UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-22039
First Trust Specialty Finance and Financial Opportunities Fund
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
Date of fiscal year end: November 30
Date of reporting period: November 30, 2009
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
SPECIALTY FINANCE
AND FINANCIAL
OPPORTUNITIES FUND
ANNUAL REPORT
FOR THE YEAR ENDED
NOVEMBER 30, 2009
(FIRST TRUST LOGO) (CONFLUENCE INVESTMENT MANAGEMENT LOGO)
TABLE OF CONTENTS
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
ANNUAL REPORT
NOVEMBER 30, 2009
Shareholder Letter ........................................................ 1
At a Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments .................................................. 6
Statement of Assets and Liabilities ....................................... 9
Statement of Operations ................................................... 10
Statements of Changes in Net Assets ....................................... 11
Statement of Cash Flows ................................................... 12
Financial Highlights ...................................................... 13
Notes to Financial Statements ............................................. 14
Report of Independent Registered Public Accounting Firm ................... 20
Additional Information. ................................................... 21
Board of Trustees and Officers ............................................ 23
Privacy Policy ............................................................ 27
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Confluence Investment Management LLC
("Confluence" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future
events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Specialty Finance and Financial Opportunities Fund (the "Fund") to
be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. When evaluating the
information included in this report, you are cautioned not to place undue
reliance on these forward-looking statements, which reflect the judgment of the
Advisor and Sub-Advisor and their respective representatives only as of the date
hereof. We undertake no obligation to publicly revise or update these
forward-looking statements to reflect events and circumstances that arise after
the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of the relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Confluence are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report, and other regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
ANNUAL REPORT
NOVEMBER 30, 2009
Dear Shareholders:
2009 was more positive for the U.S. and global markets, which eased the minds of
economists and investors alike. Many economists believe that the recession that
began in December 2007 ended in March 2009. In fact, the Dow Jones Industrial
Average's total return from March 9, 2009, (the statistical end of the bear
market) to November 30, 2009, was 61.59%. Of course, no one can guarantee that
this trend will continue, but the economy has continued to rise and most
investors have found it easier to open their financial statements since March.
First Trust Advisors L.P. ("First Trust") has always believed that in order to
be successful in reaching your financial goals, you should be invested for the
long term. A long-term investor understands that the market, from a historical
perspective, has always experienced ups and downs. But history has shown that
the patient investor is typically rewarded over the long term. We have always
believed that staying invested in quality products and having a long-term
perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in First
Trust Specialty Finance and Financial Opportunities Fund (the "Fund"). It
contains a portfolio commentary from the Fund's portfolio management team that
provides a market recap for the period, a performance analysis and a market and
Fund outlook. Additionally, the report provides the Fund's financial statements
for the period covered by the report. I encourage you to read this document and
discuss it with your financial advisor.
Since its inception, First Trust has been through many types of markets. We
remain committed to bringing you quality investment solutions regardless of the
inevitable volatility the market experiences. We offer a variety of products
that can fit many financial plans to help those investors seeking long-term
investment success. As well, we are committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Specialty Finance and Financial Opportunities Fund
Page 1
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
"AT A GLANCE"
AS OF NOVEMBER 30, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FGB
Common Share Price $ 5.43
Common Share Net Asset Value ("NAV") $ 5.98
Premium (Discount) to NAV (9.20)%
Net Assets Applicable to Common Shares $85,069,367
Current Quarterly Distribution per Common Share (1) $ 0.1400
Current Annualized Distribution per Common Share $ 0.5600
Current Distribution Rate on Closing Common Share Price (2) 10.31%
Current Distribution Rate on NAV (2) 9.36%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Market NAV
------ ----
11/30/08 3.29 4.51
12/5/08 4.28 4.61
12/12/08 3.47 4.64
12/19/08 3.71 4.89
12/26/08 3.66 4.8
1/2/09 4.4 5.16
1/9/09 4.49 5.12
1/16/09 4.11 4.93
1/23/09 4.2 4.6
1/30/09 4.07 4.4
2/6/09 3.84 4.26
2/13/09 3.36 3.87
2/20/09 2.76 3.3
2/27/09 2.54 3.01
3/6/09 1.93 2.4
3/13/09 2.44 2.91
3/20/09 2.53 3.07
3/27/09 2.97 3.48
4/3/09 3.51 3.91
4/9/09 3.68 4.09
4/17/09 3.76 4.13
4/24/09 3.62 4.02
5/1/09 3.85 4.15
5/8/09 4.31 4.74
5/15/09 3.95 4.38
5/22/09 3.81 4.32
5/29/09 4.09 4.42
6/5/09 4.58 4.73
6/12/09 4.2 4.69
6/19/09 4.28 4.74
6/26/09 4.43 4.82
7/2/09 4.47 4.8
7/10/09 3.93 4.53
7/17/09 4.5 4.93
7/24/09 4.6 5.21
7/31/09 4.96 5.51
8/7/09 5.33 5.84
8/14/09 5.2 5.58
8/21/09 5 5.63
8/28/09 5.14 5.62
9/4/09 5.08 5.47
9/11/09 5.23 5.74
9/18/09 5.49 6.04
9/25/09 5.43 5.89
10/2/09 5.29 5.83
10/9/09 5.59 6.06
10/16/09 5.42 6.02
10/23/09 5.46 5.93
10/30/09 5.2 5.69
11/6/09 5.36 5.88
11/13/09 5.5 5.88
11/20/09 5.32 5.93
11/27/09 5.44 5.89
11/30/09 5.43 5.98
PERFORMANCE
Average Annual
Total Return
1 Year Ended Inception (5/25/2007)
11/30/2009 to 11/30/2009
------------ ---------------------
Fund Performance
NAV (3) 56.00% -26.88%
Market Value (4) 94.18% -30.90%
Index Performance
Blended Benchmark (5) 41.38% N/A(6)
MSCI U.S. Investable Market Financials Index 13.09% -56.48%
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Ares Capital Corp. 12.9%
Prospect Capital Corp. 7.0
MVC Capital, Inc. 6.4
PennantPark Investment Corp. 6.3
Apollo Investment Corp. 6.0
BlackRock Kelso Capital Corp. 5.7
Hercules Technology Growth Capital, Inc. 5.3
Annaly Capital Management, Inc. 4.2
Hatteras Financial Corp. 4.1
Gladstone Capital Corp. 3.9
----
Total 61.8%
====
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
-------------------- -----------
Common Stocks:
Business Development Companies 74.0%
Residential Mortgage REITs 15.6
Domestic 5.0
Specialty Finance/Hybrid REITs 2.2
Exchange-Traded Funds 3.1
Warrants 0.1
-----
Total 100.0%
=====
% OF TOTAL
INDUSTRY INVESTMENTS
-------- -----------
Capital Markets 73.3%
Real Estate Investment Trusts (REITs) 17.9
Diversified Financial Services 6.9
Insurance 1.6
Health Care Equipment & Supplies 0.3
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 11/30/2009. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV as applicable, as of 11/30/2009. Subject to
change in the future.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
(5) Blended benchmark consists of the following (Source: Bloomberg): Red Rocks
Global Listed Private Equity Index (70%) FTSE NAREIT Mortgage REIT Index
(20%) S&P SmallCap Financials Index (10%)
(6) Previously, the blended benchmark consisted of the following:
Red Rocks Listed Private Equity Index (40%)
FTSE NAREIT Mortgage REIT Index (20%)
FTSE NAREIT Hybrid REIT Index (20%)
Merrill Lynch Preferred Stock Hybrid Securities Index (10%)
Russell 2000 Financial Services Index (10%)
Certain of these indices were discontinued during 2009, therefore the
blended benchmark was changed. See footnote (5) above for the new blended
benchmark constituents. As certain of the indices in the new blended
benchmark began subsequent to the inception date (5/25/2007) of the Fund,
the average annual total return from inception to 11/30/2009 for the
blended benchmark cannot be calculated.
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Confluence Investment Management LLC, a registered investment advisor
("Confluence" or the "Sub-Advisor") located in St. Louis, Missouri, has served
as the Sub-Advisor to First Trust Specialty Finance and Financial Opportunities
Fund (NYSE:FGB) (the "Fund") since July 29, 2008.
