As filed with the Securities and Exchange Commission on January 21, 2020
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
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No. _
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 38
First Trust Energy Income and Growth Fund Exact Name of
Registrant as Specified in Declaration of Trust
10 Westport Road, Suite C101a, 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
------------------------ ---------------------- --------------------- ---------------------- ---------------------
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Offering Registration
Being Registered Registered Per Share(1) Price(1) Fee
------------------------ ---------------------- --------------------- ---------------------- ---------------------
Common Shares, $0.01 1,000 shares $23.12 $23,120 $3.00
par value
------------------------ ---------------------- --------------------- ---------------------- ---------------------
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(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 January 16, 2020, as reported on the
NYSE American.
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.
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 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 JANUARY 21, 2020
BASE PROSPECTUS
FIRST TRUST ENERGY INCOME AND GROWTH FUND
UP TO COMMON SHARES
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. There can be no assurance that the Fund will meet its
investment objective.
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"), related public entities in the energy sector and
other energy companies, 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 (including assets obtained
through leverage as defined below) in securities of energy companies and energy
sector MLPs and energy sector MLP-related entities (each as defined on page ).
To generate additional income, the Fund writes (or sells) covered call options
on its Managed Assets. See "The Fund's Investments."
"Managed Assets" means the average daily gross asset value of the Fund
(which includes assets attributable to the Fund's preferred shares of beneficial
interest (the "Preferred Shares"), if any, and the principal amount of
Borrowings (as defined below)), 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 Fund's currently outstanding common shares of beneficial interest (the
"common shares") are, and the common shares offered in this prospectus will be,
subject to notice of issuance, listed on the NYSE American under the trading or
"ticker" symbol "FEN." The net asset value of the Fund's common shares on ,
2020 was $ per common share, and the last sale price of the common shares on
the NYSE American on such date was $ .
The Fund may offer, on an immediate, continuous or delayed basis, up
to 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. See "Description of Shares." 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. Common shares of closed-end investment companies, like
the Fund, frequently trade at a discount from their net asset value. If the
Fund's common shares trade at a discount to net asset value, the risk of loss
may increase for purchasers in an offering under this prospectus, especially for
those investors who expect to sell their common shares in a relatively short
period after purchasing shares in such an offering. See "Risks" beginning on
page .
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, 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 is subject to corporate income tax to the extent the Fund
recognizes taxable income. See "Tax Matters."
Investment Advisor and Sub-Advisor. First Trust Advisors L.P. ("First
Trust Advisors" or the "Advisor") is the Fund's investment adviser and Energy
Income Partners, LLC ("Energy Income Partners" or the "Sub-Advisor") is the
Fund's sub-adviser. See "Management of the Fund" in this prospectus and
"Investment Advisor" and "Sub-Advisor" in the Fund's Statement of Additional
Information(the "SAI").
Distributions. The Fund intends to pay quarterly distributions to common
shareholders out of legally available funds. Distributions, if any, are
determined by the Fund's Board of Trustees (the "Board of Trustees"). There is
no assurance the Fund will continue to pay regular distributions or that it will
do so at a particular rate. See "Distributions" and "Tax Matters."
Use of Leverage. The Fund is currently engaged in, and expects to continue
to engage in, the use of leverage to make additional investments to seek to
enhance the level of its current distributions to common shareholders. The Fund
may use leverage through the issuance of preferred shares of beneficial interest
("Preferred Shares") and/or through the issuance of commercial paper or notes
and/or other borrowings ("Borrowings") by the Fund. As of November 30, 2019,
aggregate leverage through Borrowings was approximately % of the Fund's Managed
Assets. The determination to use leverage is subject to the approval of Board of
Trustees. The cost associated with any issuance and use of leverage is borne by
the holders of the Fund's common shares. The use of leverage is a speculative
technique and investors should note that there are special risks and costs
associated with the leveraging of the Fund's common shares. There can be no
assurance that a leveraging strategy will be successful during any period in
which it is employed. See "Use of Leverage" and "Risks--Leverage Risk."
You should read this prospectus and the applicable prospectus supplement,
which contain important information about the Fund, before deciding whether to
invest in the common shares, and retain them 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 SAI, dated (as it may be supplemented), containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission (the "SEC") 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 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 (https://www.ftportfolios.com). Please note that the
information contained in the Fund's, Advisor's and Sub-Advisor'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
SEC's web site (http://www.sec.gov).
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 , 2020
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TABLE OF CONTENTS
PAGE
Prospectus Summary.............................................................1
Summary of Fund Expenses......................................................35
Financial Highlights..........................................................37
Market and Net Asset Value Information........................................39
The Fund......................................................................41
Use of Proceeds...............................................................41
The Fund's Investments........................................................42
Use of Leverage...............................................................48
Risks.........................................................................51
Management of the Fund........................................................70
Net Asset Value...............................................................72
Distributions.................................................................74
Dividend Reinvestment Plan....................................................74
Plan of Distribution..........................................................75
Description of Shares.........................................................77
Certain Provisions in the Declaration of Trust and By-Laws....................78
Structure of the Fund; Common Share Repurchases and Change in
Fund Structure.............................................................80
Tax Matters...................................................................81
Custodian, Administrator and Transfer Agent...................................85
Legal Opinions................................................................85
Table of Contents for the Statement of Additional Information.................86
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS AND THE APPLICABLE PROSPECTUS SUPPLEMENT. NEITHER THE FUND
NOR ANY UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH
DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT
INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR ANY UNDERWRITERS
ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER
OR SALE IS NOT PERMITTED.
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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," "believe," "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, energy and other markets,
the price at which the Fund's common shares trade in the public markets and
other factors which may be discussed in this prospectus and in the Fund's
periodic filings with the SEC.
Although the Fund believes 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
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. The Fund urges 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 Fund's
Statement of Additional Information (the "SAI"), including the documents
incorporated by reference, particularly the section entitled "Risks" beginning
on page .
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. 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 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,
2019, the Fund had 20,011,594 common shares
outstanding and net assets applicable to common
shares of $397 million. See "The Fund" below. 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 adviser,
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-adviser and is
primarily responsible for the day-to-day supervision
and investment strategy of the Fund.
First Trust Advisors, a registered investment
adviser, is an Illinois limited partnership formed in
1991. First Trust Advisors serves as investment
adviser or portfolio supervisor to investment
portfolios with approximately $ billion in assets
which it managed or supervised as of November 30,
2019.
Energy Income Partners is a limited liability company
and a registered investment adviser, 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 adviser to investment portfolios
with approximately $6.1 billion of assets which it
managed as of November 30, 2019.
THE OFFERING............. The Fund may offer, on an immediate, continuous or
delayed basis, up to 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
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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
("NAV") per share of a company's common stock
(calculated within 48 hours of pricing), absent
shareholder approval or under certain other
circumstances.
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 the Fund 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 expects to 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 within approximately three months
of receipt of such proceeds.
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 in excess of income made by MLPs in
which the Fund may invest, a portion of distributions
the Fund anticipates making to common shareholders
may consist of a return of capital and, depending on
market conditions and tax circumstances, in certain
periods, such return of capital may represent a
significant portion of the Fund's distributions. To
the extent that distributions exceed the Fund's
earnings and profits, such distributions are
generally not treated as taxable income for the
investor. Instead, the Fund's 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 from any source other
than income that adequately discloses the source or
sources of such 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
shareholder's original investment in the Fund's
common shares, and should not be confused with a
dividend from profits and earnings. 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 read any written
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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."
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, related public entities in the energy sector
and other energy companies, which the Sub-Advisor
believes offer opportunities for income and growth.
There can be no assurance that the Fund's investment
objective will be achieved. 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 of beneficial interest (the
"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. See "The Fund's Investments" and
"Risks" in this prospectus and "Investment Policies
and Techniques" in the Fund's SAI.
"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 (as defined below)),
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 Fund has adopted the following additional
non-fundamental investment policies:
o 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 Fund
considers investments in "MLP-related entities" to
include investments that offer economic exposure
to publicly traded and private MLPs, securities of
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entities holding primarily general partner or
managing member interests in MLPs and securities
that are derivatives of interests in MLPs. The
Fund considers investments in the energy sector to
include companies that derive more than a majority
of their revenues or operating income from
transporting, processing, storing, distributing,
marketing, exploring, developing, managing or
producing natural gas, natural gas liquids
("NGLs") (including propane), crude oil, refined
petroleum products, coal or electricity, or from
supplying energy-related products and services, or
any such other companies within the energy sector
as classified under the Global Industry
Classification Standards developed by MSCI, Inc.
and Standard & Poor's ("GICS"). An "energy
company" is one that derives its revenues from
transporting, processing, storing, distributing or
marketing natural gas, 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. See "The Fund's
Investments--Portfolio Composition" for a further
discussion of the Fund's principal investments.
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 term "restricted securities" refers to
securities that have not been registered under the
Securities Act of 1933, as amended (the "1933
Act"), or are held by control persons of the
issuer and securities that are subject to
contractual restrictions on their resale. 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.
See "Risks--Restricted Securities Risk."
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 "high yield" or "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 Services ("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. Below
investment grade securities are considered
speculative with respect to an issuer's capacity
to pay interest and repay principal. See
"Risks--Below Investment Grade Securities Risk."
o The Fund will not invest more than 15% 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 leverage
or market risks associated with the Fund's
portfolio.
o The Fund will not invest more than 30% of its
Managed Assets in non-U.S. securities and may
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hedge the currency risk of the non-U.S. securities
using derivative instruments. See "Risks--Non-U.S.
Securities Risk."
To generate additional income, the Fund writes (or
sells) covered call options on its Managed Assets.
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 as
soon as practicable 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, 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 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 represent an ownership interest
issued by an affiliated party of an MLP. 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. See
"The Fund's Investments--Portfolio Composition."
The Fund also may 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.
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To generate additional income, the Fund sells covered
call options on its Managed Assets.
HEDGING AND
STRATEGIC TRANSACTIONS... The Fund may, but is not required to, use various
hedging and strategic transactions ("Strategic
Transactions") to seek to reduce interest rate risks
arising from any use of 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
its Managed Assets. 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 Fund considers an option
to be "covered" if the Fund owns the security
underlying the call. See "Risks--Covered Call Options
Risk."
In addition to writing (selling) covered call options
on its Managed Assets, the Fund enters into interest
rate swaps as a principal part of its investment
strategy. In an interest rate 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). Interest rate swaps will allow the
Sub-Advisor to potentially manage the interest rate
profile of the Fund's portfolio. See "Risks--Interest
Rate Swaps Risk."
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. See
"Risks--Total Return Swaps Risk," "Risks--Equity
Swaps Risk" and "Risks--Credit Default Swaps Risk."
The Fund also may purchase derivative investments
that combine features of these instruments. See
"Additional Information About the Fund's Investments
and Investment Risks-- Strategic Transactions" and
"Other Investment Policies and Techniques" in the SAI
for more information about the foregoing Strategic
Transactions and their associated risks. The Fund
generally seeks to use these instruments and
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. See "The Fund--Investment Practices--
Strategic Transactions."
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The Fund may also enter into other Strategic
Transactions to seek to manage the risks of the
Fund's portfolio securities or for other purposes to
the extent the Sub-Advisor determines that the use of
Strategic Transactions is consistent with the Fund's
investment objective and policies and applicable
regulatory requirements. Certain of these Strategic
Transactions may provide investment leverage to the
Fund's portfolio. See "Risks-- Leverage Risk."
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.
USE OF LEVERAGE.......... The Fund is currently engaged in, and expects to
continue to engage in, the use of leverage to make
additional investments to seek to enhance the level
of its current distributions to common shareholders.
The Fund has entered into a commitment facility
agreement with BNP Paribas Prime Brokerage
International, Ltd. (as amended from time to time,
the "Commitment Facility"). As of November 30, 2019,
the maximum commitment amount was $180,000,000. As of
November 30, 2019, the principal amount of borrowings
under the Commitment Facility was $146,000,000,
representing approximately % of the Fund's Managed
Assets. As of November 30, 2019, the Fund had
$34,000,000 of unutilized funds available for
borrowing under the Commitment Facility. Borrowings
under the Commitment Facility represent the only
borrowings of the Fund as of the date of this
prospectus.
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 the issuance of commercial paper or
notes and/or other borrowings ("Borrowings"),
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 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, both the Advisor's and Sub-Advisor's
fees are higher when the Fund is leveraged. The
Advisor and the Sub-Advisor will make decisions on
whether and how much leverage the Fund will employ
based on whether it is in the best interests of the
Fund. The Advisor and the Sub-Advisor will seek
approval for and periodically review the use of
leverage with the Board of Trustees. 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
leverage is subject to the Board of Trustees'
approval and the ability of the Fund to obtain
leverage. The Fund's leverage instruments will have
seniority over the common shares. The use of
Borrowings or Preferred Shares will leverage your
investment in the Common Shares. The Fund expects to
issue additional leverage to the extent such leverage
is available. If the Fund uses additional leverage,
associated costs, if any, will be borne immediately
by common shareholders and result in a reduction of
the NAV 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,
|
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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 Fund's 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 NAV 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
leverage in addition to the Commitment Facility or,
if additional leverage is utilized, that it will be
successful in enhancing the level of the Fund's
current distributions. If the Fund is unable to
increase 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
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 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, local 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
of 1986, as amended (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. Due to the
entity-level income taxes payable by the Fund, common
shareholders of the Fund will likely receive lower
distributions than if they invested directly in the
same MLPs in which the Fund invests. However, as
discussed below, the Fund expects that a portion of
the distributions it receives from MLPs may be
treated as a return of capital. For purposes of
computing NAV, the Fund accrues deferred income taxes
for its future tax liability associated with that
portion of MLP distributions considered to be a
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
timely, to estimate deferred tax liability for
purposes of financial statement reporting and
determining the Fund's NAV. In addition, the Tax Cuts
and Jobs Act has impacted the determination of the
Fund's NAV as discussed below in "Special Risk
Considerations-- Recent Market and Economic
Developments." 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."
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Fund Assets.
o Investments in MLPs. The Fund invests primarily in
energy companies, 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.
If the MLPs were recharacterized as corporations
for federal income tax purposes, the MLPs may
themselves be subject to tax, reducing the cash
flow to the Fund. In some instances, the character
of the distributions may change if the MLPs are
recharacterized. As a partnership, an MLP
generally 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 non-cash tax deductions such as
depreciation and depletion. The Fund will incur a
current tax liability on its income allocation
from an MLP not offset by tax deductions. The
Fund's tax basis in its MLP units would be
increased by the income allocated from an MLP, and
then reduced by all distributions from the MLP
(including any distributions in excess of
allocated income), which would either increase the
Fund's taxable gain or reduce the Fund's loss
recognized upon the sale of such MLP units. The
MLPs may have losses instead of income, which the
Fund may deduct to the extent of its outside basis
in the MLPs with the losses. Such allocations of
losses will currently reduce the Fund's basis in
the MLPs, increasing the Fund's gain or reducing
the Fund's loss upon the sale of the MLP units.
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. A
reduction in the percentage of income offset by
tax deductions or an increase in sales of the
Fund's MLP holdings that result in capital gains
will reduce that portion of the Fund's
distribution from an MLP treated as a return of
capital and increase that portion treated as
income, and may result in lower after-tax
distributions to the Fund's common shareholders.
o Limitations on Interest Deductions. The Fund may
be subject to limitations on the amount of
interest deductions that it may take in each year.
Deductions for interest would be limited to 30
percent of a business's taxable income (before
interest, depreciation, and depletion). The
underlying MLP's may also be subject to a similar
limitation. The Fund intends to use leverage to
make its investments. See "Use of Leverage."
Because the limitation on interest would be based
upon income before depletion, which is sometimes a
significant deduction allocated from MLPs, the
significance of the limitation is difficult to
predict. However, it is possible that the Fund
will not be able to deduct all of its interest
expense in the year accrued. If this occurs, the
excess interest expense could be carried forward
to subsequent years, but the Fund's tax in the
year the expense is accrued could increase.
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
- 9 -
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
beneficial interest 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 the Fund pays out distributions to common
shareholders. 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. Certain qualified dividend income received
by individual shareholders would be taxed at
long-term capital gains rates, which reach a
maximum of 23.8% including a 3.8% tax on net
investment income above a certain threshold.
Distributions that are in an amount greater than
the Fund's current and accumulated earnings and
profits will represent a 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 portion of the Fund's
distributions to common shareholders will likely
represent a return of capital and, depending on
market conditions and tax circumstances, in
certain periods, such return of capital may
represent a significant portion of the Fund's
distributions. 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" and "Tax Matters."
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."
- 10 -
BENEFITS IN 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 will receive a single Form
1099 and will only be required to file income tax
returns in states in which they would ordinarily
file; 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
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 American
under the trading or "ticker" symbol "FEN." The NAV
of the Fund's common shares at the close of business
on , 2020 was $ per common share, and the
last sale price of the common shares on the NYSE
American on such date was $ .
CUSTODIAN, ADMINISTRATOR
AND TRANSFER AGENT....... BNY Mellon Investment Servicing (US) Inc. serves as
the Fund's Transfer Agent in accordance with certain
fee arrangements. The Bank of New York Mellon serves
as the Fund's Custodian, Administrator, Fund
Accountant and Board Administrator 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 NAV 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(s) 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 NAV, but in some
cases trade at a premium. The market price may be
affected by NAV, 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
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- 11 -
of the common shares of the Fund being greater than,
less than or equal to, NAV. 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 NAV 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 or near NAV 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 at a price equal
to or close to NAV 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........... Risk is inherent in all investing. The following
discussion summarizes the principal risks that you
should consider before deciding whether to invest in
the Fund. For additional information about the risks
associated with investing in the Fund, see "Risks."
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 has been designed primarily
as a long-term investment vehicle and is not intended
to be used as a short-term trading vehicle. An
investment in the Fund's Common Shares is not
intended to constitute a complete investment program
and should not be viewed as such.
Market Discount from Net Asset Value. Although the
Common Shares offered under this prospectus will be
offered at a public offering price equal to or in
excess of the NAV per share of the Fund's common
shares at the time such Common Shares are initially
sold, shares of closed-end investment companies
frequently trade at a discount from their NAV. This
characteristic is a risk separate and distinct from
the risk that the Fund's NAV per common share 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 an offering under this prospectus and
the applicable prospectus supplement. The NAV of the
Common Shares offered under this prospectus may be
reduced immediately following an offering as a result
of the payment of certain offering costs. Although
the value of the Fund's net assets is generally
considered by market participants in determining
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- 12 -
whether to purchase or sell common 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 is affected by
factors such as NAV, dividend and distribution levels
and their stability (which are in turn affected by
levels of dividend and interest payments by the
Fund's portfolio holdings, the timing and success of
the Fund's investment strategies, regulations
affecting the timing and character of the Fund's
distributions, the Fund's expenses and other
factors), supply of and demand for the common shares,
trading volume of the common shares, general market,
interest rate and economic conditions, and other
factors beyond the control of the Fund, the Fund
cannot predict whether the Common Shares offered
under this prospectus will trade at, below or above
NAV or at, below or above the public offering price
thereof.
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 through 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 the Fund to sell additional equity securities in
the future at a time and price the Fund deems
appropriate.
Management Risk and Reliance on Key Personnel. 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.
In addition, the implementation of the Fund's
investment strategy depends upon the continued
contributions of certain key employees of the Advisor
and Sub-Advisor, some of whom have unique talents and
experience and would be difficult to replace. The
loss or interruption of the services of a key member
of the portfolio management team could have a
negative impact on the Fund during the transitional
period that would be required for a successor to
assume the responsibilities of the position.
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 currently manage
and may in the future manage and/or advise other
investment funds or accounts with the same or
substantially similar investment objective and
strategies as the Fund. As a result, First Trust
Advisors, Energy Income Partners and the Fund's
portfolio managers must allocate their time and
investment ideas across multiple funds and accounts.
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 purposes of execution,
which may cause the price or brokerage costs to be
- 13 -
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,
including proprietary 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, including proprietary 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, including proprietary 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 and the terms of each of the investment
management agreement between First Trust Advisors and
the Fund and the sub-advisory agreement among First
Trust Advisors, Energy Income Partners and the Fund,
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 creates 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.
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. The Fund is not responsible for
operating MLPs and similar entities and cannot
control or monitor their compliance with applicable
tax, securities and other laws and regulations
necessary for the profitability of such investments.
Holders of MLP units could potentially become subject
to liability for all of the obligations of an MLP, if
a court determines that the rights of the unitholders
to take certain action under the limited partnership
agreement would constitute "control" of the business
of that MLP, or if a court or governmental agency
determines that the MLP is conducting business in a
state without complying with the limited partnership
statute of that state. Furthermore, the structures
- 14 -
and terms of the MLPs and other entities described in
this prospectus may not be indicative of the
structure and terms of every entity in which the Fund
invests. In addition, certain conflicts of interest
exist between common unit holders and the general
partner, including those arising from incentive
distribution payments. Conflicts of interest may
arise from incentive distribution payments paid to
the general partner, or referral of business
opportunities by the general partner or one of its
affiliates to an entity other than the MLP. Holders
of general partner or managing member interests
typically receive incentive distribution rights,
which provide them with an increasing share of the
entity's aggregate cash distributions upon the
payment of per common unit quarterly distributions
that exceed specified threshold levels above an
established minimum amount ("minimum quarterly
distribution" or "MQD"). The ability of the limited
partners or members to remove the general partner or
managing member without cause is typically very
limited. In addition, some MLPs permit the holder of
incentive distribution rights to reset, under
specified circumstances, the incentive distribution
levels and receive compensation in exchange for the
distribution rights given up in the reset.
The MLPs in which the Fund invests are primarily in
the energy sector. See "-- Investment Concentration
Risk."
The federal income tax rules relating to the auditing
of partnerships and partners have recently changed.
The Fund may have little input in any audit asserted
against an MLP and may be contractually or legally
obligated to make payments in regard to deficiencies
asserted without the ability to put forward an
independent defense.
Investment Concentration Risk. The Fund's investments
are concentrated in the group of industries that are
part of the energy sector, with a particular focus on
energy sector MLPs, energy sector MLP-related
entities and other energy companies. See "--Recent
Market and Economic Developments" for a discussion of
recent developments impacting MLPs. The Fund's
concentration in the group of industries that are
part of the energy sector may present more risk than
if the Fund were broadly diversified over multiple
sectors of the economy. A downturn in one or more
industries within the energy sector, material
declines in energy-related commodity prices, adverse
political, legislative or regulatory developments or
other events could have a larger impact on the Fund
than on an investment company that does not
concentrate in the group of industries that are part
of the energy sector. The performance of companies in
the group of industries that are part of the energy
sector may lag the performance of other sectors or
the broader market as a whole; in particular, during
a downturn like what has been experienced in recent
years in the energy sector. Certain risks inherent in
investing in the business of the types of securities
that the Fund may invest include the following:
o Commodity Pricing Risk. The operations and
financial performance of MLPs, MLP-related
entities and energy companies may be directly
affected by energy commodity prices, especially
those MLPs, MLP-related entities and energy
companies that own the underlying energy commodity
or receive payments for services that are based on
commodity prices. Such impact may be a result of
changes in the price for such commodity or a
result of changes in the price of one energy
- 15 -
commodity relative to the price of another energy
commodity (for example, the price of natural gas
relative to the price of NGLs). Commodity prices
fluctuate for several reasons, including changes
in market and economic conditions, the impact of
weather on demand, levels of domestic and
international production policies implemented by
the Organization of the Petroleum Exporting
Countries, energy conservation, domestic and
foreign governmental regulation and taxation and
the availability of local, intrastate and
interstate transportation systems. Volatility of
commodity prices which may lead to a reduction in
production or supply may also negatively impact
the performance of MLPs, MLP-related entities and
energy companies which are solely involved in the
transportation, processing, storage, 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 or indirectly tied to commodity prices
and there is uncertainty regarding these
companies' ability to maintain or grow cash
distributions to their equity holders.
o Supply and Demand Risk. As noted above, 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 operations
and 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, depressed commodity prices or access to
capital for companies engaged in exploration and
production. 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.
o Lack of Diversification of Customers and
Suppliers. Certain energy companies, energy sector
MLPs and energy sector MLP-related entities depend
upon a limited number of customers for
substantially all of their revenue. Similarly,
certain energy companies, energy sector MLPs and
energy sector MLP-related entities depend upon a
limited number of suppliers of goods or services
to continue their operations. Energy industry
downturns resulting from lower commodity prices
may put pressure on a number of these customers
and suppliers. The loss of any such customers or
suppliers, including through bankruptcy, could
materially adversely affect such companies'
results of operations and cash flow, and their
ability to make distributions to unit holders,
such as the Fund, would therefore be materially
adversely affected.
o Depletion and Exploration Risk. MLPs, MLP-related
entities and energy companies engaged in the
production (exploration, development, management
- 16 -
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. Reserves are
generally increased 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. The energy sector industries are
highly regulated. MLPs, MLP-related entities and
other energy companies are subject to significant
regulation of nearly every aspect of their
operations by federal, state and local
governmental agencies. Such regulation can change
rapidly or over time in both scope and intensity.
For example, a particular by-product or process
may be declared hazardous (sometimes
retroactively) by a regulatory agency which could
unexpectedly increase production costs. 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 other 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 cash
flow. 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 cash
flow. Any acquisition/project involves risks,
including among other things: mistaken assumptions
about revenues and costs, including synergies; the
assumption of unknown liabilities; limitations on
- 17 -
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 of such entities 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, earthquakes, tsunamis, wind 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 Weather Risk. Weather plays a role in the
seasonality of the cash flow of some energy
companies, energy sector MLPs and energy sector
MLP-related entities. Companies in the propane
industry, for example, rely on the winter season
to generate a significant portion of their
earnings. In an unusually warm winter season,
propane companies may experience decreased demand
for their product.
o Terrorism/Market Disruption Risk. MLPs,
MLP-related entities and energy companies are
subject to disruption as a result of terrorist
activities, war, and other geopolitical events,
including upheaval in the Middle East or other
energy producing regions. The U.S. government has
issued warnings that energy assets, specifically
those related to pipeline and other energy
infrastructure, production facilities and
transmission and distribution facilities, may be
targeted in future terrorist attacks. Internal
unrest, acts of violence or strained relations
between a government and energy companies or other
governments may affect the operations and
profitability of energy companies, energy sector
MLPs and energy sector MLP-related entities,
particularly marine transportation companies.
