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 811-21586
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First Trust Enhanced Equity Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(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
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(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2016
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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. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
ENHANCED EQUITY INCOME FUND (FFA)
ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2016
CHARTWELL INVESTMENT PARTNERS
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Institutional and Private Asset Management
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TABLE OF CONTENTS
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
ANNUAL REPORT
DECEMBER 31, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 10
Statement of Operations..................................................... 11
Statements of Changes in Net Assets......................................... 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.............................................. 24
Privacy Policy.............................................................. 26
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 Chartwell Investment Partners, LLC ("Chartwell"
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 Enhanced Equity Income 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/or 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 objective. 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 by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain 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.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. 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 relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Chartwell 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 material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA) ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
DECEMBER 31, 2016
Dear Shareholders:
Now that 2016 is over, many will remember some of the historic events that
occurred during the year: from the Brexit vote in the UK to leave the European
Union, to the results of the U.S. Presidential Election which seemed unlikely at
the beginning of the year, to the first World Series Championship for the
Chicago Cubs in 108 years!
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
annual report which contains detailed information about your investment for the
12 months ended December 31, 2016, including a performance analysis and the
financial statements for you to review. We encourage you to read this report and
discuss it with your financial advisor.
On November 8, Donald J. Trump was elected to become the 45th president in our
country's history. While no one has a crystal ball and the ability to predict
how his presidency will shape the United States (and the world), there is no
doubt that his populist message resonated for many Americans. And his message of
improving lives for the "average" American, while reducing the size and scope of
the federal government, also won him millions of votes. Many of his supporters
believe that with his background in business, President Trump will make policy
changes that will continue to grow the economy and spur stock markets even
higher. Many analysts predicted the Dow Jones Industrial Average would hit a new
benchmark, 20,000, in the first days of the New Year. As with all change and a
new administration, only time will tell.
As of December 31, 2016, the S&P 500(R) Index was up 11.96% calendar
year-to-date, on a total return basis, as measured by Bloomberg. The current
bull market (measuring from March 9, 2009 through December 31, 2016) is the
second longest in history. We remain bullish on the economy, but continue to
have a long-term perspective. We believe investors should think long-term as
well, since no one can predict volatility and the inevitable ups and downs that
occur in the market.
Thank you for your investment in First Trust Enhanced Equity Income Fund and for
giving First Trust the opportunity to be a part of your investment plan. We
value our relationship with you and will continue our relentless focus on
bringing the types of investments that we believe could help you reach your
financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
"AT A GLANCE"
AS OF DECEMBER 31, 2016 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FFA
Common Share Price $13.51
Common Share Net Asset Value ("NAV") $15.23
Premium (Discount) to NAV (11.29)%
Net Assets Applicable to Common Shares $304,114,249
Current Quarterly Distribution per Common Share (1) $0.240
Current Annualized Distribution per Common Share $0.960
Current Distribution Rate on Common Share Price (2) 7.11%
Current Distribution Rate on NAV (2) 6.30%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
$12.37 $14.06
11.78 13.74
11.91 13.90
1/16 12.17 14.15
11.83 13.68
11.74 13.60
12.06 13.98
2/16 12.33 14.15
12.69 14.53
12.81 14.69
12.96 14.88
3/16 12.57 14.51
12.79 14.75
12.70 14.61
12.91 14.83
13.04 14.93
4/16 12.90 14.72
12.80 14.63
12.66 14.55
12.78 14.67
5/16 13.06 14.96
13.21 14.96
13.16 14.96
13.05 14.84
6/16 12.75 14.35
13.01 14.79
13.06 14.97
13.22 15.11
13.39 15.13
7/16 13.40 15.11
13.39 15.21
13.43 15.21
13.55 15.30
8/16 13.81 15.22
14.04 15.30
13.58 14.90
13.55 15.01
13.49 14.96
9/16 13.36 15.02
13.45 14.93
13.43 14.81
13.55 14.88
10/16 13.31 14.76
12.61 14.46
13.18 14.97
13.30 15.07
11/16 13.55 15.21
13.30 15.08
13.55 15.43
13.84 15.51
13.55 15.35
12/16 13.51 15.23
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended 10 Years Ended Inception (8/26/2004)
12/31/2016 12/31/2016 12/31/2016 to 12/31/2016
FUND PERFORMANCE (3)
NAV 9.18% 11.53% 6.49% 6.71%
Market Value 9.98% 12.07% 5.36% 5.28%
INDEX PERFORMANCE
S&P 500(R) Index 11.96% 14.66% 6.95% 8.12%
BXM Index 7.07% 7.24% 4.28% 5.24%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Apple, Inc. 4.8%
Microsoft Corp. 3.6
General Electric Co. 2.8
Pfizer, Inc. 2.5
First Republic Bank 2.4
SPDR(R) S&P 500(R) ETF Trust 2.4
PepsiCo, Inc. 2.2
Carnival Corp. 2.1
Merck & Co., Inc. 2.1
JPMorgan Chase & Co. 2.1
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Total 27.0%
======
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% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
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Information Technology 19.4%
Financials 14.0
Health Care 13.5
Consumer Staples 13.0
Consumer Discretionary 11.6
Energy 9.2
Industrials 7.5
Materials 2.6
Utilities 2.4
Real Estate 2.3
Telecommunication Services 2.1
Other 2.4
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Total 100.0%
======
(1) Most recent distribution paid or declared through 12/31/2016. 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 12/31/2016. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
ANNUAL REPORT
DECEMBER 31, 2016 (UNAUDITED)
SUB-ADVISOR
Chartwell Investment Partners, LLC ("Chartwell"), a wholly-owned subsidiary of
TriState Capital Holdings, Inc., is a research-based equity and fixed-income
manager with a disciplined, team-oriented investment process.
PORTFOLIO MANAGEMENT TEAM
DOUGLAS W. KUGLER, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
PETER M. SCHOFIELD, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST ENHANCED EQUITY INCOME FUND
The investment objective of First Trust Enhanced Equity Income Fund (the "Fund")
is to provide a high level of current income and gains and, to a lesser extent,
capital appreciation. The Fund pursues its investment objective by investing in
a diversified portfolio of equity securities. Under normal market conditions,
the Fund pursues an integrated investment strategy in which the Fund invests
substantially all of its managed assets in a diversified portfolio of common
stocks of U.S. corporations and U.S. dollar-denominated equity securities of
foreign issuers. These securities are traded on U.S. securities exchanges. In
addition, on an ongoing and consistent basis, the Fund will write (sell) covered
call options on a portion of the Fund's managed assets. There can be no
assurance that the Fund's investment objective will be achieved.
MARKET RECAP
2016 was a year of both volatility and surprises not only in the stock market
but in the oil and fixed-income markets as well. The S&P 500(R) Index ("Index")
swung 24.2% between its high and low (2,271.72 and 1,829.08, respectively) for
the year. A barrel of West Texas Intermediate crude oil essentially doubled from
its low price of $26.21/barrel on February 11, 2016, to its closing price of
$53.72/barrel on December 31, 2016. The 10-year Treasury started with a yield of
2.30%, dropped to a low of 1.36% in early July and then closed the year at
2.48%. This volatility, in our opinion, was driven by the various surprises that
occurred during the year. In no particular order, the markets had to deal with
vast fluctuations in the Chinese currency and stock market, Federal Reserve
officials indicating the possibility of as many as four short-term rate hikes,
the British people voting to leave the European Union (also known as "Brexit")
and what could be the largest of the surprises - Donald Trump's political rise;
first receiving the Republican nomination and then winning the general election
to become the President of the United States. However, despite the unexpected
events and significant volatility, the Index returned 11.96% (inclusive of
dividends) for the year ended December 31, 2016. Such a positive return did not
seem likely in early February as the Index fell 10.3% (inclusive of dividends)
through February 11, which represented the worst 28 trading days to start a year
in 68 years. During that period, it seemed as though the markets were
anticipating a coordinated global recession. However, several things occurred
around February 12 which made the fear of global recession fade and allowed the
stock market to more than recover its losses. Among them were: better U.S.
economic data; OPEC (The Organization of the Petroleum Exporting Countries) was
rumored to be discussing a production freeze which reversed the slide in oil
prices; with oil prices recovering, fears over bank credit profiles eased; and
various speakers from the Federal Reserve talked down the possibility of the
previously mentioned four rate hikes. Volatility in the first half of the year
drove investors into certain groups of stocks that are considered more 'safe'
than other groups. However, as the year progressed and economic data continued
to show that global growth was not receding but could be moving higher, the
stock market rotated out of those safe-haven groups and began to bid up the more
cyclical groups in the market. And then, as the campaign for the U.S. Presidency
continued and culminated in Donald Trump's victory, the market came to believe
there would be increasing fiscal stimulus and lower taxes and the rally pressed
onwards (reaching multiple all-time highs along the way) with the Index rising
4.6% after the election to close at 2,238.83 just a little more than 1.4% off
its all-time-high.