PORTFOLIO MANAGEMENT TEAM
MARK A. KELLER, CFA - CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER
(PHOTO OF MARK A. KELLER)
Mr. Keller has nearly 30 years of investment experience with a focus on
value-oriented equity analysis and management. Prior to joining Confluence, from
1994 to May 2008, he was the Chief Investment Officer of Gallatin Asset
Management, Inc., and its predecessor organization, A.G. Edwards Asset
Management, the investment management arm of A.G. Edwards, Inc. From 1999 to
2008, Mr. Keller was Chairman of the A.G. Edwards Investment Strategy Committee,
which set investment policy and established asset allocation models for the
entire organization. Mr. Keller was a founding member of the A.G. Edwards
Investment Strategy Committee, on which he served for over 20 years, the last
ten years as Chairman. He began his career with A.G. Edwards in 1978, serving as
an equity analyst for the firm's Securities Research Department from 1979 to
1994. During his last five years in Securities Research, Mr. Keller was Equity
Strategist and manager of the firm's Focus List. Mr. Keller was a Senior Vice
President of A.G. Edwards & Sons, Inc. and of Gallatin Asset Management, Inc.,
and was a member of the Board of Directors of both companies. Mr. Keller
received a Bachelor of Arts from Wheaton College (Illinois) and is a CFA
charterholder.
DAVID B. MIYAZAKI, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
(PHOTO OF DAVID B. MIYAZAKI)
Prior to joining Confluence in May 2008, Mr. Miyazaki served as a Portfolio
Manager and Analyst with Gallatin Asset Management, Inc. Mr. Miyazaki was
responsible for equity investments in value-oriented separately managed
accounts. He also co-managed the Fund during the time the Fund was sub-advised
by Gallatin Asset Management, Inc., as well as A.G. Edwards' ETF-based asset
allocation program. In addition to portfolio management, Mr. Miyazaki served as
a member of the A.G. Edwards Investment Strategy Committee. As a strategist, he
was responsible for the firm's quantitative asset allocation models, including
its Cyclical Asset Allocation program. Prior to joining A.G. Edwards in 1999,
Mr. Miyazaki was a Portfolio Manager at Koch Industries in Wichita, Kansas. His
previous experience includes working as an Investment Analyst at Prudential
Capital Group in Dallas, Texas, and as a Bond Trader at Barre & Company, also in
Dallas. Mr. Miyazaki received a Bachelor of Business Administration from Texas
Christian University and is a CFA charterholder.
DANIEL T. WINTER, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
(PHOTO OF DANIEL T. WINTER)
Prior to joining Confluence in May 2008, Mr. Winter served as a Portfolio
Manager and Analyst with Gallatin Asset Management, Inc. While at Gallatin, Mr.
Winter chaired the portfolio management team responsible for the firm's six
value-oriented equity strategies. His responsibilities included directing the
strategy implementation and trading execution for the equity portfolios.
Additionally, Mr. Winter co-managed the Fund during the time the Fund was
sub-advised by Gallatin Asset Management, Inc. Mr. Winter also served as a
portfolio manager for the Cyclical Growth ETF Portfolio and the Cyclical Growth
and Income ETF Portfolio which were offered through variable annuities. He was
also a member of the firm's Allocation Advisor Committee which oversaw the A.G.
Edwards exchange-traded fund focused strategies. Prior to joining the firm's
Asset Management division in 1996, Mr. Winter served as a portfolio manager for
A.G. Edwards Trust Company. Mr. Winter earned a Bachelor of Arts in business
management from Eckerd College and a Master of Business Administration from
Saint Louis University. Mr. Winter is a CFA charterholder
Page 3
PORTFOLIO COMMENTARY (CONTINUED)
COMMENTARY
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
The primary investment objective of the First Trust Specialty Finance and
Financial Opportunities Fund ("FGB" or the "Fund") is to seek a high level of
current income. As a secondary objective, the Fund seeks an attractive total
return. The Fund pursues its investment objectives by investing at least 80% of
its managed assets in a portfolio of securities of specialty finance and other
financial companies that the Fund's Sub-Advisor believes offer attractive
opportunities for income and capital appreciation. There can be no assurance
that the Fund's investment objectives will be achieved. The Fund may not be
appropriate for all investors.
MARKET RECAP
FGB is a financial sector fund with a particular focus on business development
companies ("BDCs"). BDCs lend to and invest in private companies, often working
with those not large enough to efficiently access the public markets. Each BDC
has a unique profile, determined by its respective management team. Some
specialize in particular industries, while others apply a more generalized
approach and maintain a diversified portfolio. Both approaches can work
effectively and deliver to shareholders a unique and differentiated return
opportunity derived from the private markets. As of November 30, 2009, the Fund
had almost three quarters of its assets invested in 19 different BDCs.
The six months ended November 30, 2009 were a follow-through to the dramatic
recovery that began in March 2009 in the equity markets. The liquidity crisis in
2008 was so acute, many investments declined in value regardless of individual
business outlooks. Then, as the crisis passed, many of these same investments
spiraled upward, again with little regard for their business outlook. Looking
back, we can see equity investments generally became highly correlated with one
another, not just during the crisis, but also during the recovery.
The path of the BDCs went right alongside that of the broader financial
sector...that is to say, a sharp decline, followed by a rapid recovery. Yet if
we peel back the business models of the BDCs, we find profiles that were
actually much different. Problems among many financials stemmed from an excess
of bad loans, too much leverage and an overall lack of
transparency...characteristics generally not shared with the BDCs. Granted,
there were many problem loans on the books of the BDCs, and several were hurt by
a widespread lack of credit. But we believe investment portfolios for many BDCs
held up reasonably well and these companies turned out to be among the most
durable in the financials sector. None of the BDCs received governmental
assistance, and none went into bankruptcy. Many were able to keep sizable
portions of their dividends intact, and some were able to maintain and even grow
their dividends.
Because of their resilience, we believe the BDCs may be a leading group among
the financials sector to recover. Some BDCs have already raised new equity
capital. And though it has often been dilutive to existing shareholders, the
capital is allowing the BDCs to heal their wounds, strengthen balance sheets and
position themselves to resume growth. We have also witnessed some BDC
consolidation, a healthy evolution that allows the strong to carry the industry
forward by absorbing weaker, damaged competitors. If the trends continue, we
believe the industry can resume the attractive growth profile it commanded prior
to the liquidity crisis.
ONE YEAR ENDED
PERFORMANCE ANALYSIS 11/30/09
-------------------- --------------
FGB Market Value Total Return 94.18%
FGB NAV Total Return 56.00%
Blended Benchmark* 41.38%
* Components of the blended benchmark: Red Rocks Global Listed Private Equity
Index (70%); FTSE/NAREIT Mortgage REIT Index (20% );S&P SmallCap Financials
Index (10%).
SOURCE: BLOOMBERG
Page 4
PORTFOLIO COMMENTARY (CONTINUED)
The Fund's total return (+94.18%) was greater than the Fund's NAV total return
(+56.00%) as the discount to NAV narrowed substantially during the 12-month
period covered by this report. The strong performance was derived from improving
valuations and stabilizing fundamentals within the Fund's portfolio. The Fund
also outperformed its blended benchmark (+41.38%).
The Fund entered this period more heavily weighted in stocks where fundamentals
appeared stronger or valuations were unusually low. This strategy proved to be
constructive as many of the Fund's larger positions, including Ares Capital,
Prospect Capital and Apollo Investment, performed particularly well. Each of
these companies maintained substantial dividends throughout the crisis, and
their ability to raise equity capital has restored investor confidence in these
companies, demonstrated by investor interest in them.
The Fund also benefitted from its investments in residential Mortgage-Backed
Securities ("MBS") Real Estate Investment Trusts ("REITs"), which comprised
approximately 16% of the Fund's total assets. Annaly Capital, Hatteras Financial
and MFA Financial were able to take advantage of attractive yields and low
funding costs in the mortgage markets. This positive environment also enabled
one of the Fund's private MBS REITs, Cypress Sharpridge, to successfully launch
its initial public offering.
MARKET & FUND OUTLOOK
The financials sector still has many issues to face in the aftermath of the
liquidity crisis, ranging from new regulations, ongoing writedowns, limitations
on leverage, demands for transparency and widespread investor skepticism. Still,
we believe the worst of the storm is likely behind us. In our opinion, companies
can begin to turn their priorities from mere survival and capital hoarding to
growth and the creation of shareholder value.
As we look forward, we expect an environment where specific company performance
is more likely to be recognized. For many BDCs, we believe this trend should be
positive, particularly for those with strong balance sheets and access to new
capital. Loans and investments made today have attractive return/risk
characteristics, and management teams active in this environment should be able
to deliver positive results to their shareholders. Over time, BDCs can deliver
differentiated private market returns and we believe FGB is well positioned to
participate.