Political instability in other parts of the world
may also cause volatility and disruptions in the
market for the securities of energy companies,
energy sector MLPs and energy sector MLP-related
entities, even those that operate solely in North
America.
- 18 -
o Technology Risk. Some energy companies, energy
sector MLPs and energy sector MLP-related entities
are focused on developing new technologies and are
strongly influenced by technological changes.
Technology development efforts by energy
companies, energy sector MLPs and energy sector
MLP-related entities may not result in viable
methods or products. Energy companies, energy
sector MLPs and energy sector MLP-related entities
may bear high research and development costs,
which can limit their ability to maintain
operations during periods of organizational growth
or instability. Some energy companies, energy
sector MLPs and energy sector MLP-related entities
may be in the early stages of operations and may
have limited operating histories and smaller
market capitalizations on average than companies
in other sectors. As a result of these and other
factors, the value of investments in energy
companies, energy sector MLPs and energy sector
MLP-related entities may be considerably more
volatile than that in more established segments of
the economy.
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 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 MLPs, MLP-related entities and other energy
companies that operate assets are also subject
to the credit risk of their customers. For
example, during 2015 and 2016, customers of
many MLPs, MLP-related entities and other
energy companies that explore for and produce
oil, natural gas and NGLs filed for bankruptcy.
During the bankruptcy process, the debtor
entity may be able to reject a contract that it
has with an MLP, MLP-related entity or other
energy company that provides services for the
debtor, which services could include gathering,
processing, transporting, fractionating or
storing the debtor entity's production. If a
contract is successfully rejected during
bankruptcy, the affected MLP, MLP-related
entity or other energy company will have an
unsecured claim for damages but will likely
only recover a portion of its claim for damages
and may not recover anything at all.
Furthermore, if the terms of the contract are
not economic for the MLP, MLP-related entity or
other energy company, there may be an incentive
for the MLP or other company to renegotiate the
contract to increase the utilization of its
assets (whether or not the MLP, MLP-related
entity or other energy company has filed for
bankruptcy). In either case, an MLP or other
company that operates assets for an MLP,
MLP-related entity or other energy company that
is in financial distress could experience a
material adverse impact to its financial
performance and results of operations.
- 19 -
o Propane companies 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.
o MLPs, MLP-related entities and other energy
companies that own interstate pipelines are
subject to regulation by the Federal Energy
Regulatory Commission ("FERC") with respect to
the tariff rates they may charge for
transportation services. An adverse
determination by FERC with respect to the
tariff rates of such a company could have a
material adverse effect on its business,
financial condition, results of operations and
cash flows and its ability to pay cash
distributions or dividends.
o Marine shipping (or "tanker") companies are
exposed to many of the same risks as other
MLPs, MLP-related entities and other energy
companies. In addition, the highly cyclical
nature of the industry may lead to volatile
changes in charter rates and vessel values,
which may adversely affect a tanker company's
earnings. Fluctuations in charter rates and
vessel values result from changes in the supply
and demand for tanker capacity and changes in
the supply and demand for oil and oil products.
Historically, the tanker markets have been
volatile because many conditions and factors
can affect the supply and demand for tanker
capacity. Changes in demand for transportation
of oil over longer distances and supply of
tankers to carry that oil may materially affect
revenues, profitability and cash flows of
tanker companies. The successful operation of
vessels in the charter market depends upon,
among other things, obtaining profitable spot
charters and minimizing time spent waiting for
charters and traveling unladen to pick up
cargo. The value of tanker vessels may
fluctuate and could adversely affect the value
of tanker company securities. Declining tanker
values could affect the ability of tanker
companies to raise cash by limiting their
ability to refinance their vessels, thereby
adversely impacting tanker company liquidity.
Tanker company vessels are at risk of damage or
loss because of events such as mechanical
failure, collision, human error, war,
terrorism, piracy, cargo loss and bad weather.
In addition, changing economic, regulatory and
political conditions in some countries,
including political and military conflicts,
have from time to time resulted in attacks on
vessels, mining of waterways, piracy,
terrorism, labor strikes, boycotts and
- 20 -
government requisitioning of vessels. These
sorts of events could interfere with shipping
lanes and result in market disruptions and a
significant loss of tanker company earnings.
o Changes in laws or government regulations
regarding hydraulic fracturing could increase a
company's costs of doing business, limit the
areas in which it can operate and reduce oil
and natural gas production by the company.
Cash Flow Risk. A substantial portion of the cash
distributions 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 to
its equity holders depends upon the amount of cash
flow generated from the MLP's or MLP-related entity's
operations. Cash flow from operations 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. Large declines in commodity prices can
result in material declines in cash flow from
operations. 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 to
pay its debt and equity holders include increased
operating costs, capital expenditures, acquisition
costs, expansion, construction costs and borrowing
costs (including increased borrowing costs as a
result of additional collateral requirements as a
result of ratings downgrades by credit agencies).
Further, covenants in debt instruments issued by
energy companies, energy sector MLPs and energy
sector MLP-related entities in which the Fund invests
may restrict distributions to equity holders or, in
certain circumstances, may not allow distributions to
be made to equity holders. To the extent the Fund
invests in energy companies, energy sector MLPs and
energy sector MLP-related entities that reduce their
distributions to equity holders, this will result in
reduced levels of net distributable income and can
cause the Fund to reduce its distributions.
MLP and Deferred Tax Risk. Much of the benefit the
Fund derives from its investments in equity
securities of MLPs is a result of MLPs generally
being treated as partnerships for United States
federal income tax purposes. Partnerships do not pay
United States federal income tax at the partnership
level. Rather, each partner of a partnership, in
computing its United States federal income tax
liability, will include its allocable share of the
partnership's income, gains, losses, deductions and
expenses. A change in current tax law, a change in
the business of a given MLP, or a change in the types
of income earned by a given MLP could result in an
MLP being treated as a corporation for United States
federal income tax purposes, which would result in
such MLP being required to pay United States federal
income tax on its taxable income. Changes in
regulations may cause some MLPs to be reclassified as
corporations. The classification of an MLP as a
corporation for United States federal income tax
purposes would have the effect of reducing the amount
of cash available for distribution by the MLP and
causing any such distributions received by the Fund
to be taxed as dividend income to the extent of the
MLP's current or accumulated earnings and profits.
Thus, if any of the MLPs owned by the Fund were
treated as a corporation for United States federal
income tax purposes, the value and after-tax return
to the Fund with respect to its investment in such
- 21 -
MLPs would be materially reduced, which could cause a
substantial decline in the value of the common
shares.
Separately, a change in law has shifted the primary
obligation for taxes attributable to partnership
adjustments to the partnership. The MLPs may make
certain elections to push that liability out to the
partners, but the application of the law is subject
to substantial uncertainties. As a limited partner
in the MLPs in which it may invest, 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 non-cash tax deductions such as
depreciation and depletion. The Fund will incur a
current tax liability on its income allocation from
an MLP not offset by tax deductions. The Fund's tax
basis in its MLP units would be increased by the
income allocated from an MLP, and then reduced by all
distributions from the MLP (including any
distributions in excess of allocated income), which
would either increase the Fund's taxable gain or
reduce the Fund's loss recognized upon the sale of
such MLP units. 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 an increased current tax liability to the
Fund. A reduction in the percentage of the income
offset by tax deductions or an increase in sales of
the Fund's MLP holdings that result in capital gains
will reduce that portion of the Fund's distribution
from an MLP treated as a return of capital and
increase that portion treated as income, and may
result in lower after-tax distributions to the Fund's
common shareholders.
The Fund will accrue deferred income taxes for its
future tax liability associated with the difference
between the Fund's tax basis in an MLP security and
the fair market value of the MLP security. Upon the
Fund's sale of an MLP security, the Fund may be
liable for previously deferred taxes. The Fund will
rely to some extent on information provided by MLPs,
which may not necessarily be timely, to estimate its
deferred tax liability for purposes of financial
statement reporting and determining its NAV. From
time to time, the Fund will modify its estimates or
assumptions regarding its deferred tax liability as
new information becomes available.
Non-MLP energy companies in which the Fund invests
are generally taxed as corporations. Such companies
thus pay corporate-level taxes on their net taxable
income and may not offer certain other advantageous
tax characteristics of MLP investments. To the extent
that the Fund increases its investments in non-MLP
energy companies, a greater portion of the
distributions the Fund receives may consist of
taxable income, which may result in the Fund having a
larger corporate income tax expense, which may result
in less cash available to distribute. To the extent
that the Fund increases its investments in non-MLP
energy companies, a lesser percentage of future
distributions by the Fund may be treated as a return
of capital for U.S. federal income tax purposes and a
greater percentage of future distributions may be
treated as dividend payments taxable as ordinary
income or qualified dividend income.
- 22 -
Recent Market and Economic Developments. During
recent years, prices of oil and other energy
commodities have declined significantly and
experienced significant volatility. Such volatility
has adversely impacted (and may continue to impact)
many of the MLPs, MLP-related entities and other
energy companies in which the Fund has invested or
may invest. For example, many MLPs, MLP-related
entities and other energy companies have in recent
years experienced eroding growth prospects, reduced
distribution levels or, in some cases, bankruptcy.
These conditions have impacted, and may continue to
impact, the NAV of the Fund and its ability to pay
distributions to shareholders at current or historic
levels.
During periods of market volatility, MLPs,
MLP-related entities and other energy companies may
be unable to obtain new debt or equity financing on
acceptable terms or at all when market conditions are
most volatile, and downgrades of the debt of MLPs,
MLP-related entities and other energy companies by
rating agencies during times of distress could
exacerbate this challenge. In addition, downgrades of
the debt of MLPs, MLP-related entities and other
energy companies by ratings agencies may increase the
cost of borrowing under the terms of an MLP's,
MLP-related entity's and other energy company's
credit facility, and a downgrade from investment
grade to below investment may cause an MLP,
MLP-related entity and other energy company to be
required to post collateral (or additional
collateral) by its contractual counterparties, which
could reduce the amount of liquidity available to
such MLP, MLP-related entity and other energy company
and increase its need for additional funding sources.
If funding is not available when needed, or is
available only on unfavorable terms, MLPs,
MLP-related entities and other energy companies may
have to reduce their distributions to manage their
funding needs and may not be able to meet their
obligations, which may include multi-year capital
expenditure commitments, as they come due. Moreover,
without adequate funding, many MLPs, MLP-related
entities and other energy companies will be unable to
execute their growth strategies, complete future
acquisitions, take advantage of other business
opportunities or respond to competitive pressures,
any of which could have a material adverse effect on
their revenues and results of operations.
The number of energy-related MLPs has declined since
2014 for a number of reasons as discussed below. Many
of the assets held by MLPs were originally
constructed decades ago by pipeline and power
utilities. When the United States deregulated much of
the energy industry, these utilities became cyclical
commodity companies with significant levels of debt
and the resulting financial stress caused divestment
of their pipeline assets to the MLP space that was
trading at higher valuations. This trend has reversed
since 2014.
While MLPs represented a way for the industry to
lower its cost of financing between 2004 (when the
Fund was launched) and 2014, the severe correction in
the price of crude oil in 2014 caused a collapse in
MLP valuations as about half of the Alerian MLP Index
had become exposed to commodity prices between 2004
and 2014. MLP distribution cuts and even some
bankruptcies followed. MLPs are now a higher-cost way
of financing these industries; the reverse of the
conditions that led to the growth of the asset class
in the early part of the last decade. As a result,
the industry is witnessing the consolidation or
simplification of corporate structures where the MLP
- 23 -
sleeve of capital is being eliminated because it no
longer reduces a company's cost of equity financing.
Even for MLPs that have avoided exposure to commodity
prices and have been successful in growing their
dividends, the cost of the MLP structure has risen
due to growing incentive payments to the general
partner. These incentives increase with per share
dividend growth at the limited partnership level and
are due on newly issued shares, as well as older
shares that have experienced the growth. As a result,
the more successful the MLP is in growing its
dividends, the closer it gets to paying incentives to
the parent/general partner that are more onerous than
a tax at the corporate level. The lower the corporate
tax rate, the sooner this threshold is crossed. In
many cases, MLPs are merely a part of the corporate
finance structure of a company. MLPs are created when
they lower the cost of equity financing and are no
longer used when they do not. As a result of the
foregoing, the Fund may increase its non-MLP
investments consistent with its investment objective
and policies.
In addition, on December 22, 2017, the Tax Cuts and
Jobs Act was signed into law, which, among other
things, reduced the top federal income tax rate
applicable to the Fund from 35% to 21% and,
accordingly, reduced the Fund's accrual rate for
deferred federal income taxes. See "Tax Matters" and
"Market and Net Asset Value Information."
Utility Company Risk. A variety of factors may
adversely affect the business or operations of
utility companies, including: high interest costs in
connection with capital construction and improvement
programs; difficulty in raising capital in adequate
amounts on reasonable terms in periods of high
inflation and unsettled capital markets; governmental
regulation of rates charged to customers (including
the potential that costs incurred by the utility
change more rapidly than the rate the utility is
permitted to charge its customers); costs associated
with compliance with and changes in environmental and
other regulations; effects of economic slowdowns and
surplus capacity; increased competition from other
providers of utilities services; inexperience with
and potential losses resulting from a developing
deregulatory environment; costs associated with
reduced availability of certain types of fuel,
occasionally reduced availability and high costs of
natural gas for resale and the effects of energy
conservation policies; the effects of a national
energy policy and lengthy delays and greatly
increased costs and other problems associated with
the design, construction, licensing, regulation and
operation of nuclear facilities for electric
generation, including, among other considerations,
the problems associated with the use of radioactive
minerals and the disposal of radioactive wastes;
technological innovations that may render existing
plants, equipment or products obsolete; potential
impact of terrorist activities; the impact of natural
or man-made disasters; risk of counterparty or
customer default or bankruptcy may materially affect
the utility company's operations, cash flows and
ability to make distributions to shareholders,
regulation by various governmental authorities,
including the imposition of special tariffs; and
changes in tax laws, regulatory policies and
accounting standards. See "Risks--Energy Utility
Companies Risk."
Leverage Program Tax Risk. The Fund intends to use
leverage to make its investments. See "Use of
- 24 -
Leverage." The Fund may be subject to limitations on
the amount of interest deductions that it may take in
each year. The limitation on interest would be based
upon income before depletion, which is sometimes a
significant deduction allocated from MLPs. It is
possible that the Fund will not be able to deduct all
of its interest expense in the year accrued. If this
occurs, the excess interest expense could be carried
forward to subsequent years, but the Fund's tax in
the year the expense is accrued could increase.
Tax Law Change Risk. Changes in tax laws or
regulations, or interpretations thereof in the
future, could adversely affect the Fund or the MLPs,
MLP-related entities and other energy companies in
which the Fund invests. Any such changes could
negatively impact the Fund and its common
shareholders. See "Risks--Tax Law Change Risk."
Delay in Investing the Proceeds of this Offering.
Although the Fund currently intends to invest the
proceeds from any sales of the Common Shares as soon
as practicable following the completion of each
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, the Fund may not 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 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. As a result, the return
and yield on the common shares following the issuance
of Common Shares 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 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 MLPs,
MLP-related entities and other energy companies in
which the Fund invests and may in the future 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
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
- 25 -
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.
The Fund may invest in equity securities of other
energy infrastructure companies. The prices of equity
securities are sensitive to general movements in the
stock market, so a drop in the stock market may
depress the prices of equity securities in which the
Fund invests. Equity securities are structurally
subordinated to preferred stock, bonds and other debt
instruments in a company's capital structure in terms
of priority to corporate income and are therefore
inherently more risky and more experience
significantly greater price volatility than preferred
stock or debt instruments of such issuers.
Risks Associated with an Investment in Initial Public
Offerings. Securities purchased in initial public
offerings ("IPOs") are often subject to the general
risks associated with investments in companies with
small market capitalizations, and typically to a
heightened degree. Securities issued in IPOs have no
trading history, and information about the companies
may be available for very limited periods. In
addition, the prices of securities sold in an IPO may
be highly volatile. At any particular time or from
time to time, the Fund may not be able to invest in
IPOs, or to invest to the extent desired, because,
for example, only a small portion (if any) of the
securities being offered in an IPO may be available
to the Fund. IPO securities may be volatile, and the
Fund cannot predict whether investments in IPOs will
be successful.
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 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
- 26 -
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 NAV 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 NAV 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 use of leverage by the Fund involves expenses
and/or other costs, including interest or dividend
payments, which are 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 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 leverage after the issuance of additional
Common Shares, there could be an adverse impact on
the return to common shareholders. See "--Leverage
Program Tax Risk" and "Risks--Leverage Risk."
Covered Call Options Risk. There are various risks
associated with the Fund writing (or selling) covered
call options. As the writer (seller) of a call
- 27 -
option, the Fund receives cash (the premium) from the
purchaser of the option, and the purchaser has the
right to receive from the Fund any appreciation in
the underlying security over the strike price upon
exercise. In effect, the Fund forgoes, during the
life of the option, the opportunity to profit from
increases in the market value of the portfolio
security covering the option above the sum of the
premium and the strike price of the call option but
retains the risk of loss should the price of the
underlying security decline. Therefore, the writing
(or selling) of covered call options may limit the
Fund's ability to benefit from the full upside
potential of its investment strategies.
The value of call options written by the Fund, which
are priced daily, are determined by trading activity
in the broad options market and will be affected by,
among other factors, changes in the value of the
underlying security in relation to the strike price,
changes in dividend rates of the underlying security,
changes in interest rates, changes in actual or
perceived volatility of the stock market and the
underlying security, and the time remaining until the
expiration date. The value of call options written by
the Fund may be adversely affected if the market for
the option is reduced or becomes illiquid.
There can be no assurance that a liquid market will
exist when the Fund seeks to close out an option
position. Reasons for the absence of a liquid
secondary market on an exchange include the
following: (i) insufficient trading interest in
certain options; (ii) restrictions may be imposed by
an exchange on opening transactions or closing
transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with
respect to particular classes or series of options;
(iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v)
inadequate facilities of an exchange or The Options
Clearing Corporation to handle current trading
volume; or (vi) the decision of one or more exchanges
at some future date to discontinue the trading of
options (or a particular class or series of options)
for economic or other reasons. 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 would continue to be exercisable in
accordance with their terms. To the extent that the
Fund utilizes unlisted (or "over-the-counter")
options, the Fund's ability to terminate these
options may be more limited than with exchange-traded
options and may involve enhanced risk that
counterparties participating in such transactions
will not fulfill their obligations. The hours of
trading for options may not conform to the hours
during which the securities held by the Fund 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. Additionally, the exercise price
of an option may be adjusted downward before the
option's expiration as a result of the occurrence of
certain corporate events affecting the underlying
security, such as extraordinary dividends, stock
splits, mergers or other extraordinary distributions
or events. A reduction in the exercise price of
options might reduce the Fund's capital appreciation
potential on underlying securities held by the Fund.
The Fund's covered call options transactions will be
subject to limitations established by each of the
exchanges, boards of trade or other trading
- 28 -
facilities on which the options are traded. These
limitations govern the maximum number of options in
each class that may be written by a single investor
or group of investors acting in concert, regardless
of whether the options are written on the same or
different exchanges, boards of trade or other trading
facilities or are written in one or more accounts or
through one or more brokers. Thus, the number of
covered call options that the Fund may write may be
affected by options written by other investment
advisory clients of the Advisor, Sub-Advisor or their
affiliates. 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 other sanctions.
Interest Rate Swaps Risk. The use of interest rate
swaps 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 could enhance or
harm the overall performance of the common shares.
For example, the Fund may utilize interest rate swaps
in connection with the Fund's use of leverage. To the
extent there is a decline in interest rates, the
value of the interest rate swap could decline, and
could result in a decline in the NAV 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. Interest rate
swaps do not involve the delivery of securities or
other underlying assets or principal. Accordingly,
the risk of loss with respect to interest rate 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 to
offset any declines in the value of the Fund's
portfolio assets being hedged or the increase in the
Fund's cost of leverage.
Depending on whether the Fund would be entitled to
receive net payments from the counterparty on the
swap, which in turn would depend on the general state
of market interest rates at that point in time, such
a default could negatively impact the performance of
the common shares. In addition, at the time an
interest rate swap 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 leverage, the
Fund may be required to redeem or prepay some or all
of the leverage. Such redemption or prepayment would
likely result in the Fund seeking to terminate early
all or a portion of any swap transactions. Early
termination of a swap could result in a termination
payment by or to the Fund. The Fund earmarks or
maintains, in a segregated account, cash or liquid
securities having a value at least equal to the
amount required to make payment on each of the Fund's
swap transactions if the Fund were to exit its
positions in such transactions immediately and was
required to mark to market. The Fund will not enter
into interest rate swap transactions having a
notional amount that exceeds the outstanding amount
of the Fund's leverage. See "Additional Information
About the Fund's Investments and Investment
Risks--Strategic Transactions--Equity Swaps and
- 29 -
Interest Rate or Commodity Swaps, Collars, Caps and
Floors" and "Other Investment Policies and
Techniques--Swap Agreements" in the SAI.
Total Return Swaps Risk. Total return swaps are
contracts in which one party agrees to make payments
of the total return from the underlying asset(s),
which may include securities, derivatives or indices,
during the specified period in return for payments
equal to a fixed or floating rate of interest or the
total return from other underlying asset(s). The Fund
anticipates that, under its total return swaps, if
any, it will pay the counterparty a regular, set
payment at an agreed rate of return and, in return,
will receive a payment which is equal to the
performance of the underlying assets. Total return
swaps are subject to the risk that a counterparty
will default on its payment obligations. See
"Risks--Counterparty Risk." In the event that the
performance of the relevant assets is less than the
agreed rate, the Fund will be required to make
further payments to the total return swap
counterparty in respect of such shortfalls. The Fund
will not be able to replicate exactly the performance
of the relevant underlying assets because the total
return generated by the Fund's investment in a total
return swap will be reduced by certain costs and
expenses. Total return swaps may effectively add
leverage to the Fund's portfolio because the Fund
would be subject to investment exposure on the full
notional amount of the swap. See "Risks--Leverage
Risk."
Equity Swaps Risk. Equity swaps are privately
negotiated contracts between two parties, buyer and
seller, stipulating that the seller will pay to or
receive from the buyer the difference between the
nominal value of the underlying instrument at the
opening of the contract and that instrument's value
at the end of the contract. As is the case with
owning any financial instrument, there is the risk of
loss associated with entering into equity swaps.
There may be liquidity risk if the underlying
instrument is illiquid because the liquidity of
equity swaps is based on the liquidity of the
underlying instrument. Equity swaps also carry
counterparty risk, i.e., the risk that the
counterparty to the transaction may be unable or
unwilling to make payments or to otherwise honor its
financial obligations under the terms of the
contract. If the counterparty were to do so, the
value of the contract may be reduced. See
"--Counterparty Risk." A further risk in respect of
equity swaps is that adverse movements in the
underlying security will require the buyer to post
additional margin. To the extent that there is an
imperfect correlation between the return on the
Fund's obligation to its counterparty under an equity
swap and the return on related assets in its
portfolio, the equity swap transaction may increase
the Fund's financial risk.
Credit Default Swaps Risk. 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 full notional value, or "par value," of the
reference obligation through either physical
settlement or cash settlement. The Fund may be either
the buyer or seller in a credit default swap
transaction. If the Fund is a buyer and no event of
default occurs, the Fund will have made a series of
periodic payments and recover nothing of monetary
value. However, if an event of default occurs, the
Fund (if the buyer) will receive the full notional
value of the reference obligation through a cash
payment in exchange for the asset or, alternatively,
a cash payment representing the difference between
- 30 -
the expected recovery rate and the full notional
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 five years,
provided that there is no event of default. The sale
of a credit default swap effectively creates leverage
and subjects the Fund to the risks described under
"Risks--Leverage Risk." The Fund currently intends to
earmark or segregate assets on the Fund's records in
the form of cash, cash equivalents or liquid
securities in an amount equal to the notional value
of the credit default swaps of which it is the
seller. If such assets are not fully segregated by
the Fund, the use of credit default swap transactions
could then be considered leverage for purposes of the
1940 Act. Asset segregation affects the regulatory
treatment but does not diminish the effective
leverage in such instruments. Credit default swap
transactions involve greater risks than if the Fund
had invested in the reference obligation directly. In
addition to general market risk, credit default swaps
are subject to illiquidity risk, counterparty risk
and credit risk. See "Risks--Counterparty Risk."
Counterparty Risk. The Fund will be subject to credit
risk with respect to the counterparties to the
derivative transactions entered into directly by the
Fund. Changes in the credit quality of the companies
that serve as the Fund's counterparties with respect
to derivatives or other transactions supported by
another party's credit will affect the value of those
instruments. If a counterparty becomes bankrupt or
otherwise fails to perform its obligations under a
derivative contract due to financial difficulties,
the Fund may experience significant delays in
obtaining any recovery under the derivative contract
in a bankruptcy or other reorganization proceeding.
The Fund may obtain only a limited recovery or may
obtain no recovery in such circumstances.
Restricted Securities Risk. 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 American, and The Nasdaq
Stock Market LLC, 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
- 31 -
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, Strategic 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 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 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 relies to some extent
on information provided by certain MLPs, which is
usually not timely, to calculate taxable income
allocable to the MLP units held in the Fund's
portfolio and to determine the tax character of
distributions to common shareholders. From time to
time the Fund will modify its estimates and/or
assumptions 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. 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 NAV and market price of the common shares
will tend to decline if market interest rates rise.
Interest rates are at or near historic lows. The
historically low interest rate environment increases
the risks associated with rising interest rates,
including the potential for periods of volatility.
The Fund currently faces a heightened level of
interest rate risk, especially since the Federal
Reserve Board has ended its quantitative easing
program.
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
- 32 -
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, 2019, the Fund did not invest in any
below investment grade debt securities.