PERFORMANCE SUMMARY
For the year ended December 31, 2016, the Fund's net asset value ("NAV") and
market value total returns(1) were 9.18% and 9.98%, respectively, on a total
return basis. The Index returned 11.96% on a total return basis over the same
period. The covered call options program had a negative influence on the Fund's
return during the period, the size of which was in line with our expectations
given the solid positive return of the Index. There were several other headwinds
that hurt the portfolio's relative performance during the year. The first part
of the year saw performance concentrated within a few "safe-haven" groups;
-----------------------------
(1) Total return is based on the combination of reinvested dividends, capital
gains and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales loads and are not annualized for
periods less than one year. Past performance is not indicative of future
results.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
ANNUAL REPORT
DECEMBER 31, 2016 (UNAUDITED)
namely Utilities, Telecommunications and Consumer Staples. In fact, 65% of the
Index's return for the first six months of the year came from those three groups
which only comprised 16.5% of the Index's weighting. Such concentration of
performance made it difficult for the Fund to outperform the Index during that
period. Then, in the second half of the year, the stocks that outperformed were
small, more cyclical in nature and carried a higher beta (beta is a measure of
price volatility compared to the Index). The Fund did not have enough exposure
to those types of stocks since it focuses generally on higher quality companies
that tend to have less extreme betas. Within the portfolio, the largest
detractor to relative performance was the Capital Goods group with stock
selection within the group responsible for the majority of the underperformance.
An overweight in Honeywell International (which was up 15%) was not enough to
offset the underweights in various stocks in the group that were up anywhere
between 20% and 60%. Also hurting relative performance was stock selection in
the Food and Staples Retailing group where an overweight in CVS Corp (-17.8%)
was the largest negative contributor. Lastly, the Energy group was a negative
for the portfolio. The portfolio had exposure to several exploration and
production ("E&P") companies which had strong price increases (HES +24.5%, MRO
+12.4%) but did not have exposure to some of the, in our opinion, more
speculative E&P's which had much better returns. On the positive side, stock
selection in the Semiconductor and Semiconductor Equipment group was very
strong. NVIDIA Corp. (+226.9%), Micron Technology (+54.8%) and Applied Materials
(+75.7%) led the way. In addition, stock selection within the Media, Financial,
and Pharmaceuticals, Biotechnology and Life Sciences groups was beneficial to
relative performance.
MARKET OUTLOOK
The Index attained an all-time closing high of 2,271.72 on December 13, 2016,
and it closed 2016 down a little more than 1.4% from that record level. 2016 was
the eighth positive year in a row (inclusive of dividends) for the Index. For
those eight years, the market rose 194% cumulatively which represents a 14.5%
compound annual growth rate. For the last five years, the Index was up 14.7% on
a compound annual basis. Can the market maintain this strong uptrend? We believe
that depends on the answers to a myriad of questions that remain unanswered. In
our opinion, the last leg of this move upwards was the result of the market
anticipating passage of some of Donald Trump's mostly pro-growth policy
proposals. Lower corporate and individual tax rates, the promise of lower
regulation and the possibility of significant infrastructure spending are some
of the items the market is anticipating. Will they come to fruition and thereby
bring the U.S. economy out of the sluggish growth mode it has been in for some
time now? Other questions are: How quickly and to what level will the Federal
Reserve raise short-term interest rates after its recent second rate hike? What
will be the impact of those future hikes (assuming they occur) on the economy?
Will China be able to maneuver through its economic transition? Will Italian
banks have to be bailed out by the European Central Bank? What will the outcome
of elections in Germany and other European countries be and what will they
signal? These uncertainties can provide positive impetus to stock prices if they
are resolved in a market friendly manner, in our opinion. Given valuations in
the equity markets are above longer-term averages and higher interest rates
(which are typically viewed as a headwind to equity valuations) appear to be
coming, we believe that earnings growth will have to improve in order for the
equity market to move substantially higher. While earnings growth may have
proven to be more difficult recently, we believe that companies have learned how
to operate well in the low growth environment and that some of the bigger
restraints to total earnings growth (e.g. lower oil prices, stronger dollar) may
be less of a restraint on growth. Absent a global recession, we believe revenues
should move higher and companies will continue to be vigilant on controlling
costs thereby keeping margins at or near current high levels. In addition, we
believe that the uptick in mergers and acquisitions will continue as will strong
stock repurchases which should help corporations in their search for earnings
growth. Despite being slightly higher and modestly increasing, interest rates
are still lower than normal and should continue to facilitate these corporate
actions.
Our position is essentially unchanged. Despite the uncertainties, we believe the
economy should continue to grow at a reasonable, but not overly strong rate, and
corporate profits should begin to grow as well. This could provide a solid
backdrop for the market going forward. However, with valuation of the stock
market above long-term averages, moves higher in the Index will likely be more
muted going forward with the increased likelihood of periods of price declines,
in our opinion. No matter the outcome of these issues, we will manage the Fund
with the dual objectives of generating a high level of current income while
seeking capital appreciation over the market cycle.