In recent quarters, the Fund's dividend has stabilized. It is an investment
priority to maintain this dividend and position the Fund's portfolio in a manner
that can open the door to future growth. At the same time, we balance this
income objective with efforts to grow the Fund's NAV as well. To that end, we
have added some newer positions in companies that can compound earnings and grow
book value. Consistent with the Fund's stated objectives, we believe this
strategy positions the Fund to pursue a substantial and growing dividend,
alongside NAV growth.
----------
(1) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
(2) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
Page 5
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a)
NOVEMBER 30, 2009
SHARES DESCRIPTION VALUE
---------- ---------------------------------------------------- ------------
COMMON STOCKS - 112.7%
CAPITAL MARKETS - 81.7%
616,806 Apollo Investment Corp. (b) (c) .................... $ 5,933,674
1,098,733 Ares Capital Corp. (b) (c) ......................... 12,767,277
705,000 BlackRock Kelso Capital Corp. (b) (c) .............. 5,654,100
237,366 Fifth Street Finance Corp. (b) (c) ................. 2,319,066
500,716 Gladstone Capital Corp. (b) (c) .................... 3,910,592
183,333 Gladstone Investment Corp. (b) (c) ................. 846,998
50,500 GSC Investment Corp. (b) (c) ....................... 109,080
534,556 Hercules Technology Growth Capital, Inc. (b) (c) ... 5,265,377
552,307 Kohlberg Capital Corp. (b) (c) ..................... 2,651,074
19,774 Main Street Capital Corp. (c) ...................... 280,593
228,600 MCG Capital Corp. (b) (c) (d) ...................... 907,542
603,700 MVC Capital, Inc. (b) (c) .......................... 6,290,554
355,437 NGP Capital Resources Co. (b) (c) .................. 2,733,310
657,541 Patriot Capital Funding, Inc. (b) (c) .............. 2,531,532
735,000 PennantPark Investment Corp. (b) (c) ............... 6,232,800
640,827 Prospect Capital Corp. (b) (c) ..................... 6,972,198
475,485 TICC Capital Corp. (b) (c) ......................... 2,662,716
113,601 Triangle Capital Corp. (b) (c) ..................... 1,439,325
------------
69,507,808
------------
DIVERSIFIED FINANCIAL SERVICES - 8.1%
187,500 Compass Diversified Holdings (b) ................... 2,088,750
35,584 Financial Federal Corp ............................. 964,326
459,504 Medallion Financial Corp. (b) (c) .................. 3,795,503
------------
6,848,579
------------
HEALTH CARE EQUIPMENT & SUPPLIES - 0.4%
26,100 Medical Action Industries, Inc. (d) ................ 333,036
------------
INSURANCE - 1.9%
3 Berkshire Hathaway, Inc. - Class A (d) ............. 301,800
68,700 Fidelity National Financial, Inc.- Class A ......... 954,243
1,000 Wesco Financial Corp ............................... 341,000
------------
1,597,043
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 20.6%
224,500 Annaly Capital Management, Inc. (b) ................ 4,133,045
192,307 Cypress Sharpridge Investments, Inc. (e) ........... 2,519,222
116,200 Cypress Sharpridge Investments, Inc. (b) ........... 1,522,220
33,195 Hatteras Financial Corp. (b) ....................... 1,015,767
100,000 Hatteras Financial Corp. (b) (e) ................... 3,060,000
420,000 MFA Financial, Inc. (b) ............................ 3,179,400
624,518 NorthStar Realty Finance Corp ...................... 2,117,116
------------
17,546,770
------------
TOTAL COMMON STOCKS
(Cost $148,871,491) ............................. 95,833,236
------------
See Notes to Financial Statements
Page 6
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2009
SHARES/
UNITS DESCRIPTION VALUE
---------- ---------------------------------------------------- ------------
EXCHANGE-TRADED FUNDS - 3.6%
CAPITAL MARKETS - 3.6%
80,000 SPDR Barclays Capital High Yield Bond ETF........... $ 3,051,200
------------
TOTAL EXCHANGE-TRADED FUNDS
(Cost $2,665,961)................................ 3,051,200
------------
CANADIAN INCOME TRUSTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
100 ARC Energy Trust.................................... 1,919
81 Progress Energy Resources Corp...................... 989
------------
TOTAL CANADIAN INCOME TRUSTS
(Cost $3,343).................................... 2,908
------------
WARRANTS - 0.1%
REAL ESTATE INVESTMENT TRUST (REIT) - 0.1%
576,923 Cypress Sharpridge Investments, Inc., expires
04/30/11 with an exercise price of $11 per
share (d) (e) (f)................................ 128,423
------------
TOTAL WARRANTS
(Cost $0)........................................ 128,423
------------
TOTAL INVESTMENTS - 116.4%
(Cost $151,540,795) (g).......................... 99,015,767
OUTSTANDING LOAN - (16.9)%.......................... (14,350,000)
NET OTHER ASSETS AND LIABILITIES - 0.5%............. 403,600
------------
NET ASSETS - 100.0%................................. $ 85,069,367
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All or a portion of this security is serving as collateral on the
outstanding loan.
(c) Business Development Company.
(d) Non-income producing security.
(e) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A under the Securities Act of 1933,
as amended, and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. (See Note 2C-Restricted
Securities in the Notes to Financial Statements).
(f) Security is fair valued in accordance with procedures adopted by the Fund's
Board of Trustees.
(g) Aggregate cost for federal income tax purposes is $155,657,438. As of
November 30, 2009, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$5,498,165 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$62,139,836.
See Notes to Financial Statements
Page 7
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2009
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of November 30,
2009 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
11/30/2009 PRICES INPUTS INPUTS
----------- ----------- ----------- ------------
Common Stocks * ........... $95,833,236 $95,833,236 $ -- $--
Exchange-Traded Funds * ... 3,051,200 3,051,200 -- --
Canadian Income Trusts * .. 2,908 2,908 -- --
Warrants * ................ 128,423 -- 128,423 --
----------- ----------- -------- ---
TOTAL INVESTMENTS ......... $99,015,767 $98,887,344 $128,423 $--
=========== =========== ======== ===
* See Portfolio of Investments for industry breakout.
The following table presents the Fund's investments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
presented.