Non-U.S. Securities Risk. The Fund may invest a
portion of its assets in securities of non-U.S.
issuers. Investing in securities of non-U.S. issuers,
which are generally denominated in non-U.S.
currencies, may involve certain risks not typically
associated with investing in securities of U.S.
issuers. These risks include: (i) there may be less
publicly available information about non-U.S. issuers
or markets due to less rigorous disclosure or
accounting standards or regulatory practices; (ii)
non-U.S. markets may be smaller, less liquid and more
volatile than the U.S. market; (iii) potential
adverse effects of fluctuations in currency exchange
rates or controls on the value of the Fund's
investments; (iv) the economies of non-U.S. countries
may grow at slower rates than expected or may
experience a downturn or recession; (v) the impact of
economic, political, social or diplomatic events;
(vi) certain non-U.S. countries may impose
restrictions on the ability of non-U.S. issuers to
make payments of principal and interest to investors
located in the United States due to blockage of
non-U.S. currency exchanges or otherwise; and (vii)
withholding and other non-U.S. taxes may decrease the
Fund's return. Foreign companies are generally not
subject to the same accounting, auditing and
financial reporting standards as are U.S. companies.
In addition, there may be difficulty in obtaining or
enforcing a court judgment abroad. These risks may be
more pronounced to the extent that the Fund invests a
significant amount of its assets in companies located
in one region.
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 , 2019,
there were approximately publicly traded
|
MLPs, with a market capitalization of approximately
$ billion. 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.
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. Because of the limited
number of MLP issuers, these competitive conditions
may adversely impact the Fund's ability to make
- 33 -
investments in the MLP market and could adversely
impact the Fund's distributions to common
shareholders.
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 credit- worthiness of issuers and may make issuer
defaults more likely, which may result in a decline
in the value of the Fund's portfolio.
Secondary Market for the Fund's Common Shares Issued
under the Dividend Reinvestment Plan. The issuance of
common shares through the Fund's dividend
reinvestment plan may have an adverse effect on the
secondary market for the common shares. The increase
in the number of outstanding common shares resulting
from issuances pursuant to the Fund's dividend
reinvestment plan and the discount to the market
price at which such common shares may be issued, may
put downward pressure on the market price for the
common shares. Common shares will not be issued
pursuant to the dividend reinvestment plan at any
time when common shares are trading at a lower price
than the Fund's NAV per common share. When the Fund's
common shares are trading at a premium, the Fund may
also issue common shares that may be sold through
private transactions effected on the NYSE or through
broker-dealers. The increase in the number of
outstanding common shares resulting from these
offerings may put downward pressure on the market
price for common shares.
- 34 -
SUMMARY OF FUND EXPENSES
The following table and example contain 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, 2019, 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, 2019. As of that date, the
Fund had $146,000,000 of leverage outstanding pursuant to the Commitment
Facility. Such leverage represented % of Managed Assets as of November 30, 2019.
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load (as a percentage of offering price).................................................... ____%*
Offering Expenses Borne by the Common Shareholders (as a percentage of offering price)(1)......... ____%*
Dividend Reinvestment Plan Fees................................................................... None(2)
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES
(ASSUMES % LEVERAGE IS OUTSTANDING)
-----------------------------------
ANNUAL EXPENSES:
Management Fees(3)................................................................................ %
Interest and Fees on Leverage(4).................................................................. %
Other Expenses (exclusive of current and deferred income tax expense (benefit)) (5)............... %
Total Annual Expenses (exclusive of current and deferred income tax expense (benefit)) (5)........ %
-----------------------------------------------------------------------------------------------------------------------------------
* 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, 2019, based on interest rates in effect as of November 30,
2019. The table assumes total Borrowings of $146,000,000, which reflects
leverage in an amount representing % of Managed Assets. The Borrowings
bear interest at fixed and 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, 2019
has been as follows:
Period June 4, 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%
Year Ended November 30, 2013 9.49%
Year Ended November 30, 2014 11.30%
- 35 -
|
Year Ended November 30, 2015 (17.47)%
Year Ended November 30, 2016 5.05%
Year Ended November 30, 2017 (0.61)%
Year Ended November 30, 2018 %
Year Ended November 30, 2019 %
|
The table set forth below presents the Fund's annual operating expenses as a
percentage of net assets attributable to Common Shares, including an estimate of
current and deferred income tax expense (benefit).
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES
(ASSUMES % LEVERAGE IS OUTSTANDING)
ANNUAL EXPENSES:
Management Fees................................................................................... %
Interest and Fees on Leverage..................................................................... %
Other Expenses (exclusive of current and deferred income tax expense (benefit))................... %
Annual Expenses (exclusive of current and deferred income tax expense (benefit)) ................. %
Current Income Tax Expense (benefit).............................................................. %
Deferred Income Tax Expense (benefit)............................................................. %
Total Annual Expenses (including current and deferred income tax expenses)........................ %
|
The purpose of the tables above and the examples 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 Annual Expenses" are based on estimated amounts for the
Fund's 12 months of operations after November 30, 2019 unless otherwise
indicated and assumes that the Fund has not issued any additional common shares.
The following example illustrates the expenses that you would pay on a
$1,000 investment in Common Shares, assuming: (i) total annual expenses before
taxes of % of net assets attributable to Common Shares through year 10,
excluding the Fund's estimate of current and deferred income tax expense
(benefit), (ii) a 5% annual return and(iii) all distributions are reinvested at
net asset value:(1)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$ $ $ $
|
The following example illustrates the expenses that you would pay on a
$1,000 investment in Common Shares, assuming: (i) total annual expenses before
taxes of % of net assets attributable to Common Shares through year 10,
including the Fund's estimate of current and deferred income tax expense
(benefit), (ii) a 5% annual return and (iii) all distributions are reinvested at
net asset value: (1)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$ $ $ $
|
(1) These examples do not include sales load or estimated offering costs. THE
EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. The
examples assume 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 % of Managed Assets, assuming interest and fees on leverage of %.
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.
- 36 -
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, 2019 and each of the prior years then
ended is derived from the Fund's financial statements audited by , whose
report on the 2019 financial statements and the financial highlights for the
years in the period then ended is contained in . The ,
is incorporated by reference into the Fund's SAI and is available from the Fund
upon request.
[TO COME.]
- 37 -
- 38 -
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 American. The Fund's common shares
commenced trading on NYSE American 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. 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 American,
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%
- 39 -
|
PREMIUM/(DISCOUNT)
MARKET PRICE(1) NET ASSET VALUE(2) TO NET ASSET VALUE(3)
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
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%
March 31, 2013.................. $ 35.75 $ 31.35 $ 33.43 $ 29.73 6.94% 5.45%
June 30, 2013................... $ 36.38 $ 30.91 $ 33.40 $ 31.36 8.92% (1.43)%
September 30, 2013 ............. $ 34.33 $ 30.71 $ 33.48 $ 31.44 2.54% (2.32)%
December 31, 2013............... $ 33.45 $ 30.73 $ 32.82 $ 31.93 1.92% (3.76)%
March 31, 2014.................. $ 32.87 $ 31.27 $ 33.92 $ 32.59 (3.10)% (4.05)%
June 30, 2014................... $ 36.24 $ 32.47 $ 38.29 $ 34.57 (5.35)% (6.07)%
September 30, 2014 ............. $ 38.25 $ 34.66 $ 39.57 $ 36.35 (3.34)% (4.65)%
December 31, 2014............... $ 37.59 $ 31.06 $ 39.46 $ 34.87 (4.74)% (10.93)%
March 31, 2015.................. $ 36.92 $ 33.71 $ 38.47 $ 34.76 (4.03)% (3.02)%
June 30, 2015................... $ 35.61 $ 31.33 $ 36.95 $ 33.58 (3.63)% (6.70)%
September 30, 2015 ............. $ 31.03 $ 23.83 $ 33.43 $ 24.77 (7.18)% (3.79)%
December 31, 2015 .............. $ 28.74 $ 18.85 $ 29.25 $ 21.52 (1.74)% (12.41)%
March 31, 2016.................. $ 24.00 $ 16.95 $ 23.03 $ 19.26 4.21% (11.99)%
June 30, 2016................... $ 25.94 $ 22.18 $ 25.80 $ 22.32 0.54% (0.63)%
September 30, 2016 ............. $ 27.09 $ 24.86 $ 26.26 $ 25.92 3.16% (4.09)%
December 31, 2016............... $ 26.90 $ 23.38 $ 26.06 $ 24.20 3.22% (3.39)%
March 31, 2017.................. $ 27.97 $ 25.80 $ 26.55 $ 25.64 5.35% 0.62%
June 30, 2017................... $ 28.18 $ 24.20 $ 26.18 $ 23.43 7.64% 3.29%
September 30, 2017.............. $ 26.12 $ 23.52 $ 25.17 $ 22.86 3.77% 2.89%
December 31, 2017............... $ 26.51 $ 21.59 $ 25.45 $ 22.01 4.17% (1.91)%
March 31, 2018(4)............... $ $ $ $ % %
June 30, 2018................... $ $ $ $ % %
September 30, 2018 ............. $ $ $ $ % %
December 31, 2018 .............. $ $ $ $ % %
March 31, 2019.................. $ $ $ $ % %
June 30, 2019................... $ $ $ $ % %
September 30, 2019 ............. $ $ $ $ % %
December 31, 2019............... $ $ $ $ % %
|
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 , 2020 were
$ , $ and %, respectively. As of December 31, 2019, the Fund had
common shares outstanding and net assets of the Fund were $ .
(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.
(4) As a result of the Tax Cuts and Jobs Act, the Fund's deferred tax
liability was significantly reduced which in turn resulted in an increase
in the Fund's NAV. See "Risks--Recent Market and Economic Developments"
for a discussion of the impact that the Tax Cuts and Jobs Act had on the
Fund's NAV.
- 40 -
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940, as amended (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. 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 (as defined below),
Sub-Advisor (as defined below), and JonesTrading Institutional Services LLC,
pursuant to which 259,962 common shares were sold. In addition, (i) 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; (ii) on November 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; (iii) 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; (iv) 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; (v) 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; (vi) on November
30, 2013, 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; (vii) on September 23, 2013, the Fund
entered into a sales agreement with the Advisor, the Sub-Advisor, and
JonesTrading Institutional Services LLC, pursuant to which no common shares were
sold; and (viii) on June 19, 2017, the Fund entered into a sales agreement with
the Advisor, Sub-Advisor, and JonesTrading Institutional Services LLC, pursuant
to which Common Shares were sold.
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 American under the symbol "FEN." The
Fund's principal office is located at 10 Westport Road, Suite C101a, Wilton,
Connecticut 06897. The common shares of beneficial interest offered by this
prospectus and any applicable prospectus supplement 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."
The following table provides information about the Fund's outstanding
securities as of November 30, 2019:
AMOUNT HELD BY THE
AMOUNT FUND OR FOR ITS AMOUNT
TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING
Common shares................ Unlimited
|
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement, the Fund expects to
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 within approximately three months of
receipt of such proceeds. Pending any such use, the proceeds may be invested in
cash, cash equivalents or other securities.
- 41 -
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, related public entities in the energy
sector and other energy companies, which the Fund's Sub-Advisor believes offer
opportunities for income and growth. There can be no assurance that the Fund
will achieve its investment objective.
Due to the tax treatment under current law of cash distributions in excess
of income made by MLPs to their investors (such as the Fund), the Fund believes
a portion of the distributions it receives from MLP investments may be tax
deferred thereby increasing cash available for current distribution by the Fund
to its common shareholders but potentially increasing the Fund's future tax
liability. See "Risks--MLP and Deferred Tax Risk." 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 exceed the taxable income reported in a particular tax year, a portion of
the excess cash 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 its MLP units is the amount paid for the units, 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 the Fund's allocable share of net losses and by reductions in the
Fund's allocable share of the MLP's debt, if any. Thus, although cash
distributions 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. The Fund
expects to distribute cash in excess of its earnings and profits to common
shareholders, which will likely be treated as a return of capital to the extent
of the common shareholders' basis in the common shares. See "Tax Matters."
The Fund seeks to achieve its investment objective by investing primarily
in securities of MLPs, MLP- related entities in the energy sector and other
energy companies that the Sub-Advisor believes offer attractive distribution
rates and capital appreciation potential. The Fund considers investments in
"MLP-related entities" to include investments that offer economic exposure to
publicly traded and private MLPs, securities of entities holding primarily
general partner or managing member interests in MLPs and securities that are
derivatives of interests in MLPs. The Fund considers investments in the energy
sector to include companies that derive a majority of their revenues or
operating income from transporting, processing, storing, distributing,
marketing, exploring, developing, managing or producing natural gas, natural gas
liquids ("NGLs") (including propane), crude oil, refined petroleum products,
coal or electricity, or from supplying energy-related products and services, or
any such other companies within the energy sector as classified under the Global
Industry Classification Standards developed by MSCI, Inc. and Standard & Poor's
("GICS"). An "energy company" is one that derives its revenues from
transporting, processing, storing, distributing or marketing natural gas, 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. 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 has adopted the following additional non-fundamental policies:
o 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 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,
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. "See "The Fund's Investments-- Portfolio
Composition" for a further discussion of the Fund's principal
investments.
- 42 -
o The Fund may invest in unregistered or otherwise restricted
securities. The term "restricted securities" refers to securities that
have not been registered under the Securities Act of 1933, as amended
(the "1933 Act"), or are held by control persons of the issuer and
securities that are subject to contractual restrictions on their
resale. 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. See "Risks--Restricted Securities
Risk."
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, which are commonly referred
to as "high yield" or "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
Services ("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. Below investment grade securities are considered
speculative with respect to an issuer's capacity to pay interest and
repay principal. See "Risks--Below Investment Grade Securities Risk."
o The Fund will not invest more than 15% 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 leverage or market
risks associated with the Fund's portfolio.
o The Fund will not invest more than 30% of its Managed Assets in
non-U.S. securities and may hedge the currency risk of the non-U.S.
securities using derivative instruments. Non-U.S. securities include
securities issued or guaranteed by companies organized under the laws
of countries other than the United States and securities issued or
guaranteed by foreign governments, their agencies or instrumentalities
and supra-national governmental entities. See "Risks--Non-U.S.
Securities Risk."
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.
The Fund's investment objective and the investment restrictions listed in
the SAI are 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.
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.
- 43 -
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.
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. For purposes of this prospectus, an "MLP" is
a limited partnership or a limited liability company that is treated as a
partnership for federal income tax purposes, the interests in which (known as
units) are traded on securities exchanges or over-the-counter. If publicly
traded, to be treated as a partnership for U.S. federal income tax purposes, the
entity must receive at least 90% of its income from qualifying sources as set
forth in the Internal Revenue Code of 1986, as amended (the "Internal Revenue
Code"). These qualifying sources include interest, dividends, real estate rents,
gain from the sale or disposition of real property, income and gain from mineral
or natural resources activities, income and gain from the transportation or
storage of certain fuels, gain from the sale or disposition of a capital asset
held for the production of income described in the foregoing and, in certain
circumstances, income and gain from commodities or futures, forwards and options
with respect to commodities. Mineral or natural resources activities include
exploration, development, production, mining, refining, marketing and
transportation (including pipelines), of oil and gas, minerals, geothermal
energy, fertilizer, timber or carbon dioxide.
MLPs typically are structured as limited partnerships and have two classes
of interests--general partner interests and limited partner interests. Both
classes of owners are governed by the terms of a limited partnership agreement
establishing their respective rights with regard to the income and liabilities
of the MLP. The general partner typically controls the operations and management
of the MLP through an equity interest in the MLP (typically up to 2% of total
equity) and will be eligible to receive incentive distributions that increase
based on specified profit targets attained by the MLP. Limited partners own the
remainder of the MLP and have a limited role in the MLP's operations and
management. Likewise, limited partners receive periodic distributions (usually
quarterly) on a pre-tax basis until the unitholder sells its ownership interest
in the MLP. MLPs often have two classes of limited partner interests--common
units and subordinated units. Common units and general partner interests
generally accrue arrearage rights to the extent certain distribution payment
schedules are not met, but the subordinated units generally do not accrue such
arrearages. The general partner of the MLP is typically owned by an energy
company, an investment fund, the direct management of the MLP or is an entity
owned by one or more of such parties. The general partner interest may be held
by either a private or publicly traded corporation or other entity. In many
cases, the general partner owns common units, subordinated units and incentive
distribution rights("IDRs") of the MLP in addition to its general partner
interest in the MLP.
MLPs are typically structured such that common units and general partner
interests have first priority to receive quarterly cash distributions up to the
MQD (as defined below). 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; however, 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. Whenever a distribution is paid to either common
unitholders or subordinated unitholders, the general partner is paid a
proportional distribution. The holders of IDRs (usually the general partner) are
eligible to receive incentive distributions if the general partner operates the
business of the MLP in a manner which results in distributions paid per unit
surpassing specified target levels. As cash distributions to the limited
partners increase, the IDRs receive an increasingly higher percentage of the
incremental cash distributions. A common arrangement provides that the IDRs can
- 44 -
reach a tier where the holder of the IDR receives 48% of every incremental
dollar paid to partners. These IDRs encourage the general partner to streamline
costs, increase capital expenditures and acquire assets in order to increase the
MLP's cash flow and raise the quarterly cash distribution in order to reach
higher tiers. Such results benefit all security holders of the MLP.
MLPs structured as limited liability companies also issue common and
subordinated units. However, rights afforded to interest holders in a limited
liability company (called "members") vary from those granted under the limited
partnership ownership structure, in that limited liability company members
typically have broader voting rights than limited partners in a limited
partnership. Limited liability company common units represent an equity
ownership interest in an MLP, entitling the holders to a share of the MLP's
assets through distributions and/or capital appreciation. Limited liability
company MLPs generally have only one class of equity, but in cases where there
are subordinated classes, common unitholders generally have preferential
distribution rights relative to rights held by subordinated unitholders, as well
as arrearage rights if certain distribution payment schedules are not met. In
the event of liquidation, limited liability company common unitholders have a
right to the MLP's remaining assets after bondholders, other debt holders and
preferred unitholders, if any, have been paid in full. Limited liability company
common units may trade on a national securities exchange or over-the-counter. In
contrast to limited partnerships, limited liability companies have no general or
limited partner and often there are no incentive distribution rights, like those
that most limited partnerships have, which entitle management or other
unitholders to increased percentages of cash distributions as distributions
reach higher target levels. In addition, limited liability company common
unitholders typically have voting rights with respect to the limited liability
company, whereas limited partnership common unitholders generally have limited
voting rights.
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. 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, 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.
Equity Securities of MLPs and MLP-Related Entities. The Fund may invest 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. Such investments include equity
securities issued by small- and mid-capitalization companies. MLPs organized as
limited partnerships often have two classes of limited partner interests--common
units and subordinated units. Common units generally accrue arrearage rights to
the extent certain distribution payment schedules are not met, but the
subordinated units generally do not accrue such arrearages. MLP common units are
typically listed and traded on U.S. securities exchanges, including the New York
Stock Exchange (the "NYSE") and The Nasdaq Stock Market LLC ("Nasdaq"). The Fund
purchases MLP common units through open market transactions, but may also
acquire MLP common units through direct placements and initial public offerings.
MLP subordinated units are typically issued by MLPs to their original sponsors,
such as their founders, management teams, corporate general partners of MLPs,
- 45 -
entities that sell assets to MLPs, and institutional investors. The Fund may
purchase subordinated units directly from these persons. See "Risks--Risks
Associated with an Investment in Initial Public Offerings."
MLP Common Units. MLP common units represent a limited partnership
interest in an MLP and may be listed and traded on U.S. securities exchanges or
over-the-counter, with their value fluctuating predominantly based on prevailing
market conditions (such as changes in interest rates) and the success of an MLP.
The Fund purchases 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 typically have
limited voting rights and, in most instances, 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 quarterly
distributions. 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 unit holders,
but not debt holders or preferred unit holders, to the remaining assets of the
MLP. MLPs also issue different classes of common units that may have different
voting, trading, and distribution rights. MLPs also may issue new classes of
units, such as class B units, that contain distinct structural modifications.
For example, a new class of equity could be used to issue securities that do not
receive a distribution for some specified period before converting into standard
common units.
MLP Subordinated Units. MLP subordinated units are typically issued by
MLPs to their original sponsors, such as their founders, management teams,
corporate general partners of MLPs, entities that sell assets to MLPs, and
institutional investors. The Fund may purchase subordinated units directly from
these persons. Subordinated units have similar limited voting rights as common
units and are generally not listed on an exchange nor publicly traded. Once the
MQD on the common units, including any arrearages, has been paid, subordinated
units will generally 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 and general partner interests 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 and other factors.
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 holding i-units receives distributions in the form of
additional i-units in an amount equal to the cash distributions received by the
holders of 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 typically listed and
traded on the NYSE and the NYSE American.
Equity Securities of 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. 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.
- 46 -
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 by this prospectus and any applicable prospectus supplement 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
Strategic Transactions. The Fund may use hedging and strategic
transactions ("Strategic Transactions") to seek to reduce interest rate risks
arising from any use of leverage by the Fund, to facilitate portfolio management
and mitigate risks, including interest rate, currency and credit risks. Hedging
and strategic transactions are generally accepted under modern portfolio
management theory and are regularly used by many investment companies and other
institutional investors.
On November 25, 2019, the SEC published a proposed rule that, if
adopted, would change the regulation of the use of derivative instruments by
registered investment companies. The SEC sought public comment on the proposed
rule, and as a result the nature of any final regulations is uncertain at this
time. Such regulations may change the Fund's ability to use strategic
transactions.
Covered Call Options. The Fund currently writes (or sells) covered call
options on its Managed Assets. 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 writes call options only if they are "covered." In the
case of a call option on a common stock or other security, the Fund considers an
option to be "covered" if the Fund owns the security underlying the call.
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 "Risks--Covered Call Options Risk" and "Tax Matters."
Interest Rate Swaps. In addition to writing (selling) covered call options
on its Managed Assets, the Fund enters into interest rate swaps as a principal
part of its investment strategy. In an interest rate swap, the Fund exchanges
with another party their respective commitments to pay or receive interest
(e.g., an exchange of an obligation to make fixed rate payments for an
obligation to make 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. Interest
rate swaps will allow the Sub-Advisor to potentially manage the interest rate
profile of the Fund's portfolio. See "Risks--Interest Rate Swaps Risk."
Other Strategic Transactions. 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
- 47 -
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.
See "Risks--Total Return Swaps Risk," "Risks--Equity Swaps Risk" and
"Risks--Credit Default Swaps Risk." The Fund also may purchase derivative
investments that combine features of these instruments. See "Additional
Information About the Fund's Investments and Investment Risks--Strategic
Transactions" and "Other Investment Policies and Techniques" in the SAI for more
information about the foregoing Strategic Transactions and their associated
risks. The Fund generally seeks to use these instruments and 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.
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. 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. 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.
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, 2019, the Fund's portfolio turnover rate was
approximately %. 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 LEVERAGE
The Fund is currently engaged in, and expects to continue to engage in,
the use of leverage to make additional investments 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 ("Borrowings") an amount up
to 331/3% (or such other percentage to the extent permitted by the 1940 Act) of
its total 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 total assets (including the proceeds of the Preferred Shares and any
borrowings). As of November 30, 2019, the Fund utilized leverage in an amount
equal to approximately % of the Fund's Managed Assets. 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
International, Ltd. (previously 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 with The Bank of Nova Scotia
- 48 -
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, 2019, the maximum commitment amount of the Commitment
Facility was $180,000,000, which comprises of a floating rate financing amount
for $ of the facility and a fixed rate financing amount for $102,700,000 of
the facility. The borrowing rate on the floating rate financing amount is equal
to the 1-month LIBOR plus 85 basis points and the borrowing rate on the fixed
rate financing amount is 3.53%. The fixed rate financing amount is for a
ten-year period ending in 2023. There is commitment fee of 0.55% on any undrawn
amount under the Commitment Facility, which is waived on any day on which the
drawn amount is 80% or more of the maximum commitment amount. The average amount
outstanding for the year ended November 30, 2019 was $149,328,767, with a
weighted average interest rate of 3.41%. As of November 30, 2019, the Fund had
outstanding borrowings of $146,000,000 under the Commitment Facility,
representing approximately % of the Fund's Managed Assets. As of November 30,
2019, the Fund had $34,000,000 in unutilized funds available for borrowing under
the Commitment Facility. Borrowings under the Commitment Facility represent the
only Borrowings of the Fund as of the date of this prospectus and the Fund does
not have any outstanding Preferred Shares as of the date of this prospectus.
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 leverage, 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. There can be no assurance that a
leveraging strategy will be successful during any period in which it is used.
Although based on recommendations by the Advisor and the Sub-Advisor, the
determination of whether to utilize leverage as well as timing and other terms
of the offering of leverage instruments and the terms of the leverage
instruments is determined by the Fund's Board of Trustees. The Fund expects to
invest the net proceeds derived from any future leverage instrument 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 ("NAV") 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 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 Advisor and the Sub-Advisor will make decisions
on whether and how much leverage the Fund will employ based on whether it is in
the best interests of the Fund. The Advisor and the Sub-Advisor will seek
approval for and periodically review the use of leverage with the Board of
Trustees. See "Risks-- Leverage Risk."
The Fund's Declaration of Trust authorizes the Fund, without prior
approval of the common shareholders, to borrow money (such as pursuant to the
Commitment Facility). 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
- 49 -
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 total assets after
borrowings).
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.
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 adviser,
sub-adviser 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 total 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 total 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 total
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 % of Managed Assets as of November 30, 2019. Asset
coverage with respect to the Borrowings under the Commitment Facility was %
and the Fund had $34,00,000 of unutilized funds available for Borrowing under
the Commitment Facility as of that date. Outstanding balances under the
Commitment Facility accrue interest at fixed and variable rates. As of November
30, 2019, the maximum commitment amount of the Commitment Facility was
$180,000,000, which comprises of a floating rate financing amount for $ of
the facility and a fixed rate financing amount for $102,700,000 of the facility.