Page 4
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2016
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS - 93.5%
AEROSPACE & DEFENSE - 1.4%
30,000 Raytheon Co. (a)................................... $ 4,260,000
--------------
AIR FREIGHT & LOGISTICS - 1.5%
24,500 FedEx Corp. (a).................................... 4,561,900
--------------
AUTOMOBILES - 1.5%
130,000 General Motors Co. (a)............................. 4,529,200
--------------
BANKS - 7.4%
150,000 Bank of America Corp. (a).......................... 3,315,000
80,000 First Republic Bank (a)............................ 7,371,200
75,000 JPMorgan Chase & Co. (a)........................... 6,471,750
100,000 Wells Fargo & Co. (a).............................. 5,511,000
--------------
22,668,950
--------------
BEVERAGES - 4.5%
37,500 Anheuser-Busch InBev SA/NV, ADR (a)................ 3,954,000
20,000 Constellation Brands, Inc., Class A................ 3,066,200
65,000 PepsiCo, Inc. (a).................................. 6,800,950
--------------
13,821,150
--------------
BIOTECHNOLOGY - 2.6%
37,500 Celgene Corp. (a) (b).............................. 4,340,625
48,700 Gilead Sciences, Inc. (a).......................... 3,487,407
--------------
7,828,032
--------------
CAPITAL MARKETS - 1.6%
120,000 Charles Schwab (The) Corp. (a)..................... 4,736,400
--------------
CHEMICALS - 2.6%
60,000 Dow Chemical (The) Co. (a)......................... 3,433,200
30,000 LyondellBasell Industries N.V., Class A (a)........ 2,573,400
20,000 PPG Industries, Inc................................ 1,895,200
--------------
7,901,800
--------------
COMMUNICATIONS EQUIPMENT - 2.9%
170,000 Cisco Systems, Inc. (a)............................ 5,137,400
30,000 Palo Alto Networks, Inc. (b)....................... 3,751,500
--------------
8,888,900
--------------
CONSUMER FINANCE - 1.2%
51,500 American Express Co. (a)........................... 3,815,120
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 2.1%
70,000 AT&T, Inc. (a)..................................... 2,977,100
32,000 SBA Communications Corp., Class A (a) (b).......... 3,304,320
--------------
6,281,420
--------------
ELECTRIC UTILITIES - 1.2%
110,000 PPL Corp. (a)...................................... 3,745,500
--------------
ENERGY EQUIPMENT & SERVICES - 2.3%
40,000 Helmerich & Payne, Inc............................. 3,096,000
46,000 Schlumberger, Ltd. (a)............................. 3,861,700
--------------
6,957,700
--------------
See Notes to Financial Statements Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2016
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
FOOD & STAPLES RETAILING - 3.0%
27,000 Costco Wholesale Corp. (a)......................... $ 4,322,970
60,000 CVS Health Corp. (a)............................... 4,734,600
--------------
9,057,570
--------------
FOOD PRODUCTS - 1.3%
45,000 Kraft Heinz (The) Co. (a).......................... 3,929,400
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 1.8%
75,000 Medtronic PLC (a).................................. 5,342,250
--------------
HEALTH CARE PROVIDERS & SERVICES - 1.7%
32,000 UnitedHealth Group, Inc. (a)....................... 5,121,280
--------------
HOTELS, RESTAURANTS & LEISURE - 2.1%
125,000 Carnival Corp. (a)................................. 6,507,500
--------------
HOUSEHOLD DURABLES - 1.5%
100,000 Newell Brands, Inc. (a)............................ 4,465,000
--------------
INDUSTRIAL CONGLOMERATES - 4.6%
265,000 General Electric Co. (a)........................... 8,374,000
47,500 Honeywell International, Inc. (a).................. 5,502,875
--------------
13,876,875
--------------
INSURANCE - 3.7%
75,000 Arthur J. Gallagher & Co. (a)...................... 3,897,000
40,000 Chubb, Ltd. (a).................................... 5,284,800
40,000 MetLife, Inc. (a).................................. 2,155,600
--------------
11,337,400
--------------
IT SERVICES - 1.4%
42,500 Automatic Data Processing, Inc. (a)................ 4,368,150
--------------
LIFE SCIENCES TOOLS & SERVICES - 1.9%
40,000 Thermo Fisher Scientific, Inc. (a)................. 5,644,000
--------------
MEDIA - 4.0%
80,000 CBS Corp., Class B (a)............................. 5,089,600
80,000 Cinemark Holdings, Inc. (a)........................ 3,068,800
60,000 Comcast Corp., Class A (a)......................... 4,143,000
--------------
12,301,400
--------------
OIL, GAS & CONSUMABLE FUELS - 5.3%
42,000 Chevron Corp. (a).................................. 4,943,400
60,000 Hess Corp.......................................... 3,737,400
65,000 HollyFrontier Corp................................. 2,129,400
75,000 Occidental Petroleum Corp. (a)..................... 5,342,250
--------------
16,152,450
--------------
Page 6 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2016
SHARES/UNITS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
PHARMACEUTICALS - 5.6%
14,000 Allergan PLC (a) (b)............................... $ 2,940,140
110,000 Merck & Co., Inc. (a).............................. 6,475,700
235,000 Pfizer, Inc. (a)................................... 7,632,800
--------------
17,048,640
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 5.0%
115,000 Applied Materials, Inc. (a)........................ 3,711,050
19,000 Broadcom Ltd. (a).................................. 3,358,630
150,000 Intel Corp. (a).................................... 5,440,500
130,000 Micron Technology, Inc. (a) (b).................... 2,849,600
--------------
15,359,780
--------------
SOFTWARE - 5.2%
175,000 Microsoft Corp. (a)................................ 10,874,500
130,000 Oracle Corp. (a)................................... 4,998,500
--------------
15,873,000
--------------
SPECIALTY RETAIL - 1.3%
29,000 Home Depot (The), Inc. (a)......................... 3,888,320
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 4.8%
125,000 Apple, Inc. (a).................................... 14,477,500
--------------
TEXTILES, APPAREL & LUXURY GOODS - 1.2%
70,000 NIKE, Inc., Class B................................ 3,558,100
--------------
TOBACCO - 4.1%
95,000 Altria Group, Inc. (a)............................. 6,423,900
66,000 Philip Morris International, Inc. (a).............. 6,038,340
--------------
12,462,240
--------------
WATER UTILITIES - 1.2%
50,000 American Water Works Co., Inc. (a)................. 3,618,000
--------------
TOTAL COMMON STOCKS................................ 284,384,927
(Cost $242,237,094) --------------
REAL ESTATE INVESTMENT TRUSTS - 2.3%
EQUITY REAL ESTATE INVESTMENT TRUSTS - 2.3%
50,000 Lamar Advertising Co., Class A (a)................. 3,362,000
21,000 Simon Property Group, Inc. (a)..................... 3,731,070
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS................ 7,093,070
(Cost $6,909,625) --------------
MASTER LIMITED PARTNERSHIPS - 1.5%
OIL, GAS & CONSUMABLE FUELS - 1.5%
55,000 Energy Transfer Partners, L.P. (a)................. 1,969,550
100,000 Enterprise Products Partners, L.P. (a)............. 2,704,000
--------------
TOTAL MASTER LIMITED PARTNERSHIPS.................. 4,673,550
(Cost $2,639,420) --------------
See Notes to Financial Statements Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2016
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
EXCHANGE-TRADED FUNDS - 2.4%
CAPITAL MARKETS - 2.4%
32,000 SPDR(R) S&P 500(R) ETF Trust (a)................... $ 7,152,960
(Cost $6,960,364) --------------
TOTAL INVESTMENTS - 99.7%.......................... 303,304,507
(Cost $258,746,503) (c) --------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.2%)
Applied Materials, Inc. Call
350 @ $35.00 due January 2017.......................... (3,500)
--------------
Bank of America Corp. Call
750 @ 24.00 due January 2017.......................... (8,250)
--------------
Carnival Corp. Calls
275 @ 52.50 due January 2017.......................... (25,575)
325 @ 55.00 due January 2017.......................... (6,500)
--------------
(32,075)
--------------
CBS Corp. Call
400 @ 67.50 due January 2017.......................... (16,400)
--------------
Charles Schwab (The) Corp. Call
400 @ 40.00 due January 2017.......................... (34,000)
--------------
Dow Chemical (The) Co. Call
200 @ 60.00 due January 2017.......................... (3,800)
--------------
Fedex Corp. Call
100 @ 210.00 due January 2017.......................... (700)
--------------
Hess Corp. Calls
100 @ 67.50 due January 2017.......................... (4,700)
150 @ 70.00 due January 2017.......................... (3,150)
--------------
(7,850)
--------------
HollyFrontier Corp. Call
130 @ 36.00 due January 2017.......................... (3,250)
--------------
JPMorgan Chase & Co. Call
400 @ 87.50 due January 2017.......................... (39,200)
--------------
Micron Technology, Inc. Call
300 @ 23.00 due January 2017.......................... (12,000)
--------------
S&P 500(R) Index Calls (d)
300 @ 2,280.00 due January 2017....................... (210,000)
400 @ 2,300.00 due January 2017....................... (121,200)
--------------
(331,200)
--------------
UnitedHealth Group, Inc. Call
125 @ 165.00 due January 2017......................... (20,625)
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2016
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN (CONTINUED)
Wells Fargo & Co. Call
400 @ $57.50 due January 2017.......................... $ (17,200)
--------------
TOTAL CALL OPTIONS WRITTEN......................... (530,050)
(Premiums received $1,214,184) --------------
NET OTHER ASSETS AND LIABILITIES - 0.5%............ 1,339,792
--------------
NET ASSETS - 100.0%................................ $ 304,114,249
==============
-----------------------------
(a) All or a portion of this security is pledged to cover index call options
written.
