominating and Governance Committee is accepting
recommendations, at which point they may be considered for nomination. During
the last fiscal year, the Nominating and Governance Committee held four
meetings.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec, Keith and Nielson are members
of the Valuation Committee. During the last fiscal year, the Valuation Committee
held four meetings.
The Audit Committee is responsible for overseeing the Fund's accounting
and financial reporting process, the system of internal controls, audit process
and evaluating and appointing independent auditors (subject also to approval of
the Board of Trustees). Messrs. Erickson, Kadlec, Keith and Nielson, all of whom
are "independent" as defined in the listing standards of the NYSE MKT, serve on
the Audit Committee. Messrs. Kadlec and Keith have been determined to qualify as
an "Audit Committee Financial Expert" as such term is defined in Form N-CSR.
During the last fiscal year, the Audit Committee held eight meetings.
RISK OVERSIGHT
As part of the general oversight of the Fund, the Board of Trustees is
involved in the risk oversight of the Fund. The Board of Trustees has adopted
and periodically reviews policies and procedures designed to address the Fund's
risks. Oversight of investment and compliance risk, including oversight of the
Sub-Advisor, is performed primarily at the Board level in conjunction with the
Advisor's investment oversight group and the Fund'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 of Trustees at
quarterly meetings regarding, among other things, Fund performance and the
various drivers of such performance as well as information related to the
Sub-Advisor and its operations and processes. The Board of Trustees 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 Fund. The Valuation Committee monitors valuation risk and compliance with
the Fund's Valuation Procedures and oversees the pricing agents and actions by
the Advisor's Pricing Committee with respect to the valuation of portfolio
securities.
- 40 -
Not all risks that may affect the Fund can be identified nor can controls
be developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost-effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
Fund or the Advisor or other service providers. Moreover, it is necessary to
bear certain risks (such as investment related risks) to achieve the Fund's
goals. As a result of the foregoing and other factors, the Fund's ability to
manage risk is subject to substantial limitations.
BOARD DIVERSIFICATION AND TRUSTEE QUALIFICATIONS
As described above, the Nominating and Governance Committee of the Board
of Trustees oversees matters related to the nomination of Trustees. The
Nominating and Governance Committee seeks to establish an effective Board with
an appropriate range of skills and diversity, including, as appropriate,
differences in background, professional experience, education, vocations, and
other individual characteristics and traits in the aggregate. Each Trustee must
meet certain basic requirements, including relevant skills and experience, time
availability, and if qualifying as an Independent Trustee, independence from the
Advisor, Sub-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 Statement of
Additional Information, that each Trustee should serve as a trustee.
Independent Trustees. Richard E. Erickson, M.D., is an orthopedic surgeon
and President of Wheaton Orthopedics. He also has been a co-owner and director
of a fitness center and a limited partner of two real estate companies. Dr.
Erickson has served as a Trustee of each First Trust Fund since its inception.
Dr. Erickson has also served as the Lead Independent Trustee (2008 - 2009),
Chairman of the Nominating and Governance Committee (2003 - 2007) and Chairman
of the Valuation Committee (June 2006 - 2007 and 2010 - 2011) of the First Trust
Funds. He currently serves as Chairman of the Audit Committee (since January 1,
2012) of the First Trust Funds.
Thomas R. Kadlec is President of ADM Investor Services Inc. ("ADMIS"), a
futures commission merchant and wholly-owned subsidiary of the Archer Daniels
Midland Company ("ADM"). Mr. Kadlec has been employed by ADMIS and its
affiliates since 1990 in various accounting, financial, operations and risk
management capacities. Mr. Kadlec serves on the boards of several international
affiliates of ADMIS and is a member of ADM's Integrated Risk Committee, which is
tasked with the duty of implementing and communicating enterprise-wide risk
management. Mr. Kadlec has served as a Trustee of each First Trust closed-end
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. He also served as Chairman of the Valuation Committee (2008 -
2009), Chairman of the Audit Committee (2010 - 2011) and he currently serves as
Chairman of the Nominating and Governance Committee (since January 1, 2012) of
the First Trust Funds.
- 41 -
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) of the First Trust Funds. He currently serves as Lead
Independent Trustee and on the Executive Committee (since January 1, 2012) of
the First Trust Funds.
Niel B. Nielson, Ph.D., has served as President and Chief Executive
Officer of Dew Learning LLC (a global provider of digital and on-line
educational products and services) since 2012. Mr. Nielson formerly served as
President of Covenant College (2002 - 2012), and as a partner and trader (of
options and futures contracts for hedging options) for Ritchie Capital Markets
Group (1996 - 1997), where he held an administrative management position at this
proprietary derivatives trading company. He also held prior positions in new
business development for ServiceMaster Management Services Company, and in
personnel and human resources for NationsBank of North Carolina, N.A. and
Chicago Research and Trading Group, Ltd. ("CRT"). His international experience
includes serving as a director of CRT Europe, Inc. for two years, directing out
of London all aspects of business conducted by the U.K. and European subsidiary
of CRT. Prior to that, Mr. Nielson was a trader and manager at CRT in Chicago.
Mr. Nielson has served as a Trustee of each First Trust Fund since its
inception. Mr. Nielson has also served as the Chairman of the Audit Committee
(2003 - 2006), Chairman of the Nominating and Governance Committee (2008 - 2009)
and Lead Independent Trustee (2010 - 2011) and currently serves as Chairman of
the Valuation Committee (since January 1, 2012) of the First Trust Funds.
Interested Trustee. James A. Bowen is the Chairman of the Board of the
First Trust Funds and Chief Executive Officer of First Trust Advisors L.P. and
First Trust Portfolios L.P., and until January 23, 2012, also served as
President and Chief Executive Officer of the First Trust Funds. Mr. Bowen also
serves on the Executive Committee. He has over 26 years of experience in the
investment company business in sales, sales management and executive management.
Mr. Bowen has served as a Trustee of each First Trust Fund since its inception.
As described above, the Board of Trustees is divided into three classes
and, in connection with the organization of the Fund, each Trustee was elected
for an initial term of one, two or three years depending on the class.
Subsequently, the Trustees in each class are elected to serve for a term
expiring at the third succeeding annual shareholder meeting subsequent to their
election at an annual meeting, in each case until their respective successors
are duly elected and qualified, as described below. At each annual meeting, the
Trustees chosen to succeed those whose terms are expiring shall be identified as
being of the same class as the Trustees whom they succeed. Holders of any
- 42 -
Preferred Shares will be entitled to elect a majority of the Fund's Trustees
under certain circumstances. See "Description of Shares - Preferred Shares -
Voting Rights" in the Prospectus.
Each Independent Trustee is paid a fixed annual retainer of $125,000 per
year and an annual per fund fee of $4,000 for each closed-end fund or other
actively managed fund and $1,000 for each index fund in the First Trust Fund
Complex. The fixed annual retainer is allocated pro rata among each fund in the
First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are also reimbursed by the investment companies in the First
Trust Fund Complex for travel and out-of-pocket expenses incurred in connection
with all meetings. The officers and "Interested Trustee" receive no compensation
from the Fund for acting in such capacities.
The following table sets forth compensation paid by the Fund during the
Fund's last fiscal year to each of the Independent Trustees and total
compensation paid to each of the Independent Trustees by the First Trust Fund
Complex for the calendar year ended December 31, 2012. The Fund has no
retirement or pension plans. The officers and the Trustee who is an "interested
person" as designated above serve without any compensation from the Fund. The
Fund's officers are compensated by First Trust Advisors.
TOTAL COMPENSATION
AGGREGATE FROM THE FIRST TRUST
NAME OF TRUSTEE COMPENSATION FROM THE FUND (1) FUND COMPLEX(2)
Richard E. Erickson $9,422 $276,500
Thomas R. Kadlec $9,308 $271,500
Robert F. Keith $9,600 $282,250
Niel B. Nielson $9,524 $275,249
--------------------
(1) The compensation paid by the Fund to the Independent Trustees for the last
fiscal year for services to the Fund.
(2) The total estimated compensation paid to Messrs. Erickson, Kadlec, Keith
and Nielson, Independent Trustees, from the Fund and the First Trust Fund
Complex for a full calendar year is based on estimated compensation to be
paid to these Trustees for a full calendar year for services as Trustees
to the Fund and the First Trust Series Fund, the First Trust Variable
Insurance Trust and the First Defined Portfolio Fund, LLC, open-end funds
(with twelve portfolios), the First Trust Exchange-Traded Fund, First
Trust Exchange-Traded Fund II, First Trust Exchange-Traded Fund IV, First
Trust Exchange-Traded Fund VI, First Trust Exchange-Traded AlphaDEX(R)
Fund and First Trust Exchange-Traded AlphaDEX(R) Fund II, exchange-traded
funds, plus estimated compensation to be paid to these Trustees by the
First Trust Senior Floating Rate Income Fund II, the Macquarie/First Trust
Global Infrastructure/Utilities Dividend & Income Fund, the First Trust
Enhanced Equity Income Fund, the First Trust/Aberdeen Global Opportunity
Income Fund, the First Trust Mortgage Income Fund, the First Trust
Strategic High Income Fund II, the First Trust/Aberdeen Emerging
Opportunity Fund, the First Trust Specialty Finance and Financial
Opportunities Fund, the First Trust Active Dividend Income Fund, the First
Trust High Income Long/Short Fund, the First Trust Energy Infrastructure
Fund and the First Trust MLP and Energy Income Fund.
- 43 -
As of December 31, 2012, the Fund had three employees. Shareholders of the
Fund will elect certain Trustees for a three-year term at the next annual
meeting of shareholders.
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, 2012:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
ALL REGISTERED INVESTMENT
DOLLAR RANGE OF COMPANIES OVERSEEN BY
EQUITY SECURITIES TRUSTEE IN THE FIRST
TRUSTEE IN THE FUND TRUST FUND COMPLEX
James A. Bowen None $50,001 - $100,000
Richard E. Erickson $10,000 - $50,000 Over $100,000
Thomas R. Kadlec $10,000 - $50,000 Over $100,000
Robert F. Keith None Over $100,000
Niel B. Nielson $1 - $10,000 Over $100,000
As of December 31, 2012, the Independent Trustees of the Fund and
immediate family members do not own beneficially or of record any class of
securities of an investment advisor or principal underwriter of the Fund or any
person directly or indirectly controlling, controlled by, or under common
control with an investment advisor or principal underwriter of the Fund.
As of December 31, 2012, the officers and Trustees, in the aggregate,
owned less than 1% of the Shares of the Fund.
CONTROL PERSONS
To the knowledge of the Fund, as of January 31, 2013, no single
shareholder or "group" (as that term is used in Section 13(d) of the 1934 Act)
beneficially owned more than 5% of the Fund's outstanding Shares, except as
described in the following table. Information as to beneficial ownership of
Shares, including percentage of Shares beneficially owned, is based on reports
filed with the SEC by such holders and a securities position listing report from
The Depository Trust & Clearing Corporation as of January 31, 2013. The Fund
does not have any knowledge of the identity of the ultimate beneficiaries of the
Common Shares of beneficial interest listed below. A control person is one who
owns, either directly or indirectly, more than 25% of the voting securities of
the Fund or acknowledges the existence of control.
-------------------------------- -------------- -----------------------
SHARES % OF OUTSTANDING
NAME AND ADDRESS BENEFICIALLY SHARES BENEFICIALLY
OF BENEFICIAL OWNER OWNED OWNED
-------------------------------- -------------- -----------------------
The Bank of New York Mellon
525 William Penn Place
Pittsburgh, PA 15259 1,202,801 7.27%
-------------------------------- -------------- -----------------------
- 44 -
-------------------------------- -------------- -----------------------
SHARES % OF OUTSTANDING
NAME AND ADDRESS BENEFICIALLY SHARES BENEFICIALLY
OF BENEFICIAL OWNER OWNED OWNED
-------------------------------- -------------- -----------------------
Charles Schwab & Co., Inc.
2423 E. Lincoln Drive
Phoenix, AZ 85016 1,090,986 6.60%
-------------------------------- -------------- -----------------------
First Clearing, LLC
One North Jefferson Street
St. Louis, MO 63103 2,649,896 16.02%
-------------------------------- -------------- -----------------------
Morgan Stanley Smith Barney
2000 Westchester Avenue
Purchase, NY 10577 2,137,416 12.92%
-------------------------------- -------------- -----------------------
National Financial Services, LLC
200 Liberty Street
New York, NY 10281 898,860 5.43%
-------------------------------- -------------- -----------------------
Pershing LLC
1 Pershing Plaza
Jersey City, NJ 07399 937,783 5.67%
-------------------------------- -------------- -----------------------
Robert W. Baird & Co., Inc.