The borrowing rate on the floating rate financing amount is equal to the 1-month
LIBOR plus 85 basis points and the borrowing rate on the fixed rate financing
amount is 3.53%. The fixed rate financing amount is for a ten-year period ending
in 2023. As of November 30, 2019, the Fund had $146,000,000 outstanding under
the Commitment Facility. The Commitment Facility also has an annual unused fee
of 0.80% on the unutilized funds available for borrowing, subject to a waiver
(as described above). As of November 30, 2019, the approximate average annual
interest and fee rate was 3.41%.
- 50 -
Assuming that the Fund's leverage costs remain as described above (at an
assumed average annual cost of %), the annual return that the Fund's portfolio
must experience (net of expenses) in order to cover its leverage costs would be
%.
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 % of the Fund's Managed
Assets, net of expenses, and an annual leverage interest and fee rate of %.
Assumed Portfolio Total Return (Net of Expenses).................. -10% -5% 0% 5% 10%
Common Share Total Return.........................................
|
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) 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.
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 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 has been
designed primarily as a long-term investment vehicle and is not intended to be
used as a short-term trading vehicle. An investment in the Fund's common shares
is not intended to constitute a complete investment program and should not be
viewed as such.
MARKET DISCOUNT FROM NET ASSET VALUE
Although the Common Shares offered under this prospectus will be offered
at a public offering price equal to or in excess of the NAV per share of the
Fund's common shares at the time such Common Shares are initially sold, shares
of closed-end investment companies frequently trade at a discount from their
NAV. This characteristic is a risk separate and distinct from the risk that the
Fund's NAV per common share 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 an offering under
this prospectus and the applicable prospectus supplement. The NAV of the Common
Shares offered under this prospectus may be reduced immediately following an
offering as a result of the payment of certain offering costs. Although the
- 51 -
value of the Fund's net assets is generally considered by market participants in
determining whether to purchase or sell common 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 is affected by factors such as NAV, dividend and
distribution levels and their stability (which are in turn affected by levels of
dividend and interest payments by the Fund's portfolio holdings, the timing and
success of the Fund's investment strategies, regulations affecting the timing
and character of the Fund's distributions, the Fund's expenses and other
factors), supply of and demand for the common shares, trading volume of the
common shares, general market, interest rate and economic conditions, and other
factors beyond the control of the Fund, the Fund cannot predict whether the
Common Shares offered under this prospectus will trade at, below or above NAV or
at, below or above the public offering price thereof.
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 through 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 the Fund to sell additional
equity securities in the future at a time and price the Fund deems appropriate.
MANAGEMENT RISK AND RELIANCE ON KEY PERSONNEL
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.
In addition, the implementation of the Fund's investment strategy depends
upon the continued contributions of certain key employees of the Advisor and
Sub-Advisor, some of whom have unique talents and experience and would be
difficult to replace. The loss or interruption of the services of a key member
of the portfolio management team could have a negative impact on the Fund during
the transitional period that would be required for a successor to assume the
responsibilities of the position.
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 currently manage and may in the
future manage and/or advise other investment funds or accounts with the same or
substantially similar investment objective and strategies as the Fund. As a
result, First Trust Advisors, Energy Income Partners and the Fund's portfolio
managers must allocate their time and investment ideas across multiple funds and
accounts. 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 purposes 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, including proprietary
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, including
proprietary 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, including proprietary 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
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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 and the terms of each of the investment
management agreement between First Trust Advisors and the Fund and the
sub-advisory agreement among First Trust Advisors, Energy Income Partners and
the Fund, 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 creates 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.
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. The Fund is not responsible
for operating MLPs and similar entities and cannot control or monitor their
compliance with applicable tax, securities and other laws and regulations
necessary for the profitability of such investments. Holders of MLP units could
potentially become subject to liability for all of the obligations of an MLP, if
a court determines that the rights of the unitholders to take certain action
under the limited partnership agreement would constitute "control" of the
business of that MLP, or if a court or governmental agency determines that the
MLP is conducting business in a state without complying with the limited
partnership statute of that state.
Furthermore, the structures and terms of the MLPs and other entities
described in this prospectus may not be indicative of the structure and terms of
every entity in which the Fund invests. In addition, certain conflicts of
interest exist between common unit holders and the general partner, including
those arising from incentive distribution payments. Conflicts of interest may
arise from incentive distribution payments paid to the general partner, or
referral of business opportunities by the general partner or one of its
affiliates to an entity other than the MLP. Holders of general partner or
managing member interests typically receive incentive distribution rights, which
provide them with an increasing share of the entity's aggregate cash
distributions upon the payment of per common unit quarterly distributions that
exceed specified threshold levels above the MQD. The ability of the limited
partners or members to remove the general partner or managing member without
cause is typically very limited. In addition, some MLPs permit the holder of
incentive distribution rights to reset, under specified circumstances, the
incentive distribution levels and receive compensation in exchange for the
distribution rights given up in the reset.
The MLPs in which the Fund invests are primarily in the energy sector. See
"--Investment Concentration Risk."
The federal income tax rules relating to the auditing of partnerships and
partners have changed. The Fund may have little input in any audit asserted
against an MLP and may be contractually or legally obligated to make payments in
regard to deficiencies asserted without the ability to put forward an
independent defense.
INVESTMENT CONCENTRATION RISK
The Fund's investments are concentrated in the group of industries that
are part of the energy sector, with a particular focus on energy sector MLPs,
energy sector MLP-related entities and other energy sector companies. The Fund's
concentration in the group of industries that are part of the energy sector may
present more risk than if the Fund were broadly diversified over multiple
sectors of the economy. A downturn in one or more industries within the energy
sector, material declines in energy-related commodity prices, adverse political,
legislative or regulatory developments or other events could have a larger
impact on the Fund than on an investment company that does not concentrate in
the group of industries that are part of the energy sector. The performance of
companies in the group of industries that are part of the energy sector may lag
- 53 -
the performance of other sectors or the broader market as a whole; in
particular, during a downturn like what has been experienced in recent years in
the energy sector. Certain risks inherent in investing in the business of the
types of securities that the Fund may invest include the following:
o Commodity Pricing Risk. The operations and financial performance of
MLPs, MLP-related entities and energy companies may be directly
affected by energy commodity prices, especially those MLPs,
MLP-related entities and energy companies that own the underlying
energy commodity, or receive payments for services that are based on
commodity prices. Such impact may be a result of changes in the price
for such commodity or a result of changes in the price of one energy
commodity relative to the price of another energy commodity (for
example, the price of natural gas relative to the price of NGLs).
Commodity prices fluctuate for several reasons including, changes in
market and economic conditions, the impact of weather on demand,
levels of domestic and international production, policies implemented
by the Organization of the Petroleum Exporting Countries, energy
conservation, domestic and foreign governmental regulation and
taxation and the availability of local, intrastate and interstate
transportation systems. Volatility of commodity prices which may lead
to a reduction in production or supply, may also negatively impact the
performance of MLPs, MLP-related entities and energy companies which
are solely involved in the transportation, processing, storage,
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 or indirectly tied to
commodity prices and there is uncertainty regarding these companies'
ability to maintain or grow cash distributions to their equity
holders.
o Supply and Demand Risk. As noted above, 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 operations and 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,
depressed commodity prices or access to capital for companies engaged
in exploration and production. 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.
o Lack of Diversification of Customers and Suppliers. Certain energy
companies, energy sector MLPs and energy sector MLP-related entities
depend upon a limited number of customers for substantially all of
their revenue. Similarly, certain energy companies, energy sector MLPs
and energy sector MLP-related entities depend upon a limited number of
suppliers of goods or services to continue their operations. Energy
industry downturns resulting from lower commodity prices may put
pressure on a number of these customers and suppliers. The loss of any
such customers or suppliers, including through bankruptcy, could
materially adversely affect such companies' results of operations and
cash flow, and their ability to make distributions to unit holders,
such as the Fund, would therefore be materially adversely affected.
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. Reserves
are generally increased 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.
As a result of the downturn in recent years in energy-related
commodity prices, many MLPs, MLP-related entities and other energy
companies have significantly reduced capital expenditures to develop
- 54 -
their reserve bases. This resulted in declines in domestic production
levels. Many MLPs, MLP-related entities and other energy companies
monetized reserves to manage the balance sheets and maintain adequate
liquidity levels. Some MLPs, MLP-related entities and other energy
companies filed for bankruptcy in an effort to restructure their
balance sheets. These actions have had a negative impact on the
operating results and financial performance for MLPs, MLP-related
entities and other energy companies engaged in the transportation,
storage, distribution and processing of production from such MLPs,
MLP-related entities and other energy companies.
o Regulatory Risk. The energy sector industries are highly regulated.
MLPs, MLP-related entities and other energy companies are subject to
significant regulation of nearly every aspect of their operations by
federal, state and local governmental agencies. Such regulation can
change rapidly or over time in both scope and intensity. For example,
a particular by-product or process may be declared hazardous
(sometimes retroactively) by a regulatory agency which could
unexpectedly increase production costs. 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 other energy companies.
Specifically, the operations of wells, gathering systems, pipelines,
refineries and other facilities are subject to stringent and complex
federal, state and local environmental laws and regulations. These
include, for example:
o the federal Clean Air Act and comparable state laws and
regulations that impose obligations related to air emissions;
o the federal Clean Water Act and comparable state laws and
regulations that impose obligations related to discharges of
pollutants into regulated bodies of water;
o the Resource Conservation and Recovery Act ("RCRA") and comparable
state laws and regulations that impose requirements for the
handling and disposal of waste from facilities; and
o the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA," also known as "Superfund") and comparable
state laws and regulations that regulate the cleanup of hazardous
substances that may have been released at properties currently or
previously owned or operated by MLPs, MLP-related entities or
other energy companies or at locations to which they have sent
waste for disposal.
Failure to comply with these laws and regulations may trigger a
variety of administrative, civil and criminal enforcement measures,
including the assessment of monetary penalties, the imposition of
remedial requirements, and the issuance of orders enjoining future
operations. Certain environmental statutes, including RCRA, CERCLA,
the federal Oil Pollution Act and analogous state laws and
regulations, impose strict, joint and several liability for costs
required to clean up and restore sites where hazardous substances have
been disposed of or otherwise released. Moreover, it is not uncommon
for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release of
hazardous substances or other waste products into the environment.
There is an inherent risk that MLPs, MLP-related entities and other
energy companies may incur environmental costs and liabilities due to
the nature of their businesses and the substances they handle. For
example, an accidental release from wells or gathering pipelines could
subject them to substantial liabilities for environmental cleanup and
restoration costs, claims made by neighboring landowners and other
third parties for personal injury and property damage, and fines or
penalties for related violations of environmental laws or regulations.
Moreover, the possibility exists that stricter laws, regulations or
enforcement policies could significantly increase the compliance costs
of MLPs, MLP-related entities or other energy companies. For example,
hydraulic fracturing, a technique used in the completion of certain
oil and gas wells, has become a subject of increasing regulatory
scrutiny and may be subject in the future to more stringent, and more
costly to comply with, requirements. Similarly, the implementation of
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more stringent environmental requirements could significantly increase
the cost of any remediation that may become necessary. MLPs,
MLP-related entities and other energy companies may not be able to
recover these costs from insurance.
Voluntary initiatives and mandatory controls have been adopted or are
being discussed both in the United States and worldwide to reduce
emissions of "greenhouse gases" such as carbon dioxide, a by-product
of burning fossil fuels, and methane, the major constituent of natural
gas, which many scientists and policymakers believe contribute to
global climate change. These measures and future measures could result
increased costs to certain companies in which the Fund may invest to
operate and maintain facilities and administer and manage a greenhouse
gas emissions program and may reduce demand for fuels that generate
greenhouse gases and that are managed or produced by companies in
which the Fund may invest.
In the wake of a Supreme Court decision holding that the United States
Environmental Protection Agency (the "EPA") has some legal authority
to deal with climate change under the Clean Air Act, the EPA and the
Department of Transportation jointly wrote regulations to cut gasoline
use and control greenhouse gas emissions from cars and trucks. The EPA
has also taken action to require certain entities to measure and
report greenhouse gas emissions and certain facilities may be required
to control emissions of greenhouse gases pursuant to EPA air
permitting and other regulatory programs. These measures, and other
programs addressing greenhouse gas emissions, could reduce demand for
energy or raise prices, which may adversely affect the total return of
certain of the Fund's investments. In addition, certain states
(individually or in regional cooperation), have taken or proposed
measures to reduce emissions of greenhouse gases.
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 cash flow. 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 cash flow. 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 of such entities 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,
earthquakes, tsunamis, wind 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
- 56 -
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 Weather Risk. Weather plays a role in the seasonality of the cash flow
of some energy companies, energy sector MLPs and energy sector
MLP-related entities. Companies in the propane industry, for example,
rely on the winter season to generate a significant portion of their
earnings. In an unusually warm winter season, propane companies may
experience decreased demand for their product.
o Terrorism/Market Disruption Risk. MLPs, MLP-related entities and
energy companies are subject to disruption as a result of terrorist
activities, war, and other geopolitical events, including upheaval in
the Middle East or other energy producing regions. The U.S. government
has issued warnings that energy assets, specifically those related to
pipeline and other energy infrastructure, production facilities and
transmission and distribution facilities, may be targeted in future
terrorist attacks. Internal unrest, acts of violence or strained
relations between a government and energy companies or other
governments may affect the operations and profitability of energy
companies, energy sector MLPs and energy sector MLP-related entities,
particularly marine transportation companies. Political instability in
other parts of the world may also cause volatility and disruptions in
the market for the securities of energy companies, energy sector MLPs
and energy sector MLP-related entities, even those that operate solely
in North America.
o Technology Risk. Some energy companies, energy sector MLPs and energy
sector MLP-related entities are focused on developing new technologies
and are strongly influenced by technological changes. Technology
development efforts by energy companies, energy sector MLPs and energy
sector MLP-related entities may not result in viable methods or
products. Energy companies, energy sector MLPs and energy sector
MLP-related entities may bear high research and development costs,
which can limit their ability to maintain operations during periods of
organizational growth or instability. Some energy companies, energy
sector MLPs and energy sector MLP-related entities may be in the early
stages of operations and may have limited operating histories and
smaller market capitalizations on average than companies in other
sectors. As a result of these and other factors, the value of
investments in energy companies, energy sector MLPs and energy sector
MLP-related entities may be considerably more volatile than that in
more established segments of the economy.
INDUSTRY SPECIFIC RISK
MLPs, MLP-related entities and energy companies are also subject to risks
that are specific to the industry they serve.
o 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 MLPs, MLP-related entities and other energy companies that operate
assets are also subject to the credit risk of their customers. For
example, during 2015 and 2016, customers of many MLPs, MLP-related
entities and other energy companies that explore for and produce oil,
natural gas and NGLs filed for bankruptcy. During the bankruptcy
process, the debtor entity may be able to reject a contract that it
has with an MLP, MLP-related entity or other energy company that
provides services for the debtor, which services could include
gathering, processing, transporting, fractionating or storing the
debtor entity's production. If a contract is successfully rejected
during bankruptcy, the affected MLP, MLP-related entity or other
energy company will have an unsecured claim for damages but will
likely only recover a portion of its claim for damages and may not
recover anything at all. Furthermore, if the terms of the contract are
not economic for the MLP, MLP-related entity or other energy company,
there may be an incentive for the MLP or other company to renegotiate
the contract to increase the utilization of its assets (whether or not
the MLP, MLP-related entity or other energy company has filed for
bankruptcy). In either case, an MLP or other company that operates
- 57 -
assets for an MLP, MLP-related entity or other energy company that is
in financial distress could experience a material adverse impact to
its financial performance and results of operations.
o Propane companies 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.
o MLPs, MLP-related entities and other energy companies that own
interstate pipelines are subject to regulation by the Federal Energy
Regulatory Commission ("FERC") with respect to the tariff rates they
may charge for transportation services. An adverse determination by
FERC with respect to the tariff rates of such a company could have a
material adverse effect on its business, financial condition, results
of operations and cash flows and its ability to pay cash distributions
or dividends.
o Marine shipping (or "tanker") companies are exposed to many of the
same risks as other MLPs, MLP-related entities and other energy
companies. In addition, the highly cyclical nature of the industry may
lead to volatile changes in charter rates and vessel values, which may
adversely affect a tanker company's earnings. Fluctuations in charter
rates and vessel values result from changes in the supply and demand
for tanker capacity and changes in the supply and demand for oil and
oil products. Historically, the tanker markets have been volatile
because many conditions and factors can affect the supply and demand
for tanker capacity. Changes in demand for transportation of oil over
longer distances and supply of tankers to carry that oil may
materially affect revenues, profitability and cash flows of tanker
companies. The successful operation of vessels in the charter market
depends upon, among other things, obtaining profitable spot charters
and minimizing time spent waiting for charters and traveling unladen
to pick up cargo. The value of tanker vessels may fluctuate and could
adversely affect the value of tanker company securities. Declining
tanker values could affect the ability of tanker companies to raise
cash by limiting their ability to refinance their vessels, thereby
adversely impacting tanker company liquidity. Tanker company vessels
are at risk of damage or loss because of events such as mechanical
failure, collision, human error, war, terrorism, piracy, cargo loss
and bad weather. In addition, changing economic, regulatory and
political conditions in some countries, including political and
military conflicts, have from time to time resulted in attacks on
vessels, mining of waterways, piracy, terrorism, labor strikes,
boycotts and government requisitioning of vessels. These sorts of
events could interfere with shipping lanes and result in market
disruptions and a significant loss of tanker company earnings.
o Changes in laws or government regulations regarding hydraulic
fracturing could increase a company's costs of doing business, limit
the areas in which it can operate and reduce oil and natural gas
production by the company.
CASH FLOW RISK
A substantial portion of the cash distributions 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 to its equity holders depends upon the amount of cash flow
generated from the MLP's or MLP-related entity's operations. Cash flow from
operations 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. Large declines in commodity prices can result in
material declines in cash flow from operations. 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 to pay its debt and equity holders include
increased operating costs, capital expenditures, acquisition costs, expansion,
construction costs and borrowing costs (including increased borrowing costs as a
result of additional collateral requirements as a result of ratings downgrades
by credit agencies). Further, covenants in debt instruments issued by energy
companies, energy sector MLPs and energy sector MLP-related entities in which
the Fund invests may restrict distributions to equity holders or, in certain
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circumstances, may not allow distributions to be made to equity holders. To the
extent the Fund invests in energy companies, energy sector MLPs and energy
sector MLP-related entities that reduce their distributions to equity holders,
this will result in reduced levels of net distributable income and can cause the
Fund to reduce its distributions.
MLP AND DEFERRED TAX RISK
Much of the benefit the Fund derives from its investments in equity
securities of MLPs is a result of MLPs generally being treated as partnerships
for United States federal income tax purposes. Partnerships do not pay United
States federal income tax at the partnership level. Rather, each partner of a
partnership, in computing its United States federal income tax liability, will
include its allocable share of the partnership's income, gains, losses,
deductions and expenses. A change in current tax law, a change in the business
of a given MLP, or a change in the types of income earned by a given MLP could
result in an MLP being treated as a corporation for United States federal income
tax purposes, which would result in such MLP being required to pay United States
federal income tax on its taxable income. Recent changes in regulations may
cause some MLPs to be reclassified as corporations. The classification of an MLP
as a corporation for United States federal income tax purposes would have the
effect of reducing the amount of cash available for distribution by the MLP and
causing any such distributions received by the Fund to be taxed as dividend
income to the extent of the MLP's current or accumulated earnings and profits.
Thus, if any of the MLPs owned by the Fund were treated as a corporation for
United States federal income tax purposes, the value and after-tax return to the
Fund with respect to its investment in such MLPs would be materially reduced,
which could cause a substantial decline in the value of the common shares.
Separately, a change in law has shifted the primary obligation for taxes
attributable to partnership adjustments to the partnership. The MLPs may make
certain elections to push that liability out to the partners, but the
application of the new law is subject to substantial uncertainties.
In addition, the potential tax benefit to the Fund of investing in MLPs
will depend in part on the particular MLP securities selected, and whether any
distributions paid by such MLPs will be treated as a return of capital (as
opposed to currently taxable income). The Fund will rely on the Sub-Advisor to
select MLP securities that provide distributions in excess of allocable taxable
income. If the Sub-Advisor fails to do so, a greater portion of the
distributions received by the Fund may be comprised of taxable income (which
would reduce the ability of the Fund to make distributions to common
shareholders that are treated as a return of capital for United States federal
income tax purposes). In such case, the Fund may have more corporate income tax
expense than expected, which will result in less cash available to distribute to
common shareholders. Also, in connection with managing the Fund's portfolio in
order to seek to maximize the potential tax benefits discussed above, the
Sub-Advisor may be forced to sell securities at times or prices that may be
disadvantageous to the Fund.
The Fund will be treated as a regular corporation, or a "C" corporation,
for United States federal income tax purposes and, as a result, unlike most
investment companies, will be subject to corporate income tax to the extent the
Fund recognizes taxable income. Any taxes paid by the Fund will reduce the
amount available to pay distributions to common shareholders, and therefore
investors in the Fund will likely receive lower distributions than if they
invested directly in MLPs.
As a limited partner in the MLPs in which it may invest, 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 non-cash tax deductions such as depreciation and depletion. The Fund will
incur a current tax liability on its income allocation from an MLP not offset by
tax deductions. The Fund's tax basis in its MLP units would be in increased by
the income allocated from an MLP, and then reduced by all distributions from the
MLP (including any distributions in excess of allocated income), which would
either increase the Fund's taxable gain or reduce the Fund's loss recognized
upon the sale of such MLP units. 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 an 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 the income offset by tax deductions or an
increase in sales of the Fund's MLP holdings that result in capital gains will
reduce that portion of the Fund's distribution from an MLP treated as a return
of capital and increase that portion treated as income, and may result in lower
after-tax distributions to the Fund's common shareholders.
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The Fund will accrue deferred income taxes for its future tax liability
associated with the difference between the Fund's tax basis in an MLP security
and the fair market value of the MLP security. Upon the Fund's sale of an MLP
security, the Fund may be liable for previously deferred taxes. The Fund will
rely to some extent on information provided by MLPs, which may not necessarily
be timely, to estimate its deferred tax liability for purposes of financial
statement reporting and determining its NAV. In addition, the Tax Cuts and Jobs
Act has impacted the determination of the Fund's NAV as discussed below in "--
Recent Market and Economic Developments." From time to time, the Fund will
modify its estimates or assumptions regarding its deferred tax liability as new
information becomes available.
Non-MLP energy companies in which the Fund invests are generally taxed as
corporations. Such companies thus pay corporate-level taxes on their net taxable
income and may not offer certain other advantageous tax characteristics of MLP
investments. To the extent that the Fund increases its investments in non-MLP
energy companies, a greater portion of the distributions the Fund receives may
consist of taxable income, which may result in the Fund having a larger
corporate income tax expense, which may result in less cash available to
distribute. To the extent that the Fund increases its investments in non-MLP
energy companies, a lesser percentage of future distributions by the Fund may be
treated as a return of capital for U.S. federal income tax purposes and a
greater percentage of future distributions may be treated as dividend payments
taxable as ordinary income or qualified dividend income.
Because of the Fund's status as a corporation for United States federal
income tax purposes and its investments in equity securities of MLPs, the Fund's
earnings and profits may be calculated using accounting methods that are
different from those used for calculating taxable income. Because of these
differences, the Fund may make distributions out of its current or accumulated
earnings and profits, which will be treated as taxable dividends, in excess of
its taxable income. See "Tax Matters."
RECENT MARKET AND ECONOMIC DEVELOPMENTS
During recent years, prices of oil and other energy commodities have
declined significantly and experienced significant volatility. Such volatility
has adversely impacted (and may continue to impact) many of the MLPs,
MLP-related entities and other energy companies in which the Fund has invested
or may invest. For example, many MLPs, MLP-related entities and other energy
companies have in recent years experienced eroding growth prospects, reduced
distribution levels or, in some cases, bankruptcy. These conditions have
impacted, and may continue to impact, the NAV of the Fund and its ability to pay
distributions to shareholders at current or historic levels.
During periods of market volatility, MLPs, MLP-related entities and other
energy companies may be unable to obtain new debt or equity financing on
acceptable terms or at all when market conditions are most volatile, and
downgrades of the debt of MLPs, MLP-related entities and other energy companies
by rating agencies during times of distress could exacerbate this challenge. In
addition, downgrades of the debt of MLPs, MLP-related entities and other energy
companies by ratings agencies may increase the cost of borrowing under the terms
of an MLP's, MLP-related entity's and other energy company's credit facility,
and a downgrade from investment grade to below investment may cause an MLP,
MLP-related entity and other energy company to be required to post collateral
(or additional collateral) by its contractual counterparties, which could reduce
the amount of liquidity available to such MLP, MLP-related entity and other
energy company and increase its need for additional funding sources. If funding
is not available when needed, or is available only on unfavorable terms, MLPs,
MLP-related entities and other energy companies may have to reduce their
distributions to manage their funding needs and may not be able to meet their
obligations, which may include multi-year capital expenditure commitments, as
they come due. Moreover, without adequate funding, many MLPs, MLP-related
entities and other energy companies will be unable to execute their growth
strategies, complete future acquisitions, take advantage of other business
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on their revenues and results of operations.
The number of energy-related MLPs has declined since 2014 for a number of
reasons as discussed below. Many of the assets held by MLPs were originally
constructed decades ago by pipeline and power utilities. When the United States
deregulated much of the energy industry, these utilities became cyclical
commodity companies with significant levels of debt and the resulting financial
stress caused divestment of their pipeline assets to the MLP space that was
trading at higher valuations. This trend has reversed since 2014.
While MLPs represented a way for the industry to lower its cost of
financing between 2004 (when the Fund was launched) and 2014, the severe
correction in the price of crude oil in 2014 caused a collapse in MLP valuations
as about half of the Alerian MLP Index had become exposed to commodity prices
between 2004 and 2014. MLP distribution cuts and even some bankruptcies
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followed. MLPs are now a higher-cost way of financing these industries; the
reverse of the conditions that led to the growth of the asset class in the early
part of the last decade. As a result, the industry is witnessing the
consolidation or simplification of corporate structures where the MLP sleeve of
capital is being eliminated because it no longer reduces a company's cost of
equity financing.