(b) Non-income producing security.
(c) Aggregate cost for federal income tax purposes is $258,605,394. As of
December 31, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$54,837,711 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$10,138,598.
(d) Call options on securities indices were written on a portion of the common
stock positions that were not used to cover call options written on
individual equity securities held in the Fund's portfolio.
ADR American Depositary Receipt
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Common Stocks*.................................... $ 284,384,927 $ 284,384,927 $ -- $ --
Real Estate Investment Trusts*.................... 7,093,070 7,093,070 -- --
Master Limited Partnerships*...................... 4,673,550 4,673,550 -- --
Exchange-Traded Funds*............................ 7,152,960 7,152,960 -- --
------------- ------------- ------------- -------------
Total Investments................................. $ 303,304,507 $ 303,304,507 $ -- $ --
============= ============= ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Call Options Written.............................. $ (530,050) $ (530,050) $ -- $ --
============= ============= ============= =============
* See the Portfolio of Investments for industry breakdown.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at December 31, 2016.
See Notes to Financial Statements Page 9
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2016
ASSETS:
Investments, at value
(Cost $258,746,503)............................................................................ $303,304,507
Cash.............................................................................................. 1,046,777
Dividends receivable.............................................................................. 650,159
Prepaid expenses.................................................................................. 3,912
------------
Total Assets................................................................................... 305,005,355
------------
LIABILITIES:
Options written, at value (Premiums received $1,214,184).......................................... 530,050
Payables:
Investment advisory fees....................................................................... 259,533
Audit and tax fees............................................................................. 43,319
Printing fees.................................................................................. 23,727
Administrative fees............................................................................ 14,278
Transfer agent fees............................................................................ 8,818
Custodian fees................................................................................. 4,468
Legal fees..................................................................................... 3,411
Financial reporting fees....................................................................... 771
Trustees' fees and expenses.................................................................... 41
Other liabilities................................................................................. 2,690
------------
Total Liabilities.............................................................................. 891,106
------------
NET ASSETS........................................................................................ $304,114,249
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................... $263,631,234
Par value......................................................................................... 199,732
Accumulated net investment income (loss).......................................................... 1,333,882
Accumulated net realized gain (loss) on investments and written options........................... (6,292,737)
Net unrealized appreciation (depreciation) on investments and written options..................... 45,242,138
------------
NET ASSETS........................................................................................ $304,114,249
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share).............................. $ 15.23
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)....... 19,973,164
============
Page 10 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $23,254)............................................. $ 7,093,006
Interest.......................................................................................... 202
------------
Total investment income........................................................................ 7,093,208
------------
EXPENSES:
Investment advisory fees.......................................................................... 2,952,390
Administrative fees............................................................................... 144,202
Printing fees..................................................................................... 75,905
Audit and tax fees................................................................................ 43,622
Transfer agent fees............................................................................... 35,947
Custodian fees.................................................................................... 26,180
Trustees' fees and expenses....................................................................... 17,808
Legal fees........................................................................................ 9,534
Financial reporting fees.......................................................................... 9,250
Other............................................................................................. 33,465
------------
Total expenses................................................................................. 3,348,303
------------
NET INVESTMENT INCOME (LOSS)...................................................................... 3,744,905
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments.................................................................................... 12,799,433
Written options................................................................................ (1,213,045)
------------
Net realized gain (loss).......................................................................... 11,586,388
------------
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................... 8,521,655
Written options................................................................................ 46,975
------------
Net change in unrealized appreciation (depreciation).............................................. 8,568,630
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................... 20,155,018
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 23,899,923
============
See Notes to Financial Statements Page 11
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2016 12/31/2015
------------ ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 3,744,905 $ 4,166,263
Net realized gain (loss)........................................................... 11,586,388 16,788,987
Net change in unrealized appreciation (depreciation)............................... 8,568,630 (21,431,903)
------------ ------------
Net increase (decrease) in net assets resulting from operations.................... 23,899,923 (476,653)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (3,566,425) (12,083,764)
Net realized gain.................................................................. (9,587,119) (6,691,010)
Return of capital.................................................................. (6,020,694) --
------------ ------------
Total distributions to shareholders................................................ (19,174,238) (18,774,774)
------------ ------------
Total increase (decrease) in net assets............................................ 4,725,685 (19,251,427)
NET ASSETS:
Beginning of period................................................................ 299,388,564 318,639,991
------------ ------------
End of period...................................................................... $304,114,249 299,388,564
============ ============
Accumulated net investment income (loss) at end of period.......................... $ 1,333,882 $ 693,703
============ ============
COMMON SHARES:
Common Shares at end of period*..................................................... 19,973,164 19,973,164
============ ============
-----------------------------
* On September 15, 2016, the Fund commenced a share repurchase program. The
program will continue until the earlier of (i) the repurchase of 998,658
common shares or (ii) March 15, 2017. Since September 15, 2016, the Fund
has not repurchased any common shares.
Page 12 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2016 2015 2014 (a) 2013 2012
---------- ---------- ---------- ---------- ----------
Net asset value, beginning of period............ $ 14.99 $ 15.95 $ 15.24 $ 13.27 $ 12.51
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 0.19 0.20 0.24 0.21 0.26
Net realized and unrealized gain (loss)......... 1.01 (0.22) 1.39 2.66 1.40
-------- -------- -------- -------- --------
Total from investment operations................ 1.20 (0.02) 1.63 2.87 1.66
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.18) (0.60) (0.92) (0.90) (0.72)
Net realized gain............................... (0.48) (0.34) -- -- --
Return of capital............................... (0.30) -- -- -- (0.18)
-------- -------- -------- -------- --------
Total distributions to Common Shareholders...... (0.96) (0.94) (0.92) (0.90) (0.90)
-------- -------- -------- -------- --------
Net asset value, end of period.................. $ 15.23 $ 14.99 $ 15.95 $ 15.24 $ 13.27
======== ======== ======== ======== ========
Market value, end of period..................... $ 13.51 $ 13.20 $ 14.34 $ 13.32 $ 11.84
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (b)....... 9.18% 0.72% 11.63% 23.11% 14.18% (c)
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (b).......... 9.98% (1.35)% 14.83% 20.60% 17.68%
======== ======== ======== ======== ========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $304,114 $299,389 $318,640 $304,297 $265,009
Ratio of total expenses to average net assets... 1.13% 1.12% 1.18% 1.19% 1.21%
Ratio of net investment income (loss) to average
net assets................................... 1.27% 1.33% 1.54% 1.45% 1.90%
Portfolio turnover rate......................... 32% 45% 44% 40% 66%
-----------------------------
(a) On February 20, 2014, the Fund's Board of Trustees approved an interim and
new sub-advisory agreement with Chartwell Investment Partners, Inc.
("Chartwell"), which became the Fund's sub-advisor on March 5, 2014, under
the interim sub-advisory agreement. On July 2, 2014, the Fund's
shareholders voted to approve the new sub-advisory agreement.
(b) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(c) The Fund received reimbursements from Chartwell Investment Partners, L.P.
(the predecessor to Chartwell) in the amount of $77,318, which represents
less than $0.01 per share. Since the Fund was reimbursed, there was no
effect on the Fund's total return.