INVESTMENTS AT FAIR VALUE TRANSFERS NET UNREALIZED
USING SIGNIFICANT UNOBSERVABLE BALANCE AS OF IN (OUT) APPRECIATION BALANCE AS OF
INPUTS (LEVEL 3) NOVEMBER 30, 2008 OF LEVEL 3 (DEPRECIATION) NOVEMBER 30, 2009
------------------------------ ----------------- ----------- -------------- -----------------
Common Stocks ................ $2,419,222 $(2,519,222) $100,000 $--
Warrants ..................... -- (128,423) 128,423 --
---------- ----------- -------- ---
Total Investments ............ $2,419,222 $(2,647,645) $228,423 $--
========== =========== ======== ===
See Notes to Financial Statements
Page 8
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2009
ASSETS:
Investments, at value
(Cost $151,540,795) ................................................ $ 99,015,767
Cash .................................................................. 2,516,469
Prepaid expenses ...................................................... 6,624
Receivables:
Dividends ............................................................. 323,037
Interest .............................................................. 21
-------------
Total Assets .................................................... 101,861,918
-------------
LIABILITIES:
Outstanding loan ...................................................... 14,350,000
Payables:
Distributions to Common Shareholders ............................ 1,992,387
Investment advisory fees ........................................ 81,012
Audit and tax fees .............................................. 49,200
Printing fees ................................................... 34,691
Interest and fees due on loan ................................... 20,852
Legal fees ...................................................... 11,983
Administrative fees ............................................. 8,333
Trustees' fees and expenses ..................................... 6,711
Transfer agent fees ............................................. 5,179
Custodian fees .................................................. 2,482
Other liabilities ..................................................... 229,721
-------------
Total Liabilities ............................................... 16,792,551
-------------
NET ASSETS ............................................................ $ 85,069,367
=============
NET ASSETS CONSIST OF:
Paid-in capital ....................................................... $ 267,581,726
Par value ............................................................. 142,313
Accumulated net investment income (loss) .............................. (1,992,387)
Net unrealized appreciation (depreciation) of investments ............. (52,525,028)
Accumulated net realized gain (loss) on investments ................... (128,137,257)
-------------
NET ASSETS ............................................................ $ 85,069,367
=============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .. $ 5.98
=============
Number of Common Shares outstanding (unlimited number of Common
Shares has been authorized) ........................................ 14,231,333
=============
See Notes to Financial Statements
Page 9
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2009
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $22) .................... $ 10,680,428
Interest ............................................................. 10,884
------------
Total investment income ........................................... 10,691,312
------------
EXPENSES:
Investment advisory fees ............................................. 805,321
Interest and fees on loan ............................................ 242,023
Legal fees ........................................................... 134,060
Administration fees .................................................. 99,997
Printing fees ........................................................ 95,897
Audit and tax fees ................................................... 51,163
Trustees' fees and expenses .......................................... 38,405
Transfer agent fees .................................................. 36,646
Custodian fees ....................................................... 15,177
Other ................................................................ 46,102
------------
Total expenses .................................................... 1,564,791
------------
NET INVESTMENT INCOME (LOSS) ......................................... 9,126,521
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments .............................. (40,464,711)
------------
Net change in unrealized appreciation (depreciation) on investments .. 60,809,817
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) .............................. 20,345,106
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ...... $ 29,471,627
============
See Notes to Financial Statements
Page 10
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
11/30/2009 11/30/2008
------------ -------------
OPERATIONS:
Net investment income (loss) ...................................... $ 9,126,521 $ 14,462,089
Net realized gain (loss) .......................................... (40,464,711) (80,922,293)
Net change in unrealized appreciation (depreciation) .............. 60,809,817 (45,371,825)
------------ -------------
Net increase (decrease) in net assets resulting from operations ... 29,471,627 (111,832,029)
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. (7,773,176) (17,995,120)
Return of capital ................................................. (836,780) (1,293,149)
------------ -------------
Total distributions to shareholders ............................... (8,609,956) (19,288,269)
------------ -------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested ............................ -- 2,172,230
Offering costs .................................................... -- 85,301
------------ -------------
Net increase (decrease) in net assets resulting from capital
transactions ................................................... -- 2,257,531
------------ -------------
Total increase (decrease) in net assets ........................... 20,861,671 (128,862,767)
NET ASSETS:
Beginning of period ............................................... 64,207,696 193,070,463
------------ -------------
End of period ..................................................... $ 85,069,367 $ 64,207,696
============ =============
Accumulated net investment income (loss) at end of period ......... $ (1,992,387) $ (3,557,834)
============ =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period .............................. 14,231,333 14,064,166
Common Shares issued as reinvestment under the Dividend
Reinvestment Plan .............................................. -- 167,167
------------ -------------
Common Shares at end of period .................................... 14,231,333 14,231,333
============ =============
See Notes to Financial Statements
Page 11
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations .................. $ 29,471,627
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating
activities:
Purchases of investments ........................................... (23,113,036)
Sales of investments ............................................... 18,076,896
Net realized gain/loss on investments .............................. 40,464,711
Net change in unrealized appreciation/depreciation on investments .. (60,809,817)
CHANGES IN ASSETS AND LIABILITIES:
Increase in dividends receivable ................................... (1,712)
Increase in interest receivable .................................... (21)
Increase in prepaid expenses ....................................... (2,794)
Decrease in interest and fees on loan .............................. (131,497)
Increase in investment advisory fees payable ....................... 14,932
Increase in printing fees payable .................................. 8,427
Decrease in legal fees payable ..................................... (3,047)
Decrease in custodian fees payable ................................. (1,100)
Decrease in Trustees' fees and expenses payable .................... (777)
Increase in transfer agent fees payable ............................ 2,656
Increase in accrued expenses and other liabilities ................. 228,220
------------
CASH PROVIDED BY OPERATING ACTIVITIES ................................. $ 4,203,668
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income ....... (9,338,622)
Return of capital distributions ....................................... (836,780)
Issuances of loan ..................................................... 5,000,000
Repayments of loan .................................................... (2,100,000)
------------
CASH USED IN FINANCING ACTIVITIES ..................................... (7,275,402)
-----------
Decrease in cash ...................................................... (3,071,734)
Cash at beginning of period ........................................... 5,588,203
-----------
CASH AT END OF PERIOD ................................................. $ 2,516,469
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees ..................... $ 373,520
===========
See Notes to Financial Statements
Page 12
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR PERIOD
ENDED ENDED ENDED
11/30/2009 11/30/2008(h) 11/30/2007(a)
---------- ------------- -------------
Net asset value, beginning of period .................. $ 4.51 $ 13.73 $ 19.10(b)
------- ------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .......................... 0.65 1.02 0.70
Net realized and unrealized gain (loss) ............... 1.43 (8.88) (5.32)
------- ------- --------
Total from investment operations ...................... 2.08 (7.86) (4.62)
------- ------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ................................. (0.55) (1.27) (0.71)
Return of capital ..................................... (0.06) (0.09) --
------- ------- --------
Total from distributions .............................. (0.61) (1.36) (0.71)
------- ------- --------
Common Shares offering costs charged to paid-in
capital ............................................ -- -- (0.04)
------- ------- --------
Net asset value, end of period ........................ $ 5.98 $ 4.51 $ 13.73
======= ======= ========
Market value, end of period ........................... $ 5.43 $ 3.29 $ 14.23
======= ======= ========
TOTAL RETURN BASED ON NET ASSET VALUE (c) (d) ......... 56.00% (61.38)% (24.53)%
======= ======= ========
TOTAL RETURN BASED ON MARKET VALUE (d) (e) ............ 94.18% (72.80)% (25.36)%
======= ======= ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .................. $85,069 $64,208 $193,070
Ratio of total expenses to average net assets ......... 2.29% 2.72% 1.99%(f)
Ratio of total expenses to average net assets
excluding interest expense and fees ................ 1.94% 1.73% 1.41%(f)
Ratio of net investment income to average net assets .. 13.36% 9.53% 8.64%(f)
Portfolio turnover rate ............................... 20% 15% 3%
INDEBTEDNESS:
Loan outstanding (in 000's) ........................... $14,350 $11,450 $ 36,000
Asset coverage per $ 1,000 of indebtedness (g) ........ $ 6,928 $ 6,608 $ 6,363
----------
(a) Initial seed date of April 23, 2007. The Fund commenced operations on May
25, 2007.
(b) Net of sales load of $0.90 per share on initial offering.
(c) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.
(d) Total return is not annualized for periods less than one year.
(e) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price.
(f) Annualized.
(g) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the
outstanding loan balance in 000's.
(h) On July 29, 2008, Confluence Investment Management LLC became the
sub-advisor to the Fund.
See Notes to Financial Statements
Page 13
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009
1. FUND DESCRIPTION
First Trust Specialty Finance and Financial Opportunities Fund (the "Fund") is a
non-diversified, closed-end management investment company organized as a
Massachusetts business trust on March 20, 2007, and is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FGB
on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks attractive total return as a secondary objective. Under
normal market conditions, the Fund invests at least 80% of its Managed Assets in
a portfolio of securities of specialty finance and other financial companies
that Confluence Investment Management LLC ("Confluence" or the "Sub-Advisor")
believes offer attractive opportunities for income and capital appreciation.
Under normal market conditions, the Fund concentrates its investments in
securities of companies within industries in the financial sector. "Managed
Assets" means the average daily gross asset value of the Fund (including assets
attributable to the principal amount of borrowings) minus the sum of the Fund's
accrued and unpaid dividends and accrued liabilities (other than the principal
amount of any borrowings incurred by the Fund). There can be no assurance that
the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern
time, on each day the NYSE is open for trading. Domestic debt securities and
foreign securities are priced using data reflecting the earlier closing of the
principal markets for those securities. The NAV per Common Share is calculated
by dividing the value of all assets of the Fund (including accrued interest and
dividends), less all liabilities (including accrued expenses, dividends
declared but unpaid and any borrowings of the Fund), by the total number of
Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are 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, or the valuations are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities
and investments. Additionally, if events occur after the close of the principal
markets for particular securities (e.g., domestic debt and foreign securities),
but before the Fund values its as sets, that could materially affect NAV, First
Trust may use a fair value method 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 Fund's Board of Trustees and in accordance with the
provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued 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 traded on the 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. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days when purchased are valued at amortized cost.
Page 14
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient
frequency and volume to provide pricing information on an
ongoing basis.
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
- Quoted prices for similar securities in active markets.
- Quoted prices for identical or similar securities in
markets that are non-active. A non-active market is a
market where there are few transactions for the
security, the prices are not current, or price
quotations vary substantially either over time or among
market makers, or in which little information is
released publicly.
- Inputs other than quoted prices that are observable for
the security (for example, interest rates and yield
curves observable at commonly quoted intervals,
volatilities, prepayment speeds, loss severities,
credit risks, and default rates).