Even for MLPs that have avoided exposure to commodity prices and have been
successful in growing their dividends, the cost of the MLP structure has risen
due to growing incentive payments to the general partner. These incentives
increase with per share dividend growth at the limited partnership level and are
due on newly issued shares, as well as older shares that have experienced the
growth. As a result, the more successful the MLP is in growing its dividends,
the closer it gets to paying incentives to the parent/general partner that are
more onerous than a tax at the corporate level. The lower the corporate tax
rate, the sooner this threshold is crossed. In many cases, MLPs are merely a
part of the corporate finance structure of a company. MLPs are created when they
lower the cost of equity financing and are no longer used when they do not. As a
result of the foregoing, the Fund may increase its non-MLP investments
consistent with its investment objective and policies.
In addition, on December 22, 2017, the Tax Cuts and Jobs Act was signed
into law, which, among other things, reduced the top federal income tax rate
applicable to the Fund from 35% to 21% and, accordingly, reduced the Fund's
accrual rate for deferred federal income taxes. See "Tax Matters" and "Market
and Net Asset Value Information."
UTILITIES COMPANY RISK
A variety of factors may adversely affect the business or operations of utility
companies, including: high interest costs in connection with capital
construction and improvement programs; difficulty in raising capital in adequate
amounts on reasonable terms in periods of high inflation and unsettled capital
markets; governmental regulation of rates charged to customers (including the
potential that costs incurred by the utility change more rapidly than the rate
the utility is permitted to charge its customers); costs associated with
compliance with and changes in environmental and other regulations; effects of
economic slowdowns and surplus capacity; increased competition from other
providers of utilities services; inexperience with and potential losses
resulting from a developing deregulatory environment; costs associated with
reduced availability of certain types of fuel, occasionally reduced availability
and high costs of natural gas for resale and the effects of energy conservation
policies; the effects of a national energy policy and lengthy delays and greatly
increased costs and other problems associated with the design, construction,
licensing, regulation and operation of nuclear facilities for electric
generation, including, among other considerations, the problems associated with
the use of radioactive minerals and the disposal of radioactive wastes;
technological innovations that may render existing plants, equipment or products
obsolete; potential impact of terrorist activities; the impact of natural or
man-made disasters; risk of counterparty or customer default or bankruptcy may
materially affect the utility company's operations, cash flows and ability to
make distributions to shareholders, regulation by various governmental
authorities, including the imposition of special tariffs; and changes in tax
laws, regulatory policies and accounting standards.
LEVERAGE PROGRAM TAX RISK
The Fund intends to use leverage to make its investments. See "Use of
Leverage." The Fund may be subject to limitations on the amount of interest
deductions that it may take in each year. The limitation on interest would be
based upon income before depletion, which is sometimes a significant deduction
allocated from MLPs. It is possible that the Fund will not be able to deduct all
of its interest expense in the year accrued. If this occurs, the excess interest
expense could be carried forward to subsequent years, but the Fund's tax in the
year the expense is accrued could increase.
TAX LAW CHANGE RISK
Changes in tax laws or regulations, or interpretations thereof in the
future, could adversely affect the Fund or the MLPs, MLP-related entities and
other energy companies in which the Fund invests. Any such changes could
negatively impact the Fund and its common shareholders. For example, if as a
result of a change in the tax laws, MLPs are required to be treated as
corporations rather than partnerships for tax purposes, MLPs would be subject to
entity level tax at corporate tax rates and any distributions received by the
Fund from an MLP would be treated as dividend income to the extent it was
attributable to the MLP's current or accumulated earnings and profits. Such
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treatment would negatively impact the amount and tax characterization of
distributions received by the Fund and its common shareholders. The IRS has
adopted regulations, which are currently in effect, that limit the nature of
qualifying income for MLPs. Some MLPs may convert to corporations under these
regulations or restructure their activities to qualify under these regulations.
In addition, there have been proposals in Congress to eliminate certain tax
incentives widely used by oil and gas companies and to impose new fees on
certain energy producers. The elimination of such tax incentives and imposition
of such fees could adversely affect MLPs, MLP-related entities and other energy
sector and energy utility companies and/or the energy sector generally.
Furthermore, recently enacted legislation (which by its terms became effective
for taxable years beginning after December 31, 2017) generally requires that
taxes, penalties, and interest associated with an audit of a partnership be
assessed and collected at the partnership level. Therefore, an adverse federal
income tax audit of an MLP that the Fund invests in could result in the Fund
being required to pay federal income tax or pay a deficiency dividend (without
having received additional cash). The Fund may have little input in any audit
asserted against an MLP and may be contractually or legally obligated to make
payments in regard to deficiencies asserted without the ability to put forward
an independent defense. Accordingly, even if an MLP in which the Fund invests
were to remain classified as a partnership, it could be required to pay
additional taxes, interest and penalties as a result of an audit adjustment, and
the Fund, as a direct or indirect partner of such MLP, could be required to bear
the economic burden of those taxes, interest and penalties, which would reduce
the value of the common shares.
DELAY IN INVESTING THE PROCEEDS OF THIS OFFERING
Although the Fund currently intends to invest the proceeds from any sales
of the Common Shares as soon as practicable following the completion of each
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, the Fund may not 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. As a result, the return and
yield on the common shares following the issuance of Common Shares 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 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 MLPs, MLP-related entities and other energy companies in
which the Fund invests and may in the future 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 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 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 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
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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.
The Fund may invest in equity securities of other energy companies. The
prices of equity securities are sensitive to general movements in the stock
market, so a drop in the stock market may depress the prices of equity
securities in which the Fund invests. Equity securities are structurally
subordinated to preferred stock, bonds and other debt instruments in a company's
capital structure in terms of priority to corporate income and are therefore
inherently more risky and more experience significantly greater price volatility
than preferred stock or debt instruments of such issuers.
RISKS ASSOCIATED WITH AN INVESTMENT IN INITIAL PUBLIC OFFERINGS
Securities purchased in initial public offerings ("IPOs") are often
subject to the general risks associated with investments in companies with small
market capitalizations, and typically to a heightened degree. Securities issued
in IPOs have no trading history, and information about the companies may be
available for very limited periods. In addition, the prices of securities sold
in an IPO may be highly volatile. At any particular time or from time to time,
the Fund may not be able to invest in IPOs, or to invest to the extent desired,
because, for example, only a small portion (if any) of the securities being
offered in an IPO may be available to the Fund. IPO securities may be volatile,
and the Fund cannot predict whether investments in IPOs will be successful.
LEVERAGE RISK
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.
The successful use of leverage depends on the Sub-Advisor's ability to predict
or hedge correctly interest rate and market movements. 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 NAV 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 NAV 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 use of leverage by the Fund involves expenses and/or other costs,
including interest or dividend payments, which are 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
- 63 -
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.
Certain types of leverage may result in the Fund being subject to
covenants relating to asset coverage and 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. 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 these asset coverage and portfolio
composition requirements and no event of default exists under the borrowing
program. 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. 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 typically 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.
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 herein. There is no assurance
that the Fund will not violate financial covenants relating to the Commitment
Facility or other 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. Furthermore, with respect to a borrowing program instituted by the
Fund, the credit agreements governing such a program, including the Commitment
Facility, includes other 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 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 in which the Fund is currently engaged; (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.
The Fund also may be subject to certain restrictions on investments
imposed by guidelines of one or more rating agencies, which may issue ratings
for Preferred Shares or other leverage instruments 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 NAV 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. Because common shareholders indirectly bear
the cost of leverage, an increase in interest and dividend obligations on the
Fund's leverage may reduce the total return to common shareholders.
It is possible that the Fund will be unable to obtain additional leverage,
particularly when capital and credit markets are experiencing extreme volatility
and disruption. The availability of leverage will depend on a variety of
- 64 -
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 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 leverage on favorable terms,
or at all. If the Fund is unable to increase its 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. See "--Leverage Program Tax Risk."
COVERED CALL OPTIONS RISK
There are various risks associated with the Fund writing (or selling)
covered call options. As the writer (seller) of a call option, the Fund receives
cash (the premium) from the purchaser of the option, and the purchaser has the
right to receive from the Fund any appreciation in the underlying security over
the strike price upon exercise. In effect, the Fund forgoes, during the life of
the option, the opportunity to profit from increases in the market value of the
portfolio security covering the option above the sum of the premium and the
strike price of the call option but retains the risk of loss should the price of
the underlying security decline. Therefore, the writing (or selling) of covered
call options may limit the Fund's ability to benefit from the full upside
potential of its investment strategies.
The value of call options written by the Fund, which are priced daily, are
determined by trading activity in the broad options market and will be affected
by, among other factors, changes in the value of the underlying security in
relation to the strike price, changes in dividend rates of the underlying
security, changes in interest rates, changes in actual or perceived volatility
of the stock market and the underlying security, and the time remaining until
the expiration date. The value of call options written by the Fund may be
adversely affected if the market for the option is reduced or becomes illiquid.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange on
opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) inadequate facilities of an
exchange or The Options Clearing Corporation to handle current trading volume;
or (vi) the decision of one or more exchanges at some future date to discontinue
the trading of options (or a particular class or series of options) for economic
or other reasons. 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 would continue to be exercisable in
accordance with their terms. To the extent that the Fund utilizes unlisted (or
"over-the-counter") options, the Fund's ability to terminate these options may
be more limited than with exchange-traded options and may involve enhanced risk
that counterparties participating in such transactions will not fulfill their
obligations.
The hours of trading for options may not conform to the hours during which
the securities held by the Fund 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. Additionally, the exercise price of an option
may be adjusted downward before the option's expiration as a result of the
occurrence of certain corporate events affecting the underlying security, such
as extraordinary dividends, stock splits, mergers or other extraordinary
distributions or events. A reduction in the exercise price of options might
reduce the Fund's capital appreciation potential on underlying securities held
by the Fund.
The Fund's covered call options transactions are subject to limitations
established by each of the exchanges, boards of trade or other trading
facilities on which the options are traded. These limitations govern the maximum
number of options in each class that may be written by a single investor or
group of investors acting in concert, regardless of whether the options are
written on the same or different exchanges, boards of trade or other trading
facilities or are written in one or more accounts or through one or more
brokers. Thus, the number of covered call options that the Fund may write may be
affected by options written by other investment advisory clients of the Advisor,
Sub-Advisor or their affiliates. 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 other sanctions.
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INTEREST RATE SWAPS RISK
The use of interest rate swaps 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 could enhance or harm the overall performance
of the common shares. For example, the Fund may utilize interest rate swaps in
connection with the Fund's use of leverage. To the extent there is a decline in
interest rates, the value of the interest rate swap could decline, and could
result in a decline in the NAV 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.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate 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 to offset
any declines in the value of the Fund's portfolio assets being hedged or the
increase in the Fund's cost of leverage. Depending on whether the Fund would be
entitled to receive net payments from the counterparty on the swap, which in
turn would depend on the general state of market interest rates at that point in
time, such a default could negatively impact the performance of the common
shares. In addition, at the time an interest rate swap 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 leverage, the Fund may be required to redeem or prepay some or all of
the leverage. Such redemption or prepayment would likely result in the Fund
seeking to terminate early all or a portion of any swap transactions. Early
termination of a swap could result in a termination payment by or to the Fund.
The Fund earmarks or maintains, in a segregated account, cash or liquid
securities having a value at least equal to the amount required to make payment
on each of the Fund's swap transactions if the Fund were to exit its positions
in such transactions immediately and was required to mark to market. The Fund
will not enter into interest rate swap transactions having a notional amount
that exceeds the outstanding amount of the Fund's leverage. See "Additional
Information About the Fund's Investments and Investment Risks--Strategic
Transactions--Equity Swaps and Interest Rate or Commodity Swaps, Collars, Caps
and Floors" and "Other Investment Policies and Techniques--Swap Agreements" in
the SAI.
TOTAL RETURN SWAPS RISK
Total return swaps are contracts in which one party agrees to make
payments of the total return from the underlying asset(s), which may include
securities, derivatives or indices, during the specified period in return for
payments equal to a fixed or floating rate of interest or the total return from
other underlying asset(s). The Fund anticipates that, under its total return
swaps, if any, it will pay the counterparty a regular, set payment at an agreed
rate of return and, in return, will receive a payment which is equal to the
performance of the underlying assets. Total return swaps are subject to the risk
that a counterparty will default on its payment obligations. See
"Risks--Counterparty Risk." In the event that the performance of the relevant
assets is less than the agreed rate, the Fund will be required to make further
payments to the total return swap counterparty in respect of such shortfalls.
The Fund will not be able to replicate exactly the performance of the relevant
underlying assets because the total return generated by the Fund's investment in
a total return swap will be reduced by certain costs and expenses. Total return
swaps may effectively add leverage to the Fund's portfolio because the Fund
would be subject to investment exposure on the full notional amount of the swap.
See "Risks--Leverage Risk."
EQUITY SWAPS RISK
Equity swaps are privately negotiated contracts between two parties, buyer
and seller, stipulating that the seller will pay to or receive from the buyer
the difference between the nominal value of the underlying instrument at the
opening of the contract and that instrument's value at the end of the contract.
As is the case with owning any financial instrument, there is the risk of loss
associated with entering into equity swaps. There may be liquidity risk if the
underlying instrument is illiquid because the liquidity of equity swaps is based
on the liquidity of the underlying instrument. Equity swaps also carry
counterparty risk, i.e., the risk that the counterparty to the transaction may
be unable or unwilling to make payments or to otherwise honor its financial
obligations under the terms of the contract. If the counterparty were to do so,
the value of the contract may be reduced. See "--Counterparty Risk." A further
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risk in respect of equity swaps is that adverse movements in the underlying
security will require the buyer to post additional margin. To the extent that
there is an imperfect correlation between the return on the Fund's obligation to
its counterparty under an equity swap and the return on related assets in its
portfolio, the equity swap transaction may increase the Fund's financial risk.
CREDIT DEFAULT SWAPS RISK
Credit Default Swaps Risk. 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 full notional value, or "par value," of the reference obligation
through either physical settlement or cash settlement. The Fund may be either
the buyer or seller in a credit default swap transaction. If the Fund is a buyer
and no event of default occurs, the Fund will have made a series of periodic
payments and recover nothing of monetary value. However, if an event of default
occurs, the Fund (if the buyer) will receive the full notional value of the
reference obligation through a cash payment in exchange for the asset or,
alternatively, a cash payment representing the difference between the expected
recovery rate and the full notional 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 five years, provided that there is no event of default.
The sale of a credit default swap effectively creates leverage and subjects the
Fund to the risks described under "Risks--Leverage Risk." The Fund currently
intends to earmark or segregate assets on the Fund's records in the form of
cash, cash equivalents or liquid securities in an amount equal to the notional
value of the credit default swaps of which it is the seller. If such assets are
not fully segregated by the Fund, the use of credit default swap transactions
could then be considered leverage for purposes of the 1940 Act. Asset
segregation affects the regulatory treatment but does not diminish the effective
leverage in such instruments. Credit default swap transactions involve greater
risks than if the Fund had invested in the reference obligation directly. In
addition to general market risk, credit default swaps are subject to illiquidity
risk, counterparty risk and credit risk. See "Risks--Counterparty Risk."
COUNTERPARTY RISK
The Fund will be subject to credit risk with respect to the counterparties
to the derivative transactions entered into directly by the Fund. Changes in the
credit quality of the companies that serve as the Fund's counterparties with
respect to derivatives or other transactions supported by another party's credit
will affect the value of those instruments. If a counterparty becomes bankrupt
or otherwise fails to perform its obligations under a derivative contract due to
financial difficulties, the Fund may experience significant delays in obtaining
any recovery under the derivative contract in a bankruptcy or other
reorganization proceeding. The Fund may obtain only a limited recovery or may
obtain no recovery in such circumstances.
RESTRICTED SECURITIES RISK
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 NYSE, NYSE American and Nasdaq,
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
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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, Strategic 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 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 relies to some extent on information
provided by certain MLPs, which is usually not timely, to calculate taxable
income allocable to the MLP units held in the Fund's portfolio and to determine
the tax character of distributions to common shareholders. From time to time the
Fund will modify its estimates and/or assumptions as new information becomes
available. To the extent the Fund modifies its estimates and/or assumptions, the
NAV 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 NAV 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. The historically low interest rate
environment increases the risks associated with rising interest rates, including
the potential for periods of volatility. The Fund currently faces a heightened
level of interest rate risk, especially since the Federal Reserve Board has
ended its quantitative easing program.
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,
2019, the Fund did not invest in any below investment grade securities. Below
investment grade securities, also sometimes referred to as "high yield" or
"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
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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-U.S. SECURITIES RISK
The Fund may invest a portion of its assets in securities of non-U.S.
issuers. Investing in securities of non-U.S. issuers, which are generally
denominated in non-U.S. currencies, may involve certain risks not typically
associated with investing in securities of U.S. issuers. These risks include:
(i) there may be less publicly available information about non-U.S. issuers or
markets due to less rigorous disclosure or accounting standards or regulatory
practices; (ii) non-U.S. markets may be smaller, less liquid and more volatile
than the U.S. market; (iii) potential adverse effects of fluctuations in
currency exchange rates or controls on the value of the Fund's investments; (iv)
the economies of non-U.S. countries may grow at slower rates than expected or
may experience a downturn or recession; (v) the impact of economic, political,
social or diplomatic events; (vi) certain non-U.S. countries may impose
restrictions on the ability of non-U.S. issuers to make payments of principal
and interest to investors located in the United States due to blockage of
non-U.S. currency exchanges or otherwise; and (vii) withholding and other
non-U.S. taxes may decrease the Fund's return. Foreign companies are generally
not subject to the same accounting, auditing and financial reporting standards
as are U.S. companies. In addition, there may be difficulty in obtaining or
enforcing a court judgment abroad. These risks may be more pronounced to the
extent that the Fund invests a significant amount of its assets in companies
located in one region.
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 , 2019, there were
approximately publicly traded MLPs, with a market capitalization of
approximately $ billion. 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 and policies.
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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."
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. 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.
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.
SECONDARY MARKET FOR THE FUND'S COMMON SHARES ISSUED UNDER THE DIVIDEND
REINVESTMENT PLAN
The issuance of common shares through the Fund's dividend reinvestment
plan may have an adverse effect on the secondary market for the common shares.
The increase in the number of outstanding common shares resulting from issuances
pursuant to the Fund's dividend reinvestment plan and the discount to the market
price at which such common shares may be issued, may put downward pressure on
the market price for the common shares. Common shares will not be issued
pursuant to the dividend reinvestment plan at any time when common shares are
trading at a lower price than the Fund's NAV per common share. When the Fund's
common shares are trading at a premium, the Fund may also issue common shares
that may be sold through private transactions effected on the NYSE or through
broker-dealers. The increase in the number of outstanding common shares
resulting from these offerings may put downward pressure on the market price for
common shares.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
General oversight of the duties performed by the Advisor and Sub-Advisor
is the responsibility of the Board of Trustees. There are five Trustees of the
Fund, one of whom is an "interested person" (as defined in the 1940 Act) and
four of whom are not "interested persons." 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 L.P. ("First Trust Advisors" or the "Advisor") is the
investment adviser to the Fund. First Trust Advisors L.P. serves as investment
adviser or portfolio supervisor to investment portfolios with approximately
$ billion in assets which it managed or supervised as of November 30, 2019.
It is located at 120 East Liberty Drive, Wheaton, Illinois 60187.
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First Trust Advisors L.P. is responsible for supervising the Sub-Advisor,
monitoring the Fund's investment portfolio, managing the Fund's business affairs
and providing certain clerical, bookkeeping and other administrative services.
First Trust Advisors L.P. is an Illinois limited partnership formed in
1991 and an investment adviser registered with the SEC under the Advisers Act.
First Trust Advisors L.P. 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 ownership interests. The Charger
Corporation is an Illinois corporation controlled by James A. Bowen, Chief
Executive Officer of the Advisor. First Trust Advisors L.P. 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, LLC ("Energy Income Partners" or the
"Sub-Advisor") serves as the Fund's Sub-Advisor. In this capacity, Energy Income
Partners is primarily responsible for the day-to-day supervision and investment
strategy of and making investment decisions for, the Fund.
Energy Income Partners, located at 10 Wright Street, Westport, Connecticut
06880, is a registered investment adviser and serves as investment adviser to
investment portfolios with approximately $6.1 billion of assets as of November
30, 2019.
Energy Income Partners is a Delaware limited liability company and an
SEC-registered investment adviser, 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-adviser to the Fund, Energy Income Partners serves as the
investment manager to separately managed accounts, unregistered investment
companies, a registered investment company and provides a model portfolio to
unified managed accounts. Energy Income Partners also serves as the sub-adviser
to three other registered investment companies advised by First Trust Advisors,
two actively managed exchange traded funds, a sleeve of an actively managed
exchange-traded fund, a sleeve of a variable insurance trust and an Irish
Domiciled UCITs fund. 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, owns,
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, Principal of
Energy Income Partners and a co-portfolio manager. 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 a co-portfolio
manager. 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.
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John K. Tysseland is a Principal of Energy Income Partners and a
co-portfolio manager. Mr. Tysseland has been a portfolio manager of the Fund
since 2016. Prior to joining Energy Income Partners in 2014, he worked at Citi
Research, most recently serving as a Managing Director where he covered
midstream energy companies and MLPs. From 1998 to 2005, he worked at Raymond
James & Associates as a Vice President who covered the oilfield service industry
and established the firm's initial coverage of MLPs in 2001. Prior to that, he
was an Equity Trader at Momentum Securities from 1997 to 1998 and an Assistant
Executive Director at Sumar Enterprises from 1996 to 1997. He graduated from The
University of Texas at Austin with a BA in economics.
Saul Ballesteros is the Head of Trading and Operations 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 between First Trust
Advisors and the Fund (the "Investment Management Agreement"), 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).
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) is 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. The Advisor and the Sub-Advisor will make decisions on whether and how
much leverage the Fund will employ based on whether it is in the best interests
of the Fund. The Advisor and the Sub-Advisor will seek approval for and
periodically review the use of leverage with the Board of Trustees. In this
regard, if the Fund uses leverage in the amount equal to % of the Fund's
Managed Assets (after their issuance), the Fund's management fee would be %
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 Investment Management Agreement is available in the Fund's Annual Report to
Shareholders for the period ended November 30, 2019.
NET ASSET VALUE
The Fund determines the NAV of its common shares daily as of the close of
regular session trading on the NYSE (normally 4:00 p.m. Eastern Time). NAV 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
- 72 -
liquidation value of any outstanding Preferred Shares, by the total number of
shares outstanding. The Fund relies 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 NAV of the Fund would likely fluctuate.
For purposes of determining the NAV of the Fund, readily marketable
portfolio securities listed on any exchange other than Nasdaq 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. 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, is 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 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.
When applicable, fair value of securities of an issuer is determined by
the Board or a committee of the Board. In fair valuing the Fund's investments,
such as unregistered securities of MLPs, MLP-related entities and private energy
companies, consideration is given to the following factors:
o the fundamental business data relating to the issuer;
o an evaluation of the forces which influence the market in which the
securities of the issuer are purchased and sold;
o the type, size and cost of the security;
o the financial statements of the issuer;
o the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
o the information as to any transactions in or offers for the security;
o the price and extent of public trading in similar securities (or
equity securities) of the issuer, or comparable companies;
o the coupon payments;
o the quality, value and saleability of collateral, if any, securing the
security;
o the business prospects of the issuer, including any ability to obtain
money or resources from a parent or affiliate and an assessment of the
issuer's management;
o the prospects for the issuer's industry, and multiples (of earnings
and/or cash flow) being paid for similar businesses in that industry;
o the issuer's competitive position within the industry;
o the issuer's ability to access additional liquidity through public and
private markets; and
o other relevant factors.
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DISTRIBUTIONS
Under normal market conditions, the Fund currently makes, and intends to
continue 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 likely will 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 are 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 return of capital to the extent of a shareholder's
basis in the common shares, and such distributions will correspondingly increase
the realized gain 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 a shareholder elects to receive cash distributions, distributions
will automatically be reinvested into additional common shares pursuant to the
Fund's Dividend Reinvestment Plan. Shareholders will be taxed upon the
reinvested amounts as if they 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, are 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., 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 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 NAV at the time of
valuation, the Fund will issue new shares at a price equal to the greater
of (i) NAV per common share on that date or (ii) 95% of the market price
on that date.
(2) If common shares are trading below NAV 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
American 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.
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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., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PLAN OF DISTRIBUTION
The Fund may sell its Common Shares from time to time under this
prospectus and any related prospectus supplement in any one or more of the
following ways: (1) directly to one or more purchasers; (2) through agents; (3)
to or through underwriters; or (4) through dealers. See also "Dividend
Reinvestment Plan" above.
Each prospectus supplement relating to an offering of the Common Shares
will state the terms of the offering, including as applicable:
o the names of any agents, underwriters or dealers;
o any sales loads or other items constituting underwriters'
compensation;
o any discounts, commissions, fees or concessions allowed or reallowed
or paid to dealers or agents;
o the public offering or purchase price of the offered securities and
the estimated net proceeds we will receive from the sale; and
o any securities exchange on which the offered Common Shares may be
listed.
Any public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
DIRECT SALES
The Fund may sell the Common Shares directly to, and solicit offers from,
purchasers, including institutional investors or others who may be deemed to be
underwriters as defined in the 1933 Act for any resales of the Common Shares. In
this case, no underwriters or agents would be involved. The Fund may use
electronic media, including the Internet, to sell Common Shares directly. The
terms of any of those sales will be described in a prospectus supplement.
BY AGENTS
The Fund may offer the Common Shares through agents that it designates.
Any agent involved in the offer and sale will be named and any commissions
payable by the Fund will be described in the prospectus supplement. Unless
otherwise indicated in the prospectus supplement, the agents will be acting on a
best-efforts basis for the period of their appointment.
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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 one or
more underwriters or dealers acting as principal or agent for the Fund.