777 E. Wisconsin Avenue
9th Floor
Milwaukee, WI 53202 1,275,540 7.71%
-------------------------------- -------------- -----------------------
INVESTMENT ADVISOR
First Trust Advisors L.P., 120 East Liberty Drive, Suite 400, Wheaton,
Illinois 60187, is the investment advisor to the Fund. First Trust Advisors
serves as investment advisor or portfolio supervisor to investment portfolios
with approximately $62 billion in assets which it managed or supervised as of
November 30, 2012. As investment advisor, First Trust Advisors provides the Fund
with professional investment supervision and selects the Fund's Sub-Advisor
(with the approval of the Board of Trustees) and permits any of its officers or
employees to serve without compensation as Trustees or officers of the Fund if
elected to such positions. First Trust Advisors supervises the activities of the
Fund's Sub-Advisor and provides the Fund with certain other services necessary
with the management of the portfolio.
First Trust Advisors is an Illinois limited partnership formed in 1991 and
an investment advisor registered with the Commission under the Investment
Advisers Act of 1940 (the "Advisers Act"). First Trust Advisors has one limited
partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one general
partner, The Charger Corporation. Grace Partners is a limited partnership with
one general partner, The Charger Corporation, and a number of limited partners.
Grace Partners' and The Charger Corporation's primary business is investment
- 45 -
advisory and broker/dealer services through their ownership interests. The
Charger Corporation is an Illinois corporation controlled by James A. Bowen,
Chief Executive Officer of the Advisor. First Trust Advisors is controlled by
Grace Partners and The Charger Corporation.
First Trust Advisors is advisor or sub-advisor to 16 mutual funds, seven
exchange-traded funds consisting of 75 series and 13 closed-end funds (including
the Fund) and is the portfolio supervisor of certain unit investment trusts
sponsored by First Trust Portfolios L.P. First Trust Portfolios L.P. specializes
in the underwriting, trading and distribution of unit investment trusts and
other securities. First Trust Portfolios L.P., an Illinois limited partnership
formed in 1991, took over the First Trust product line and acts as sponsor for
successive series of The First Trust Combined Series, FT Series (formerly known
as The First Trust Special Situations Trust), The First Trust Insured Corporate
Trust, The First Trust of Insured Municipal Bonds and The First Trust GNMA. The
First Trust product line commenced with the first insured unit investment trust
in 1974, and to date, more than $200 billion in gross assets have been deposited
in First Trust Portfolios L.P. unit investment trusts.
First Trust Advisors acts as investment advisor to the Fund pursuant to an
Investment Management Agreement. The Investment Management Agreement continues
in effect from year to year after its initial two-year term so long as its
continuation is approved at least annually by the Trustees including a majority
of the Independent Trustees, or the vote of a majority of the outstanding voting
securities of the Fund. It may be terminated at any time without the payment of
any penalty upon 60 days' written notice by either party, or by a majority vote
of the outstanding voting securities of the Fund or by the Board of Trustees
(accompanied by appropriate notice), and will terminate automatically upon its
assignment. The Investment Management Agreement may also be terminated, at any
time, without payment of any penalty, by the Board or by vote of a majority of
the outstanding voting securities of the Fund, in the event that it shall have
been established by a court of competent jurisdiction that the Advisor, or any
officer or director of the Advisor, has taken any action which results in a
breach of the material covenants of the Advisor set forth in the Investment
Management Agreement. The Investment Management Agreement provides that First
Trust Advisors 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 the 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 the Advisor in
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the Investment Management
Agreement.
Pursuant to the Investment Management Agreement between the Advisor and
the Fund, the Fund has agreed to pay for the services and facilities provided by
the Advisor an annual management fee, payable on a monthly basis, equal to 1.00%
of the Fund's Managed Assets. For purposes of calculation of the management fee,
the Fund's "Managed Assets" means the average daily gross asset value of the
Fund (which includes assets attributable to the Fund's Preferred Shares, if any,
and the principal amount of borrowings), minus the sum of the Fund's accrued and
unpaid dividends on any outstanding Preferred Shares and accrued liabilities
- 46 -
(other than the principal amount of any borrowings incurred, commercial paper or
notes or other forms of indebtedness issued by the Fund and the liquidation
preference of any outstanding Preferred Shares).
In addition to the fee of the Advisor, the Fund pays all other costs and
expenses of its operations except the Sub-Advisor's fee, which is paid by the
Advisor out of the Advisor's management fee. The costs and expenses paid by the
Fund include: compensation of its Trustees (other than the Trustee affiliated
with the Advisor), custodian, transfer agent, administrative, accounting and
dividend disbursing expenses, legal fees, leverage expenses, expenses of
independent auditors, expenses of repurchasing shares, expenses of preparing,
printing and distributing shareholder reports, notices, proxy statements and
reports to governmental agencies, and taxes, if any. All fees and expenses are
accrued daily and deducted before payment of dividends to investors.
Pursuant to a sub-advisory agreement among the Fund, the Advisor and the
Sub-Advisor, (the "Sub-Advisory Agreement"), the Sub-Advisor receives a
portfolio management fee equal to 0.50% of the Fund's Managed Assets. The
Sub-Advisor's fee is paid by the Advisor out of the Advisor's management fee.
Because the fee paid to the Advisor and by the Advisor to the Sub-Advisor will
be calculated on the basis of the Fund's Managed Assets, which include the
proceeds of leverage, the dollar amount of the Advisor's and Sub-Advisor's fees
will be higher (and the Advisor and Sub-Advisor will be benefited to that
extent) when leverage is utilized. In this regard, if the Fund uses leverage in
the amount equal to 26% of the Fund's Managed Assets (after their issuance), the
Fund's management fee would be 1.35% of net assets attributable to common
shares. See "Summary of Fund Expenses" in the Fund's Prospectus.
CODE OF ETHICS
The Fund, the Advisor and the Sub-Advisor have each adopted codes of
ethics under Rule 17j-1 under the 1940 Act. These codes permit personnel subject
to the code to invest in securities, including securities that may be purchased
or held by the Fund. These codes can be reviewed and copied at the Commission's
Public Reference Room in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at (202)
942-8090. The codes of ethics are available on the EDGAR Database on the
Commission's website (http://www.sec.gov), and copies of these codes may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov, or by writing the Commission Public
Reference Section, Washington, D.C. 20549-0102.
PROXY VOTING PROCEDURES
The Fund has adopted a proxy voting policy that seeks to ensure that
proxies for securities held by the Fund are voted consistently and solely in the
best economic interests of the Fund.
The Board of Trustees is responsible for oversight of the Fund's proxy
voting process. The Board has delegated day-to-day proxy voting responsibility
- 47 -
to Energy Income Partners. Energy Income Partners' Proxy Voting Policy is set
forth in Appendix B to the Statement of Additional Information.
Information regarding how the Fund voted proxies relating to portfolio
securities is available: (i) without charge, upon request, by calling (800)
621-1675; (ii) on the Fund's website at http://www.ftportfolios.com; and (iii)
by accessing the Commission's website at http://www.sec.gov.
SUB-ADVISOR
Energy Income Partners serves as the Fund's Sub-Advisor. In this capacity,
Energy Income Partners is responsible for the selection and on-going monitoring
of the securities in the Fund's investment portfolio.
Energy Income Partners, located at 49 Riverside Avenue, Westport,
Connecticut 06880, is a registered investment advisor and serves as investment
advisor or portfolio supervisor to investment portfolios with approximately $2.8
billion of assets as of November 30, 2012.
Energy Income Partners is a Delaware limited liability company and an
SEC-registered investment advisor, founded in October 2003 by James J. Murchie
to provide professional asset management services in the area of energy related
master limited partnerships and other high payout securities in the energy
sector. In addition to serving as Sub-Advisor to the Fund, Energy Income
Partners serves as the investment manager to three unregistered investment
companies and advisor to one private registered investment company. Energy
Income Partners also serves as the sub-advisor to the First Trust Energy
Infrastructure Fund (NYSE: FIF), First Trust North American Energy
Infrastructure Fund (NYSE: EMLP) and First Trust MLP and Energy Income Fund
(NYSE: FEI). Energy Income Partners mainly focuses on portfolio companies that
operate infrastructure assets such as pipelines, storage and terminals that
receive fee-based or regulated income from their customers. Energy Income
Partners currently has a staff of seven full-time and three part-time persons.
First Trust Capital Partners, LLC, an affiliate of the Advisor, purchased,
through a wholly-owned subsidiary, a 15% ownership interest in each of the
Sub-Advisor and EIP Partners, LLC, a Delaware limited liability company and
affiliate of the Sub-Advisor.
James J. Murchie is the Founder, Chief Executive Officer, co-portfolio
manager and a Principal of Energy Income Partners. After founding Energy Income
Partners in October 2003, Mr. Murchie and the Energy Income Partners investment
team joined Pequot Capital Management Inc. ("Pequot Capital") in December 2004.
In August 2006, Mr. Murchie and the Energy Income Partners investment team left
Pequot Capital and re-established Energy Income Partners. Prior to founding
Energy Income Partners, Mr. Murchie was a Portfolio Manager at Lawhill Capital
Partners, LLC ("Lawhill Capital"), a long/short equity hedge fund investing in
commodities and equities in the energy and basic industry sectors. Before
Lawhill Capital, Mr. Murchie was a Managing Director at Tiger Management, LLC,
where his primary responsibility was managing a portfolio of investments in
- 48 -
commodities and related equities. Mr. Murchie was also a Principal at Sanford C.
Bernstein. He began his career at British Petroleum, PLC. Mr. Murchie holds a BA
from Rice University and an MA from Harvard University.
Eva Pao is a Principal of Energy Income Partners and is co-portfolio
manager for all its funds. She has been with Energy Income Partners since
inception in 2003. From 2005 to mid-2006, Ms. Pao joined Pequot Capital
Management during Energy Income Partners' affiliation with Pequot. Prior to
Harvard Business School, Ms. Pao was a Manager at Enron Corp where she managed a
portfolio in Canadian oil and gas equities for Enron's internal hedge fund that
specialized in energy-related equities and managed a natural gas trading book.
Ms. Pao holds degrees from Rice University and Harvard Business School.
Linda Longville is the Research Director and a Principal of Energy Income
Partners. Ms. Longville has been with Energy Income Partners since its inception
in 2003, including the time the Energy Income Partners investment team spent at
Pequot Capital between December 2004 and July 2006. From April 2001 through
September 2003, she was a research analyst for Lawhill Capital. Prior to Lawhill
Capital, Ms. Longville held positions in finance and business development at
British Petroleum, PLC and Advanced Satellite Communications, Inc. She has a BAS
from Miami University (Ohio) and an MA from Case Western Reserve University.
Saul Ballesteros is the Head of Trading and a Principal of Energy Income
Partners. Mr. Ballesteros joined Energy Income Partners in 2006 after six years
as a proprietary trader at FPL Group and Mirant Corp. From 1994 through 1999, he
was with Enron's internal hedge fund in various positions of increased
responsibility, and, from 1991 through 1994, Mr. Ballesteros was a manager of
financial planning at IBM. Mr. Ballesteros holds a BS from Duke University and
an MBA from Northwestern University.
------------ --------------------------------------------------------------------------------------
NUMBER OF OTHER ACCOUNTS MANAGED AND ASSETS BY ACCOUNT TYPE
AS OF NOVEMBER 30, 2012
------------ --------------------------------------------------------------------------------------
REGISTERED INVESTMENT
COMPANIES OTHER POOLED
(OTHER THAN THE FUND) INVESTMENT VEHICLES OTHER ACCOUNTS
------------ --------------------------- ------------------------------ --------------------------
Number: 4 Number: 3 Number: 635
Assets: $1,517.8 million Assets: $176.7 million Assets: $473.4 million
------------ --------------------------- ------------------------------ --------------------------
Each of the three other pooled investment vehicles managed by the
Sub-Advisor, totaling $176.7 million in assets under management as of November
30, 2012, is subject to performance-based advisory fees. Two of the 635 other
accounts managed by the Sub-Advisor, totaling $45.4 million in assets under
management as of November 30, 2012, are subject to performance-based advisory
fees.
The portfolio managers are compensated by a competitive minimum base
salary and share in the profits of Energy Income Partners in relationship to
their ownership of Energy Income Partners.
- 49 -
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 the same investment
models that are used in connection with the management of the Fund.
If a portfolio manager identifies a limited investment opportunity which
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.
With respect to securities transactions for the Fund, the Sub-Advisor
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 a 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 such fund or other account(s) involved.
The Sub-Advisor, the Advisor and the Fund have adopted certain compliance
procedures which 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.
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 objective, policies and
restrictions as provided in the Prospectus and this Statement of Additional
Information, 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 Commission 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 Fund's Declaration of Trust and
- 50 -
By-laws, as amended from time to time, and the stated investment objective,
policies and restrictions of the Fund. The Sub-Advisor is responsible for
effecting all security transactions for the Fund's assets. The Sub-Advisory
Agreement provides that the Sub-Advisor shall 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 such Sub-Advisory
Agreement, or by reason of its reckless disregard of its obligations and duties
under such 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 receives a portfolio management fee equal to 0.50% of the
Fund's Managed Assets. The Sub-Advisor's fee is paid by the Advisor out of the
Advisor's management fee.