- Inputs that are derived principally from or
corroborated by observable market data by correlation
or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing
the security.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of November 30, 2009, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis.
The Fund may hold real estate investment trusts ("REITS"). Distributions from
such investments may include a return of capital component from the REIT to the
extent of the cost basis of such REIT investments. The actual character of
amounts received during the year is not known until after the fiscal year end.
The Fund records the character of distributions received from the REITs during
the year based on estimates available. The Fund's characterization may be
subsequently revised based on information received from the REITs after their
tax reporting periods conclude.
The Fund may also hold business development companies ("BDCs"), exchange-traded
funds ("ETFs") and Canadian income trusts ("ClTs"). The tax character of
distributions received from these securities may vary when reported by the
issuer after their tax reporting periods conclude.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that cannot be
offered for public sale without first being registered under the Securities Act
of 1933, as amended (the "1933 Act"). Prior to registration, restricted
securities may only be resold in transactions exempt from registration under
Rule 144A of the 1933 Act. As of November 30, 2009, the Fund held restricted
securities as shown in the following table. The Fund does not have the right to
demand that such securities be registered. These securities are valued according
to the valuation procedures as stated in the Portfolio Valuation footnote (Note
2A) and are not expressed as a discount to the carrying value of comparable
unrestricted securities.
ACQUISITION SHARES/ % OF
SECURITY DATE UNITS PRICE CARRYING COST VALUE NET ASSETS
-------- ----------- ------- ------ ------------- ---------- ----------
Cypress Sharpridge 5/19/08 192,307 $13.10 $2,999,989 $2,519,222 2.96%
Investments, Inc.
Cypress Sharpridge
Investments, Inc.,
Warrants 5/19/08 576,923 -- -- 128,423 0.15
Hatteras Financial Corp. 1/29/08 100,000 30.60 2,400,000 3,060,000 3.60
---------- ---------- ----
$5,399,989 $5,707,645 6.71%
========== ========== ====
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income, if any, of the Fund are declared and paid
quarterly or as the Board of Trustees may determine from time to time.
Distributions of any net capital gains earned by the Fund are distributed at
least annually. Distributions will automatically be reinvested into additional
Common Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund. Permanent differences incurred during the fiscal year ended
November 30, 2009 resulting in book and tax accounting differences have been
reclassified at year end to reflect an increase in accumulated net investment
income of $212,102, and a decrease to paid-in capital of $212,102. Net assets
were not affected by this reclassification.
The tax character of distributions paid during the fiscal years ended November
30, 2009 and November 30, 2008 was as follows:
Distributions paid from:
2009 2008
---------- -----------
Ordinary Income .... $7,773,176 $17,995,120
Return of Capital .. 836,780 1,293,149
As of November 30, 2009, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ............... $ --
Net Unrealized Appreciation (Depreciation) .. (56,641,671)
Accumulated Capital and Other Losses ........ (124,020,614)
E. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such loss against any future realized capital gains. The
Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At November 30, 2009, the
Fund had a capital loss carryforward for federal income tax purposes of
$123,554,849 with $5,166,354, $62,747,095 and $55,641,400 expiring on November
30, 2015, 2016 and 2017, respectively.
Certain capital losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended November 30, 2009, the Fund intends to elect to defer net realized capital
losses of $465,765 incurred between November 1, 2009 through November 30, 2009.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2009, 2008
and 2007 remain open to federal and state audit. As of November 30, 2009,
management has evaluated the application of these standards to the Fund, and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax provisions.
F. EXPENSES:
The Fund pays all expenses directly related to its operations.
G. ORGANIZATION AND OFFERING COSTS:
Organization costs consisted of costs incurred to establish the Fund and enable
it to legally do business. These costs included filing fees, listing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consisted of legal fees pertaining
to the Fund's Common Shares offered for sale, registration fees, underwriting
fees, and printing of the initial prospectus, among other fees. First Trust and
Gallatin Asset Management, Inc., the Fund's prior sub-advisor, paid all
organization costs and all offering costs of the Fund (other than sales load)
that exceeded $0.04 per Common Share. The Fund's share of Common Share offering
costs, $561,210, was recorded as a reduction of the
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009
proceeds from the sale of Common Shares during the fiscal period ended November
30, 2007. During the fiscal year ended November 30, 2008, it was determined that
actual offering costs were less than the estimated offering costs by $85,301.
Therefore, paid-in-capital was increased by that amount for the fiscal year
ended November 30, 2008, as reflected in the Statements of Changes in Net
Assets.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets.
Confluence serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.50% of Managed Assets
that is paid by First Trust from its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., an indirect majority-owned
subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's
Administrator, Fund Accountant and Transfer Agent in accordance with certain fee
arrangements. PFPC Trust Company, also an indirect, majority-owned subsidiary of
The PNC Financial Services Group, Inc., serves as the Fund's Custodian in
accordance with certain fee arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each additional trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
are paid $2,500 annually to serve in such capacities, with such compensation
paid by the trusts in the First Trust Fund Complex and divided among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
The Lead Independent Trustee and each Committee chairman served two-year terms
which ended on December 31, 2009, before rotating to serve as a chairman of
another committee or as Lead Independent Trustee. The officers and "Interested"
Trustee receive no compensation from the Fund for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities, excluding
U.S. government and short-term investments, for the year ended November 30,
2009, were $22,204,608 and $15,858,878, respectively.
5. LEVERAGE
On September 12, 2008, the Fund entered into a Credit Agreement and a Credit
Annex thereto with Credit Suisse Securities (USA) LLC, which currently provides
for an uncommitted credit facility to be used as leverage for the Fund (the
"Credit Suisse Facility"). The Credit Suisse Facility provides for a secured,
uncommitted line of credit for the Fund, where Fund assets are pledged against
advances made to the Fund. Under the requirements of the 1940 Act, the Fund,
immediately after any such borrowings, must have an "asset coverage " of at
least 300% (33 1/3% of the Fund's total assets after borrowings). The total
amount of loans that may be outstanding at any one time under the Credit Suisse
Facility is $70,000,000. For the year ended November 30, 2009, the daily average
amount outstanding under the Credit Suisse Facility was $12,237,123. The high
and low annual interest rates during the year ended November 30, 2009 were
3.41% and 1.73%, respectively, and the weighted-average interest rate was 1.89%.
The interest rate at November 30, 2009 was 1.74%.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009
7. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the equity market, or when political or economic events
affecting the issuers occur. When the Advisor or Sub-Advisor determines that it
is temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so (such as when a market disruption event has occurred and
trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
FINANCIAL SECTOR CONCENTRATION RISK: Under normal market conditions, the Fund
will invest at least 25% of its total assets in securities of companies within
industries in the financial sector. A fund concentrated in a single industry or
sector is likely to present more risks than a fund that is broadly diversified
over several industries or groups of industries. Compared to the broad market,
an individual sector may be more strongly affected by changes in the economic
climate, broad market shifts, moves in a particular dominant stock, or
regulatory changes. Specialty finance and other financial companies in general
are subject to extensive government regulation, which may change frequently.
The profitability of specialty finance and other financial companies is largely
dependent upon the avail ability and cost of capital funds, and may fluctuate
significantly in response to changes in interest rates, as well as changes in
general economic conditions. From time to time, severe competition may also
affect the profitability of specialty finance and other financial companies.
Financial companies can be highly dependent upon access to capital markets and
any impediments to such access, such as general economic conditions or a
negative perception in the capital markets of a company's financial condition or
prospects, could adversely affect its business. Leasing companies can be
negatively impacted by changes in tax laws which affect the types of
transactions in which such companies engage.
BUSINESS DEVELOPMENT COMPANY ("BDC") RISK: Investments in closed-end funds that
elect to be treated as BDCs may be subject to a high degree of risk. BDCs
typically invest in small and medium-sized private and certain public companies
that may not have access to public equity markets or capital raising. As a
result, a BDC's portfolio typically will include a substantial amount of
securities purchased in private placements, and its portfolio may carry risks
similar to those of a private equity or venture capital fund. Securities that
are not publicly registered may be difficult to value and may be difficult to
sell at a price representative of their intrinsic value. Investments in BDCs are
subject to various risks, including management's ability to meet the BDC's
investment objective, and to manage the BDC's portfolio when the underlying
securities are redeemed or sold, during periods of market turmoil and as
investors' perceptions regarding a BDC or its underlying investments change.
BDC shares are not redeemable at the option of the BDC shareholder and, as with
shares of other closed-end funds, they may trade in the secondary market at a
discount to their NAV.