BY UNDERWRITERS
The Fund may offer and sell the Common Shares from time to time to one or
more underwriters who would purchase the Common Shares as principal for resale
to the public, either on a firm commitment or best efforts basis. If the Fund
sells Common Shares to underwriters, the Fund will execute an underwriting
agreement with them at the time of the sale and will name them in the prospectus
supplement. In connection with these sales, the underwriters may be deemed to
have received compensation from the Fund in the form of underwriting discounts
and commissions. The underwriters also may receive commissions from purchasers
of the Common Shares for whom they may act as agent. Unless otherwise stated in
the prospectus supplement, the underwriters will not be obligated to purchase
the Common Shares unless the conditions set forth in the underwriting agreement
are satisfied, and if the underwriters purchase any of the Common Shares, they
will be required to purchase all of the offered Common Shares. In the event of
default by any underwriter, in certain circumstances, the purchase commitments
may be increased among the non-defaulting underwriters or the underwriting
agreement may be terminated. The underwriters may sell the offered Common Shares
to or through dealers, and those dealers may receive discounts, concessions or
commissions from the underwriters as well as from the purchasers for whom they
may act as agent.
If a prospectus supplement so indicates, the Fund may grant the
underwriters an option to purchase additional Common Shares at the public
offering price, less the underwriting discounts and commissions, within a
specified number of days from the date of the prospectus supplement, to cover
any overallotments.
BY DEALERS
The Fund may offer and sell the Common Shares from time to time to one or
more dealers who would purchase the securities as principal. The dealers then
may resell the offered Common Shares to the public at fixed or varying prices to
be determined by those dealers at the time of resale. The names of the dealers
and the terms of the transaction will be set forth in the prospectus supplement.
GENERAL INFORMATION
Agents, underwriters, or dealers participating in an offering of the
Common Shares may be deemed to be underwriters, and any discounts and commission
received by them and any profit realized by them on resale of the offered Common
Shares for whom they may act as agent may be deemed to be underwriting discounts
and commissions under the 1933 Act.
The Fund may offer to sell the Common Shares either at a fixed price or at
prices that may vary, at market prices prevailing at the time of sale, at prices
related to prevailing market prices, or at negotiated prices.
To facilitate an offering of the Common Shares in an underwritten
transaction and in accordance with industry practice, the underwriters may
engage in transactions that stabilize, maintain, or otherwise affect the market
price of the Common Shares. Those transactions may include overallotment,
entering stabilizing bids, effecting syndicate covering transactions, and
reclaiming selling concessions allowed to an underwriter or a dealer.
o An overallotment in connection with an offering creates a short
position in the Common Shares for the underwriters' own account.
o An underwriter may place a stabilizing bid to purchase the Common
Shares for the purpose of pegging, fixing, or maintaining the price of
the Common Shares.
o Underwriters may engage in syndicate covering transactions to cover
overallotments or to stabilize the price of the Common Shares by
bidding for, and purchasing, the Common Shares or any other securities
in the open market in order to reduce a short position created in
connection with the offering.
o The managing underwriter may impose a penalty bid on a syndicate
member to reclaim a selling concession in connection with an offering
when the Common Shares originally sold by the syndicate member are
purchased in syndicate covering transactions or otherwise.
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Any of these activities may stabilize or maintain the market price of the
Common Shares above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
Any underwriters to whom the Common Shares are sold for offering and sale
may make a market in the Common Shares, but the underwriters will not be
obligated to do so and may discontinue any market-making at any time without
notice.
Under agreements entered into with the Fund, underwriters and agents may
be entitled to indemnification by the Fund against certain civil liabilities,
including liabilities under the 1933 Act, or to contribution for payments the
underwriters or agents may be required to make. The underwriters, agents, and
their affiliates may engage in financial or other business transactions with the
Fund and its subsidiaries, if any, in the ordinary course of business.
The maximum commission or discount to be received by any member of the
Financial Industry Regulatory Authority or independent broker-dealer will not be
greater than eight percent of the initial gross proceeds from the sale of any
security being sold.
To the extent permitted under the 1940 Act and the rules and regulations
promulgated thereunder, the underwriters may from time to time act as a broker
or dealer and receive fees in connection with the execution of our portfolio
transactions after the underwriters have ceased to be underwriters and, subject
to certain restrictions, each may act as a broker while it is an underwriter.
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 an offering under this
prospectus and any applicable prospectus supplement have a par value of $0.01
per share and, subject to the rights of the 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, 2019, the Fund had 20,011,594 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
Board of Trustees in its 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 American (formerly the NYSE MKT or NYSE Amex) under the trading or "ticker"
symbol "FEN."
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 NAV. Shares of closed-end investment companies
like the Fund have during some periods traded at prices higher than NAV and
during other periods have traded at prices lower than NAV. 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, NAV, 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 NAV 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 authorize the Fund 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 total 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, the
Preferred Shares may 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. The
Fund also believes 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 that two years
of 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 or the
Declaration of Trust, 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 any 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.
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
- 78 -
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 a majority 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 outstanding shares. 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
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.
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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 NAV 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 NAV, 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 NAV. 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 NAV 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 or
near NAV 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 NAV 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 appropriate, 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
propose to shareholders that the Fund convert 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 NAV and that any such discount may not be in the interest of
shareholders, the Fund's Board of Trustees, in consultation with the Advisor and
the Sub-Advisor, 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 NAV that may develop. In connection with its
consideration from time to time of open market 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 NAV 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 NAV. 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 NAV 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
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expectation of being able to receive a price of NAV for a portion of their
common shares in conjunction with an announced repurchase program or tender
offer for the common shares.
Although repurchases or tender offers may 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 borrowings or 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 American 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 appropriate, given
the Fund's investment objective and policies. Investors should assume,
therefore, that it is unlikely that the Board of Trustees would vote to propose
to shareholders that the Fund convert 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 NAV, less such redemption charge or contingent
deferred sales 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 would intend 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 possible that new common
shares would be sold at NAV 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 U.S. 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 advisers 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,
partnerships and other pass through entities, United States expatriates, and
dealers in securities or currencies, (ii) persons that will hold common shares
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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 and
traders that have elected the mark to market method of accounting, (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 21%. However, certain ordinary
income dividends received by the Fund that are attributable to qualifying
dividends from certain corporations may be eligible for the dividend received
deduction. However, the presence of covered call options in the portfolio may
reduce the amount of dividends that are treated as qualifying dividends.
Any such U.S. corporate income 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.
The MLPs in which the Fund invests 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 invests in energy MLPs, so the majority of the Fund's items of
income, gain, loss, deduction and expense is 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.
Although the Fund intends to hold the interests in the MLPs for
investment, the Fund may 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 U.S. federal income tax rate
applies to long-term capital gains for entities treated as corporations for U.S.
federal income tax purposes, such as the Fund. Thus, the Fund will be subject to
U.S. federal income tax on its long-term capital gains, like ordinary income, at
rates of up to 21%.
The Fund may have income that is sourced to other countries and taxed in
other countries. Because of the differences in the way countries calculate
taxable income, the Fund may have net taxable income in other countries in years
in which the Fund has net losses for U.S. tax purposes. Similarly, the Fund may
have net taxable income for U.S. tax purposes in years in which the Fund has net
losses in one or more other countries. This mismatch may cause the Fund to not
be able to use foreign taxes paid as credit against U.S. taxes in all
circumstances.
The Fund is not treated as a regulated investment company for U.S. 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
- 82 -
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.
LIMITATIONS ON INTEREST DEDUCTIONS
Since 2017, the Fund has been subject to limitations on the amount of
interest deductions that it may take in each year. Deductions for interest would
be limited to 30 percent of a business's taxable income (before interest,
depreciation, and depletion). The underlying MLP's may also be subject to a
similar limitation. The Fund intends to use leverage to make its investments.
See "Use of Leverage." Because the limitation on interest would be based upon
income before depletion, which is sometimes a significant deduction allocated
from MLPs, the significance of the limitation is difficult to predict. However,
it is possible that the Fund will not be able to deduct all of its interest
expense in the year accrued. If this occurs, the excess interest expense could
be carried forward to subsequent years, but the Fund's tax in the year the
expense is accrued could increase.
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 U.S. federal income tax purposes.
The portion of the Fund's distributions treated as a dividend for U.S.
federal income tax purposes should be treated as qualified dividend income for
U.S. federal income tax purposes, subject to certain holding period and other
requirements. Certain qualified dividend income received by individual
shareholders will be taxed at long-term capital gains rates, which reach a
maximum of 20%. Corporations are generally subject to tax on dividends at a
maximum 21% rate, but, for tax years beginning after December 31, 2017,
corporations may be eligible to exclude 50% 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 the distribution exceeds the basis of the common shares. 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
23.8% (including a 3.8% tax on net investment income above a certain threshold).
Corporations are taxed on capital gains at their ordinary income 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
derived from its investments in the MLPs in its portfolio. Thus, the Fund
anticipates that only a portion of its distributions will be treated as
dividends to its common shareholders for U.S. 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.
Distributions from the Fund 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.
- 83 -
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 U.S. 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, 2018 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. Income from the Fund may also be subject to a 3.8% "Medicare
tax." This tax will generally apply to the net investment income (such as
interest and dividends, including dividends paid with respect to common shares)
and gains of a shareholder who is an individual 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 U.S. 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 24%. 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
U.S. Federal Income Taxation of MLPs. MLPs are generally intended to be
taxed as partnerships for U.S. federal income tax purposes. As a partnership, an
MLP is treated as a pass-through entity for U.S. federal income tax purposes.
This means that the U.S. 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 U.S. 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. The IRS has finalized
regulations that limit the nature of qualifying income for MLPs. Some MLPs may
convert to corporations under these regulations or restructure their activities
to qualify under these regulations.
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
- 84 -
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 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.
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., 301 Bellevue Parkway, Wilmington, Delaware 19809. Pursuant
to an Administration and Accounting Services Agreement, The Bank of New York
Mellon 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 The Bank of New York Mellon an annual fee,
calculated daily and payable on a monthly basis, of 0.05% of the Fund's first
$500 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
Morgan, Lewis & Bockius 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.
- 85 -
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
Use of Proceeds......................................................... 1
Investment Objective.................................................... 1
Investment Policies and Restrictions.................................... 2
Investment Policies and Techniques...................................... 4
Additional Information About the Fund's Investments and Investment
Risks................................................................ 6
Other Investment Policies and Techniques................................ 29
Management of the Fund.................................................. 39
Investment Advisor...................................................... 51
Sub-Advisor............................................................. 53
Portfolio Transactions and Brokerage.................................... 58
Certain Provisions in the Declaration of Trust and By-Laws.............. 59
Repurchase of Fund Shares; Conversion to Open-End Fund.................. 62
Net Asset Value......................................................... 64
Tax Matters............................................................. 67
Independent Registered Public Accounting Firm........................... 72
Custodian, Administrator and Transfer Agent............................. 73
Additional Information.................................................. 73
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.................. B-1
|
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FIRST TRUST ENERGY INCOME AND GROWTH FUND
UP TO COMMON SHARES
PROSPECTUS
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 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 JANUARY 21, 2020
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 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 (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 American
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). As used in this Statement of Additional Information,
unless the context requires otherwise, "common shares" refer to the Fund's
common shares of beneficial interest currently outstanding as well as those
Common Shares offered by the Prospectus and any prospectus supplement and the
holders of the common shares are called "common shareholders." 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.
This Statement of Additional Information is dated ___________________.
TABLE OF CONTENTS
PAGE
USE OF PROCEEDS...............................................................1
INVESTMENT OBJECTIVE..........................................................1
INVESTMENT POLICIES AND RESTRICTIONS..........................................2
INVESTMENT POLICIES AND TECHNIQUES............................................4
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS AND INVESTMENT RISKS......6
OTHER INVESTMENT POLICIES AND TECHNIQUES.....................................29
MANAGEMENT OF THE FUND.......................................................39
INVESTMENT ADVISOR...........................................................51
SUB-ADVISOR..................................................................53
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................58
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS...................59
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND.......................62
NET ASSET VALUE..............................................................64
TAX MATTERS..................................................................67
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................................72
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT..................................73
ADDITIONAL INFORMATION.......................................................73
|
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 expects to 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 within
approximately three months of receipt of such proceeds.
Pending investment in securities that meet the Fund's investment objective
and policies, the net proceeds of an offering under the Prospectus and the
applicable prospectus supplement 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"), related
public entities in the energy sector and other energy companies which the Fund's
sub-advisor, Energy Income Partners, LLC ("Energy Income Partners" or the
"Sub-Advisor"), believes offer opportunities for income and growth. The Fund
considers investments in "MLP-related entities" to include investments that
offer economic exposure to publicly traded and private MLPs, securities of
entities holding primarily general partner or managing member interests in MLPs
and securities that are derivatives of interests in MLPs. The Fund considers
investments in the energy sector to include companies that derive a majority of
their revenues or operating income from transporting, processing, storing,
distributing, marketing, exploring, developing, managing or producing natural
gas, natural gas liquids ("NGLs") (including propane), crude oil, refined
petroleum products, coal or electricity, or from supplying energy-related
products and services, or any such other companies within the energy sector as
classified under GICS. As used in this Statement of Additional Information,
unless the context requires otherwise, MLPs are MLPs in the energy sector. There
can be no assurance that the Fund's investment objective will be achieved.
Due to the tax treatment under current law of cash distributions in excess
of income made by MLPs in which the Fund may invest, a portion of distributions
the Fund anticipates making to common shareholders may consist of a return of
capital and, depending on market conditions and tax circumstances, in certain
periods, such return of capital may represent a significant portion of the
Fund's distributions. To the extent that distributions exceed the Fund's
earnings and profits, such distributions are generally not treated as taxable
income for the investor. Instead, the Fund's 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.
- 1 -
INVESTMENT POLICIES AND 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 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 Services
("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 15% 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 leverage or market risks
associated with the Fund's portfolio.
o The Fund will not invest more than 30% of its Managed Assets in
non-U.S. securities and may 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 its Managed Assets.
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
- 2 -
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 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, as a fundamental policy, 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 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.
- 3 -
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 U.S.
government; (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 the Federal Home Loan Mortgage
Corporation; 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
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.
- 4 -
(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 typically reflects current
market rates. 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 for temporary or
defensive purposes 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 for temporary or defensive
purposes 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, 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.
- 5 -
(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, the rules thereunder and
interpretations thereof.
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 processing services and MLPs that either produce coal or
receive royalties from the production of coal may be directly affected by energy
commodity prices. MLPs that provide handling and delivery of propane or crude
oil often 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 or price exposure to
commodity prices. The MLP asset class 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.
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,
- 6 -
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.
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 pricing and supply of
alternative fuels to generators are the primary drivers of coal demand.
MLPs and MLP-related entities and other energy companies 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, among other things: 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 and other energy related companies 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 and other energy companies operating
interstate pipelines and related storage facilities are subject to substantial
regulation by 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
related storage facilities; and certain other matters. FERC also regulates the
interstate transportation of crude oil and petroleum products, including:
regulation of rates and practices of oil pipeline 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 and other energy companies 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
- 7 -
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 and other energy companies 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.
Energy sector and energy companies may be adversely affected by possible
terrorist attacks in the United States and throughout the world. It is possible
that facilities of energy sector and energy companies, due to the critical
nature of their energy and energy utility 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, in the past, terrorist attacks have
resulted in changes in the insurance markets making 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 sector and energy utility companies to raise needed
capital. Moreover, global political and economic instability could affect the
operations of MLP entities and other companies in the energy sector in
unpredictable ways.
Recent Developments Regarding Commodity Prices. Prices of oil and other
energy commodities have declined significantly and experienced significant
volatility during recent years and oil prices. Companies engaged in crude oil
and natural gas exploration, development or production, natural gas gathering
and processing, crude oil refining and transportation and coal mining or sales
may be directly affected by the commodity prices of such natural resources. The
volatility of commodity prices may also indirectly affect certain companies
engaged in the transportation, processing, storage or distribution of such
commodities. Some companies that own the underlying commodities may be unable to
effectively mitigate or manage direct margin exposure to commodity price levels.
The energy sector as a whole may also be impacted by the perception that the
performance of energy sector companies is directly linked to commodity prices.
As a result, many companies in which the Fund may invest have been and may
continue to be adversely impacted by declines in, and volatility of, prices of
energy commodities. Reductions in production of oil and other energy commodities
may lag decreases in demand or declines in commodity prices, resulting in global
oversupply in such commodities. Continued low prices for energy commodities, or
- 8 -
continued volatility of such prices, could further erode such companies' growth
prospects and negatively impact such companies' ability to sustain attractive
distribution levels, which could adversely impact the NAV of the common shares
and the ability of the Fund to continue to pay distributions on the common
shares at current levels. Because the Fund is focused in MLP and energy
companies operating in the industry or group of industries that make up the
energy sector of the economy, the Fund may be more susceptible to risks
associated with energy commodity prices than an investment company that does not
concentrate in such sector.
Recent Developments Regarding MLP Distributions. Recently, a number of
MLPs have reduced, suspended or eliminated their distributions. Such
distribution reductions could adversely impact the ability of the Fund to
continue to pay distributions on the common shares at current levels.
Recent Developments Regarding MLP Debt Restructurings. Adverse
developments in the energy sector may result in MLPs seeking to restructure debt
or file for bankruptcy. Limited partners in such MLPs, such as the Fund, may owe
taxes on debt that is forgiven in a bankruptcy or an out-of-court restructuring,
as cancellation of debt income, which creates a tax liability for investors
without an associated cash distribution. While an MLP facing a debt
restructuring may seek to implement structures that would limit the tax
liability associated with the debt restructuring, there can be no assurance that
such structures could be successfully implemented or would not have other
adverse impacts on the Fund as an investor in the MLP.
MASTER LIMITED PARTNERSHIPS
Under normal circumstances the Fund invests in equity securities of energy
sector MLPs and MLP-related entities. For purposes of this document, an MLP is a
limited partnership or a limited liability company, the interests in which
(known as units) are traded on securities exchanges or over-the-counter.
Qualification as a partnership for U.S. federal income tax purposes eliminates
U.S. federal income tax on MLP income at the entity level.
An MLP that is a limited partnership may have 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 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. The shares of
some general partner interests are also publicly traded which securities often
include interests in limited partner units and general partner interests.
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,
- 9 -
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 as a percentage of
earnings and cash flow than other types of companies and the Fund uses 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 U.S. federal income 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 return of capital to the extent of the investor's basis in its MLP
interest and, to the extent the distribution exceeds the investor's basis in the
MLP, capital 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."
- 10 -
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 and subordinated units of MLPs, and I-Shares, which
represent an ownership interest of an MLP issued by an affiliated party, and
common stock 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 an MLP and may be listed and traded on U.S. securities exchanges or
over-the-counter with their value fluctuating predominantly based on prevailing
market conditions (such as changes in interest rates) and the success of the
MLP. The Fund purchases 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 typically have limited voting rights and, in most instances, 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 quarterly distributions. Common unit holders have first priority
over any subordinated shares 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 unit holders, but not debt holders or
preferred unit holders, to the remaining assets of the MLP. MLPs also issue
different classes of common units that may have different voting, trading and
- 11 -
distribution rights. MLPs also may issue new classes of units, such as class B
units, that contain distinct structural modifications. For example, a new class
of equity could be used to issue securities that do not receive a distribution
for some specified period before converting into standard common units.
MLP Subordinated Units. MLP subordinated units typically are issued by
MLPs to their original sponsors, such as their founders, management teams,
corporate general partners of MLPs, entities that sell assets to MLPs, and
institutional investors. The Fund may purchase subordinated units directly from
these persons. Subordinated units have similar limited voting rights as common
units and are generally not listed on an exchange nor 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 units, subordinated units do not have
arrearage rights. In the event of liquidation, common units and general partner
interests 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 and other factors.
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 holding I-units receives distributions in the form of
additional I-Units in an amount equal to the cash distributions received by the
holders of 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. 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. The
MLP affiliate issuing the I-Shares is structured as a corporation for U.S.
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
typically listed and traded on the New York Stock Exchange and the NYSE
American.
Equity Securities of Energy Companies. The Fund intends to invest in
equity securities issued by energy companies which are not MLPs. The Fund
purchases 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 its
Managed Assets.
Private Investment in a Public Entity ("PIPE"). 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 Securities
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
- 12 -
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 Securities Act.
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
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 "high yield" or "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;
- 13 -
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
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 sectors and industries, such as the energy sector, could adversely
affect the ability of below investment grade debt issuers in that sector or
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.
- 14 -
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
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
- 15 -
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 Stock Market LLC ("Nasdaq") 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
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.
Non-U.S. Securities. The Fund may invest in non-U.S. securities and may
hedge the currency risk of the non-U.S. securities using derivative instruments.
A fund that invests in non-U.S. securities may experience more rapid and extreme
changes in value than a fund that invests exclusively in securities of U.S.
companies. The securities markets of many foreign countries are relatively
small, with a limited number of companies representing a small number of
industries. Investments in foreign securities (including those denominated in
U.S. dollars) are subject to economic and political developments in the
countries and regions where the issuers operate or are domiciled, or where the
securities are traded, such as changes in economic or monetary policies. Values
may also be affected by restrictions on receiving the investment proceeds from a
foreign country. Less information may be publicly available about foreign
companies than about U.S. companies. Foreign companies are generally not subject
to the same accounting, auditing and financial reporting standards as are U.S.
companies. In addition, the Fund's investments in non-U.S. securities may be
subject to the risk of nationalization or expropriation of assets, imposition of
currency exchange controls or restrictions on the repatriation of foreign
currency, confiscatory taxation, political or financial instability and adverse
diplomatic developments. In addition, there may be difficulty in obtaining or
enforcing a court judgment abroad. Dividends or interest on, or proceeds from
the sale of, non-U.S. securities may be subject to non-U.S. withholding taxes,
and special U.S. tax considerations may apply.
The Fund also may invest in foreign government debt, which includes bonds
that are issued or backed by foreign governments or their agencies,
instrumentalities or political subdivisions or by foreign central banks. The
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance with terms
of such debt, and the Fund may have limited legal recourse in the event of
- 16 -
default. Continuing uncertainty as to the status of the Euro and the European
Monetary Union and the potential for certain countries to withdraw from the
institution has created significant volatility in currency and financial markets
generally. Any partial or complete dissolution of the European Union ("EU")
could have significant adverse effects on currency and financial markets, and on
the values of a Fund's portfolio investments. The United Kingdom's referendum on
June 23, 2016 to leave the European Union (known as "Brexit") sparked
depreciation in the value of the British pound, short-term declines in the stock
markets and heightened risk of continued economic volatility worldwide. Although
the long-term effects of Brexit are difficult to gauge and cannot be fully
known, they could have wide ranging implications for the United Kingdom's
economy, including: possible inflation or recession, continued depreciation of
the pound, or disruption to Britain's trading arrangements with the rest of
Europe. The United Kingdom is one of the EU's largest economies; its departure
also may negatively impact the EU and Europe as a whole, such as by causing
volatility within the union, trigging prolonged economic downturns in certain
European countries or sparking additional member states to contemplate departing
the EU (thereby perpetuating political instability in the region).
The cost of servicing external debt will also generally be adversely
affected by rising international interest rates, as many external debt
obligations bear interest at rates which are adjusted based upon international
interest rates. Because non-U.S. securities may trade on days when the Fund's
common shares are not priced and the NYSE is closed, NAV can change at times
when common shares cannot be sold.
Because the Fund may invest in securities or other instruments denominated
or quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates may affect the value of instruments held by the Fund and the
unrealized appreciation or depreciation of investments. Currencies of certain
countries may be volatile and therefore may affect the value of instruments
denominated in such currencies, which means that NAV could decline as a result
of changes in the exchange rates between foreign currencies and the U.S. dollar.
The Fund may incur costs in connection with the conversions between various
currencies. In addition, certain countries may impose foreign currency exchange
controls or other restrictions on the repatriation, transferability or
convertibility of currency.
Continuing uncertainty as to the status of the euro and the European
Monetary Union (the "EMU") has created significant volatility in currency and
financial markets generally. Any partial or complete dissolution of the EMU
could have significant adverse effects on currency and financial markets, and on
the values of the Fund's portfolio investments. If one or more EMU countries
were to stop using the euro as its primary currency, the Fund's investments in
such countries, if any, may be redenominated into a different or newly adopted
currency. As a result, the value of those investments could decline
significantly and unpredictably. In addition, instruments or other investments
that are redenominated may be subject to foreign currency risk, liquidity risk
and valuation risk to a greater extent than similar investments currently
denominated in euros.
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 assets for
investment purposes when the Sub-Advisor believes it will enhance returns.
- 17 -
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 writes call
options only if they are "covered." In the case of a call option on a common
stock or other security, the Fund considers an option to be "covered" if the
Fund owns the security underlying the call.
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.
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 leverage by the Fund, to facilitate portfolio management and mitigate
risks, including, without limitation, interest rate, currency and credit risks.
The Fund writes (or sells), covered call options on its Managed Assets. 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
- 18 -
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 leverage issued by the Fund, or establish positions
in the derivatives markets as a temporary substitute for purchasing or selling
particular securities. Market conditions determine whether and in what
circumstances the Fund employs any of the hedging and strategic techniques
described below. The Fund incurs brokerage and other costs in connection with
its hedging transactions.
Certain Strategic 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. In addition to the following discussion under this section,
see "Other Investment Policies and Techniques" below for a further discussion of
Strategic Transactions and their associated risks.
No assurance can be given that these practices will achieve the desired
result. The successful utilization of Strategic Transactions requires skills
different from those needed in the selection of the Fund's portfolio.
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
- 19 -
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 its Managed Assets. 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 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. In the case of a
call option on a common stock or other security, the Fund considers an option to
be "covered" if the Fund owns the security underlying the call.
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."
Writing options on portfolio securities may be considered senior
securities for the purposes of the 1940 Act, unless appropriate steps are taken
to segregate the Fund's assets or otherwise cover its obligations. The Fund will
segregate assets or otherwise cover its positions with respect to its options in
accordance with the applicable federal securities laws, the rules thereunder and
the various interpretive positions of the SEC and its staff.
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
- 20 -
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.
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 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.