The Fund paid the Advisor $12,909,799 in advisory fees in the aggregate
for the last three fiscal years ending November 30, 2012. The Advisor paid the
Sub-Advisor $6,454,899 in sub-advisory fees in the aggregate for the last three
fiscal years ending November 30, 2012. See "Summary of Fund Expenses" and
"Management of the Fund -- Investment Management Agreement" in the Fund's
Prospectus.
The Sub-Advisory Agreement may be terminated without the payment of any
penalty by First Trust Advisors, the Fund's Board of Trustees, or a majority of
the outstanding voting securities of the Fund (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 common shareholders of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, the Sub-Advisor 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 the Sub-Advisor 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 the Sub-Advisor and its advisees. The best price to the Fund means
the best net price without regard to the mix between purchase or sale price and
commission, if any. Purchases may be made from underwriters, dealers, and, on
occasion, the issuers. Commissions will be paid on the Fund's futures and
options transactions, if any. The purchase price of portfolio securities
purchased from an underwriter or dealer may include underwriting commissions and
dealer spreads. The Fund may pay mark-ups on principal transactions. In
selecting broker/dealers and in negotiating commissions, the Sub-Advisor
considers, among other things, the firm's reliability, the quality of its
execution services on a continuing basis and its financial condition. The
- 51 -
selection of a broker-dealer may take into account the sale of products
sponsored or advised by the Sub-Advisor and/or its affiliates. If approved by
the Fund's Board of Trustees, the Sub-Advisor may select an affiliated
broker-dealer to effect transactions in the Fund, so long as such transactions
are consistent with Rule 17e-1 under the 1940 Act. The Fund paid brokerage
commissions in the amounts of $508,096, $421,127 and $428, 905 in 2012, 2011 and
2010, respectively. The Fund did not pay any brokerage commissions to any
affiliated persons of the Fund.
Section 28(e) of the Securities Exchange Act of 1934, as amended ("Section
28(e)"), 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).
In light of the above, in selecting brokers, the Sub-Advisor may 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 the Sub-Advisor 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 the Sub-Advisor or
the Fund. The Sub-Advisor believes that the research information received in
this manner provides the Fund with benefits by supplementing the research
otherwise available to the Fund. The investment advisory fees paid by the Fund
to the Advisor under the Investment Management Agreement is not reduced as a
result of receipt by the Advisor or the Sub-Advisor of research services.
The Advisor and Sub-Advisor may place portfolio transactions for other
advisory accounts advised by them, and research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Sub-Advisor in servicing all of its accounts; not all of such services may be
used by the Sub-Advisor in connection with the Fund. The Sub-Advisor believes it
is not possible to measure separately the benefits from research services to
each of the accounts (including the Fund) they advise. 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, the Sub-Advisor believes
such costs to the Fund will not be disproportionate to the benefits received by
the Fund on a continuing basis. The Sub-Advisor 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
- 52 -
available to the Fund. In making such allocations between the Fund and other
advisory accounts, the main factors considered by the Sub-Advisor are the
investment objective, 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, and the opinions of the persons
responsible for recommending investments to the Fund and such other accounts and
funds.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS
Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
of Trust (the "Declaration") contains an express disclaimer of shareholder
liability for debts or obligations of the Fund and requires that notice of such
limited liability be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees. The Declaration further provides
for indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund solely by reason of his or her being a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Fund believes that the likelihood of such circumstances is
remote.
The Declaration and By-Laws include provisions that could limit the
ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status. The number of trustees is currently five,
but by action of two-thirds of the trustees, the Board of Trustees may from time
to time be increased or decreased. The Board of Trustees is divided into three
classes of trustees serving staggered three-year terms, with the terms of one
class expiring at each annual meeting of shareholders. If the Fund issues
Preferred Shares, the Fund may establish a separate class for the trustees
elected by the holders of the Preferred Shares. Subject to applicable provisions
of the 1940 Act, vacancies on the Board of Trustees may be filled by a majority
action of the remaining trustees. Such provisions may work to delay a change in
the majority of the Board of Trustees. The provisions of the Declaration of
Trust relating to the election and removal of trustees may be amended only by a
vote of two-thirds of the trustees then in office. The By-Laws may be amended
only by the Board of Trustees.
Generally, the Declaration requires the affirmative vote or consent by
holders of at least two-thirds of the shares outstanding and entitled to vote,
except as described below, to authorize (1) a conversion of the Fund from a
closed-end to an open-end investment company, (2) a merger or consolidation of
the Fund with any corporation, association, trust or other organization,
including a series or class of such other organization (other than a merger,
consolidation, reorganization or sale of assets with an acquiring fund that is
not an operating entity immediately prior to the transaction), (3) a sale, lease
or exchange of all or substantially all of the Fund's assets (other than in the
regular course of business of the Fund, sales of assets in connection with the
termination of the Fund as provided in the Declaration of Trust, or sale of
assets with an acquiring fund that is not an operating entity immediately prior
to the transaction), (4) in certain circumstances, a termination of the Fund,
(5) removal of Trustees by shareholders, or (6) certain transactions in which a
Principal Shareholder (as defined below) is a party to the transactions.
However, with respect to items (1), (2) and (3) above, if the applicable
transaction has been already approved by the affirmative vote of two-thirds of
the Trustees, then the majority of the outstanding voting securities as defined
in the 1940 Act (a "Majority Shareholder Vote") is required. In addition, if
- 53 -
there are then preferred shares outstanding, with respect to (1) above,
two-thirds of the preferred shares voting as a separate class shall also be
required unless the action has already been approved by two-thirds of the
Trustees, in which case then a Majority Shareholder Vote is required. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the shares otherwise required by law or by the terms of any class or
series of preferred shares, whether now or hereafter authorized, or any
agreement between the Fund and any national securities exchange. Further, in the
case of items (2) or (3) that constitute a plan of reorganization (as such term
is used in the 1940 Act) which adversely affects the preferred shares within the
meaning of section 18(a)(2)(D) of the 1940 Act, except as may otherwise be
required by law, the approval of the action in question will also require the
affirmative vote of two thirds of the preferred shares voting as a separate
class provided, however, that such separate class vote shall be by a Majority
Shareholder Vote if the action in question has previously been approved by the
affirmative vote of two-thirds of the Trustees.
Approval of shareholders is not required, however, for any transaction,
whether deemed a merger, consolidation, reorganization or otherwise whereby the
Fund issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions may be amended except by the vote of at least
two-thirds of the Shares outstanding and entitled to vote.
As noted above, pursuant to the Declaration of Trust, the affirmative
approval of two-thirds of the Shares outstanding and entitled to vote, subject
to certain exceptions, shall be required for the following transactions in which
a Principal Shareholder (as defined below) is a party: (1) the merger or
consolidation of the Fund or any subsidiary of the Fund with or into any
Principal Shareholder; (2) the issuance of any securities of the Fund to any
Principal Shareholder for cash other than pursuant to a dividend reinvestment or
similar plan available to all shareholders; (3) the sale, lease or exchange of
all or any substantial part of the assets of the Fund to any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purpose of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period); (4) the sale, lease or exchange to the Fund or any subsidiary thereof,
in exchange for securities of the Fund, of any assets of any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purposes of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period). However, shareholder approval for the foregoing transactions shall not
be applicable to (1) any transaction, including, without limitation, any rights
offering, made available on a pro rata basis to all shareholders of the Fund or
class thereof unless the Trustees specifically make such transaction subject to
this voting provision, (2) any transaction if the Trustees shall by resolution
have approved a memorandum of understanding with such Principal Shareholder with
respect to and substantially consistent with such transaction or (3) any such
transaction with any corporation of which a majority of the outstanding shares
of all classes of stock normally entitled to vote in elections of directors is
owned of record or beneficially by the Fund and its subsidiaries. As described
in the Declaration of Trust, a Principal Shareholder shall mean any corporation,
person or other entity which is the beneficial owner, directly or indirectly, of
more than 5% of the outstanding shares and shall include any affiliate or
associate (as such terms are defined in the Declaration of Trust) of a Principal
- 54 -
Shareholder. The above affirmative vote shall be in addition to the vote of the
shareholders otherwise required by law or by the terms of any class or series of
preferred shares, whether now or hereafter authorized, or any agreement between
the Fund and any national securities exchange.
The provisions of the Declaration described above could have the effect of
depriving the common shareholders of opportunities to sell their common shares
at a premium over market value by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The overall
effect of these provisions is to render more difficult the accomplishment of a
merger or the assumption of control by a third party. They provide, however, the
advantage of potentially requiring persons seeking control of a Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's investment objective and policies. The Board of
Trustees of the Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its common
shareholders.
The Declaration provides that the obligations of the Fund are not binding
upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable to any person in
connection with the Fund property or the affairs of the Fund or for any neglect
or wrongdoing of any officer, employee or agent of the Fund or for the act or
omission of any other Trustee. Nothing in the Declaration, however, protects a
Trustee against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office with or on behalf of the
Fund.
Reference should be made to the Declaration on file with the Commission
for the full text of these provisions.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Fund's common shares trade in the open market at a price that is be a function
of several factors, including dividend levels (which are in turn affected by
expenses), NAV, call protection, price, dividend stability, relative demand for
and supply of such shares in the market, general market and economic conditions
and other factors. Because shares of a closed-end investment company may
frequently trade at prices lower than NAV, the Trustees, in consultation with
the Fund's Advisor, Sub-Advisor and the corporate finance services and
consulting agent that the Advisor has retained from time to time, may review
possible actions to reduce any such discount. Actions may include the repurchase
of such shares in the open market or in private transactions, the making of a
tender offer for such shares, or the conversion of the Fund to an open-end
investment company. There can be no assurance, however, that the Trustees will
decide to take any of these actions, or that share repurchases or tender offers,
if undertaken, will reduce a market discount. After any consideration of
potential actions to seek to reduce any significant market discount, the
Trustees may, subject to their fiduciary obligations and compliance with
applicable state and federal laws, authorize the commencement of a
share-repurchase program or tender offer. The size and timing of any such share
repurchase program or tender offer will be determined by the Trustees in light
- 55 -
of the market discount of the common shares, trading volume of the common
shares, information presented to the Trustees regarding the potential impact of
any such share repurchase program or tender offer, and general market and
economic conditions. There can be no assurance that the Fund will in fact effect
repurchases of or tender offers for any of its common shares. Before deciding
whether to take any action if the Fund's common shares trade below NAV, the
Trustees would consider all relevant factors, including the extent and duration
of the discount, the liquidity of the Fund's portfolio, the impact of any action
that might be taken on the Fund or its shareholders and market considerations.
Based on these considerations, even if the Fund's shares should trade at a
discount, the Trustees may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
Further, the staff of the Commission currently requires that any tender
offer made by a closed-end investment company for its shares must be at a price
equal to the NAV of such shares on the close of business on the last day of the
tender offer. Any service fees incurred in connection with any tender offer made
by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will increase the Fund's expenses
and reduce the Fund's net income. Any share repurchase, tender offer or
borrowing that might be approved by the Trustees would have to comply with the
Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and
regulations thereunder.
Although the decision to take action in response to a discount from NAV
will be made by the Trustees at the time they consider such issue, it is the
Trustees' present policy, which may be changed by the Trustees, not to authorize
repurchases of common shares or a tender offer for such shares if (1) such
transactions, if consummated, would (a) result in the delisting of the common
shares from the NYSE MKT, or (b) impair status as a registered closed-end
investment company under the 1940 Act; (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objective and policies in order to repurchase shares; or (3)
there is, in the Board of Trustees' judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Fund, (b) general suspension of or limitation
on prices for trading securities on the NYSE MKT, (c) declaration of a banking
moratorium by Federal or state authorities or any suspension of payment by
United States or state banks in which the Fund invests, (d) material limitation
affecting the Fund or the issuers of its portfolio securities by Federal or
state authorities on the extension of credit by lending institutions or on the
exchange of non-U.S. currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (f) other event or condition which would have a material
adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Trustees may in the future modify
these conditions in light of experience with respect to the Fund.