REIT, MORTGAGE-RELATED AND ASSET-BACKED SECURITIES RISKS: Investing in REITs
involves certain unique risks in addition to investing in the real estate
industry in general. REITs are subject to interest rate risk (especially
mortgage REITs) and the risk of default by lessees or borrowers. An equity REIT
may be affected by changes in the value of the underlying properties owned by
the REIT. A mortgage REIT may be affected by the ability of the issuers of its
portfolio of mortgages to repay their obligations. REITs whose underlying
assets are concentrated in properties used by a particular industry are also
subject to risks associated with such industry. REITs may have limited financial
resources, their securities may trade less frequently and in a limited volume,
and their securities may be subject to more abrupt or erratic price movements
than larger company securities.
In addition to REITs, the Fund may invest in a variety of other mortgage-related
securities, including commercial mortgage securities and other mortgage-backed
instruments. Rising interest rates tend to extend the duration of
mortgage-related securities, making them more sensitive to changes in interest
rates, and may reduce the market value of the securities. In addition,
mortgage-related securities are subject to prepayment risk, the risk that
borrowers may pay off their mortgages sooner than expected, particularly when
interest rates decline. This can reduce the Fund's returns because the Fund may
have to reinvest that money at lower prevailing interest rates.
The Fund's investments in other asset-backed securities are subject to risks
similar to those associated with mortgage-backed securities, as well as
additional risks associated with the nature of the assets and the servicing of
those assets.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to the payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions or purchase Common Shares.
NON-DIVERSIFICATION RISK: Because the Fund is non-diversified, it is only
limited as to the percentage of its assets which may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. Because the Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence and to the financial conditions of the issuers in which it invests.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
January 26, 2010, the date the financial statements were issued, and has
determined that there were no subsequent events requiring recognition or
disclosure in the financial statements.
Page 19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST SPECIALTY FINANCE AND
FINANCIAL OPPORTUNITIES FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Specialty Finance and Financial Opportunities Fund (the "Fund"), including
the portfolio of investments, as of November 30, 2009, and the related statement
of operations and cash flows for the year then ended, the statements of changes
in net assets for each of the two years in the period then ended, and the
financial highlights for the periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of November 30, 2009 by correspondence with the Fund's
custodian. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Specialty Finance and Financial Opportunities Fund as of November 30,
2009, the results of its operations and its cash flows for the year then ended,
the changes in its net assets for each of the two years in the period then
ended, and the financial highlights for the periods presented, in conformity
with accounting principles generally accepted in the United States of America.
/S/(DELOITTE & TOUCHE LLP)
Chicago, Illinois
January 26, 2010
Page 20
ADDITIONAL INFORMATION
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009 (UNAUDITED)
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 (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent"), in additional
Common Shares under the Plan. If you elect to receive cash distributions, you
will receive all distributions in cash paid by check mailed directly to you by
the Plan Agent, as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If 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 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 the 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.
The Plan Agent maintains all Common 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.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
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.
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 by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 21
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
TAX INFORMATION
Of the ordinary income (including short-term capital gain, if applicable)
distributions made by the Fund during the year ended November 30, 2009, 4.02%
qualified for the corporate dividends received deduction available to corporate
shareholders.
The Fund hereby designates as qualified dividend income distributions 4.03% of
ordinary income distributions (including short-term capital gains, if
applicable), for the fiscal year ended November 30, 2009.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of June 16, 2009, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund,
First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity
Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High
Income Fund, First Trust Strategic High Income Fund II, First Trust
Tax-Advantaged Preferred Income Fund, First Trust Specialty Finance and
Financial Opportunities Fund and First Trust Active Dividend Income Fund, was
held on April 16, 2009. At the Annual Meeting, Trustees Richard E. Erickson and
Thomas R. Kadlec were elected by the holders of Common Shares of the Fund as
Class II Trustees for three-year terms expiring at the Fund's annual meeting of
shareholders in 2012. The number of votes cast in favor of Dr. Erickson was
13,407,180, the number of votes against was 449,823 and the number of
abstentions was 374,330. The number of votes cast in favor of Mr. Kadlec was
13,389,221, the number of votes against was 467,782 and the number of
abstentions was 374,330. James A. Bowen, Robert F. Keith and Niel B. Nielson are
the current and continuing Trustees.
Page 22
BOARD OF TRUSTEES AND OFFICERS
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009 (UNAUDITED)
Information pertaining to Trustees and Officers of the Fund is set forth below.
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST OTHER
FUND COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE AND PRINCIPAL OCCUPATIONS OVERSEEN DIRECTORSHIPS
AND POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
----------------------------- ----------------------- ------------------------------------- --------------- ---------------
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee - Three Year Term Physician; President, Wheaton 61 None
c/o First Trust Advisors L.P. - Since Fund Inception Orthopedics; Co-owner and Co-Director
120 E. Liberty Drive, (January 1996 to May 2007), Sports
Suite 400 Med Center for Fitness; Limited
Wheaton, IL 60187 Partner, Gundersen Real Estate
D.OB.: 04/51 Partnership; Limited Partner,
Sportsmed LLC
Thomas R. Kadlec, Trustee - Three Year Term Senior Vice President and Chief 61 Director of ADM
c/o First Trust Advisors L.P. - Since Fund Inception Financial Officer (May 2007 to Investor
120 E. Liberty Drive, Present), Vice President and Chief Service, Inc.
Suite 400 Financial Officer (1990 to May 2007), and ADM
Wheaton, IL 60187 ADM Investor Services, Inc. (Futures Investor
D.O.B.: 11/57 Commission Merchant) Services
International
Robert F. Keith, Trustee - Three Year Term President (2003 to Present), Hibs 61 None
c/o First Trust Advisors L.P. - Since June 2006 Enterprises (Financial and Management
120 E. Liberty Drive, Consulting)
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
----------
(1) Currently, Robert F. Keith, is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec,
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson, are each serving as
trustees until the Fund's 2010 annual meeting of shareholders. Officers of
the Fund have an indefinite term.
Page 23
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST OTHER
FUND COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE AND PRINCIPAL OCCUPATIONS OVERSEEN DIRECTORSHIPS
AND POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
----------------------------- ----------------------- ------------------------------------- --------------- ---------------
INDEPENDENT TRUSTEE - (CONTINUED)
Niel B. Nielson, Trustee - Three Year Term President (June 2002 to Present), 61 Director of
c/o First Trust Advisors L.P. - Since Fund Inception Covenant College Covenant
120 E. Liberty Drive, Transport Inc.
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
INTERESTED TRUSTEES
James A. Bowen(2), Trustee, - Three Year Trustee President, First Trust Advisors L.P. 61 Trustee of
President, Chairman of the Term and Indefinite and First Trust Portfolios L.P.; Wheaton College
Board and CEO Officer Term Chairman of the Board of Directors,
120 E. Liberty Drive, - Since Fund Inception BondWave LLC (Software Development
Suite 400 Company/Investment Advisor) and
Wheaton, IL 60187 Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 Advisor)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
--------------------- ---------------------------- ------------------------- -------------------------------
OFFICERS WHO ARE NOT TRUSTEES (3)
Mark R. Bradley Treasurer, Controller, Chief - Indefinite Term Chief Financial Officer, First
120 E. Liberty Drive, Financial Officer and Chief - Since Fund Inception Trust Advisors L.P. and First
Suite 400 Accounting Officer Trust Portfolios L.P.; Chief
Wheaton, IL 60187 Financial Officer, BondWave LLC
D.O.B.: 11/57 (Software Development
Company/Investment Advisor) and
Stonebridge Advisors LLC
(Investment Advisor)
----------
(1) Currently, Robert F. Keith, is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec,
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson, are each serving as
trustees until the Fund's 2010 annual meeting of shareholders. Officers of
the Fund have an indefinite term.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as President of First Trust Advisors L.P., investment advisor of the Fund.
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 24
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
--------------------- ---------------------------- ------------------------- -------------------------------
OFFICERS WHO ARE NOT TRUSTEES(3) - (CONTINUED)
Erin E. Chapman Assistant Secretary - Indefinite Term Assistant General Counsel
120 E. Liberty Drive, - Since June 2009 (October 2007 to Present),
Suite 400 Associate Counsel (March 2006
Wheaton, IL 60187 to October 2007), First Trust
D.O.B.: 08/76 Advisors L.P. and First Trust
Portfolios L. P.; Associate
Attorney (November 2003 to
March 2006), Doyle & Bolotin,
Ltd.