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 and, for some options, no secondary market on an exchange
or elsewhere may exist. 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.
- 21 -
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. Generally, 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. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.
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 organization associated with the exchange on which futures
- 22 -
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.
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
- 23 -
partially offset an increase in the price of securities that the Fund purchases.
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 purchases. 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.
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
- 24 -
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
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,
- 25 -
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 uses 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
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 is 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 is maintained in a segregated account by
the Fund's custodian. If the swap transaction is entered into on other than a
- 26 -
net basis, the full amount of the Fund's obligations is 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 enters into equity and interest
rate or commodity transactions are broker-dealers and other financial
institutions. The Fund may 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, 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
- 27 -
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.
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
- 28 -
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 acquires. 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.
Regulation as a "Commodity Pool." CFTC Rule 4.5 requires operators of
registered investment companies to either limit such investment companies' use
of futures, options on futures and swaps or register as a "commodity pool
operator" ("CPO") and submit to dual regulation by the CFTC and the SEC. In
order to be able to comply with the exclusion from the CPO definition pursuant
to CFTC Rule 4.5 with respect to the Fund, the Advisor must limit the Fund's
transactions in commodity futures, commodity option contracts and swaps for
non-bona fide hedging purposes by either (a) limiting the aggregate initial
margin and premiums required to establish non-bona fide 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-bona fide hedging
commodities positions to not more than 100% of 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 would no longer be excluded from the CPO
definition and may be required to register as a CPO, and the Sub-Advisor may be
required to register as a commodity trading advisor ("CTA"). In the event the
Advisor or the Sub-Advisor is required to register as a CPO or CTA, as
applicable, 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 a CPO with respect to the Fund under the
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
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 in accordance with the Fund's
policies.
Asset Coverage for Futures and Options Positions. The Fund complies 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, earmarks or sets 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
- 29 -
the futures or options position is outstanding, unless replaced with other
permissible assets, and will be marked-to-market daily.
Risks Associated with Futures Contracts and Futures Options. 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. See
"--Futures Contracts" and "--Risks and Special Considerations Concerning
Derivatives" below.
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
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
- 30 -
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
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
- 31 -
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.
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,
- 32 -
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 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.
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
- 33 -
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. 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 market movements or 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 investment or hedging purposes
might result in a poorer overall performance for the Fund, whether or not
adjusted for risk, than if the Fund had not used derivatives.
(2) Credit/Counterparty 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 lower than for over-the-counter
derivatives not cleared through a central counterparty, since generally a
clearing organization provides a guarantee of performance and cleared
derivative transactions benefit from daily mark-to-market and settlement
as well as from segregation and minimum capital requirements applicable to
intermediaries. For privately-negotiated instruments not cleared through a
central counterparty, there are no similar protections. 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. Such
counterparty risk is accentuated in the case of contracts with longer
maturities where there is a greater risk that a specific event may prevent
or delay settlement, or where the Fund has concentrated its transactions
with a single or small group of counterparties. The Fund is not restricted
from dealing with any particular counterparty or from concentrating any or
all of its transactions with one counterparty. 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
- 34 -
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
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 more
liquid than over-the-counter transactions. The illiquidity of the
derivatives markets may be due to various factors, including congestion,
disorderly markets, limitations on deliverable supplies, the participation
of speculators, government regulation and intervention, and technical and
operational or system failures. In addition, daily limits on price
fluctuations and speculative position limits on exchanges on which the
Fund may conduct its transactions in derivative instruments may prevent
prompt liquidation of positions, subjecting the Fund to the potential of
greater losses. 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) Volatility. The prices of many derivative instruments, including
many options and swaps, are highly volatile. Price movements of options
- 35 -
contracts and payments pursuant to swap agreements are influenced by,
among other things, interest rates, changing supply and demand
relationships, trade, fiscal, monetary and exchange control programs and
policies of governments, and national and international political and
economic events and policies. The value of options and swap agreements
also depends upon the price of the securities or currencies underlying
them.
(7) 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.
SWAP AGREEMENTS
For hedging and 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
- 36 -
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.
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.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in Real Estate Investment Trusts ("REITs"). REITs are
financial vehicles that pool investors' capital to purchase or finance real
estate. REITs are generally classified as equity REITs, mortgage REITs, or a
- 37 -
combination of equity and mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive income from the collection of
interest payments. REITs are not taxed on income distributed to shareholders
provided they comply with the applicable tax requirements.
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
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 to persons
unaffiliated with the Fund 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 stockholder vote would otherwise occur before the loan was
repaid. In the event of bankruptcy or other default of the borrower, the Fund
- 38 -
could experience both delays in liquidating the loan collateral or recovering
the loaned securities and/or incur losses, including 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, possible subnormal
levels of income and lack of access to income during this period, and expenses
of enforcing its rights. As with other extensions of credit, there are risks of
delay in the recovery or even loss of rights in the collateral should a borrower
default or fail financially.
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, 2019, the Fund's portfolio turnover rate was
approximately %. 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 (as defined below) 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. or
Energy Income Partners, LLC, which are the investment adviser and sub-adviser,
respectively, to the Fund, or any of their 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 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.
- 39 -
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUSTEESHIPS OR
TERM OF OFFICE(2) TRUST DIRECTORSHIPS
AND YEAR FIRST PRINCIPAL OCCUPATIONS FUND COMPLEX HELD BY
NAME, ADDRESS AND POSITION AND OFFICES ELECTED OR DURING THE OVERSEEN BY TRUSTEE DURING THE
DATE OF BIRTH WITH FUND APPOINTED PAST 5 YEARS TRUSTEE PAST 5 YEARS
Trustee who is an Interested
Person of the Fund
----------------------------
James A. Bowen(1) Chairman of the o Class III(3)(4) Chief Executive Officer, 153 None
120 East Liberty Drive, Board and Trustee First Trust Advisors Portfolios
Suite 400 o 2004 L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.;
D.O.B.: 09/55 Chairman of the Board of
Directors, BondWave LLC
(Software Development
Company) and Stonebridge
Advisors LLC (Investment
Advisor)
Independent Trustees
----------------------------
Richard E. Erickson Trustee o Class II(3)(4) Physician and Officer, 153 None
c/o First Trust Advisors L.P. Wheaton Orthopedics; Portfolios
120 East Liberty Drive, o 2004 Limited Partner,
Suite 400 Gundersen Real Estate
Wheaton, IL 60187 Limited Partnership
D.O.B.: 04/51 (June 1992 to December
2016); Member, Sportsmed
LLC (April 2007 to
November 2015)
Thomas R. Kadlec Trustee o Class II(3)(4) President, ADM Investor 153 Director of ADM
c/o First Trust Advisors L.P. Services, Inc. (Futures Portfolios Investor Services,
120 East Liberty Drive, o 2004 Commission Merchant) Inc.; ADM Investor
Suite 400 Services
Wheaton, IL 60187 International; and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith Trustee o Class I(3)(4) President, Hibs 153 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial Portfolios Company of
120 East Liberty Drive, o 2006 and Management Illinois
Suite 400 Consulting)
Wheaton, IL 60187
D.O.B.: 11/56
|
- 40 -
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUSTEESHIPS OR
TERM OF OFFICE(2) TRUST DIRECTORSHIPS
AND YEAR FIRST PRINCIPAL OCCUPATIONS FUND COMPLEX HELD BY
NAME, ADDRESS AND POSITION AND OFFICES ELECTED OR DURING THE OVERSEEN BY TRUSTEE DURING THE
DATE OF BIRTH WITH FUND APPOINTED PAST 5 YEARS TRUSTEE PAST 5 YEARS
Niel B. Nielson Trustee o Class III(3)(4) Managing Director and 153 Director of
c/o First Trust Advisors L.P. Chief Operating Officer Portfolios Covenant Transport
120 East Liberty Drive, o 2004 (January 2015 to Inc. (May 2003 to
Suite 400 present), Pelita Harapan May 2014)
Wheaton, IL 60187 Educational Foundation
D.O.B.: 03/54 (Educational Products
and Services); President
and Chief Executive
Officer (June 2012 to
September 2014), Servant
Interactive LLC
(Educational Products
and Services); President
and Chief Executive
Officer (June 2012 to
September 2014), Dew
Learning LLC
(Educational Products
and Services); President
(June 2002 to June
2012), Covenant College
Officers of the Fund
James M. Dykas President and Chief o Indefinite term Managing Director and N/A N/A
120 East Liberty Drive, Executive Officer Chief Financial Officer
Suite 400 o 2016 (January 2016 to
Wheaton, IL 60187 present), Controller
D.O.B.: 01/66 (January 2011 to January
2016), Senior Vice
President (April 2007 to
January 2016), First
Trust Advisors L.P. and
First Trust Portfolios
L.P.; Chief Financial
Officer, BondWave LLC
(Software Development
Company) (January 2016
to present) and
Stonebridge Advisors LLC
(Investment Advisor)
(January 2016 to
present)
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 and
D.O.B.: 05/60 General Counsel,
BondWave LLC (Software
Development Company) and
Secretary, Stonebridge
Advisors LLC (Investment
Advisor)
|
- 41 -
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUSTEESHIPS OR
TERM OF OFFICE(2) TRUST DIRECTORSHIPS
AND YEAR FIRST PRINCIPAL OCCUPATIONS FUND COMPLEX HELD BY
NAME, ADDRESS AND POSITION AND OFFICES ELECTED OR DURING THE OVERSEEN BY TRUSTEE DURING THE
DATE OF BIRTH WITH FUND APPOINTED PAST 5 YEARS TRUSTEE PAST 5 YEARS
Daniel J. Lindquist Vice President o Indefinite term Managing Director (July N/A N/A
120 East Liberty Drive, 2012 to present), Senior
Suite 400 o 2005 Vice President
Wheaton, IL 60187 (September 2005 to July
D.O.B.: 02/70 2012), First Trust
Advisors L.P. and First
Trust Portfolios L.P.
Kristi A. Maher Compliance Officer o Indefinite term Deputy General Counsel, N/A N/A
120 East Liberty Drive, and Assistant First Trust Advisors
Suite 400 Secretary o CCO since L.P. and First Trust
Wheaton, IL 60187 January 2011, Portfolios L.P.
D.O.B.: 12/66 Assistant
Secretary since
2012
Donald P. Swade Treasurer, Chief o Indefinite term Senior Vice President N/A N/A
120 East Liberty Drive, Financial Officer (July 2016 to present),
Suite 400 and Chief Accounting o Since January Vice President (April
Wheaton, IL 60187 Officer 2016 2012 to July 2016),
D.O.B.: 08/72 First Trust Advisors
L.P. and First Trust
Portfolios L.P., Vice
President (September
2006 to April 2012),
Guggenheim Funds
Investment Advisors,
LLC/Claymore Securities,
Inc.
|
(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.
(3) Currently, Robert F. Keith, as a Class I Trustee, is serving a term until
the Fund's 2020 annual meeting. Richard E. Erickson and Thomas R. Kadlec,
as Class II Trustees, are each serving a term until the Fund's 2021 annual
meeting. James A. Bowen and Niel B. Nielson, as Class III Trustees, are
each serving a term until the Fund's 2022 annual meeting.
(4) Each Trustee has served in such capacity since the Fund's inception.
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 and First Trust Variable Insurance Trust, open-end
funds with seven 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 MLP and Energy
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, and First Trust
High Income Long/Short Fund, First Trust Energy Infrastructure Fund, First Trust
- 42 -
Dynamic Europe Equity Income Fund, First Trust New Opportunities MLP & Energy
Fund, First Trust Intermediate Duration Preferred & Income Fund and First Trust
Senior Floating Rate 2022 Target Term 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 III, First Trust
Exchange-Traded Fund IV, First Trust Exchange-Traded Fund V, First Trust
Exchange-Traded Fund VI, First Trust Exchange-Traded Fund VII, First Trust
Exchange-Traded Fund VIII, First Trust Exchange-Traded AlphaDEX(R) Fund and
First Trust Exchange-Traded AlphaDEX(R) Fund II, exchange-traded funds with
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
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 all but two of the First Trust closed-end funds
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 will review 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
- 43 -
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 serves a
three-year term or until his successor is selected.
The Board of Trustees has established four standing committees (as
described below) and has delegated certain of its responsibilities to those
committees. The Board and its committees meet frequently throughout the year to
oversee the 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.
The three committee chairs and the Lead Independent Trustee rotate every
three years in serving as chair of the Audit Committee, the Nominating and
Governance Committee or the Valuation Committee, or as Lead Independent Trustee.
The Lead Independent Trustee and immediate past Lead Independent Trustee also
serve 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. Kadlec, Mr. Bowen and Mr. Erickson are
members of the Executive Committee. During the last fiscal year, the Executive
Committee held meetings.
The Nominating and Governance Committee is responsible for appointing and
nominating non-interested persons to the Trust's Board of Trustees. Messrs.
Erickson, Kadlec, Keith and Nielson are members of the Nominating and Governance
Committee. The Nominating and Governance Committee operates under a written
charter adopted and approved by the Board. If there is no vacancy on the Board
of Trustees, the Board will not actively seek recommendations from other
parties, including shareholders. The Board of Trustees adopted a mandatory
retirement age of 75 for Trustees, beyond which age Trustees are ineligible to
serve. The Committee will not consider new trustee candidates who are 72 years
of age or older. When a vacancy on the Board of Trustees occurs and nominations
are sought to fill such vacancy, the Nominating and Governance Committee may
- 44 -
seek nominations from those sources it deems appropriate in its discretion,
including shareholders of Fund. To submit a recommendation for nomination as a
candidate for a position on the Board of Trustees, shareholders of the Fund
should mail such recommendation to W. Scott Jardine, Secretary, 120 East Liberty
Drive, Suite 400, Wheaton, Illinois 60187. Such recommendation shall include the
following information: (i) evidence of Fund ownership of the person or entity
recommending the candidate (if a Fund shareholder); (ii) a full description of
the proposed candidate's background, including education, experience, current
employment and date of birth; (iii) names and addresses of at least three
professional references for the candidate; (iv) information as to whether the
candidate is an "interested person" in relation to the Fund, as such term is
defined in the 1940 Act, and such other information that may be considered to
impair the candidate's independence; and (v) any other information that may be
helpful to the Committee in evaluating the candidate. If a recommendation is
received with satisfactorily completed information regarding a candidate during
a time when a vacancy exists on the Board or during such other time as the
Nominating and Governance Committee is accepting recommendations, the
recommendation will be forwarded to the Chair of the Nominating and Governance
Committee and to 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 meetings.
The Valuation Committee is responsible for the oversight of the valuation
procedures of the Fund (the "Valuation Procedures"), for determining the fair
value of the Fund's securities or other assets under certain circumstances as
described in the Valuation Procedures and for evaluating the performance of any
pricing service for the Fund. Messrs. Erickson, Kadlec, Keith and Nielson are
members of the Valuation Committee. During the last fiscal year, the Valuation
Committee held meetings.
The Audit Committee is responsible for overseeing the Fund's accounting
and financial reporting process, the system of internal controls and audit
process and for evaluating and appointing independent auditors (subject also to
Board approval). Messrs Erickson, Kadlec, Keith and Nielson serve on the Audit
Committee. Messrs. Erickson, Kadlec, Keith and Nielson, all of whom are
"independent" as defined in the listing standards of the NYSE, serve on the
Audit Committee. Messrs. Kadlec and Keith each has 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 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
- 45 -
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.
Not all risks that may affect the Fund can be identified nor can controls
be developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost-effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
Fund or the Advisor or other service providers. For instance, as the use of
Internet technology has become more prevalent, the Fund and its service
providers have become more susceptible to potential operational risks through
breaches in cyber security (generally, intentional and unintentional events that
may cause the Fund or a service provider to lose proprietary information, suffer
data corruption or lose operational capacity). There can be no guarantee that
any risk management systems established by the Fund, its service providers, or
issuers of the securities in which the Fund invests to reduce cyber security
risks will succeed, and the Fund cannot control such systems put in place by
service providers, issuers or other third parties whose operations may affect
the Fund and/or its shareholders. Moreover, it is necessary to bear certain
risks (such as investment related risks) to achieve the Fund's goals. As a
result of the foregoing and other factors, the Fund's ability to manage risk is
subject to substantial limitations.
BOARD DIVERSIFICATION AND TRUSTEE QUALIFICATIONS
As described above, the Nominating and Governance Committee of the Board
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 current Trustee should serve as a Trustee in
light of the Trust's business and structure.
- 46 -
Independent Trustees. Richard E. Erickson, M.D., is an orthopedic surgeon.
He also has been President of Wheaton Orthopedics, a co-owner and directors 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 and on the Executive
Committee (2008 - 2009), Chairman of the Nominating and Governance Committee
(2003 - 2007 and 2014 - 2016), Chairman of the Audit Committee (2012 - 2013) and
Chairman of the Valuation Committee (June 2006 - 2007 and 2010 - 2011) of the
First Trust Funds. He currently serves as Lead Independent Trustee and on the
Executive Committee (since January 1, 2017) of the First Trust Funds.
Thomas R. Kadlec is President of ADM Investor Services Inc. ("ADMIS"), a
futures commission merchant and wholly-owned subsidiary of the Archer Daniels
Midland Company ("ADM"). Mr. Kadlec has been employed by ADMIS and its
affiliates since 1990 in various accounting, financial, operations and risk
management capacities. Mr. Kadlec serves on the boards of several international
affiliates of ADMIS and is a member of ADM's Integrated Risk Committee, which is
tasked with the duty of implementing and communicating enterprise-wide risk
management. In 2014, Mr. Kadlec was elected to the board of the Futures Industry
Association. Mr. Kadlec has served as a Trustee of each First Trust closed-end
fund since its inception. Mr. Kadlec has also served on the Executive Committee
since 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) and Chairman of the Audit Committee (2010 - 2011) and Chairman of the
Nominating and Governance Committee (2012 - 2013). He currently serves as
Chairman of the Valuation Committee and on the Executive Committee (since
January 1, 2017) of the First Trust Funds.
Robert F. Keith is President of Hibs Enterprises, a financial and
management consulting firm. Mr. Keith has been with Hibs Enterprises since 2004.
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), Chairman of the Nominating and Governance
Committee (2010 - 2011) and Chairman of the Valuation Committee (2014 - 2016) of
the First Trust Funds. He served as Lead Independent Trustee and on the
Executive Committee (2012 - 2016) and currently serves as Chairman of the Audit
Committee (since January 1, 2017) of the First Trust Funds.
Niel B. Nielson, Ph.D., has been the Managing Director and Chief Operating
Officer of Pelita Harapan Educational Foundation, a global provider of
educational products and services since January, 2015. Mr. Nielson formerly
served as the President and Chief Executive Officer of Dew Learning LLC from
June 2012 through September 2014, President of Covenant College (2002 - 2012),
- 47 -
and as a partner and trader (of options and futures contracts for hedging
options) for Ritchie Capital Markets Group (1996 - 1997), where he held an
administrative management position at this proprietary derivatives trading
company. He also held prior positions in new business development for
ServiceMaster Management Services Company, and in personnel and human resources
for NationsBank of North Carolina, N.A. and Chicago Research and Trading Group,
Ltd. ("CRT"). His international experience includes serving as a director of CRT
Europe, Inc. for two years, directing out of London all aspects of business
conducted by the U.K. and European subsidiary of CRT. Prior to that, Mr. Nielson
was a trader and manager at CRT in Chicago. Mr. Nielson has served as a Trustee
of each First Trust Fund since its inception and of the First Trust Funds since
1999. Mr. Nielson has also served as the Chairman of the Audit Committee (2003 -
2006), Chairman of the Valuation Committee (2007 - 2008), Chairman of the
Nominating and Governance Committee (2008 - 2009) and Lead Independent Trustee
and a member of the Executive Committee (2010 - 2011). He currently serves as
Chairman of the Nominating and Governance Committee (since January 1, 2017) of
the First Trust Funds.
Interested Trustee. James A. Bowen is Chief Executive Officer of First
Trust Advisors L.P. and First Trust Portfolios L.P. Mr. Bowen is involved in the
day-to-day management of the First Trust Funds and serves on the Executive
Committee. He has over 26 years of experience in the investment company business
in sales, sales management and executive management. Mr. Bowen has served as a
Trustee of each First Trust Fund since its inception and of the First Trust
Funds since 1999.
As described above, the Board of Trustees is divided into three classes
and, in connection with the organization of the Fund, Trustees were elected for
an initial term. The Class I Trustee will serve until the second succeeding
annual meeting subsequent to his initial election; Class II Trustees will serve
until the third succeeding annual meeting subsequent to their initial election;
and Class III Trustees will serve until the first succeeding annual meeting
subsequent to their initial election. 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 and shall be elected for a term
expiring at the time of the third succeeding annual meeting subsequent to their
election, in each case until their respective successors are duly elected and
qualified. Holders of any 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.
Effective January 1, 2016, the fixed annual retainer paid to the
Independent Trustees is $230,000 per year and an annual per fund fee is $2,500
for each closed-end fund and actively managed fund and $250 for each index fund.
The fixed annual retainer is allocated equally among each fund in the First
Trust Fund Complex rather than being allocated on a pro rata basis based on each
fund's net assets. Additionally, the Lead Independent Trustee is paid $30,000
annually, the Chairman of the Audit Committee and the Chairman of the Valuation
Committee are each paid $20,000 annually and the Chairman of the Nominating and
Governance Committee is paid $10,000 annually to serve in such capacities with
compensation allocated pro rata among each fund in the First Trust Fund Complex
based on its net assets.
- 48 -
The following table sets forth compensation (including reimbursement for
travel and out-of-pocket expenses) paid by the Fund during the Fund's last
fiscal year ended November 30, 2010 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, 2019. 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 COMPENSATION FROM THE FIRST TRUST
NAME OF TRUSTEE FROM THE FUND(1) FUND COMPLEX(2)
Richard E. Erickson $ $
Thomas R. Kadlec $ $
Robert F. Keith $ $
Niel B. Nielson $ $
--------------------
|
(1) The compensation paid by the Fund to the Independent Trustees for the last
fiscal year for services to the Fund.
(2) The total compensation paid to the Independent Trustees for the calendar
year ended December 31, 2019 for services to the portfolios existing in
2019, which consisted of open-end mutual funds, closed-end funds and
exchange-traded funds.
As of the date of this Statement of Additional Information, the Fund has
three employees. The shareholders of the Fund will be asked to vote on the
election of 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, 2019:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
ALL REGISTERED
DOLLAR RANGE OF INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN THE
TRUSTEE IN THE FUND FIRST TRUST FUND COMPLEX
James A. Bowen
Richard E. Erickson
Thomas R. Kadlec
Robert F. Keith
Niel B. Nielson
|
As of December 31, 2019, 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 the date of this Statement of Additional Information, the officers
and Trustees, in the aggregate, owned less than 1% of the Shares of the Fund.
- 49 -
CONTROL PERSONS
To the knowledge of the Fund, as of November 30, 2019, no single
shareholder or "group" (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act")) beneficially owned more than
5% of the Fund's outstanding common shares, except as described in the following
table. Information as to the beneficial ownership of common shares of the Fund,
including the percentage of common 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 November 30, 2019.
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
NAME AND ADDRESS BENEFICIALLY OUTSTANDING SHARES
OF BENEFICIAL OWNER OWNED BENEFICIALLY OWNED
--------------------------------------------------------------------------------
%
--------------------------------------------------------------------------------
|
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 $ billion in assets which it managed or supervised as of
November 30, 2019. 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
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 seven mutual funds, ___
exchange-traded funds consisting of ___ series and ___ 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.
- 50 -
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 as of November 30, 2019, more than $__
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.
The Investment Management Agreement between the Advisor and the Fund has
been approved by the Board of Trustees of the Fund, including a majority of the
Independent Trustees, and the sole shareholder of the Fund. Information
regarding the Board of Trustees' approval of the Investment Management and
Sub-Advisory Agreements is available in the Fund's annual report for the fiscal
year ended November 30, 2019. Pursuant to the Investment Management Agreement,
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
(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).
- 51 -
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 % of the Fund's Managed Assets (after their issuance), the
Fund's management fee would be % 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.
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 10 Wright Street, Westport, Connecticut
06880, is a registered investment advisor and serves as investment advisor or
portfolio supervisor to investment portfolios with approximately $6.1 billion of
assets as of November 30, 2019.
- 52 -
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 separately managed accounts,
unregistered investment companies, a registered investment company and provides
a model portfolio to unified managed accounts. In addition to the Fund, Energy
Income Partners also serves as the sub-adviser to three other registered
investment companies advised by First Trust Advisors, an actively managed
exchange traded fund, a sleeve of an actively managed exchange traded fund, a
sleeve of a variable insurance trust and an Irish Domiciled UCITs fund. 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 13 full-time and 4 part-time/contract persons.
First Trust Capital Partners, LLC, an affiliate of the Advisor, owns,
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, Principal of
Energy Income Partners and a co-portfolio manager. 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 a co-portfolio
manager. 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.
John K. Tysseland is a Principal of Energy Income Partners and a
co-portfolio manager. Mr. Tysseland has been a portfolio manager of the Fund
since 2016. Prior to joining Energy Income Partners in 2014, he worked at Citi
Research, most recently serving as a Managing Director where he covered
midstream energy companies and MLPs. From 1998 to 2005, he worked at Raymond
James & Associates as a Vice President who covered the oilfield service industry
and established the firm's initial coverage of MLPs in 2001. Prior to that, he
- 53 -
was an Equity Trader at Momentum Securities from 1997 to 1998 and an Assistant
Executive Director at Sumar Enterprises from 1996 to 1997. He graduated from The
University of Texas at Austin with a BA in economics.