See Notes to Financial Statements Page 13
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016
1. ORGANIZATION
First Trust Enhanced Equity Income Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 20, 2004, and is registered with the Securities and Exchange
Commission (the "SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FFA on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to provide a high level of current income and
gains and, to a lesser extent, capital appreciation. The Fund pursues its
investment objective by investing in a diversified portfolio of equity
securities. Under normal market conditions, the Fund pursues an integrated
investment strategy in which the Fund invests substantially all of its Managed
Assets in a diversified portfolio of common stocks of U.S. corporations and U.S.
dollar-denominated equity securities of non-U.S. issuers, in each case that are
traded on U.S. securities exchanges, and on an ongoing and consistent basis
writes (sells) covered call options on a portion of the Fund's Managed Assets.
"Managed Assets" means the total asset value of the Fund minus the sum of the
Fund's liabilities, including the value of call options written (sold). There
can be no assurance that the Fund will achieve its investment objective. The
Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 946, "Financial
Services-Investment Companies." 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 ("U.S.
GAAP") 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. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. The Fund's 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, the value of call options written (sold) and dividends declared but
unpaid), 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. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Common stocks, real estate investment trusts ("REITs"), master limited
partnerships ("MLPs"), exchange-traded funds and other equity securities
listed on any national or foreign exchange (excluding The Nasdaq Stock
Market LLC ("Nasdaq") and the London Stock Exchange Alternative Investment
Market ("AIM")) are valued at the last sale price on the exchange on which
they are principally traded or, for Nasdaq and AIM securities, the
official closing price. Securities traded on more than one securities
exchange are valued at the last sale price or official closing price, as
applicable, at the close of the securities exchange representing the
principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Exchange-traded options contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded options contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price. Over-the-counter options contracts are fair
valued at the mean of their most recent bid and asked price, if available,
and otherwise at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a third-party pricing service is unable to provide a
market price; securities whose trading has been formally suspended; a security
whose market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
Page 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the third-party pricing service, does not reflect the security's fair value. As
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services; 6)
relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
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:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, 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.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of December 31, 2016, is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective and may write (sell) options to hedge against changes in
the value of equities. Also, the Fund seeks to generate additional income, in
the form of premiums received, from writing (selling) the options. The Fund may
write (sell) covered call options ("options") on all or a portion of the equity
securities held in the Fund's portfolio and on securities indices as determined
to be appropriate by Chartwell Investment Partners, LLC ("Chartwell" or the
"Sub-Advisor"), consistent with the Fund's investment objective. The number of
options the Fund can write (sell) is limited by the amount of equity securities
the Fund holds in its portfolio. Options on securities indices are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security and are similar to
options on single securities, except that the exercise of securities index
options requires cash settlement payments and does not involve the actual
purchase or sale of securities. The Fund will not write (sell) "naked" or
uncovered options. If certain equity securities held in the Fund's portfolio are
not covered by a related call option on the individual equity security,
securities index options may be written on all or a portion of such uncovered
securities. When the Fund writes (sells) an option, an amount equal to the
premium received by the Fund is included in "Options written, at value" on the
Fund's Statement of Assets and Liabilities. Options are marked-to-market daily
and their value will be affected by changes in the value and dividend rates of
the underlying equity securities, changes in interest rates, changes in the
actual or perceived volatility of the securities markets and the underlying
equity securities and the remaining time to the options' expiration. The value
of options may also be adversely affected if the market for the options becomes
less liquid or trading volume diminishes.
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss and is included
in "Net realized gain (loss) on investments" on the Statement of Operations. If
the price of the underlying equity security is less than the option's strike
price, the option will likely expire without being exercised. The option premium
received by the Fund will, in this case, be treated as short-term capital gain
on the expiration date of the option. The Fund may also elect to close out its
position in an option prior to its expiration by purchasing an option of the
same series as the option written (sold) by the Fund. Gain or loss on options is
presented separately as "Net realized gain (loss) on written options" on the
Statement of Operations.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Sub-Advisor to predict pertinent market movements, which cannot be assured.
Thus, the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. 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, if any, is
recorded daily on the accrual basis, including amortization of premiums and
accretion of discounts.
The Fund may hold securities of publicly-traded REITs. Distributions from such
investments may be comprised of return of capital, capital gains and income. The
actual character of amounts received during the year is not known until after
the REITs' fiscal year end. The Fund records the character of distributions
received from REITs during the year based on estimates available. The
characterization of distributions received by the Fund may be subsequently
revised based on information received from the REITs after their tax reporting
periods conclude.
For the year ended December 31, 2016, distributions of $402,800 received from
MLPs have been reclassified as return of capital. The cost basis of the
applicable MLPs has been reduced accordingly.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income of the Fund are declared and paid quarterly
or as the Board of Trustees may determine from time to time. Distributions of
any net realized 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 realized capital gains are determined in
accordance with income tax regulations, which may differ from U.S. GAAP. Certain
capital accounts in the financial statements are periodically adjusted for
permanent differences in order to reflect their tax character. These permanent
differences are primarily due to the varying treatment of income and gain/loss
on portfolio securities held by the Fund and have no impact on net assets or NAV
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some point in the future. Permanent differences
incurred during the year ended December 31, 2016, primarily as a result of
distributions in excess of current year taxable income, have been reclassified
at year end to reflect an increase in accumulated net investment income (loss)
of $461,699, an increase in accumulated net realized gain (loss) on investments
and written options of $1,181,067 and a decrease to paid-in-capital of
$1,642,766. Net assets were not affected by this reclassification.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016
The tax character of distributions paid during the fiscal years ended December
31, 2016 and 2015 was as follows:
Distributions paid from: 2016 2015
Ordinary income................................ $ 3,415,478 $ 12,083,764
Long-term capital gain......................... 9,738,066 6,691,010
Return of capital.............................. 6,020,694 --
As of December 31, 2016, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income.................. $ --
Undistributed capital gains.................... --
--------------
Total undistributed earnings................... --
Accumulated capital and other losses........... --
Net unrealized appreciation (depreciation)..... 44,875,547
--------------
Total accumulated earnings (losses)............ 44,875,547
Other.......................................... (4,592,264)
Paid-in capital................................ 263,830,966
--------------
Net assets..................................... $ 304,114,249
==============
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 and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years beginning after December 22, 2010,
may be carried forward indefinitely, and their character is retained as
short-term and/or long-term losses. Previously, net capital losses were carried
forward up to eight years and treated as short-term losses. As a transition
rule, the Act requires that post-enactment net capital losses be used before
pre-enactment net capital losses. At December 31, 2016, the Fund had no pre- or
post-enactment capital loss carryforwards for federal income tax purposes.
The Fund is subject to certain limitations under the 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.
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 2013, 2014,
2015 and 2016 remain open to federal and state audit. As of December 31, 2016,
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 positions.
F. EXPENSES
The Fund will pay all expenses directly related to its operations.
G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
H. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. 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. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Chartwell manages the Fund's portfolio subject to First Trust's supervision.
Chartwell receives a monthly portfolio management fee calculated at an annual
rate of 0.50% of the Fund's Managed Assets that is paid monthly by First Trust
out of its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon
Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended December 31, 2016, were $94,095,413 and
$109,628,514, respectively.
5. DERIVATIVE TRANSACTIONS
Written option activity for the Fund was as follows:
NUMBER OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-------------------------------------------------------------------------------------------
Options outstanding at December 31, 2015........... 7,115 $ 974,414
Options Written.................................... 75,270 14,468,254
Options Expired.................................... (46,145) (4,087,873)
Options Exercised.................................. (6,160) (400,168)
Options Closed..................................... (24,975) (9,740,443)
--------- --------------
Options outstanding at December 31, 2016........... 5,105 $ 1,214,184
========= ==============
The following table presents the types of derivatives held by the Fund at
December 31, 2016, the primary underlying risk exposure and the location of
these instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------- ---------------------------------------
DERIVATIVE STATEMENTS OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
--------------- ------------- -------------------------- ----------- -------------------------- -----------
Written Options Equity Risk -- -- Options written, at value $ 530,050
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
December 31, 2016, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
EQUITY RISK
Net realized gain (loss) on written options $ (1,213,045)
Net change in unrealized appreciation (depreciation) on written
options 46,975
The Fund does not have the right to offset financial assets and financial
liabilities related to option contracts on the Statement of Assets and
Liabilities.