James M. Dykas Assistant Treasurer - Indefinite Term Senior Vice President (April
120 E. Liberty Drive, - Since Fund Inception 2007 to Present), Vice
Suite 400 President (January 2005 to
Wheaton, IL 60187 April 2007), First Trust
D.O.B.: 01/66 Advisors L.P. and First Trust
Portfolios L.P.
Christopher Fallow Assistant Vice President - Indefinite Term Assistant Vice President
120 E. Liberty Drive, - Since Fund Inception (August 2006 to Present),
Suite 400 Associate (January 2005 to
Wheaton, IL 60187 August 2006), First Trust
D.O.B.: 04/79 Advisors L.P. and First Trust
Portfolios L.P.
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 25
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
--------------------- ---------------------------- ------------------------- -------------------------------
OFFICERS WHO ARE NOT TRUSTEES(3) - (CONTINUED)
W. Scott Jardine Secretary and Chief - Indefinite Term General Counsel, First Trust
120 E. Liberty Drive, Compliance Officer - Since Fund Inception Advisors L.P., First Trust
Suite 400 Portfolios L.P. and BondWave
Wheaton, IL 60187 LLC (Software Development
D.O.B.: 05/60 Company/ Investment Advisor);
Secretary of Stonebridge
Advisors LLC (Investment
Advisor)
Daniel J. Lindquist Vice President - Indefinite Term Senior Vice President
120 E. Liberty Drive, - Since Fund Inception (September 2005 to Present),
Suite 400 Vice President (April 2004 to
Wheaton, IL 60187 September 2005), First Trust
D.O.B.: 02/70 Advisors L.P. and First Trust
Portfolios L.P.
Coleen D. Lynch Assistant Vice President - Indefinite Term Assistant Vice President
120 E. Liberty Drive, - Since July 2008 (January 2008 to Present),
Suite 400 First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.;
D.O.B.: 07/58 Vice President (May 1998 to
January 2008), Van Kampen
Asset Management and Morgan
Stanley Investment Management
Kristi A. Maher Assistant Secretary and Deputy - Indefinite Term Deputy General Counsel (May
120 E. Liberty Drive, Chief Compliance Officer - Assistant Secretary 2007 to Present), Assistant
Suite 400 since Fund Inception General Counsel (March 2004 to
Wheaton, IL 60187 and Deputy Chief May 2007), First Trust
D.O.B.: 12/66 Compliance Officer Advisors L.P. and First Trust
since November 2009 Portfolios L.P.
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 26
PRIVACY POLICY
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2009
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") consider your privacy an important priority in maintaining our
relationship. We are committed to protecting the security and confidentiality of
your personal information.
SOURCES OF INFORMATION
We may collect nonpublic personal information about you from the following
sources:
- Information we receive from you or your broker-dealer, investment
adviser or financial representative through interviews, applications,
agreements or other forms;
- Information about your transactions with us, our affiliates or others;
- Information we receive from your inquiries by mail, e-mail or
telephone; and
- Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:
- In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians and
trustees, or that assist us in the distribution of investor materials
such as trustees, banks, financial representatives and printers.
- We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund. Please
note, however, that the California Financial Information Privacy Act contains an
"opt out" mechanism that California consumers may use to prevent us from
sharing nonpublic personal information with affiliates.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however, if we do
change it, we will tell you promptly.
For questions about our policy, or for additional copies of this notice, please
contact us at (800) 621-1675.
Page 27
This Page Left Blank Intentionally.
(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Confluence Investment Management LLC
349 Marshall Avenue, Suite 302
Saint Louis, MO 63119
ADMINISTRATOR, FUND ACCOUNTANT & TRANSFER AGENT
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party.
(c) During the period covered by this report, the code of ethics that
applies to the registrant's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and that
relates to any element of the code of ethics description was amended
to name W. Scott Jardine as the Compliance Coordinator for the
implementation and administration of the aforementioned code. The
amended code of ethics is provided as an exhibit pursuant to Item
12(a)(1).
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are
employed by the registrant or a third party, that relates to one or
more of the items set forth in paragraph (b) of this item's
instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years were $0
for the fiscal year ended November 30, 2008 and $44,000 for the fiscal year
ended November 30, 2009.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for assurance and related services by the principal
accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for the fiscal year ended
November 30, 2008 and $0 for the fiscal year ended November 30, 2009.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed
in each of the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0 for the fiscal year ended November 30, 2008 and $0 for
the fiscal year ended November 30, 2009.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $5,000
for the fiscal year ended November 30, 2008 and $5,200 for the fiscal year ended
November 30, 2009. These fees were for tax consultation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of
the last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning to the registrant's
adviser were $0 for the fiscal year ended November 30, 2008 and $0 for the
fiscal year ended November 30, 2009.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of the
last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for the fiscal year ended November 30, 2008 and
$0 for the fiscal year ended November 30, 2009.
All Other Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years for products and services provided by the
principal accountant to the registrant's investment adviser, other than the
services reported in paragraphs (a) through (c) of this Item were $0 for the
fiscal year ended November 30, 2008 and $0 for the fiscal year ended November
30, 2009.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the DE MINIMIS exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the registrant and the registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the pre-approval
exceptions included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for the fiscal year
ended November 30, 2008, were $5,000 for the registrant and $12,143 for the
registrant's investment adviser, and for the fiscal year ended November 30,
2009, were $5,200 for the registrant and $36,000 for the registrant's investment
adviser.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The Registrant has a separately designated audit committee consisting of all the
independent trustees of the Registrant. The members of the audit committee are:
Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to shareholders
filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
CONFLUENCE INVESTMENT MANAGEMENT LLC
PROXY VOTING POLICIES AND PROCEDURES
1. INTRODUCTION
As a registered investment adviser, Confluence Investment Management LLC
("Confluence" or the "Adviser") has a fiduciary duty to act solely in the best
interests of its clients. If the client is a registered investment company under
the Investment Company Act of 1940 or the client requests Confluence to do so in
writing, the Adviser will vote proxy materials for its clients.
In cases where the client has delegated proxy voting responsibility and
authority to the Adviser, the Adviser has adopted and implemented the following
policies and procedures, which it believes are reasonably designed to ensure
that proxies are voted in the best interests of its clients. In pursuing this
policy, proxies should be voted in a manner that is intended to maximize value
to the client. In situations where Adviser accepts such delegation and agrees to
vote proxies, Adviser will do so in accordance with these Policies and
Procedures. The Adviser may delegate its responsibilities under these Policies
and Procedures to a third party, provided that no such delegation shall relieve
the Adviser of its responsibilities hereunder and the Adviser shall retain final
authority and fiduciary responsibility for such proxy voting.
2. GENERAL
In the event requests for proxies are received with respect to the voting of
equity securities on routine matters, such as election of directors or approval
of auditors, the proxies usually will be voted with management unless the
Adviser determines it has a conflict or the Adviser determines there are other
reasons not to vote with management. On non-routine matters, such as amendments
to governing instruments, proposals relating to compensation and stock option
and equity compensation plans, corporate governance proposals and shareholder
proposals, the Adviser will vote, or abstain from voting if deemed appropriate,
on a case by case basis in a manner it believes to be in the best interest of
the Company's shareholders. In the event requests for proxies are received with
respect to debt securities, the Adviser will vote on a case by case basis in a
manner it believes to be in the best economic interest of the Company's
shareholders.
The Chief Compliance Officer or his/her designate is responsible for monitoring
Adviser's proxy voting actions and ensuring that (i) proxies are received and
forwarded to the appropriate decision makers; and (ii) proxies are voted in a
timely manner upon receipt of voting instructions. The Adviser is not
responsible for voting proxies it does not receive, but will make reasonable
efforts to obtain missing proxies.
The Chief Compliance Officer or his/her designate shall implement procedures to
identify and monitor potential conflicts of interest that could affect the proxy
voting process, including (i) significant client relationships; (ii) other
potential material business relationships; and (iii) material personal and
family relationships.
All decisions regarding proxy voting shall be determined by the Investment
Committee of the Adviser and shall be executed by the Chief Compliance Officer
or his/her designate. Every effort shall be made to consult with the portfolio
manager and/or analyst covering the security.
The Adviser may determine not to vote a particular proxy, if the costs and
burdens exceed the benefits of voting (e.g., when securities are subject to loan
or to share blocking restrictions).