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 Operations 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, 2019
------------------------------------------------------------------------------------------------------------------------------------
REGISTERED
REGISTERED INVESTMENT OTHER POOLED
INVESTMENT COMPANIES INVESTMENT
COMPANIES SUBJECT TO OTHER VEHICLES OTHER ACCOUNTS
(OTHER PERFORMANCE- POOLED SUBJECT TO SUBJECT TO
THAN THE BASED INVESTMENT PERFORMANCE-BASED OTHER PERFORMANCE-BASED
PORTFOLIO MANAGER FUND) ADVISORY FEES VEHICLES ADVISORY FEES ACCOUNTS ADVISORY FEES
------------------------------------------------------------------------------------------------------------------------------------
James J. Murchie Number: Number: Number: Number: Number: Number:
Assets: $ Assets: $ Assets: $ Assets: $ Assets: $ Assets: $
------------------------------------------------------------------------------------------------------------------------------------
Eva Pao Number: Number: Number: Number: Number: Number:
Assets: $ Assets: $ Assets: $ Assets: $ Assets: $ Assets: $
------------------------------------------------------------------------------------------------------------------------------------
John K. Tysseland Number: Number: Number: Number: Number: Number:
Assets: $ Assets: $ Assets: $ Assets: $ Assets: $ Assets: $
------------------------------------------------------------------------------------------------------------------------------------
|
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.
The following table sets forth the dollar range of equity securities
beneficially owned by the portfolio managers in the Fund as of November 30,
2019:
- 54 -
DOLLAR RANGE OF
EQUITY SECURITIES
PORTFOLIO MANAGER IN THE FUND
James J. Murchie
Eva Pao
John K. Tysseland
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. In addition, Section 17(d) of
the 1940 Act may limit or prevent the Fund from participating in certain joint
transactions with affiliated persons.
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
- 55 -
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
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. 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.
The following table sets for the advisory fee paid by the Fund to the
Advisor for the periods indicated in the table below.
Fiscal Year ended November 30, 2019 $
Fiscal Year ended November 30, 2018 $
Fiscal Year ended November 30, 2017 $6,560,348
The following table sets for the advisory fee paid by the Advisor to the
Sub-Advisor for the periods indicated in the table below.
Fiscal Year ended November 30, 2019 $
Fiscal Year ended November 30, 2018 $
Fiscal Year ended November 30, 2017 $3,280,174
- 56 -
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.
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
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.
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
- 57 -
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 $_______ , $_______ and $690,822 in fiscal years
ended 2019, 2018 and 2017, 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
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
- 58 -
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.
During the fiscal year ended November 30, 2019, the Fund paid $ in
commissions to brokers in return for research services. During the fiscal year
ended November 30, 2019, the Fund did not acquire any securities of its regular
brokers or dealers as defined in Rule 10b-1 under the 1940 Act or the parents of
the brokers or dealers.
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 a majority 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 outstanding shares. 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
- 59 -
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
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
- 60 -
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
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
- 61 -
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
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 American, 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 American, (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
- 62 -
shareholders if shares were repurchased. The Trustees may in the future modify
these conditions in light of experience with respect to the Fund.
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 American. 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
- 63 -
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
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 Nasdaq 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.
- 64 -
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.
- 65 -
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
provisions of the Code, on Treasury regulations promulgated thereunder as in
- 66 -
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, partnerships and other
pass-through entities, United States expatriates, 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 and traders that
have elected the mark-to-market method of accounting, (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 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 21%. Any such U.S. corporate income 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.
The MLPs in which the Fund invests 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 invests 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.
- 67 -
Although the Fund holds 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 distributions 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 21%.
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 practice of the Fund to sell or buy offsetting positions may redirect the
portion of the distributions that are treated as qualified dividends. The
maximum federal income tax rate for individuals on qualified dividend income is
currently generally 20%. The current maximum rate for individuals on ordinary
income is 37%. Corporations are generally subject to tax on dividends at a
maximum 21% rate, but, for tax years beginning after December 31, 2017,
corporations may be eligible to exclude 50% 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 the distribution exceeds the basis of the common shares. 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
- 68 -
20% on long-term capital gains. Corporations are taxed on capital gains at their
ordinary income 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
derived from its investments in the MLPs in its portfolio. 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
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.
Distributions from the Fund after June 30, 2014 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 either (A) have not entered into an agreement with
the U.S. Treasury to collect and disclose certain information or (B) are not
resident for tax purposes in a jurisdiction that has entered into an agreement
with the IRS to collect and provide the information otherwise required, 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 prior 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, 2018 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
either (A) have not entered into an agreement with the U.S. Treasury to collect
and disclose certain information or (B) are not resident for tax purposes in a
- 69 -
jurisdiction that has entered into an agreement with the IRS to collect and
provide the information otherwise required, 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. Income from the Fund may also be subject to a 3.8% "Medicare
tax". This tax will generally apply to the net investment income (such as
interest and dividends, including dividends paid with respect to the common
shares) of a shareholder who is an individual 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 24%. 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
- 70 -
fertilizer, geothermal energy, and timber). As discussed above, the Fund invests
in energy MLPs that derive income from such sources, so the income of the MLPs
in the Fund's portfolio should qualify as qualifying income. The IRS has
finalized regulations that limit the nature of qualifying income for MLPs. Some
MLPs may convert to corporations under the regulations or restructure their
activities to qualify under the regulations.
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 on its own tax returns. 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) to the common shareholders rather than based upon the
income, gain, loss or deductions of the MLPs in which the Fund invests.
Foreign Investments. Dividends or other income (including, in some cases,
capital gains) received by the Fund from investments in non-U.S. securities may
be subject to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes in some cases. Foreign taxes paid by the Fund will reduce
the return from the Fund's investments. Common shareholders will not be entitled
to claim credits or deductions on their own tax returns for foreign taxes paid
by the Fund.
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
- 71 -
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.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Financial Statements of the Fund as of November 30, 2019, incorporated
by reference in this Statement of Additional Information, have been audited by ,
an independent registered public accounting firm, as stated in their report
which is incorporated herein by reference. Such financial statements have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing. provides auditing services to
the Fund. The principal business address of is .
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
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. The Bank of New York Mellon 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
- 72 -
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.
- 73 -
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Fund's financial statements and financial highlights and the report of
__________________ thereon, contained in the following documents filed by the
Fund with the SEC, 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, 2019 contained in the Fund's Form N-CSR filed with the
SEC on _______________. 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 SERVICES -- A BRIEF DESCRIPTION OF CERTAIN
STANDARD & POOR'S RATINGS SERVICES, 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. 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 the promise we impute;
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. The
'CC' rating is used when a default has not yet occurred, but Standard & Poor's
expects default to be a virtual certainty, regardless of the anticipated time to
default.
C
A 'C' rating is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher.
D
An obligation rated 'D' is in default or in breach of an imputed promise.
For non-hybrid capital instruments, the 'D' rating category is used when
payments on an obligation are not made on the date due, unless Standard & Poor's
believes that such payments will be made within five business days in the
absence of a stated grace period or within the earlier of the stated grace
period or 30 calendar days. The 'D' rating also will be used upon the filing of
a bankruptcy petition or the taking of similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay provisions.
An obligation's rating is lowered to 'D' if it is subject to a distressed
exchange offer.
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. Ratings of 'B-1', 'B-2', and 'B-3' may be assigned
to indicate finer distinctions within the 'B' category. 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 commitments.
B-1
A short-term obligation rated 'B-1' is regarded as having significant
speculative characteristics, but the obligor has a relatively stronger capacity
to meet its financial commitments over the short-term compared to other
speculative-grade obligors.
B-2
A short-term obligation rated 'B-2' is regarded as having significant
speculative characteristics, and the obligor has an average speculative-grade
capacity to meet its financial commitments over the short-term compared to other
speculative-grade obligors.
- A-4 -
B-3
A short-term obligation rated 'B-3' is regarded as having significant
speculative characteristics, and the obligor has a relatively weaker capacity to
meet its financial commitments over the short-term compared to other
speculative-grade obligors.
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 default or in breach of an imputed
promise. For non-hybrid capital instruments, the 'D' rating category is used
when payments on an obligation are not made on the date due, unless Standard &
Poor's believes that such payments will be made within any stated grace period.
However, any stated grace period longer than five business days will be treated
as five business days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay provisions.
An obligation's rating is lowered to 'D' if it is subject to a distressed
exchange offer.
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
Dual ratings may be assigned to debt issues that have a put option or
demand feature. The first component of the rating addresses the likelihood of
repayment of principal and interest as due, and the second component of the
rating addresses only the demand feature. The first component of the rating can
relate to either a short-term or long-term transaction and accordingly use
either short-term or long-term rating symbols. The second component of the
rating relates to the put option and is assigned a short-term rating symbol (for
example, 'AAA/A-1+' or 'A-1+/A- 1'). With U.S. municipal short-term demand debt,
the U.S. municipal short-term note rating symbols are used for the first
component of the rating (for example, 'SP-1+/A-1+').
ACTIVE QUALIFIERS (CURRENTLY APPLIED AND/OR OUTSTANDING)
Standard & Poor's uses five qualifiers that limit the scope of a rating.
The structure of the transaction can require the use of a qualifier such as a
'p' qualifier, which indicates the rating addressed the principal portion of the
obligation only. Likewise, the qualifier can indicate a limitation on the type
of information used, such as 'pi' for public information. A qualifier appears as
a suffix and is part of the rating.
L
Ratings qualified with 'L' apply only to amounts invested up to federal
deposit insurance limits.
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' suffix indicates that the
- A-6 -
rating addresses the principal portion of the obligation only and that the
interest is not rated.
PI
Ratings with a 'pi' subscript 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' qualifier, 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 post-bankruptcy 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 the obligations of these entities'.
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
- A-7 -
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.
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 AND U
The "u" and 'unsolicited' designations are unsolicited 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 was 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
long-term credit rating of the issuer was lowered below an investment-grade
level and/or the issuer's bonds are deemed taxable. Discontinued use in January
2001.
G
THE LETTER 'G' FOLLOWED THE RATING SYMBOL WHEN A FUND'S PORTFOLIO CONSISTED
PRIMARILY OF DIRECT U.S. GOVERNMENT SECURITIES.
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 was largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
- A-8 -
of the project, made no comment on the likelihood of or the risk of default upon
failure of such completion.
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, which 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, with
minimal credit risk.
Aa
Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A
Obligations rated A are considered upper-medium grade and are subject to
low credit risk.
- A-9 -
Baa
Obligations rated Baa are subject to moderate credit risk. They are
considered medium grade and as such may possess certain speculative
characteristics.
Ba
Obligations rated Ba are judged to have speculative elements 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 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 class and are typically in
default with little prospect for recovery of principal or interest.
Note: Moody's appends 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.
MEDIUM-TERM NOTE PROGRAM RATINGS
Moody's assigns provisional ratings to medium-term note (MTN) programs and
to the individual debt securities issued from them (referred to as drawdowns or
notes). These ratings may be expressed on Moody's general long-term or
short-term rating sale, depending upon the intended tenor of the notes to be
issued under the program.
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). However, the rating assigned to a drawdown
from a rated MTN program may differ from the program if the drawdown is exposed
to additional credit risks besides the issuer's default, such as links to the
- A-10 -
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.
Market participants must determine whether any particular note is rated,
and if so, at what rating level. 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.
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
- A-11 -
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"), using a variation of
the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating.
When either the long- or short-term aspect of a VRDO is not rated, that piece is
designated NR, e.g., Aaa/NR or NR/VMIG 1. VMIG rating expirations are a function
of each issue's specific structural or credit features.
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.
- A-12 -
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, INC.
("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.
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.
- A-13 -
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.
CC
Very high levels of credit risk. Default of some kind appears probable.
- A-14 -
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
distressed debt exchange.
RD
Restricted default. 'RD' ratings indicate an issuer that in Fitch Ratings'
opinion has experienced an uncured payment default on a bond, loan or other
material financial obligation but which has not entered into bankruptcy filings,
administration, receivership, liquidation or other formal winding-up procedure,
and which has not otherwise ceased 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.
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.
- A-15 -
"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.
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
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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.
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:
- A-17 -
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'.
RATING WATCHES AND RATING OUTLOOKS
Rating Watches and Outlooks form part of the Credit Rating and indicate
the likely direction of the rating.
Rating Watch
Rating Watches indicate that there is a heightened probability of a rating
change and the likely direction of such a change. These are designated as
"Positive", indicating a potential upgrade, "Negative", for a potential
downgrade, or "Evolving", if ratings may be raised, lowered or affirmed.
However, ratings that are not on Rating Watch can be raised or lowered without
being placed on Rating Watch first, if circumstances warrant such an action.
A Rating Watch is typically event-driven and, as such, it is generally
resolved over a relatively short period. The event driving the Watch may be
either anticipated or have already occurred, but in both cases, the exact rating
implications remain undetermined. The Watch period is typically used to gather
further information and/or subject the information to further analysis.
- A-18 -
Additionally, a Watch may be used where the rating implications are already
clear, but where a triggering event (e.g. shareholder or regulatory approval)
exists. The Watch will typically extend to cover the period until the triggering
event is resolved or its outcome is predictable with a high enough degree of
certainty to permit resolution of the Watch.
Rating Watches can be employed by all analytical groups and are applied to
the ratings of individual entities and/or individual instruments. At the lowest
categories of speculative grade ('CCC', 'CC' and 'C') the high volatility of
credit profiles may imply that almost all ratings should carry a Watch. Watches
are nonetheless only applied selectively in these categories, where a committee
decides that particular events or threats are best communicated by the addition
of the Watch designation.
Rating Outlook
Rating Outlooks indicate the direction a rating is likely to move over a
one- to two-year period. They reflect financial or other trends that have not
yet reached the level that would trigger a rating action, but which may do so if
such trends continue. The majority of Outlooks are generally Stable, which is
consistent with the historical migration experience of ratings over a one- to
two-year period. Positive or Negative rating Outlooks do not imply that a rating
change is inevitable and, similarly, ratings with Stable Outlooks can be raised
or lowered without a prior revision to the Outlook, if circumstances warrant
such an action. Occasionally, where the fundamental trend has strong,
conflicting elements of both positive and negative, the Rating Outlook may be
described as Evolving.
Outlooks are currently applied on the long-term scale to issuer ratings in
corporate finance (including sovereigns, industrials, utilities, financial
institutions and insurance companies) and public finance outside the U.S.; to
issue ratings in public finance in the U.S.; to certain issues in project
finance; to Insurer Financial Strength Ratings; to issuer and/or issue ratings
in a number of National Rating scales; and to the ratings of structured finance
transactions and covered bonds. Outlooks are not applied to ratings assigned on
the short-term scale and are applied selectively to ratings in the 'CCC', 'CC'
and 'C' categories. Defaulted ratings typically do not carry an Outlook.
Deciding When to Assign Rating Watch or Outlook
Timing is informative but not critical to the choice of a Watch rather
than an Outlook. A discrete event that is largely clear and the terms of which
are defined, but which will not happen for more than six months - such as a
lengthy regulatory approval process - would nonetheless likely see ratings
placed on Watch rather than a revision to the Outlook.
An Outlook revision may, however, be deemed more appropriate where a
series of potential event risks has been identified, none of which individually
warrants a Watch but which cumulatively indicate heightened probability of a
rating change over the following one to two years.
- A-19 -
A revision to the Outlook may also be appropriate where a specific event
has been identified, but where the conditions and implications of that event are
largely unclear and subject to high execution risk over an extended period - for
example a proposed, but politically controversial, privatization.
STANDARD RATING ACTIONS
Affirmed*
The rating has been reviewed with no change in rating. Ratings
affirmations may also include an affirmation of, or change to an Outlook when an
Outlook is used.
Confirmed
Action taken in response to an external request or change in terms. Rating
has been reviewed in either context, and no rating change has been deemed
necessary. For servicer ratings, action taken in response to change in financial
condition or IDR of servicer where servicer rating is reviewed in that context
exclusively, and no rating action has been deemed necessary.
Downgrade*
The rating has been lowered in the scale.
Matured*/Paid-In-Full
a. 'Matured' - This action is used when an issue has reached the end of
its repayment term and rating coverage is discontinued. Denoted as 'NR'.
b. 'Paid-In-Full' - This action indicates that the issue has been paid in
full. As the issue no longer exists, it is therefore no longer rated. Denoted as
'PIF'.
New Rating*
Rating has been assigned to a previously unrated issue primarily used in
cases of shelf issues such as MTNs or similar programs.
Pre-refunded*
Assigned to long-term US Public Finance issues after Fitch assesses
refunding escrow.
Publish*
Initial public announcement of rating on the agency's website, although
not necessarily the first rating assigned. This action denotes when a previously
private rating is published.
- A-20 -
Upgrade*
The rating has been raised in the scale.
Withdrawn*
The rating has been withdrawn and the issue or issuer is no longer rated
by Fitch Ratings. Indicated in the rating databases with symbol "WD."
*A rating action must be recorded for each rating in a required cycle to
be considered compliant with Fitch policy concerning aging of ratings. Not all
Ratings or Data Actions, or changes in rating modifiers, will meet this
requirement. Actions that meet this requirement are noted with an '*' in the
above definitions.
- A-21 -
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 voting discretion in a manner consistent with the best
interest of the client. EIP notes that voting proxies is not an integral part of
its investment strategy, and when it disagrees with an issuer's management or
the issuer's policies, EIP's general recourse is to divest or reduce its
position.
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;
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.
With the aim of ensuring that proxies are voted in the best interests of EIP
clients, EIP has engaged Institutional Shareholder Services Inc. ("ISS") 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, after reviewing ISS's own Proxy Voting Guidelines, has concluded
that ISS's Proxy Voting Guidelines are reasonably designed to vote proxies in
the best interests of EIP's clients, and has therefore directed ISS to utilize
its Proxy Voting Guidelines in making recommendations to vote, as those
guidelines may be amended from time to time.
Notwithstanding anything herein to the contrary, from time to time EIP may
determine that voting in contravention to a recommendation made by ISS may be in
the best interest of EIP's clients. When EIP chooses to override an ISS voting
recommendation, EIP will document the occurrence, including the reason(s) that
it chose to do so. Documentation of any override of an ISS voting recommendation
shall be reviewed at the next scheduled Brokerage Committee meeting. In certain
circumstances, voting situations may arise in which the optimal voting decision
may not be easily captured by a rigid set of voting guidelines. This is
particularly the case for significant corporate events, including, but not
necessarily limited to, mergers and acquisitions, dissolutions, conversions and
- B-1 -
consolidations. While each such transaction is unique in its terms, conditions
and potential economic outcome, EIP will conduct such additional analysis as it
deems necessary to form the voting decision that it believes is in the best
interests of its clients. All records relating to such analyses will be
maintained and reviewed periodically by the Chief Compliance Officer ("CCO") or
her designee. On an annual basis, EIP's Brokerage Committee shall be responsible
for approving the ongoing use of ISS as a proxy voting service provider. Such
approval shall be based upon, among other things, a reviews of (1) ISS's Proxy
Voting Guidelines, including any changes thereto; (2) the results of internal
testing regarding ISS's adherence to its proxy voting guidelines; (3) periodic
due diligence over ISS as described further below; and
(4) any potential factual errors, potential incompleteness, or potential
methodological weaknesses in ISS's analysis that were identified and documented
throughout the preceding twelve month period. 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 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, subject to EIP's right to override an ISS voting
recommendation. Under no circumstances will EIP override an ISS recommendation
in any instance in which EIP identifies a potential conflict of interest.
DISCLOSURE ON HOW PROXIES WERE VOTED
EIP will disclose to clients in Part 2A of 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:
- B-2 -
o 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.
o 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.
o 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 will follow the following procedures with respect to the oversight
of ISS in making recommendation with respect to and voting client proxies:
o Periodically, but no less frequently than semi-annually, sample proxy
votes to review whether they complied with EIP's proxy voting policies
and procedures, including a review of those items that relate to
certain proposals that may require more analysis (e.g., non-routine
matters).
o Collect information, no less frequently than annually, reasonably
sufficient to support the conclusion that ISS has the capacity and
competency to adequately analyze proxy issues. In this regard, the CCO
shall consider, among other things:
o the adequacy and quality of ISS's staffing and personnel;
o the robustness of its policies and procedures regarding its
ability to (i) ensure that its proxy voting recommendations are
based on current and accurate information and (ii) identify,
disclose and address any conflicts of interest;
o ISS's engagement with issuers, including ISS's process for
ensuring that it has complete and accurate information about each
issuer and each particular matter, and ISS's process, if any, for
EIP to access the issuer's views about ISS's voting
recommendations in a timely and efficient manner;
o ISS's efforts to correct any identified material deficiencies in
its analysis;
o ISS's disclosure to EIP regarding the sources of information and
methodologies used in formulating voting recommendations or
executing voting instructions;
o ISS's consideration of factors unique to a specific issuer or
proposal when evaluating a matter subject to a shareholder vote;
and
o any other considerations that the CCO believes would be
appropriate in considering the nature and quality of the services
provided by ISS.
For purposes of these procedures, the CCO may rely upon information posted by
ISS on its website, provided that ISS represents that the information is
complete and current.
If a circumstance occurs in which EIP becomes aware of potential factual errors,
potential incompleteness, or potential methodological weaknesses in ISS's
analysis that may materially affect the voting recommendation provided by ISS,
EIP shall investigate the issue in a timely manner and shall request additional
information from ISS as is necessary to identify and resolve the identified
discrepancy. EIP shall document the results of each such investigation and
present the results to the Brokerage Committee at its next scheduled meeting.
RECORDKEEPING ON PROXIES
It is the responsibility of EIP's CCO to ensure that the following proxy voting
records are maintained:
- B-3 -
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.
Updated December 2019.
- B-4 -
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 will be
incorporated into Part B of a Pre-effective Amendment to the Registration
Statement by reference to Registrant's Annual Report for the fiscal year ended
November 30, 2019 contained in its Form N-CSR, as described in the statement of
additional information.
2. Exhibits:
a. 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 Underwriting Agreement.*
h.2 Form of Sales Agreement.*
i. None.
j. Custodian Services Agreement. (3)
k.1 Transfer Agency Services Agreement. (3)
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k.2 Administration and Accounting Services Agreement. (3)
k.3 Committed Facility Agreement dated January 23, 2009. (7)
k.4 Amendment to Committed Facility Agreement dated March 2, 2010. (14)
k.5 Amended and Restated Committed Facility Agreement dated July 24, 2013.
(16)
k.6 Second Amended and Restated Committed Facility Agreement dated October 8,
2013. (16)
k.7 First Amendment to Second Amended and Restated Committed Facility
Agreement dated June 12, 2014. (16)
k.8 Third Amendment to Second Amended and Restated Committed Facility
Agreement dated March 18, 2016. (16)
k.9 Fifth Amendment to Second Amended and Restated Committed Facility
Agreement dated November 1, 2017.*
k.10 Sixth Amendment to Second Amended and Restated Committed Facility
Agreement dated May 22, 2019.*
l.1 Opinion and consent of Chapman and Cutler LLP.*
l.2 Opinion and consent of Morgan, Lewis & Bockius 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. (11)
r.3 Code of Ethics of First Trust Advisors L.P. (11)
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r.4. Code of Ethics of Energy Income Partners, LLC. (5)
s. Powers of Attorney. **
(1) Filed on April 1, 2004 as Exhibit a. to Registrant's Registration
Statement on Form N-2 (File No. 333-114131) and incorporated herein by
reference.
(2) Filed on June 24, 2004 in Pre-Effective Amendment No. 3 to 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 Registrations 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.
(11) Filed on March 12, 2013 in Registrant's Registration Statement on Form N-2
(File No. 333-187192) and incorporated herein by reference.
(12) Filed on April 22, 2013 in Registrant's Registration Statement of Form N-2
(File No. 333-187192) and incorporated herein by reference.
(13) Filed on April 30, 2013 in Registrant's Registration Statement on Form N-2
(File No. 333-187192) and incorporated herein by reference.
(14) Filed on September 23, 2013 in Registrant's Post-Effective Amendment No. 2
to Registrant's Registration Statement on Form N-2 (File No. 333-187192)
and incorporated herein by reference.
(15) Filed on May 2, 2017 as Exhibit s. to Registrant's Registration Statement
on Form N-2 (File No. 333-217580) and incorporated herein by reference.
(16) Filed on June 19, 2017 in Registrant's Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2 (File No. 333-217580) and
incorporated herein by reference.
* To be filed by amendment.
** Filed herewith.
Item 26: Marketing Arrangements
Reference is made to the form of underwriting agreement and/or sales
agreement for the Registrant's common shares to be filed in a post-effective
amendment to the Registrant's Registration Statement and the section entitled
"Plan of Distribution" contained in Registrant's Prospectus, filed herewith as
Part A of Registrant's Registration Statement.
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 $*
------------------------------------------------------- ------------------------
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* 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 , 2020
------------------------------------------------------- ------------------------
Title of Class Number of Record Holders
------------------------------------------------------- ------------------------
Common Shares, $0.01 par value *
------------------------------------------------------- ------------------------
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* 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," and the Form
ADV of Energy Income Partners, LLC (File No. 801-66907) filed with the
Commission are 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. Not applicable.
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; and
(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.
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 21st day of
January, 2020.
FIRST TRUST ENERGY INCOME AND GROWTH FUND
By: /s/ James M. Dykas
------------------------------------
James M. Dykas, President and
Chief Executive Officer
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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
--------------------------------------------------------------------------------
President and Chief
/s/ James M. Dykas Executive Officer January 21, 2020
------------------------- (Principal Executive
James M. Dykas Officer)
--------------------------------------------------------------------------------
Chief Financial Officer,
Chief Accounting Officer
/s/ Donald P. Swade and Treasurer January 21, 2020
------------------------- (Principal Financial and
Donald P. Swade Accounting Officer)
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James A. Bowen(1) Chairman of the Board
and Trustee )
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Richard E. Erickson(1) Trustee ) By: /s/ W. Scott Jardine
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W. Scott Jardine
Thomas R. Kadlec(1) Trustee ) Attorney-In-Fact
------------------------------------------------------ January 21, 2020
|
Robert F. Keith(1) Trustee )
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Niel B. Nielson(1) Trustee )
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(1) Original powers of attorney authorizing W. Scott Jardine, James M. Dykas,
Eric F. Fess and Kristi A. Maher to execute Registrant's Registration
Statement, and Amendments thereto, for each of the trustees of the
Registrant on whose behalf this Registration Statement is filed, were
previously executed and are filed as an Exhibit hereto.
INDEX TO EXHIBITS
s. Powers of Attorney.
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