- 56 -
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's shares outstanding and entitled to
vote; provided, however, that unless otherwise provided by law, if there are
preferred shares outstanding, the affirmative vote of two-thirds of the
preferred shares voting as a separate class shall be required; provided,
however, that such votes shall be by the affirmative vote of the majority of the
outstanding voting securities, as defined in the 1940 Act, if the action in
question was previously approved by the affirmative vote of two-thirds of the
Trustees. Such affirmative vote or consent shall be in addition to the vote or
consent of the holders of the shares otherwise required by law or by the terms
of any class or series of preferred shares, whether now or hereafter authorized,
or any agreement between the Fund and any national securities exchange. See the
Prospectus under "Closed-End Fund Structure" for a discussion of voting
requirements applicable to conversion of the Fund to an open-end company. If the
Fund converted to an open-end company, the Fund's common shares would no longer
be listed on the NYSE MKT. Any Preferred Shares would need to be redeemed and
any Borrowings may need to be repaid upon conversion to an open-end investment
company. Additionally, the 1940 Act imposes limitations on open-end funds'
investments in illiquid securities, which could restrict the Fund's ability to
invest in certain securities discussed in the Prospectus to the extent discussed
therein. Such limitations could adversely affect distributions to Fund common
shareholders in the event of conversion to an open-end fund. Shareholders of an
open-end investment company may require the company to redeem their shares on
any business day (except in certain circumstances as authorized by or under the
1940 Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of redemption. In order to avoid maintaining
large cash positions or liquidating favorable investments to meet redemptions,
open-end companies typically engage in a continuous offering of their shares.
Open-end companies are thus subject to periodic asset in-flows and out-flows
that can complicate portfolio management. The Trustees may at any time propose
conversion of the Fund to an open-end company depending upon their judgment as
to the advisability of such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below NAV will result
in an increase in the NAV of those shares that remain outstanding. However,
there can be no assurance that share repurchases or tenders at or below NAV will
result in the Fund's shares trading at a price equal to their NAV. Nevertheless,
the fact that the Fund's shares may be the subject of repurchase or tender
offers from time to time may reduce any spread between market price and NAV that
might otherwise exist.
In addition, a purchase by the Fund of its common shares will decrease the
Fund's Managed Assets which would likely have the effect of increasing the
Fund's expense ratio.
NET ASSET VALUE
The NAV of the common shares of the Fund is computed based upon the value
of the Fund's portfolio securities and other assets. The NAV is determined daily
as of the close of regular session trading on the New York Stock Exchange
(normally 4:00 p.m. eastern time). U.S. debt securities will normally be priced
using data reflecting the earlier closing of the principal markets for those
securities. The Fund calculates NAV per Common Share by subtracting the Fund's
- 57 -
liabilities (including accrued expenses, dividends payable, current and deferred
income taxes, any borrowings of the Fund and the market value of written call
options) and the liquidation value of any outstanding Preferred Shares from the
Fund's Managed Assets (the value of the securities and other investments the
Fund holds plus cash or other assets, including interest accrued but not yet
received and option premiums) and dividing the result by the total number of
common shares outstanding. The Fund relies to some extent on information
provided by MLPs, which is not necessarily timely, to estimate taxable income
allocable to MLP units held by the Fund and to estimate associated deferred tax
liability. From time to time the Fund will modify its estimates and/or
assumption regarding its deferred tax liability as new information becomes
available. To the extent the Fund modifies its estimates and/or assumptions, the
net asset value of the Fund would likely fluctuate.
The assets in the Fund's portfolio are valued daily in accordance with
Valuation Procedures (as defined below) adopted by the Trustees. The Sub-Advisor
anticipates that a majority of the Fund's assets will be valued using market
information supplied by third parties. In the event that market quotations are
not readily available, the pricing service does not provide a valuation for a
particular asset (as is the case for unlisted investments), or the valuations
are deemed unreliable, or if events occurring after the close of the principal
markets for particular securities (e.g., U.S. debt securities), but before the
Fund values its assets, would materially affect NAV, the Fund may use a fair
value method in good faith to value the Fund's securities and investments. The
use of fair value pricing by the Fund is governed by Valuation Procedures
adopted by the Trustees, and in accordance with the provisions of the 1940 Act.
For purposes of determining the NAV of the Fund, readily marketable
portfolio securities listed on any U.S. exchange other than The Nasdaq Stock
Market are valued, except as indicated below, at the last sale price on the
business day as of which such value is being determined. If there has been no
sale on such day, the securities are valued at the mean of the most recent bid
and asked prices on such day. Securities admitted to trade on Nasdaq are valued
at the Nasdaq Official Closing Price as determined by Nasdaq. Portfolio
securities traded on more than one securities exchange are valued at the last
sale price 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.
Equity securities traded in the over-the-counter market, but excluding
securities admitted to trading on Nasdaq, are valued at the closing bid prices.
Fixed income securities with a remaining maturity of 60 days or more will be
valued by the Fund using a pricing service. When price quotes are not available,
fair market value is based on prices of comparable securities. Fixed income
securities maturing within 60 days are valued by the Fund on an amortized cost
basis.
Any derivative transaction that the Fund enters into may, depending on the
applicable market environment, have a positive or negative value for purposes of
calculating NAV. Any option transaction that the Fund enters into may, depending
on the applicable market environment, have no value or a positive value.
Exchange traded options and futures contracts are valued at the closing price in
the market where such contracts are principally traded.
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The value of any portfolio security held by the Fund for which reliable
market quotations are not readily available, including illiquid securities, or
if a valuation is deemed inappropriate, will be determined under procedures
adopted by the Board of Trustees in a manner that reflects fair market value of
the security on the valuation date.
Unlisted Investments--Fair Value. When applicable, fair value is
determined by the Board of Trustees or its designee. In fair valuing the Fund's
investments, consideration is given to several factors, which may include, among
others, the following:
o the projected cash flows for the issuer or borrower;
o the fundamental business data relating to the issuer or borrower;
o an evaluation of the forces which influence the market in which
these securities are purchased and sold;
o the type, size and cost of holding;
o the financial statements of the issuer or borrower;
o the credit quality and cash flow of issuer, based on the
Sub-Advisor's or external analysis;
o the information as to any transactions in or offers for the holding;
o the price extent of public trading in similar securities (or equity
securities) of the issuer/borrower, or comparable companies;
o the coupon payments;
o the quality, value and saleability of collateral securing the
security or loan;
o the business prospects of the issuer/borrower, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the issuer's or borrower's management;
o the prospects for the issuer's or borrower's industry, and multiples
(of earnings and/or cash flow) being paid for similar businesses in
that industry;
o any decline in value over time due to the nature of the assets - for
example, an entity that has a finite-life concession agreement with
a government agency to provide a service (e.g., toll roads and
airports); and
o other relevant factors.
- 59 -
If the Board of Trustees or its designee cannot obtain a market value or
the Board of Trustees or its designee determines that the value of a security as
so obtained does not represent a fair value as of the valuation time (due to a
significant development subsequent to the time its price is determined or
otherwise), fair value for the security shall be determined pursuant to
methodologies established by the Board of Trustees (the "Valuation Procedures").
The Valuation Procedures provide that direct placements of securities of private
companies (i.e., companies with no outstanding public securities) will be valued
based upon a fair value methodology, which has typically been at cost. The
Valuation Procedures provide that securities that are convertible into publicly
traded securities (i.e., subordinated units) ordinarily will be valued at the
market value of the publicly traded security less a discount equal in amount to
the discount negotiated at the time of purchase. A report of any prices
determined pursuant to such fair value methodologies will be presented to the
Board of Trustees or a designated committee thereof no less frequently than
quarterly.
The Valuation Procedures also provide that the Board of Trustees or its
designee will review the valuation of the obligation for income taxes separately
for current taxes and deferred taxes due to the differing impact of each on the
anticipated timing of distributions by the Fund to its shareholders.
The allocation between current and deferred income taxes is determined
based upon the value of assets reported for book purposes compared to the
respective net tax bases of assets as determined for federal income tax
purposes. It is anticipated that cash distributions from MLPs in which the Fund
invests will not equal the amount of taxable income allocable to the Fund,
primarily due to depreciation and amortization recorded by MLPs which generally
results in a portion of the cash distribution received to not be recognizable as
income for tax purposes. The relative portion of such distributions not
recognized for tax purposes will vary among the MLPs, and will also vary year by
year for each MLP. The Board of Trustees or its designee will be able to
directly confirm the portion of each distribution recognized as taxable income
when it receives annual tax reporting information from each MLP. The allocation
between current and deferred income taxes also impacts the determination of the
Fund's earnings and profits, as described in Section 312 of the Internal Revenue
Code of 1986, as amended (the "Code").
TAX MATTERS
The following discussion of federal income tax matters is based on the
advice of Chapman and Cutler LLP, counsel to the Fund.
MATTERS ADDRESSED
This section and the discussion in the Prospectus provide a general
summary of the material U.S. federal income tax consequences to the persons who
purchase, own and dispose of the common shares. It does not address all federal
income tax consequences that may apply to investment in the common shares.
Unless otherwise indicated, this discussion is limited to taxpayers who are U.S.
persons, as defined herein. The discussion that follows is based on the
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provisions of the Code, on Treasury regulations promulgated thereunder as in
effect on the date hereof and on existing judicial and administrative
interpretations thereof. These authorities are subject to change and to
differing interpretations, which could apply retroactively. Potential investors
should consult their own tax advisors in determining the federal, state, local,
foreign and any other tax consequences to them of the purchase, ownership and
disposition of the common shares. This discussion does not address all tax
consequences that may be applicable to a U.S. person that is a beneficial owner
of common shares, nor does it address, unless specifically indicated, the tax
consequences to, among others, (i) persons that may be subject to special
treatment under U.S. federal income tax law, including, but not limited to,
banks, insurance companies, thrift institutions, regulated investment companies,
real estate investment trusts, tax-exempt organizations and dealers in
securities or currencies, (ii) persons that will hold common shares as part of a
position in a "straddle" or as part of a "hedging," "conversion" or other
integrated investment transaction for U.S. federal income tax purposes, (iii)
persons whose functional currency is not the U.S. dollar or (iv) persons that do
not hold common shares as capital assets within the meaning of Section 1221 of
the Code.
For purposes of this discussion, a "U.S. person" is (i) an individual
citizen or resident of the United States, (ii) a corporation or partnership
organized in or under the laws of the United States or any state thereof or the
District of Columbia (other than a partnership that is not treated as a U.S.
person under any applicable Treasury regulations), (iii) an estate the income of
which is subject to U.S. federal income taxation regardless of its source, or
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more U.S. persons
have the authority to control all the substantial decisions of such trust.
Notwithstanding clause (iv) above, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as U.S. persons prior
to such date that elect to continue to be so treated also shall be considered
U.S. persons.
TAX CHARACTERIZATION OF THE FUND FOR U.S. FEDERAL INCOME TAX PURPOSES
The Fund has elected to be treated as a regular C corporation for U.S.
federal income tax purposes. Thus, the Fund is subject to U.S. corporate income
tax on its U.S. taxable income. Such taxable income generally would include all
of the Fund's net income from the MLPs. The current U.S. federal maximum
graduated income tax rate for corporations is 35%. In addition, the United
States also imposes a 20% alternative minimum tax on the recalculated
alternative minimum taxable income of an entity treated as a corporation. Any
such U.S. corporate income tax or alternative minimum tax could materially
reduce cash available to make payments on the common shares. The Fund will also
be obligated to pay state income tax on its taxable income, either because the
states follow the federal election or because the states separately impose a tax
on the Fund.
The MLPs in which the Fund intends to invest generally are treated as
partnerships for U.S. federal income tax purposes. As a partner in the MLPs, the
Fund will be required to report its allocable share of MLP income, gain, loss,
deduction and expense, whether or not any cash is distributed from the MLPs.
The Fund intends to invest in energy MLPs, so the Fund anticipates that
the majority of the Fund's items of income, gain, loss, deduction and expense
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will be related to energy ventures. However, some items are likely to relate to
the temporary investment of the Fund's capital, which may be unrelated to energy
ventures.
In general, for certain periods in the investment life cycle, energy
ventures historically have generated taxable income in amounts less than the
amount of cash distributions that they have produced. The Fund anticipates that
it will not incur U.S. federal income tax on a significant portion of its cash
flow received, particularly after taking into account the Fund's current
operating expenses. However, the Fund's particular investments may not perform
consistently with historical patterns in the industry, and additional tax may be
incurred by the Fund.
Although the Fund intends to hold the interests in the MLPs for
investment, the Fund is likely to sell interests in a particular MLP from time
to time. On any such sale, the Fund generally will recognize gain or loss based
upon the difference between the consideration received for tax purposes on the
sale and the Fund's tax basis in the interest sold. The consideration received
is generally the amount paid by the purchaser plus any debt of the MLP allocated
to the Fund that will shift to the purchaser on the sale. The Fund's tax basis
in an MLP is the amount paid for the interest, increased by the Fund's allocable
share of net income and gains and the MLP's debt, if any, and capital
contributions to the MLP, and decreased for any distributions of cash received
by the Fund by reductions in the Fund's allocable share of the MLP's debt, if
any, and by the Fund's allocable share of net losses. Thus, although cash in
excess of taxable income and net tax losses may create a temporary economic
benefit to the Fund, they will increase the amount of gain (or decrease the
amount of loss) on the sale of an interest in an MLP. No favorable federal
income tax rate applies to long-term capital gains for entities treated as
corporations for federal income tax purposes, such as the Fund. Thus, the Fund
will be subject to federal income tax on its long-term capital gains, like
ordinary income, at rates of up to 35%.