3. REGISTERED INVESTMENT COMPANIES
In cases in which the client is a registered investment company under the
Investment Company Act of 1940, delegates proxy voting (E.G., where Confluence
acts as a sub-adviser of a closed-end fund) and required by law, Confluence will
vote such proxies in the same proportion as the vote of all other shareholders
of the fund (I.E. "echo vote" or `mirror vote"), unless otherwise required by
law. When required by law, Confluence will also echo vote proxies of securities
in unaffiliated investment vehicles. For example, section 12(d)(1)(F) of the
Investment Company Act of 1940 requires echo voting of registered investment
companies that sub-advise or manage securities of other registered investment
companies.
4. CONFLICTS OF INTEREST
In the event an employee determines that the Adviser has a conflict of interest
due to, for example, a relationship with a company or an affiliate of a company,
or for any other reason which could influence the advice given, the employee
will advise the Chief Compliance Officer who will advise the Investment
Committee, and the Investment Committee will decide whether the Adviser should
either (1) disclose to the client the conflict to enable the client to evaluate
the advice in light of the conflict or (2) disclose to the client the conflict
and decline to provide the advice.
The Adviser shall use commercially reasonable efforts to determine whether a
potential conflict may exist, and a potential conflict shall be deemed to exist
only if one or more of the managers of the Adviser actually knew or should have
known of the conflict. The Adviser is sensitive to conflicts of interest that
may arise in the proxy decision-making process and has identified the following
potential conflicts of interest:
- A principal of the Adviser or any person involved in the proxy
decision-making process currently serves on the Board of the portfolio
company.
- An immediate family member of a principal of the Adviser or any person
involved in the proxy decision-making process currently serves as a
director or executive officer of the portfolio company.
- The Adviser, any fund managed by the Adviser, or any affiliate holds a
significant ownership interest in the portfolio company.
This list is not intended to be exclusive. All employees are obligated to
disclose any potential conflict to the Adviser's Chief Compliance Officer.
If a material conflict is identified, Adviser management may (i) disclose the
potential conflict to the client and obtain consent; or (ii) establish an
ethical wall or other informational barriers between the person(s) that are
involved in the conflict and the persons making the voting decisions.
5. RECORDKEEPING The Chief Compliance Officer or his/her designate is
responsible for maintaining the following records:
- proxy voting policies and procedures;
- proxy statements (provided, however, that the Adviser may rely on the
Securities and Exchange Commission's EDGAR system if the issuer filed its
proxy statements via EDGAR or may rely on a third party as long as the
third party has provided the Adviser with a copy of the proxy statement
promptly upon request);
- records of votes cast and abstentions; and
- any records prepared by the Adviser that were material to a proxy voting
decision or that memorialized a decision.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Investment decisions for the registrant are made by the Portfolio Management
Team of Confluence Investment Management LLC ("Confluence"). The members of the
Confluence Portfolio Management Team are responsible for portfolio management,
security selection, leverage management, trading, compliance, position
reconciliation, communication and reporting to the registrant's investment
adviser.
Information provided as of February 4, 2010
MARK A. KELLER, CFA - CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER
Mr. Keller has nearly 30 years of investment experience with a focus on
value-oriented equity analysis and management. Prior to joining Confluence, from
1994 to May 2008, he was the Chief Investment Officer of Gallatin Asset
Management, Inc., and its predecessor organization, A.G. Edwards Asset
Management, the investment management arm of A.G. Edwards, Inc. From 1999 to
2008, Mr. Keller was Chairman of the A.G. Edwards Investment Strategy Committee,
which set investment policy and established asset allocation models for the
entire organization. Mr. Keller was a founding member of the A.G. Edwards
Investment Strategy Committee, on which he served for over 20 years, the last
ten years as Chairman. He began his career with A.G. Edwards in 1978, serving as
an equity analyst for the firm's Securities Research Department from 1979 to
1994. During his last five years in Securities Research, Mr. Keller was Equity
Strategist and manager of the firm's Focus List. Mr. Keller was a Senior Vice
President of A.G. Edwards & Sons, Inc. and of Gallatin Asset Management, Inc.,
and was a member of the Board of Directors of both companies. Mr. Keller
received a Bachelor of Arts from Wheaton College (Illinois) and is a CFA
charterholder.
DAVID B. MIYAZAKI, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
Prior to joining Confluence in May 2008, Mr. Miyazaki served as a Portfolio
Manager and Analyst with Gallatin Asset Management, Inc. Mr. Miyazaki was
responsible for equity investments in value-oriented separately managed
accounts. He also co-managed the Fund during the time the Fund was sub-advised
by Gallatin Asset Management, Inc., as well as A.G. Edwards' ETF-based asset
allocation program. In addition to portfolio management, Mr. Miyazaki served as
a member of the A.G. Edwards Investment Strategy Committee. As a strategist, he
was responsible for the firm's quantitative asset allocation models, including
its Cyclical Asset Allocation program. Prior to joining A.G. Edwards in 1999,
Mr. Miyazaki was a Portfolio Manager at Koch Industries in Wichita, Kansas. His
previous experience includes working as an Investment Analyst at Prudential
Capital Group in Dallas, Texas, and as a Bond Trader at Barre & Company, also in
Dallas. Mr. Miyazaki received a Bachelor of Business Administration from Texas
Christian University and is a CFA charterholder.
DANIEL T.WINTER, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
Prior to joining Confluence in May 2008, Mr. Winter served as a Portfolio
Manager and Analyst with Gallatin Asset Management, Inc. While at Gallatin, Mr.
Winter chaired the portfolio management team responsible for the firm's six
value-oriented equity strategies. His responsibilities included directing the
strategy implementation and trading execution for the equity portfolios.
Additionally, Mr. Winter co-managed the Fund during the time the Fund was
sub-advised by Gallatin Asset Management, Inc. Mr. Winter also served as a
portfolio manager for the Cyclical Growth ETF Portfolio and the Cyclical Growth
and Income ETF Portfolio which were offered through variable annuities. He was
also a member of the firm's Allocation Advisor Committee which oversaw the A.G.
Edwards exchange-traded fund focused strategies. Prior to joining the firm's
Asset Management division in 1996, Mr. Winter served as a portfolio manager for
A.G. Edwards Trust Company. Mr. Winter earned a Bachelor of Arts in business
management from Eckerd College and a Master of Business Administration from
Saint Louis University. Mr. Winter is a CFA charterholder.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
Information provided as of November 30, 2009
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
No. of
Accounts Total Assets in
where Accounts
Total Advisory where
Name of Portfolio No. of Fee is Advisory Fee
Manager or Accounts Based on is Based on
Team Member Type of Accounts Managed Total Assets Performance Performance
----------------- ---------------- -------- ------------ ----------- ---------------
1. Mark Keller Registered Investment Companies: 0 $ 0 0 $0
Other Pooled Investment Vehicles: 0 $ 0 0 $0
Other Accounts: 1,996 $495mil 0 $0
2. David Miyazaki Registered Investment Companies: 0 $ 0 0 $0
Other Pooled Investment Vehicles: 0 $ 0 0 $0
Other Accounts: 1,996 $495mil 0 $0
3. Daniel Winter Registered Investment Companies: 0 $ 0 0 $0
Other Pooled Investment Vehicles: 0 $ 0 0 $0
Other Accounts: 1,996 $495mil 0 $0
POTENTIAL CONFLICTS OF INTERESTS
The Confluence Portfolio Management Team may purchase or sell in other accounts
the same securities that are purchased or sold for the registrant. If a
situation arises where the same securities are being purchased or sold in other
accounts and the registrant, the Portfolio Management Team's policy is to follow
a trade rotation to avoid simultaneous and competing buy or sell orders.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF FEBRUARY 4, 2010
The members of the Confluence Portfolio Management Team are compensated with an
annual base salary and a discretionary bonus based on Confluence's overall firm
profits rather than individual product line performance or profitability. In
addition Confluence's portfolio managers are equity owners in the Firm, aligning
their long-term interests with the registrant's holders to strive to achieve
superior investment performance over an appropriate time period. This ensures
that the portfolio managers are incentivized to implement a consistent
investment strategy for the registrant without incurring undue risk.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of November 30, 2009
Dollar Range of Registrant
Name Shares Beneficially Owned
---- --------------------------
Mark Keller $50,001 - $100,000
David Miyazaki $10,001 - $ 50,000
Daniel Winter $ 1 - $ 10,000
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of trustees, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Specialty Finance and Financial Opportunities Fund
By (Signature and Title)* /s/ James A. Bowen
------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date January 25, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date January 25, 2010
By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date January 25, 2010
* Print the name and title of each signing officer under his or her
signature.