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.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 19
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST ENHANCED EQUITY INCOME
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Enhanced Equity Income Fund (the "Fund"), including the portfolio of
investments, as of December 31, 2016, and the related statements of operations
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 each of the
five years in the period then ended. 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 audit 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 December 31, 2016 by correspondence with the Fund's
custodian and brokers; when replies were not received from brokers, we performed
other auditing procedures. 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 Enhanced Equity Income Fund, as of December 31, 2016, the results of its
operations 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 each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 22, 2017
Page 20
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016 (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 BNY
Mellon Investment Servicing (US) 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 the 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 net asset value ("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 (866) 340-1104, 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 BNY Mellon Investment
Servicing (US) 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 investments 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 ("SEC") website located at
http://www.sec.gov.
Page 21
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Qs
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.
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 April 26, 2016, 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 Form N-CSR and N-Q contain certifications by the Fund's principal
executive officer and principal financial officer to the Fund's public
disclosure in such reports and that are required by Rule 30a-2 under the 1940
Act.
TAX INFORMATION
For the year ended December 31, 2016, the amount of long-term capital gain
distributions designated by the Fund was $9,738,066 which is taxable at the
applicable capital gain tax rates for federal income tax purposes.
Of the ordinary income (including short-term capital gain, if applicable)
distributions made by the Fund during the year ended December 31, 2016, 40.08%
qualified for the corporate dividends received deduction available to corporate
shareholders. The Fund hereby designates as qualified dividend income 45.27% of
its ordinary income distributions (including short-term capital gain, if
applicable), for the year ended December 31, 2016.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust High Income Long/Short Fund, First Trust Energy Infrastructure
Fund, First Trust MLP and Energy Income Fund, First Trust Intermediate Duration
Preferred & Income Fund and First Trust New Opportunities MLP & Energy Fund was
held on April 22, 2016 (the "Annual Meeting"). At the Annual Meeting, James A.
Bowen and Niel B. Nielson were elected by the Common Shareholders of the First
Trust Enhanced Equity Income Fund as Class III Trustees for a three-year term
expiring at the Fund's annual meeting of shareholders in 2019. The number of
votes cast in favor of Mr. Bowen was 16,721,095, the number of votes against was
1,299,842 and the number of broker non-votes was 1,952,227. The number of votes
cast in favor of Mr. Nielson was 16,736,669, the number of votes against was
1,284,268 and the number of broker non-votes was 1,952,227. Rickard E. Erickson,
Thomas R. Kadlec, and Robert F. Keith are the other current and continuing
Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
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 securities markets, 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.
EQUITY SECURITIES RISK: The Fund invests in equity securities. An adverse event
affecting an issuer, such as an unfavorable earnings report, may depress the
value of a particular equity security held by the Fund. Also, the prices of
equity securities are sensitive to general movements in the stock market and a
drop in the stock market may depress the prices of equity securities to which
the Fund has exposure. Equity securities prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, or when political
or economic events affecting the issuers or their industries occur.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016 (UNAUDITED)
OPTION RISK: The Fund may write (sell) covered call options on all or a portion
of the equity securities held in the Fund's portfolio as determined to be
appropriate by the Fund's Sub-Advisor, consistent with the Fund's investment
objective. The ability to successfully implement the Fund's investment strategy
depends on the Sub-Advisor's ability to predict pertinent market movements,
which can not be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold an equity security that it might
otherwise sell. There can be no assurance that a liquid market for the options
will exist when the Fund seeks to close out an option position. Additionally, to
the extent that the Fund purchases options pursuant to a hedging strategy, the
Fund will be subject to additional risks.
INDUSTRY RISK: The Fund may not invest 25% or more of its total assets in
securities of issuers in any single industry. If the Fund is focused in an
industry, it may present more risks than if it were broadly diversified over
numerous industries of the economy. Individual industries may be subject to
unique risks which may include, among others, governmental regulation,
inflation, technological innovations that may render existing products and
equipment obsolete, competition from new entrants, high research and development
costs, and rising interest rates.
INCOME RISK: Net investment income paid by the Fund to its Common Shareholders
is derived from the premiums it receives from writing (selling) call options and
from the dividends and interest it receives from the equity securities and other
investments held in the Fund's portfolio and short-term gains thereon. Premiums
from writing (selling) call options and dividends and interest payments made by
the securities in the Fund's portfolio can vary widely over time. Dividends on
equity securities are not fixed but are declared at the discretion of an
issuer's board of directors. There is no guarantee that the issuers of the
equity securities in which the Fund invests will declare dividends in the future
or that if declared they will remain at current levels. The Fund cannot assure
as to what percentage of the distributions paid on the Common Shares, if any,
will consist of qualified dividend income or long-term capital gains, both of
which are taxed at lower rates for individuals than are ordinary income and
short-term capital gains.
NON-U.S. RISK: The Fund may invest a portion of its assets in the equity
securities of issuers domiciled in jurisdictions other than the U.S. Investments
in the securities and instruments of non-U.S. issuers involve certain
considerations and risks not ordinarily associated with investments in
securities and instruments of U.S. issuers. Non-U.S. companies are not generally
subject to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Non-U.S. securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may be
subject to withholding and other non-U.S. taxes, which may adversely affect the
net return on such investments. A related risk is that there may be difficulty
in obtaining or enforcing a court judgment abroad.
Page 23
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUST TRUSTEESHIPS OR
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY
POSITION WITH THE TRUST SERVICE (1) DURING PAST 5 YEARS TRUSTEE TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician, Officer, Wheaton Orthopedics; 138 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 E. Liberty Drive, o Since Fund Limited Partnership (June 1992 to
Suite 400 Inception December 2016); Member, Sportsmed LLC
Wheaton, IL 60187 (April 2007 to November 2015)
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President, ADM Investor Services, Inc. 138 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President, Hibs Enterprises (Financial 138 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 E. Liberty Drive, o Since June 2006 Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 138 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Covenant
120 E. Liberty Drive, o Since Fund Pelita Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products
and Services); President and Chief
Executive Officer (June 2012 to
September 2014), Dew Learning LLC
(Educational Products and Services);
President (June 2002 to June 2012),
Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(2), Trustee o Three-Year Term Chief Executive Officer, First Trust 138 None
and Chairman of the Board Advisors L.P. and First Trust Portfolios
120 E. Liberty Drive, o Since Fund L.P.; Chairman of the Board of
Suite 400 Inception Directors, BondWave LLC (Software
Wheaton, IL 60187 Development Company) and Stonebridge
D.O.B.: 09/55 Advisors LLC (Investment Advisor)
-----------------------------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2017 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2018 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2019 annual meeting of shareholders.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
Page 24
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief
120 E. Liberty Drive, Executive Officer Financial Officer (January 2016 to
Suite 400 o Since January 2016 Present), Controller (January 2011 to
Wheaton, IL 60187 January 2016), Senior Vice President
D.O.B.: 01/66 (April 2007 to January 2016), First
Trust Advisors L.P. and First Trust
Portfolios L.P.; Chief Financial
Officer (January 2016 to Present),
BondWave LLC (Software Development
Company) and Stonebridge Advisors
LLC (Investment Advisor)
Donald P. Swade Treasurer, Chief o Indefinite Term Senior Vice President (July 2016 to
120 E. Liberty Drive, Financial Officer and Present), Vice President (April 2012
Suite 400 Chief Accounting Officer o Since January 2016 to July 2016), First Trust Advisors
Wheaton, IL 60187 L.P. and First Trust Portfolios L.P.;
D.O.B.: 08/72 Vice President (September 2006 to
April 2012), Guggenheim Funds
Investment Advisors, LLC and Claymore
Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust
120 E. Liberty Drive, Legal Officer Advisors L.P. and First Trust
Suite 400 o Since Fund Portfolios L.P.; Secretary and
Wheaton, IL 60187 Inception General Counsel, BondWave LLC;
D.O.B.: 05/60 Secretary, Stonebridge Advisors LLC
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005
Suite 400 o Since December 2005 to July 2012), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.