In calculating the Fund's alternative minimum taxable income, certain
percentage depletion deductions and intangible drilling costs may be treated as
items of tax preference. Items of tax preference increase alternative minimum
taxable income and increase the likelihood that the Fund may be subject to the
alternative minimum tax.
The Fund is not treated as a regulated investment company for federal
income tax purposes. In order to qualify as a regulated investment company, the
income and assets of the company must meet certain minimum threshold tests.
Because the Fund invests a substantial portion of its Managed Assets in MLPs
that invest in energy ventures, the Fund does not meet such tests under current
law. In contrast to the tax rules that will apply to the Fund, a regulated
investment company generally does not pay corporate income tax. Thus, the
regulated investment company taxation rules have no application to the Fund or
common shareholders of the Fund.
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TAXATION OF THE SHAREHOLDERS
Distributions. The Fund's distributions will be treated as dividends to
common shareholders to the extent of the Fund's current or accumulated earnings
and profits as determined for federal income tax purposes.
The portion of the Fund's distributions treated as a dividend for federal
income tax purposes should be treated as qualified dividend income for federal
income tax purposes, subject to certain holding period and other requirements.
The maximum federal income tax rate for individuals on qualified dividend income
is currently generally 20%. Dividends may also be subject to a Medicare tax of
3.8%. Corporations are generally subject to tax on dividends at a maximum 35%
rate, but corporations may be eligible to exclude 70% of the dividends if
certain holding period requirements are met.
If a Fund distribution exceeds the Fund's current and accumulated earnings
and profits, the distribution will be treated as a non-taxable adjustment to the
basis of the common shares to the extent of such basis, and then as capital gain
to the extent of the excess distribution. Such gain will be long-term capital
gain if the holding period for the common shares is more than one year.
Individuals are currently subject to a maximum tax rate of 20% on long-term
capital gains. Gains may also be subject to a Medicare tax of 3.8%. Corporations
are taxed on capital gains at their ordinary graduated rates.
A corporation's earnings and profits are generally calculated by making
certain adjustments to the corporation's reported taxable income. Based upon the
historic performance of similar MLPs, the Fund anticipates that the distributed
cash from the MLPs in its portfolio will exceed the Fund's earnings and profits.
Thus, the Fund anticipates that only a portion of its distributions will be
treated as dividends to its common shareholders for federal income tax purposes.
Special rules apply to the calculation of earnings and profits for
corporations invested in energy ventures. The Fund's earnings and profits will
be calculated using (i) straight-line depreciation rather than a percentage
depletion method and (ii) five-year and ten-year amortization of drilling costs
and exploration and development costs, respectively. Thus, these deductions may
be significantly lower for purposes of calculating earnings and profits than
they are for purposes of calculating taxable income. Because of these
differences, the Fund may make distributions out of earnings and profits,
treated as dividends, in years in which Fund distributions exceed the Fund's
taxable income.
A common shareholder participating in the Fund's automatic dividend
reinvestment plan will be taxed upon the reinvested amount as if actually
received by the participating common shareholder and the participating common
shareholder reinvested such amount in additional Fund common shares.
The Fund will notify common shareholders annually as to the federal income
tax status of Fund distributions to them.
- 63 -
Distributions from the Fund after December 31, 2013 may be subject to a
U.S. withholding tax of 30% in the case of distributions to (i) certain non-U.S.
financial institutions that have not entered into an agreement with the U.S.
Treasury to collect and disclose certain information and are not resident in a
jurisdiction that has entered into such an agreement with the U.S. Treasury and
(ii) certain other non-U.S. entities that do not provide certain certifications
and information about the entity's U.S. owners.
Sale of Shares. Upon the sale of common shares, a common shareholder will
generally recognize capital gain or loss measured by the difference between the
amount received on the sale and the common shareholder's tax basis of common
shares sold. As discussed above, such tax basis may be less than the price paid
for the common shares as a result of Fund distributions in excess of the Fund's
earnings and profits. Such capital gain or loss will generally be long-term
capital gain or loss, if such common shares were capital assets held for more
than one year. The federal income tax treatment of long-term capital gains is
described above. The deductibility of capital losses is subject to limitations.
In addition, the gross proceeds from dispositions of interests in the Fund after
December 31, 2016 may be subject to a U.S. withholding tax of 30% in the case of
payments to (i) certain non-U.S. financial institutions that have not entered
into an agreement with the U.S. Treasury to collect and disclose certain
information and are not resident in a jurisdiction that has entered into such an
agreement with the U.S. Treasury and (ii) certain other non-U.S. entities that
do not provide certain certifications and information about the entity's U.S.
owners.
Medicare Tax. Under the "Health Care and Education Reconciliation Act of
2010," income from the Fund may also be subject to a new 3.8% "Medicare tax"
imposed for taxable years beginning after 2012 This tax will generally apply to
the net investment income of a shareholder who is an individual, trust or estate
if such shareholder's adjusted gross income exceeds certain threshold amounts,
which are $250,000 in the case of a married couple filing joint returns and
$200,000 in the case of single individuals.
Information Reporting and Withholding. The Fund will be required to report
annually to the Internal Revenue Service (the "IRS"), and to each common
shareholder, the amount of distributions and consideration paid in redemptions,
and the amount withheld for federal income taxes, if any, for each calendar
year, except as to exempt holders (including certain corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, and individual
retirement accounts). Each common shareholder (other than common shareholders
who are not subject to the reporting requirements without supplying any
documentation) that is a U.S. person will be required to provide the Fund, under
penalties of perjury, an IRS Form W-9 or an equivalent form containing the
common shareholder's name, address, correct federal taxpayer identification
number and a statement that the common shareholder is not subject to backup
withholding. Should a non-exempt common shareholder fail to provide the required
certification, backup withholding will apply. The current backup withholding
rate is 28%. Backup withholding is not an additional tax. Any such withholding
will be allowed as a credit against the common shareholder's federal income tax
liability provided the required information is furnished to the IRS.
- 64 -
TAX CONSEQUENCES OF CERTAIN INVESTMENTS
Federal Income Taxation of MLPs. MLPs are generally intended to be taxed
as partnerships for federal income tax purposes. As a partnership, an MLP is
treated as a pass-through entity for federal income tax purposes. This means
that the federal income items of the MLP, though calculated and determined at
the partnership level, are allocated among the partners in the MLP and are
included directly in the calculation of the taxable income of the partners
whether or not cash flow is distributed from the MLP. The MLP files an
information return, but normally pays no federal income tax.
MLPs are often publicly traded. Publicly traded partnerships are generally
treated as corporations for federal income tax purposes. However, if an MLP
satisfies certain income character requirements, the MLP will generally continue
to be treated as partnership for federal income tax purposes. Under these
requirements, an MLP must receive at least 90% of its gross income from certain
"qualifying income" sources.
Qualifying income for this purpose generally includes interest, dividends,
real property rents, real property gains, and income and gain from the
exploration, development, mining or production, processing, refining,
transportation or marketing of any mineral or natural resource (including
fertilizer, geothermal energy, and timber). As discussed above, the Fund
currently invests in energy MLPs that derive income from such sources, so the
income of the MLPs should qualify as qualifying income.
As discussed above, the tax items of an MLP are allocated through to the
partners of the MLP whether or not an MLP makes any distributions of cash. In
part because estimated tax payments are payable quarterly, partnerships often
make quarterly cash distributions. A distribution from a partnership will
generally be treated as a non-taxable adjustment to the basis of the Fund's
interest in the partnership to the extent of such basis, and then as gain to the
extent of the excess distribution. The gain will generally be capital gain, but
a variety of rules could potentially recharacterize the gain as ordinary income.
The Fund's initial tax basis is the price paid for the MLP interest plus any
debt of the MLP allocated to the Fund. The tax basis is decreased for
distributions received by the Fund, by reductions in the Fund's allocable share
of the MLP's debt, if any, and by the Fund's allocable share of net losses, and
increased for capital contributions and by the Fund's allocable share of net
income and gains.
When interests in a partnership are sold, the difference between (i) the
sum of the sales price and the Fund's share of debt of the partnership that will
be allocated to the purchaser and (ii) the Fund's adjusted tax basis will be
taxable gain or loss, as the case may be.
The Fund should receive a Form K-1 from each MLP, showing its share of
each item of MLP income, gain, loss, deductions and expense. The Fund will use
that information to calculate its taxable income and its earnings and profits.
Because the Fund has elected to be taxed as a corporation, the Fund will
report the tax items of the MLPs and any gain or loss on the sale of interests
in the MLPs. The Fund's common shareholders will be viewed for federal income
tax purposes as having income or loss on their investment in the Fund rather
- 65 -
than in the underlying MLPs. Common shareholders will receive a Form 1099 from
the Fund based upon the distributions made (or deemed to have been made) rather
than based upon the income, gain, loss or deductions of the MLPs in which the
Fund invests.
Other Investments. The Fund may attempt to, generate premiums from the
sale of call options. These premiums typically will result in short-term capital
gains to the Fund. Transactions involving the disposition of the Fund's
underlying securities (whether pursuant to the exercise of a call option, put
option or otherwise) will give rise to capital gains or losses. Because the Fund
does not have control over the exercise of the call options it writes, such
exercises or other required sales of the underlying stocks may cause the Fund to
realize capital gains or losses at inopportune times.
Certain of the Fund's investment practices may be 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 an ordinary loss or a deduction into a capital loss
(the deductibility of which is more limited) or (iii) cause the Fund to
recognize income or gain without a corresponding receipt of cash. The Fund will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these provisions, if possible.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds. In reports or other communications to shareholders of the Fund
or in advertising materials, the Fund may compare its performance with that of
(1) other investment companies listed in the rankings prepared by Lipper, Inc.
("Lipper"), Morningstar Inc. or other independent services; publications such as
Barrons, Business Week, Forbes, Fortune, Institutional Investor, Kiplinger's
Personal Finance, Money, Morningstar Mutual Fund Values, The New York Times, The
Wall Street Journal and USA Today; or other industry or financial publications
or (2) the Standard & Poor's Index of 500 Stocks, the Dow Jones Industrial
Average, NASDAQ Composite Index and other relevant indices and industry
publications. Comparison of the Fund to an alternative investment should be made
with consideration of differences in features and expected performance. The Fund
may obtain data from sources or reporting services, such as Bloomberg Financial
and Lipper, that the Fund believes to be generally accurate.
From time to time, the Fund may quote the Fund's total return, aggregate
total return or yield in advertisements or in reports and other communications
to shareholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and type of the respective investment companies' portfolio
securities.
- 66 -
The Fund's "average annual total return" is computed according to a
formula prescribed by the Commission. The formula can be expressed as follows:
Average Annual Total Return will be computed as follows:
ERV = P(1+T)/n/
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10-year periods at the end of
the 1-, 5-, or 10-year periods (or fractional portion).
The Fund may also quote after-tax total returns to show the impact of
assumed federal income taxes on an investment in the Fund. The Fund's total
return "after taxes on distributions" shows the effect of taxable distributions,
but not any taxable gain or loss, on an investment in shares of the Fund for a
specified period of time. The Fund's total return "after taxes on distributions
and sale of Fund shares" shows the effect of both taxable distributions and any
taxable gain or loss realized by the shareholder upon the sale of Fund shares at
the end of a specified period. To determine these figures, all income,
short-term capital gain distributions, and long-term capital gains distributions
are assumed to have been taxed at the highest marginal individualized federal
tax rate then in effect. Those maximum tax rates are applied to distributions
prior to reinvestment and the after-tax portion is assumed to have been
reinvested in the Fund. State and local taxes are ignored.
Actual after-tax returns depend on a shareholder's tax situation and may
differ from those shown. After-tax returns reflect past tax effects and are not
predictive of future tax effects.
Average Annual Total Return (After Taxes on Distributions) will be
computed as follows:
ATV/D/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV/D/ = ending value of a hypothetical $1,000 investment made at the
beginning of the period, at the end of the period (or
fractional portion thereof), after taxes on fund distributions
but not after taxes on redemptions.
- 67 -
Average Annual Total Return (After Taxes on Distributions and Sale of Fund
Shares) will be computed as follows:
ATV/DR/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on
distributions and redemption)
n = number of years
ATV/DR/ = ending value of a hypothetical $1,000 investment made at the
beginning periods, at the end of the periods (or fractional
portion thereof), after taxes on fund distributions and
redemptions.
Quotations of yield for the Fund will be based on all investment income
per share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
Yield = 2 [( a-b/cd +1)/6/ - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
Past performance is not indicative of future results. At the time
shareholders sell their shares, they may be worth more or less than their
original investment.
EXPERTS
The Financial Highlights that appear in the Prospectus and the Financial
Statements of the Fund as of and for the year ended November 30, 2012,
incorporated by reference in this Statement of Additional Information, have been
audited by Deloitte & Touche LLP, an independent registered public accounting
firm, as set forth in their report on the 2012 financial statements and the
financial highlights for the five years in the period then ended thereon
incorporated by reference in this Statement of Additional Information, and is
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing services. Deloitte & Touche LLP provides
auditing services to the Fund. The principal business address of Deloitte &
Touche LLP is 111 South Wacker Drive, Chicago, Illinois 60606.
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
The Bank of New York Mellon, One Wall Street, New York, New York 10286
serves as custodian for the Fund. As such, The Bank of New York Mellon has
custody of all securities and cash of the Fund and attends to the collection of
principal and income and payment for and collection of proceeds of securities
- 68 -
bought and sold by the Fund. BNY Mellon Investment Servicing (US) Inc., 301
Bellevue Parkway, Wilmington, Delaware 19809, is the transfer agent, registrar,
dividend disbursing agent and shareholder servicing agent for the Fund and
provides certain clerical, bookkeeping, shareholder servicing and administrative
services necessary for the operation of the Fund and maintenance of shareholder
accounts. BNY Mellon Investment Servicing (US) Inc. also provides certain
accounting and administrative services to the Fund pursuant to an Administration
and Accounting Services Agreement, including maintaining the Fund's books of
account, records of the Fund's securities transactions, and certain other books
and records; acting as liaison with the Fund's independent registered public
accounting firm and providing the independent registered public accounting firm
with certain Fund accounting information; and providing other continuous
accounting and administrative services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Commission. The Fund's Prospectus, any prospectus supplement and this
Statement of Additional Information do not contain all of the information set
forth in the Registration Statement, including any exhibits and schedules
thereto. For further information with respect to the Fund and the shares offered
hereby, reference is made to the Fund's Registration Statement. Statements
contained in the Fund's Prospectus, any prospectus supplement and this Statement
of Additional Information as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Copies of the Registration Statement may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission.
- 69 -
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Fund's financial statements and financial highlights and the reports
of Deloitte & Touche LLP thereon, contained in the following documents filed by
the Fund with the Commission, are hereby incorporated by reference into, and are
made part of, this Statement of Additional Information: The Fund's Annual Report
for the year ended November 30, 2012 contained in the Fund's Form N-CSR filed
with the Commission on February 6, 2013. A copy of such Annual Report must
accompany the delivery of this Statement of Additional Information.
F-1
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS GROUP -- A BRIEF DESCRIPTION OF CERTAIN STANDARD
& POOR'S RATINGS GROUP, A DIVISION OF THE MCGRAW-HILL COMPANIES ("STANDARD &
POOR'S" OR "S&P") RATING SYMBOLS AND THEIR MEANINGS (AS PUBLISHED BY S&P)
FOLLOWS:
A Standard & Poor's issue credit rating is a forward-looking opinion about
the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program (including ratings on medium-term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes into
account the currency in which the obligation is denominated. The opinion
reflects Standard & Poor's view of the obligor's capacity and willingness to
meet its financial commitments as they become due, and may assess terms, such as
collateral security and subordination, which could affect ultimate payment in
the event of default.
Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days--including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on Standard & Poor's
analysis of the following considerations:
o Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with
the terms of the obligation;
o Nature of and provisions of the obligation; and
o Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
Issue ratings are an assessment of default risk, but may incorporate an
assessment of relative seniority or ultimate recovery in the event of default.
Junior obligations are typically rated lower than senior obligations, to reflect
the lower priority in bankruptcy as noted above. (Such differentiation may apply
when an entity has both senior and subordinated obligations, secured and
unsecured obligations, or operating company and holding company obligations.)
A-1
AAA
An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA
An obligation rated 'AA' differs from the highest-rated obligations only
to a small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A
An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB
An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC, AND C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB
An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B
An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
A-2
CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C
A 'C' rating is assigned to obligations that are currently highly
vulnerable to nonpayment, obligations that have payment arrearages allowed by
the terms of the documents, or obligations of an issuer that is the subject of a
bankruptcy petition or similar action which have not experienced a payment
default. Among others, the 'C' rating may be assigned to subordinated debt,
preferred stock or other obligations on which cash payments have been suspended
in accordance with the instrument's terms or when preferred stock is the subject
of a distressed exchange offer, whereby some or all of the issue is either
repurchased for an amount of cash or replaced by other instruments having a
total value that is less than par.
D
An obligation rated 'D' is in payment default. The 'D' rating category is
used when payments on an obligation, including a regulatory capital instrument,
are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action if payments on an obligation
are jeopardized. An obligation's rating is lowered to 'D' upon completion of a
distressed exchange offer, whereby some or all of the issue is either
repurchased for an amount of cash or replaced by other instruments having a
total value that is less than par.
PLUS (+) OR MINUS (-)
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major rating
categories.
NR
This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
A-3
SHORT-TERM ISSUE CREDIT RATINGS
A-1
A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2
A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3
A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B
A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
A-4
C
A short-term obligation rated 'C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
D
A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation, including a regulatory capital
instrument, are not made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
SPUR (STANDARD & POOR'S UNDERLYING RATING)
This is a rating of a stand-alone capacity of an issue to pay debt service
on a credit-enhanced debt issue, without giving effect to the enhancement that
applies to it. These ratings are published only at the request of the debt
issuer/obligor with the designation SPUR to distinguish them from the
credit-enhanced rating that applies to the debt issue. Standard & Poor's
maintains surveillance of an issue with a published SPUR.
MUNICIPAL SHORT-TERM NOTE RATINGS DEFINITIONS
A Standard & Poor's U.S. municipal note rating reflects Standard & Poor's
opinion about the liquidity factors and market access risks unique to the notes.
Notes due in three years or less will likely receive a note rating. Notes with
an original maturity of more than three years will most likely receive a
long-term debt rating. In determining which type of rating, if any, to assign,
Standard & Poor's analysis will review the following considerations:
o Amortization schedule--the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and
o Source of payment--the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
A-5
Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2
Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3
Speculative capacity to pay principal and interest.
DUAL RATINGS
Standard and Poor's assigns "dual" ratings to all debt issues that have a
put option or demand feature as part of their structure. The first rating
addresses the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term rating symbols
are used for bonds to denote the long-term maturity and the short-term rating
symbols for the put option (for example, 'AAA/A-1+'). With U.S. municipal
short-term demand debt, note rating symbols are used with the short-term issue
credit rating symbols (for example, 'SP-1+/A-1+').
ACTIVE QUALIFIERS (CURRENTLY APPLIED AND/OR OUTSTANDING)
I
This suffix is used for issues in which the credit factors, terms, or
both, that determine the likelihood of receipt of payment of interest are
different from the credit factors, terms or both that determine the likelihood
of receipt of principal on the obligation. The 'i' subscript indicates that the
rating addresses the interest portion of the obligation only. The 'i' subscript
will always be used in conjunction with the 'p' subscript, which addresses the
likelihood of receipt of principal. For example, a rated obligation could be
assigned ratings of 'AAAp NRi' indicating that the principal portion is rated
'AAA' and the interest portion of the obligation is not rated.
L
Ratings qualified with 'L' apply only to amounts invested up to federal
deposit insurance limits.
A-6
P
This suffix is used for issues in which the credit factors, the terms,
or both, that determine the likelihood of receipt of payment of principal are
different from the credit factors, terms or both that determine the likelihood
of receipt of interest on the obligation. The 'p' subscript indicates that the
rating addresses the principal portion of the obligation only. The 'p' subscript
will always be used in conjunction with the 'i' subscript, which addresses
likelihood of receipt of interest. For example, a rated obligation could be
assigned ratings of 'AAAp NRi' indicating that the principal portion is rated
'AAA' and the interest portion of the obligation is not rated.
PI
Ratings with a 'pi' suffix are based on an analysis of an issuer's
published financial information, as well as additional information in the public
domain. They do not, however, reflect in-depth meetings with an issuer's
management and therefore may be based on less comprehensive information than
ratings without a 'pi' subscript. Ratings with a 'pi' subscript are reviewed
annually based on a new year's financial statement, but may be reviewed on an
interim basis if a major event occurs that may affect the issuer's credit
quality.
PRELIMINARY
Preliminary ratings, with the 'prelim' suffix, may be assigned to obligors
or obligations, including financial programs, in the circumstances described
below. Assignment of a final rating is conditional on the receipt by Standard &
Poor's of appropriate documentation. Standard & Poor's reserves the right not to
issue a final rating. Moreover, if a final rating is issued, it may differ from
the preliminary rating.
o Preliminary ratings may be assigned to obligations, most commonly
structured and project finance issues, pending receipt of final
documentation and legal opinions.
o Preliminary ratings are assigned to Rule 415 Shelf Registrations. As
specific issues, with defined terms, are offered from the master
registration, a final rating may be assigned to them in accordance
with Standard & Poor's policies.
o Preliminary ratings may be assigned to obligations that will likely
be issued upon the obligor's emergence from bankruptcy or similar
reorganization, based on late-stage reorganization plans,
documentation and discussions with the obligor. Preliminary ratings
may also be assigned to the obligors. These ratings consider the
anticipated general credit quality of the reorganized or
postbankruptcy issuer as well as attributes of the anticipated
obligation(s).
o Preliminary ratings may be assigned to entities that are being
formed or that are in the process of being independently established
when, in Standard & Poor's opinion, documentation is close to final.
Preliminary ratings may also be assigned to these entities'
obligations.
A-7
o Preliminary ratings may be assigned when a previously unrated entity
is undergoing a well-formulated restructuring, recapitalization,
significant financing or other transformative event, generally at
the point that investor or lender commitments are invited. The
preliminary rating may be assigned to the entity and to its proposed
obligation(s). These preliminary ratings consider the anticipated
general credit quality of the obligor, as well as attributes of the
anticipated obligation(s) assuming successful completion of the
transformative event. Should the transformative event not occur,
Standard & Poor's would likely withdraw these preliminary ratings.
o A preliminary recovery rating may be assigned to an obligation that
has a preliminary issue credit rating.
SF
The (sf) suffix is assigned to all issues and issuers to which a
regulation, such as the European Union Regulation on Credit Rating Agencies,
requires the assignment of an additional symbol which distinguishes a structured
finance instrument or obligor (as defined in the regulation) from any other
instrument or obligor. The addition of this subscript to a credit rating does
not change the definition of that rating or our opinion about the issue's or
issuer's creditworthiness.
T
This symbol indicates termination structures that are designed to honor
their contracts to full maturity or, should certain events occur, to terminate
and cash settle all of their contracts before their final maturity date.
UNSOLICITED
Unsolicited ratings are those credit ratings assigned at the initiative of
Standard & Poor's and not at the request of the issuer or its agents.
INACTIVE QUALIFIERS (NO LONGER APPLIED OR OUTSTANDING)
*
This symbol indicated continuance of the ratings is contingent upon
Standard & Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows. Discontinued use in August
1998.
C
This qualifier was used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if the
A-8
long-term credit rating of the issuer is below an investment-grade level and/or
the issuer's bonds are deemed taxable. Discontinued use in January 2001.
PR
The letters 'pr' indicate that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of or the risk of default
upon failure of such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
Q
A 'q' subscript indicates that the rating is based solely upon
quantitative analysis of publicly available information. Discontinued use in
April 2001.
R
The 'r' modifier was assigned to securities containing extraordinary
risks, particularly market risks, that are not covered in the credit rating. The
absence of an 'r' modifier should not be taken as an indication that an
obligation will not exhibit extraordinary non-credit related risks. Standard &
Poor's discontinued the use of the 'r' modifier for most obligations in June
2000 and for the balance of the obligations (mainly structured finance
transactions) in November 2002.
MOODY'S INVESTORS SERVICE, INC. -- A BRIEF DESCRIPTION OF CERTAIN MOODY'S
INVESTORS SERVICE, INC. ("MOODY'S") RATING SYMBOLS AND THEIR MEANINGS (AS
PUBLISHED BY MOODY'S) FOLLOWS:
LONG-TERM OBLIGATION RATINGS
Moody's long-term ratings are opinions of the relative credit risk of
financial obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings use Moody's Global Scale and reflect both the likelihood
of default and any financial loss suffered in the event of default.
Aaa
Obligations rated Aaa are judged to be of the highest quality, subject to
the lowest level of credit risk.
Aa
Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A-9
A
Obligations rated A are judged to be upper-medium grade and are subject to
low credit risk.
Baa
Obligations rated Baa are judged to be medium-grade and subject to
moderate credit risk and as such may possess certain speculative
characteristics.
Ba
Obligations rated Ba are judged to be speculative and are subject to
substantial credit risk.
B
Obligations rated B are considered speculative and are subject to high
credit risk.
Caa
Obligations rated Caa are judged to be speculative of poor standing and
are subject to very high credit risk.
Ca
Obligations rated Ca are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.
C
Obligations rated C are the lowest rated and are typically in default with
little prospect for recovery of principal or interest.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category. Additionally, a "(hyb)" indicator is appended to
all ratings of hybrid securities issued by banks, insurers, finance companies,
and securities firms.