D.O.B: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.,
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer Since
D.O.B.: 12/66 January 2011
o Assistant Secretary
Since Fund Inception
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 25
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
DECEMBER 31, 2016 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o 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. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o 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, proxy
services, solicitors and printers.
o 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 within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees 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 go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 26
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, LLC
1205 Westlakes Drive, Suite 100
Berwyn, PA 19312
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
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
[BLANK BACK COVER]
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) There have been no amendments, during the period covered by this report,
to 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, and that relates to any element of the code of ethics
description.
(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.
(e) Not applicable.
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 were $38,000.00 for 2015 and
$38,000.00 for 2016.
(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 2015 and $91.91 for 2016. The fees for 2016 were
for preparation of new pricing committee procedures and were the Registrant's
pro-rated share of share of the fees which were spread amongst all funds in the
First Trust fund complex.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years of the registrant 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 2015 and $0 for 2016.
(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 $5,200
for 2015 and $5,200 for 2016. These fees were for tax preparation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years of the registrant for professional services rendered by
the principal accountant for tax compliance, tax advice, and tax planning to the
registrant's adviser were $0 for 2015 and $0 for 2016.
(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 $3,000 for 2015 and $0 for 2016. The fees in 2015
were for a conversion of the fund accounting system.
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 services reported
in paragraphs (a) through (c) of this Item were $0 for 2015 and $0 for 2016.
(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 2015 were $8,200
and $12,500 for the Registrant and the Registrant's investment adviser,
respectively, and for 2016 were $5,200 and $13,000, for the Registrant and the
Registrant's investment adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees 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.
(a) 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.
CHARTWELL INVESTMENT PARTNERS
PROXY VOTING POLICIES AND PROCEDURES
o ADOPTED APRIL 11, 1997
o AS AMENDED FEBRUARY, 2016
PURPOSE. Chartwell Investment Partners ("Chartwell") has adopted these Proxy
Voting Policies and Procedures ("Policies") to seek to ensure that it exercises
voting authority on behalf of Chartwell clients in a manner consistent with the
best interests of each client and its agreement with the client.
SCOPE. These Policies apply where clients have delegated the authority and
responsibility to Chartwell to decide how to vote proxies. Chartwell does not
accept or retain authority to vote proxies in accordance with individual client
guidelines with the exception of those clients who wish their proxies voted in
accordance with Taft-Hartley Proxy Voting Guidelines and who have instructed
Chartwell to do so. In addition, Clients who wish to instruct Chartwell not to
vote in accordance with AFL-CIO Key Vote Survey recommendations, as described
below, retain that authority. Clients who wish to arrange to vote proxies in
accordance with their own guidelines may elect to do so at any time by notifying
Chartwell. Chartwell generally will follow these Policies if asked to make
recommendations about proxy voting to clients who request that advice but have
not delegated proxy voting responsibility to Chartwell.
GUIDING PRINCIPLES. Chartwell believes that voting proxies in the best interests
of each client means making a judgment as to what voting decision is most likely
to maximize total return to the client as an investor in the securities being
voted, and casting the vote accordingly. For this reason, Chartwell's evaluation
of the possible impact of a proxy vote on the economic interests of company
shareholders similarly situated to Chartwell's clients will be the primary
factor governing Chartwell's proxy voting decisions.
USE OF INDEPENDENT PROXY VOTING SERVICE. Chartwell has retained ISS, an
independent proxy voting service, to assist it in analyzing specific proxy votes
with respect to securities held by Chartwell clients and to handle the
mechanical aspects of casting votes. Historically, Chartwell has placed
substantial reliance on ISS' analyses and recommendations and generally gives
instructions to ISS to vote proxies in accordance with ISS' recommendations,
unless Chartwell reaches a different conclusion than ISS about how a particular
matter should be voted. ISS' proxy voting recommendations typically are made
available to Chartwell about a week before the proxy must be voted, and are
reviewed and monitored by members of the Proxy Voting Committee (and, in certain
cases, by Chartwell portfolio managers), with a view to determining whether it
is in the best interests of Chartwell's clients to vote proxies as recommended
by ISS, or whether client proxies should be voted on a particular proposal in
another manner. In addition, Chartwell generally votes in accordance with
AFL-CIO Key Votes Survey, a list of proposals and meetings based on
recommendations by the AFL-CIO Office of Investment. To the extent that any of
the proxy voting positions stated in these Policies are inconsistent with a Key
Vote Survey recommendation, Chartwell will generally vote in accordance with the
Key Vote Survey recommendation on all impacted securities unless any client has
chosen to instruct Chartwell to refrain from doing so. In that case, Chartwell
will vote the client's securities position in accordance with these Policies
(which may or may not cause the vote to be the same as the Key Vote Survey
recommendation).
ADMINISTRATION OF POLICIES. Chartwell has established a Proxy Voting Committee
to oversee and administer the voting of proxies on behalf of clients, comprised
of approximately five representatives of the firm's compliance and operations
departments. The Committee's responsibilities include reviewing and updating
these Policies as may be appropriate from time to time; identifying and
resolving any material conflicts of interest on the part of Chartwell or its
personnel that may affect particular proxy votes; evaluating and monitoring, on
an ongoing basis, the analyses, recommendations and other services provided by
ISS or another third party retained to assist Chartwell in carrying out its
proxy voting responsibilities; when deemed appropriate by the Committee,
consulting with Chartwell portfolio managers and investment professionals on
particular proposals or categories of proposals presented for vote; and
determining when and how client proxies should be voted other than in accordance
with the general rules and criteria set forth in Chartwell's Proxy Voting
Guidelines or with the recommendations of ISS or another independent proxy
voting service retained by Chartwell.
CONFLICTS OF INTEREST. It is Chartwell's policy not to exercise its authority to
decide how to vote a proxy if there is a material conflict of interest between
Chartwell's interests and the interests of the client that owns the shares to be
voted that could affect the vote on that matter. To seek to identify any such
material conflicts, a representative of the Proxy Voting Committee screens all
proxies and presents any potential conflicts identified to the Committee for
determination of whether the conflict exists and if so, whether it is material.
Conflicts of interest could result from a variety of circumstances, including,
but not limited to, significant personal relationships between executive
officers of an issuer and Chartwell personnel, a current or prospective
investment adviser-client relationship between an issuer or a pension plan
sponsored by an issuer and Chartwell, a significant ownership interest by
Chartwell or its personnel in the issuer and various other business, personal or
investment relationships. Generally, a current or prospective adviser-client
relationship will not be considered material for these purposes if the net
advisory revenues to Chartwell have not in the most recent fiscal year and are
not expected in the current fiscal year to exceed 1/2 of 1 percent of
Chartwell's annual advisory revenue.
Currently, the Proxy Voting Committee has determined that voting in accordance
with AFL-CIO Key Votes Survey recommendations is not a material conflict of
interest. In reaching this decision, the Committee recognized that Chartwell has
many union clients and many clients that are not union-oriented. By voting all
impacted securities positions in accordance with AFL-CIO recommendations, it
could be said that Chartwell is attempting to retain or attract existing and
prospective union clients. However, the overall number of proxy issues in the
AFL-CIO Key Votes Survey on which Chartwell has historically voted is
approximately 14 - 30 out of a total of approximately 500 company meetings and
thousands of proxy votes cast by Chartwell each year. Chartwell does not use its
AFL-CIO Key Votes Survey rankings for marketing purposes, so to the extent any
client or prospect becomes aware of how Chartwell votes in the Surveys, it does
so on its own. In addition, Union Clients have the ability to instruct Chartwell
to vote their proxies entirely in accordance with the Taft-Hartley policy.