MEDIUM-TERM NOTE PROGRAM RATINGS
Moody's assigns ratings to medium-term note (MTN) programs and to the
individual debt securities issued from them (referred to as drawdowns or notes).
A-10
MTN program ratings are intended to reflect the ratings likely to be
assigned to drawdowns issued from the program with the specific priority of
claim (e.g. senior or subordinated). To capture the contingent nature of a
program rating, Moody's assigns provisional ratings to MTN programs. A
provisional rating is denoted by (P) in front of the rating when the assignment
of a final rating is subject to the fulfillment of contingencies but is highly
likely that the rating will become definitive after all documents are received
or an obligation is issued into the market.
The rating assigned to a drawdown from a rated MTN or bank/deposit note
program is definitive in nature, and may differ from the program rating if the
drawdown is exposed to additional credit risks besides the issuer's default,
such as links to the defaults of other issuers, or has other structural features
that warrant a different rating. In some circumstances, no rating may be
assigned to a drawdown.
Moody's encourages market participants to contact Moody's Ratings Desks or
visit www.moody's.com directly if they have questions regarding ratings for
specific notes issued under a medium-term note program. Unrated notes issued
under an MTN program may be assigned an NR (not rated) symbol.
SHORT-TERM OBLIGATION RATINGS
Moody's short-term ratings are opinions of the ability of issuers to honor
short-term financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted.
Moody's employs the following designations to indicate the relative
repayment ability of rated issuers:
P-1
Issuers (or supporting institutions) rated Prime-1 have a superior ability
to repay short-term debt obligations.
P-2
Issuers (or supporting institutions) rated Prime-2 have a strong ability
to repay short-term debt obligations.
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within
any of the Prime rating categories.
Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced
by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
A-11
U.S. MUNICIPAL SHORT-TERM OBLIGATION RATINGS
There are three rating categories for short-term municipal obligations
that are considered investment grade. These ratings are designated as Municipal
Investment Grade (MIG) and are divided into three levels -- MIG 1 through MIG 3.
In addition, those short-term obligations that are of speculative quality are
designated SG, or speculative grade. MIG ratings expire at the maturity of the
obligation.
MIG 1
This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG 2
This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
MIG 3
This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG
This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
U.S. MUNICIPAL DEMAND OBLIGATION RATINGS
In the case of variable rate demand obligations (VRDOs), a two-component
rating is assigned; a long or short-term debt rating and a demand obligation
rating. The first element represents Moody's evaluation of the degree of risk
associated with scheduled principal and interest payments. The second element
represents Moody's evaluation of the degree of risk associated with the ability
to receive purchase price upon demand ("demand feature"). The second element
uses a rating variation of the MIG scale called the Variable Municipal
Investment Grade or VMIG rating.
A-12
VMIG 1
This designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG 2
This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG 3
This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
SG
This designation denotes speculative-grade credit quality. Demand features
rated in this category may supported by a liquidity provider that does not have
an investment grade short-term rating or may lack the structural and/or legal
protections necessary to ensure the timely payment of purchase price upon
demand.
FITCH RATINGS -- A BRIEF DESCRIPTION OF CERTAIN FITCH RATINGS ("FITCH")
RATINGS SYMBOLS AND THEIR MEANINGS (AS PUBLISHED BY FITCH) FOLLOWS:
INTERNATIONAL ISSUER AND CREDIT RATING SCALES
The Primary Credit Rating Scales (those featuring the symbols 'AAA'-'D'
and 'F1'-'D') are used for debt and financial strength ratings.
LONG-TERM RATING SCALES--ISSUER CREDIT RATING SCALES
Rated entities in a number of sectors, including financial and
non-financial corporations, sovereigns and insurance companies, are generally
assigned Issuer Default Ratings (IDRs). IDRs opine on an entity's relative
vulnerability to default on financial obligations. The "threshold" default risk
addressed by the IDR is generally that of the financial obligations whose
non-payment would best reflect the uncured failure of that entity. As such, IDRs
also address relative vulnerability to bankruptcy, administrative receivership
or similar concepts, although the agency recognizes that issuers may also make
pre-emptive and therefore voluntary use of such mechanisms.
A-13
In aggregate, IDRs provide an ordinal ranking of issuers based on the
agency's view of their relative vulnerability to default, rather than a
prediction of a specific percentage likelihood of default.
AAA
Highest credit quality. 'AAA' ratings denote the lowest expectation of
default risk. They are assigned only in cases of exceptionally strong capacity
for payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
Very high credit quality. 'AA' ratings denote expectations of very low
default risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
High credit quality. 'A' ratings denote expectations of low default risk.
The capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.
BBB
Good credit quality. 'BBB' ratings indicate that expectations of default
risk are currently low. The capacity for payment of financial commitments is
considered adequate but adverse business or economic conditions are more likely
to impair this capacity.
BB
Speculative. 'BB' ratings indicate an elevated vulnerability to default
risk, particularly in the event of adverse changes in business or economic
conditions over time; however, business or financial flexibility exists which
supports the servicing of financial commitments.
B
Highly speculative. 'B' ratings indicate that material default risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is vulnerable to
deterioration in the business and economic environment.
CCC
Substantial credit risk. Default is a real possibility.
A-14
CC
Very high levels of credit risk. Default of some kind appears probable.
C
Exceptionally high levels of credit risk. Default is imminent or
inevitable, or the issuer is in standstill. Conditions that are indicative of a
'C' category rating of an issuer include:
a. the issuer has entered into a grace or cure period following
non-payment of a material financial obligation;
b. the issuer has entered into a temporary negotiated waiver or
standstill agreement following a payment default on a material financial
obligation; or
c. Fitch Ratings otherwise believes a condition of 'RD' or 'D' to
be imminent or inevitable, including through the formal announcement of a
coercive debt exchange.
RD
Restricted default. 'RD' ratings indicate an issuer that in Fitch Ratings'
opinion has experienced an uncured payment default on a bond, loan or other
material financial obligation but which has not entered into bankruptcy filings,
administration, receivership, liquidation or other formal winding-up procedure,
and which has not otherwise ceased business. This would include:
a. the selective payment default on a specific class or currency
of debt;
b. the uncured expiry of any applicable grace period, cure period
or default forbearance period following a payment default on a bank loan,
capital markets security or other material financial obligation;
c. the extension of multiple waivers or forbearance periods upon a
payment default on one or more material financial obligations, either in
series or in parallel; or
d. execution of a coercive debt exchange on one or more material
financial obligations.
D
Default. 'D' ratings indicate an issuer that in Fitch Ratings' opinion has
entered into bankruptcy filings, administration, receivership, liquidation or
other formal winding-up procedure, or which has otherwise ceased business.
A-15
Default ratings are not assigned prospectively to entities or their
obligations; within this context, non-payment on an instrument that contains a
deferral feature or grace period will generally not be considered a default
until after the expiration of the deferral or grace period, unless a default is
otherwise driven by bankruptcy or other similar circumstance, or by a coercive
debt exchange.
"Imminent" default typically refers to the occasion where a payment
default has been intimated by the issuer, and is all but inevitable. This may,
for example, be where an issuer has missed a scheduled payment, but (as is
typical) has a grace period during which it may cure the payment default.
Another alternative would be where an issuer has formally announced a coercive
debt exchange, but the date of the exchange still lies several days or weeks in
the immediate future.
In all cases, the assignment of a default rating reflects the agency's
opinion as to the most appropriate rating category consistent with the rest of
its universe of ratings, and may differ from the definition of default under the
terms of an issuer's financial obligations or local commercial practice.
Note: The modifiers "+" or "-" may be appended to a rating to denote relative
status within the major rating categories. Such suffixes are not added to the
'AAA' Long-Term IDR category, or to Long-Term IDR categories below 'B'.
Limitations of the Issuer Credit Rating Scale:
Specific limitations relevant to the issuer credit rating scale include:
o The ratings do not predict a specific percentage of default
likelihood over any given time period.
o The ratings do not opine on the market value of any issuer's
securities or stock, or the likelihood that this value may
change.
o The ratings do not opine on the liquidity of the issuer's
securities or stock.
o The ratings do not opine on the possible loss severity on an
obligation should an issuer default.
o The ratings do not opine on the suitability of an issuer as
counterparty to trade credit.
o The ratings do not opine on any quality related to an issuer's
business, operational or financial profile other than the
agency's opinion on its relative vulnerability to default.
Ratings assigned by Fitch Ratings articulate an opinion on discrete and
specific areas of risk. The above list is not exhaustive, and is provided for
the reader's convenience.
A-16
SHORT-TERM RATINGS -- SHORT-TERM RATINGS ASSIGNED TO ISSUERS OR OBLIGATIONS IN
CORPORATE, PUBLIC AND STRUCTURED FINANCE
A short-term issuer or obligation rating is based in all cases on the
short-term vulnerability to default of the rated entity or security stream and
relates to the capacity to meet financial obligations in accordance with the
documentation governing the relevant obligation. Short-Term Ratings are assigned
to obligations whose initial maturity is viewed as "short term" based on market
convention. Typically, this means up to 13 months for corporate, sovereign, and
structured obligations, and up to 36 months for obligations in U.S. public
finance markets.
F1
Highest short-term credit quality. Indicates the strongest intrinsic
capacity for timely payment of financial commitments; may have an added "+" to
denote any exceptionally strong credit feature.
F2
Good short-term credit quality. Good intrinsic capacity for timely payment
of financial commitments.
F3
Fair short-term credit quality. The intrinsic capacity for timely payment
of financial commitments is adequate.
B
Speculative short-term credit quality. Minimal capacity for timely payment
of financial commitments, plus heightened vulnerability to near term adverse
changes in financial and economic conditions.
C
High short-term default risk. Default is a real possibility.
RD
Restricted default. Indicates an entity that has defaulted on one or more
of its financial commitments, although it continues to meet other financial
obligations. Applicable to entity ratings only.
A-17
D
Default. Indicates a broad-based default event for an entity, or the
default of a short-term obligation.
Limitations of the Short-Term Ratings Scale:
Specific limitations relevant to the Short-Term Ratings scale include:
o The ratings do not predict a specific percentage of default
likelihood over any given time period.
o The ratings do not opine on the market value of any issuer's
securities or stock, or the likelihood that this value may
change.
o The ratings do not opine on the liquidity of the issuer's
securities or stock.
o The ratings do not opine on the possible loss severity on an
obligation should an obligation default.
o The ratings do not opine on any quality related to an issuer
or transaction's profile other than the agency's opinion on
the relative vulnerability to default of the rated issuer or
obligation.
Ratings assigned by Fitch Ratings articulate an opinion on discrete and
specific areas of risk. The above list is not exhaustive, and is provided for
the reader's convenience.
ADDITIONAL INFORMATION
'Not Rated' or 'NR': A designation of 'Not Rated' or 'NR' is used to
denote securities not rated by Fitch where Fitch has rated some, but not all,
securities comprising an issuance capital structure.
'Withdrawn': The rating has been withdrawn and the issue or issuer is no
longer rated by Fitch. Indicated in rating databases with the symbol 'WD'.
A-18
APPENDIX B
ENERGY INCOME PARTNERS, LLC
PROXY VOTING POLICIES AND PROCEDURES
If an adviser exercises voting authority with respect to client
securities, Advisers Act Rule 206(4)-6 requires the adviser to adopt and
implement written policies and procedures reasonably designed to ensure that
client securities are voted in the best interest of the client. This is
consistent with legal interpretations which hold that an adviser's fiduciary
duty includes handling the voting of proxies on securities held in client
accounts over which the adviser exercises investment or voting discretion, in a
manner consistent with the best interest of the client.
Absent unusual circumstances, EIP exercises voting authority with respect
to securities held in client accounts pursuant to provisions in its advisory
agreements. Accordingly, EIP has adopted these policies and procedures with the
aim of meeting the following requirements of Rule 206(4)-6:
o ensuring that proxies are voted in the best interest of clients;
o addressing material conflicts that may arise between EIP's interests
and those of its clients in the voting of proxies;
o disclosing to clients how they may obtain information on how EIP
voted proxies with respect to the client's securities; and
o describing to clients EIP's proxy voting policies and procedures
and, upon request, furnishing a copy of the policies and procedures
to the requesting client.
ENGAGEMENT OF INSTITUTIONAL SHAREHOLDER SERVICES INC.
Group
With the aim of ensuring that proxies are voted in the best interest of
EIP clients, EIP has engaged Institutional Shareholder Services Inc. ("ISS"),
formerly known as RiskMetrics Group, as its independent proxy voting service to
provide EIP with proxy voting recommendations, as well as to handle the
administrative mechanics of proxy voting. EIP has directed ISS to utilize its
Proxy Voting Guidelines in making recommendations to vote, as those guidelines
may be amended from time to time.
Conflicts of Interest in Proxy Voting
There may be instances where EIP's interests conflict, or appear to
conflict, with client interests in the voting of proxies. For example, EIP may
provide services to, or have an investor who is a senior member of, a company
whose management is soliciting proxies. There may be a concern that EIP would
B-1
vote in favor of management because of its relationship with the company or a
senior officer. Or, for example, EIP (or its senior executive officers) may have
business or personal relationships with corporate directors or candidates for
directorship.
EIP addresses these conflicts or appearances of conflicts by ensuring that
proxies are voted in accordance with the recommendations made by ISS, an
independent third party proxy voting service. As previously noted, in most
cases, proxies will be voted in accordance with ISS's own pre-existing proxy
voting guidelines.
Disclosure on How Proxies Were Voted
EIP will disclose to clients in its Form ADV how clients can obtain
information on how their proxies were voted, by contacting EIP at its office in
Westport, CT. EIP will also disclose in the ADV a summary of these proxy voting
policies and procedures and that upon request, clients will be furnished a full
copy of these policies and procedures.
It is the responsibility of the CCO to ensure that any requests made by
clients for proxy voting information are responded to in a timely fashion and
that a record of requests and responses are maintained in EIP's books and
records.
Proxy Materials
EIP personnel will instruct custodians to forward to ISS all proxy
materials received on securities held in EIP client accounts.
Limitations
In certain circumstances, where EIP has determined that it is consistent
with the client's best interest, EIP will not take steps to ensure that proxies
are voted on securities in the client's account. The following are circumstances
where this may occur:
* Limited Value: Proxies will not be required to be voted on
securities in a client's account if the value of the client's
economic interest in the securities is indeterminable or
insignificant (less than $1,000). Proxies will also not be required
to be voted for any securities that are no longer held by the
client's account.
* Securities Lending Program: When securities are out on loan, they
are transferred into the borrower's name and are voted by the
borrower, in its discretion. In most cases, EIP will not take steps
to see that loaned securities are voted. However, where EIP
determines that a proxy vote, or other shareholder action, is
materially important to the client's account, EIP will make a good
faith effort to recall the security for purposes of voting,
understanding that in certain cases, the attempt to recall the
security may not be effective in time for voting deadlines to be
met.
B-2
* Unjustifiable Costs: In certain circumstances, after doing a
cost-benefit analysis, EIP may choose not to vote where the cost of
voting a client's proxy would exceed any anticipated benefits to the
client of the proxy proposal.
OVERSIGHT OF POLICY
The CCO is responsible for overseeing these proxy voting policies and
procedures. In addition, the CCO will review these policies and procedures not
less than annually with a view to determining whether their implementation has
been effective and that they are operating as intended and in such a fashion as
to maintaining EIP's compliance with all applicable requirements.
RECORDKEEPING ON PROXIES
It is the responsibility of EIP's CCO to ensure that the following proxy
voting records are maintained:
o a copy of EIP's proxy voting policies and procedures;
o a copy of all proxy statements received on securities in client
accounts (EIP may rely on ISS or the SEC's EDGAR system to satisfy
this requirement);
o a record of each vote cast on behalf of a client (EIP relies on ISS
to satisfy this requirement);
o a copy of any document prepared by EIP that was material to making a
voting decision or that memorializes the basis for that decision;
o a copy of each written client request for information on how proxies
were voted on the client's behalf or for a copy of EIP's proxy
voting policies and procedures; and
o a copy of any written response to any client request for information
on how proxies were voted on their behalf or furnishing a copy of
EIP's proxy voting policies and procedures.
The CCO will see that these books and records are made and maintained in
accordance with the requirements and time periods provided in Rule 204-2 of the
Advisers Act.
For any registered investment companies advised by EIP, votes made on its
behalf will be stored electronically or otherwise recorded so that they are
available for preparation of the Form N-PX, Annual Report of Proxy Voting Record
of Registered Management Investment Company.
B-3
PART C - OTHER INFORMATION
Item 25: Financial Statements and Exhibits
1. Financial Statements:
The Registrant's audited financial statements, notes to the financial
statements and the report of independent public accounting firm thereon have
been incorporated into Part B of the Registration Statement by reference to
Registrant's Annual Report for the fiscal year ended November 30, 2012 contained
in its Form N-CSR, as described in the statement of additional information.
2. Exhibits:
a.1 Declaration of Trust dated March 25, 2004.(1)
a.2 Amendment to Declaration of Trust dated November 10, 2008.(10)
a.3 Amendment to Declaration of Trust dated November 10, 2011.(10)
a.4 Amendment to Declaration of Trust dated March 13, 2012.(10)
b. Amended and Restated By-Laws of Fund.(6)
c. None.
d. Form of Share Certificate.(2)
e. Terms and Conditions of the Dividend Reinvestment Plan.(2)
f. None.
g.1 Investment Management Agreement between Registrant and First Trust
Advisors L.P.(9)
g.2 Sub-Advisory Agreement between Registrant, First Trust Advisors L.P. and
Energy Income Partners, LLC.(9)
h.1 Form of Sales Agreement.(8)
h.2 Underwriting Agreement.*
i. None.
j. Custodian Services Agreement.(3)
k.1 Transfer Agency Services Agreement.(3)
k.2 Administration and Accounting Services Agreement.(3)
k.3 Committed Facility Agreement.(7)
l.1 Opinion and consent of Chapman and Cutler LLP.
l.2 Opinion and consent of Bingham McCutchen LLP.
m. None.
n. Consent of Independent Registered Public Accounting Firm.
o. None.
p. Subscription Agreement between Registrant and First Trust Advisors
L.P.(3)
q. None.
r.1 Code of Ethics of Registrant.(4)
r.2 Code of Ethics of First Trust Portfolios L.P.
r.3 Code of Ethics of First Trust Advisors L.P.
r.4 Code of Ethics of Energy Income Partners, LLC.(5)
s. Powers of Attorney.*
--------------------------------------------------------------------------------
* To be filed by amendment.
(1) Filed on April 1, 2004 in Registrant's Registration Statement on Form
N-2 (File No. 333-114131) and incorporated herein by reference.
(2) Filed on June 24, 2004 in Registrant's Registration Statement on Form
N-2 (File No. 333-114131) and incorporated herein by reference.
(3) Filed on November 30, 2004 in Registrant's Registration Statement on
Form N-2 (File No. 333-120853) and incorporated herein by reference.
(4) Filed on February 10, 2006 in Registrant's Registration Statement on
Form N-2 (File No. 333-131771) and incorporated herein by reference.
(5) Filed on October 14, 2008 in Registrant's Registration Statement on Form
N-2 (File No. 333-154254) and incorporated herein by reference.
(6) Filed on January 29, 2007 in Registrant's Annual Report on Form NSAR-B
(File No. 811-21529) and incorporated herein by reference.
(7) Filed on March 16, 2009 in Registrant's Registration Statement on Form
N-2 (File No. 333-154254) and incorporated herein by reference.
(8) Filed on May 19, 2009 in Registrant's Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2 (File No. 333-154254)
and incorporated herein by reference.
(9) Filed on March 2, 2012 in Registrant's Registration Statement on Form
N-2 (File No. 333-179878) and incorporated herein by reference.
(10) Filed on April 18, 2012 in Registrant's Registration Statement on Form
N-2 (File No. 333-179878) and incorporated herein by reference.
Item 26: Marketing Arrangements
Reference is made to the section entitled "Plan of Distribution" contained
in Registrant's Prospectus, filed herewith as Part A of Registrant's
Registration Statement and to information contained under the section entitled
"Plan of Distribution" in any Prospectus Supplement to the Prospectus.
Item 27: Other Expenses of Issuance and Distribution
---------------------------------------------------------- --------------------
Securities and Exchange Commission Fees $ *
---------------------------------------------------------- --------------------
Financial Industry Regulatory Authority, Inc. Fees $ *
---------------------------------------------------------- --------------------
Printing and Engraving Expenses $ *
---------------------------------------------------------- --------------------
Legal Fees $ *
---------------------------------------------------------- --------------------
Listing Fees $ *
---------------------------------------------------------- --------------------
Accounting Expenses $ *
---------------------------------------------------------- --------------------
Blue Sky Filing Fees and Expenses $ *
---------------------------------------------------------- --------------------
Miscellaneous Expenses $ *
---------------------------------------------------------- --------------------
Total $ *
---------------------------------------------------------- --------------------
* To be completed by amendment.
Item 28: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 29: Number of Holders of Securities
At ________________, 2013
--------------------------------------- --------------------------------------
Title of Class Number of Record Holders
--------------------------------------- --------------------------------------
Common Shares, $0.01 par value *
--------------------------------------- --------------------------------------
* To be completed by amendment
Item 30: Indemnification
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
(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; and
(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,
Trustee Emeritus 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 Investment Advisers
The information in the Statement of Additional Information under the captions
"Management of the Fund--Trustees and Officers" and "Sub-Advisor" is hereby
incorporated by reference.
Item 32: Location of Accounts and Records.
First Trust Advisors L.P. maintains the Declaration of Trust, By-Laws, minutes
of trustees and shareholders meetings and contracts of the Registrant, all
advisory material of the investment adviser, all general and subsidiary ledgers,
journals, trial balances, records of all portfolio purchases and sales, and all
other required records.
Item 33: Management Services
Not applicable.
Item 34: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10
percent from its net asset value as of the effective date of the
Registration Statement, or (2) the net asset value increases to an
amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. The Registrant undertakes (a) to file, during any period in which offers
or sales are being made, a post-effective amendment to this Registration
Statement:
(1) to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(2) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(b) that, for the purpose of determining liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of those securities at that time shall be deemed to be the
initial bona fide offering thereof;
(c) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering;
(d) that, for the purpose of determining liability under the Securities Act
of 1933 to any purchaser, if the Registrant is subject to Rule 430C:
each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the
Securities Act of 1933, shall be deemed to be part of and included in
this Registration Statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in this
Registration Statement or prospectus that is part of this registration
statement or made in a document incorporated or deemed incorporated by
reference into this registration statement or prospectus that is part of
this registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supercede or modify any
statement that was made in this registration statement or prospectus
that was part of this registration statement or made in any such
document immediately prior to such date of first use;
(e) that for the purpose of determining liability of the Registrant under
the Securities Act of 1933 to any purchaser in the initial distribution
of securities:
The undersigned Registrant undertakes that in a primary offering of
securities of the undersigned Registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the
undersigned Registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to the purchaser:
(1) any preliminary prospectus or prospectus of the undersigned Registrant
relating to the offering required to be filed pursuant to Rule 497 under
the Securities Act of 1933;
(2) the portion of any advertisement pursuant to Rule 482 under the
Securities Act of 1933 relating to the offering containing material
information about the undersigned Registrant or its securities provided
by or on behalf of the undersigned Registrant; and
(3) any other communication that is an offer in the offering made by the
undersigned Registrant to the purchaser.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant under Rule 497(h) under
the Securities Act of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared effective; and
b. For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional
Information.
7. Upon each issuance of securities pursuant to this Registration
Statement, the Registrant undertakes to file a form of prospectus and/or
prospectus supplement pursuant to Rule 497 and a post-effective
amendment to the extent required by the Securities Act of 1933 and the
rules and regulations thereunder, including, but not limited to a
post-effective amendment pursuant to Rule 462(c) or Rule 462(d) under
the Securities Act of 1933.
8. The Registrant undertakes to file a post-effective amendment pursuant to
Section 8(c) of the Securities Act of 1933 in connection with any
offering of its securities below net asset value.
9. The Registrant undertakes to file a post-effective amendment upon each
issuance of securities pursuant to this registration statement in which
such securities are sold other than for cash, including in exchange
transactions for non-control securities or for a combination of cash and
non-control securities.
10. The Registrant undertakes to file a post-effective amendment with
respect to any offering of common shares pursuant to this Registration
Statement which is structured as a linked or unit offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Wheaton, and State of Illinois, on the 12th day of
March, 2013.
FIRST TRUST ENERGY INCOME AND GROWTH
FUND
By: /s/ Mark R. Bradley
--------------------------------------
Mark R. Bradley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
-------------------------------------- ------------------------------------ ------------------------------------
Signature Title Date
-------------------------------------- ------------------------------------ ------------------------------------
/s/ Mark R. Bradley President and Chief Executive March 12, 2013
----------------------------- Officer (Principal Executive
Mark R. Bradley Officer)
-------------------------------------- ------------------------------------ ------------------------------------
/s/ James M. Dykas Chief Financial Officer, Chief March 12, 2013
----------------------------- Accounting Officer and Treasurer
James M. Dykas (Principal Financial and Accounting
Officer)
-------------------------------------- ------------------------------------ ------------------------------------
INDEX TO EXHIBITS
l.1 Opinion and consent of Chapman and Cutler LLP.
l.2 Opinion and consent of Bingham McCutchen LLP.
n. Consent of Independent Registered Public Accounting Firm.
r.2 Code of Ethics of First Trust Portfolios L.P.
r.3 Code of Ethics of First Trust Advisors L.P.