Recognizing that deciding this is not a material conflict of interest is
fundamentally subjective, Chartwell nonetheless discloses its practices to
clients and invites clients to instruct Chartwell not to change any vote in
these Policies to be consistent with an AFL-CIO Key Votes Survey recommendation
(even though voting consistently with these Policies may result in voting the
same way).
In the event the Committee determines that there is a material conflict of
interest that may affect a particular proxy vote, Chartwell will NOT make the
decision how to vote the proxy in accordance with these Policies unless the
Policies specify how votes shall be cast on that particular type of matter,
i.e., "for" or "against" the proposal. Where the Policies provide that the
voting decision will be made on a "case-by-case" basis, Chartwell will either
request the client to make the voting decision, or the vote will be cast in
accordance with the recommendations of ISS or another independent proxy voting
service retained by Chartwell for that purpose. Chartwell also will not provide
advice to clients on proxy votes without first disclosing any material conflicts
to the client requesting such advice.
WHEN CHARTWELL DOES NOT VOTE PROXIES. Chartwell may not vote proxies respecting
client securities in certain circumstances, including, but not limited to,
situations where (a) the securities are no longer held in a client's account;
(b) the proxy and other relevant materials are not received in sufficient time
to allow analysis or an informed vote by the voting deadline; (c) Chartwell
concludes that the cost of voting the proxy will exceed the expected potential
benefit to the client; or (d) the securities have been loaned out pursuant to a
client's securities lending program and are unavailable to vote.
The policies contained herein are a sampling of select, key proxy voting
guidelines and are not exhaustive. A full listing of ISS' 2017 proxy voting
guidelines can be found at
http://www.issgovernance.com/policy-gateway/2017-policy-information/
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF DECEMBER 31, 2016
Chartwell Investment Partners, LLC ("Chartwell"), a wholly owned subsidiary of
TriState Capital Holdings, Inc., is a research based equity and fixed-income
manager with a disciplined, team-oriented investment process. The Chartwell
Portfolio Management Team consists of the following:
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 19 years of investment industry experience. His areas of
focus include the Consumer Discretionary, Industrials, Materials and Technology
sectors of the market. He has been a portfolio manager for the Fund since 2007.
From 1993 to 2003, he held several positions at Morgan Stanley Investment
Management (Miller Anderson & Sherrerd) the last of which was Senior Associate
and Analyst for the Large Cap Value team. Mr. Kugler is a member of the CFA
(Chartered Financial Analysts) Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. Mr. Kugler earned a
Bachelor's degree in Accounting from the University of Delaware.
PETER M. SCHOFIELD, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
Mr. Schofield is a Senior Portfolio Manager on Chartwell's large-cap equity
portfolio management team and has 31 years of investment industry experience.
His areas of focus include Consumer Staples, Health Care and Information
Technology. From 2005 to 2010, he was a Co-Chief Investment Officer at Knott
Capital. From 1996 to 2005, he was a Portfolio Manager at Sovereign Asset
Management. Prior to Sovereign Asset Management, he was a portfolio manager at
Geewax, Terker & Company. Mr. Schofield holds the Chartered Financial Analyst
designation and is a member of the CFA (Chartered Financial Analysts) Institute
and the CFA Society of Philadelphia. Mr. Schofield earned a Bachelor's degree in
History from the University of Pennsylvania.
The investment team for the First Trust Enhanced Equity Income Fund consists of
two portfolio managers with an average of 25 years of investment experience. All
team members conduct fundamental research and meet with company management.
Purchase and sale decisions are made by the portfolio managers. The day-to-day
work and the management of the Fund is divided evenly among the portfolio
managers.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
INFORMATION PROVIDED AS OF DECEMBER 31, 2016
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
# of Accounts Total Assets
-------------- -------------
Managed for for which
------------ ----------
Total # of which Advisory Advisory Fee
----------- --------------- -------------
Name of Portfolio Manager or Accounts Total Fee is Based on is Based on
----------------------------- --------- ------ ---------------- ------------
Team Member Type of Accounts* Managed Assets Performance Performance
----------- ----------------- ------- ------ ----------- -----------
1. Douglas W. Kugler Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 1 $700,000 0 $0
Vehicles:
Other Accounts: 14 $349.1Mil 0 $0
2. Peter M. Schofield Registered Investment 1 $40.5 Mil 0 $0
Companies:
Other Pooled Investment 1 $600,000 0 $0
Vehicles:
Other Accounts: 14 $349.1 Mil 0 $0
POTENTIAL CONFLICTS OF INTERESTS
The portfolio managers manage other accounts for Chartwell including
institutional portfolios of similar investment styles. None of these portfolio
managers manage any hedge funds nor any accounts with performance-based fees.
When registered funds and investment accounts are managed side-by-side, firm
personnel must strictly follow the policies and procedures outlined in our Trade
Allocation Policy to ensure that accounts are treated in a fair and equitable
manner, and that no client or account is favored over another. When registered
funds and investment accounts are trading under the same investment product, and
thus trading the same securities, shares are allocated on a pro-rata basis based
on market value, and all portfolios obtain the same average price.
On a monthly basis, Jon Caffey, a member of Chartwell's Compliance Group,
oversees the performance calculation process handled in Operations, and
completes a spreadsheet of monthly portfolio returns by client. Caffey provides
this spreadsheet to the CEO, CCO and various investment personnel for their
review. Any performance dispersion noted by anyone on the distribution list is
investigated by Caffey by reviewing the underlying transactional detail,
holdings & security weightings by portfolio. This monthly process ensures that
all portfolios that are managed under the same investment product are treated
fairly, and traded in accordance with firm policy.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF DECEMBER 31, 2016
The compensation paid to a Chartwell portfolio manager and analyst consists of
base salary, annual bonus, ownership distribution, and an annual profit-sharing
contribution to the firm's retirement plan.
A portfolio manager's and analyst's base salary is determined by Chartwell's
Compensation Committee and is reviewed at least annually. A portfolio manager's
and analyst's experience, historical performance, and role in firm or product
team management are the primary considerations in determining the base salary.
Industry benchmarking is utilized by the Compensation Committee on an annual
basis.
Chartwell also provides a profit sharing and 401(k) plan for all employees. The
annual profit sharing contribution and/or matching contribution from Chartwell
is discretionary and based solely on the profitability of the firm.
Annual bonuses are determined by the Compensation Committee based on a number of
factors. The primary factor is a performance-based compensation schedule that is
applied to all accounts managed by a portfolio manager within a particular
investment product, and is not specific to any one account. The bonus is
calibrated based on the gross composite performance of such accounts versus the
appropriate benchmark and peer group rankings. Portfolio construction, sector
and security weighting, and performance are reviewed by the Compliance Committee
and Compensation Committee to prevent a manager from taking undue risks.
Additional factors used to determine the annual bonus include the portfolio
manager's contribution as an analyst, product team management, and contribution
to the strategic planning and development of the investment group as well as the
firm. For employee retention purposes, if an individual employee's bonus exceeds
$50,000 for a given year, an amount equal to 25% of the bonus is deferred and
paid 3 years after the initial pay date.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF DECEMBER 31, 2016:
Name of Portfolio Manager or Dollar Range of Fund Shares
Team Member Beneficially Owned
Douglas W. Kugler $50,001-100,000
Peter M. Schofield $0
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
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 Enhanced Equity Income Fund
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: February 22, 2017
-------------------
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 M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: February 22, 2017
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: February 22, 2017
-------------------
* Print the name and title of each signing officer under his or her signature.