U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 2
[ ] Post-Effective Amendment No. _
and
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 2
First Trust/Aberdeen Global Opportunity Income Fund
Exact Name of Registrant as Specified in Declaration of Trust
1001 Warrenville Road, Suite 300, Lisle, Illinois 60532
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(630) 241-4141
Registrant's Telephone Number, including Area Code
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Eric F. Fess, Esq. Leonard B. Mackey, Jr., Esq. Chapman and Cutler LLP Clifford Chance US LLP 111 West Monroe Street 31 West 52nd Street Chicago, Illinois 60603 New York, New York 10019 |
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement
If any of the securities being registered on this form are offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box)
[ ] when declared effective pursuant to section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
---------------- ------------ ---------------- ---------------- ---------------
Title of Proposed Proposed
Securities Amount Maximum Maximum Amount of
Being Being Offering Price Aggregate Registration
Registered Registered Per Unit Offering Price Fee
---------------- ------------ ---------------- ---------------- ---------------
Common Shares, 18,750,000 $20.00 $375,000,000(1) $47,512.50(2)
$0.01 par value
---------------- ------------ ---------------- ---------------- ---------------
|
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $2.53 of which has been previously paid.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such dates as the Commission, acting pursuant to said Section 8(a), may determine.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 23, 2004
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY
INCOME FUND
COMMON SHARES
$20.00 PER SHARE
The Fund. First Trust/Aberdeen Global Opportunity Income Fund (the "Fund") is a newly organized diversified, closed-end management investment company.
Investment Objectives. The Fund's primary investment objective is to seek a high level of current income. As a secondary objective, the Fund will seek capital appreciation. The Fund will pursue these objectives by investing in the world bond markets through a diversified portfolio of investment grade and below-investment grade government and corporate debt securities.
The Fund may invest in both investment grade and non-investment grade debt issues. Non-investment grade debt issues are commonly referred to as "high yield" or "junk" bonds and are considered speculative with respect to the issuer's capacity to pay interest and repay principal. Investments in government debt may also include bonds issued by countries considered to be emerging markets. There can be no assurance that the Fund's investment objectives will be achieved.
No Prior History. BECAUSE THE FUND IS NEWLY ORGANIZED, ITS SHARES HAVE NO HISTORY OF PUBLIC TRADING. SHARES OF CLOSED-END INVESTMENT COMPANIES FREQUENTLY TRADE AT A DISCOUNT FROM THEIR NET ASSET VALUE. THIS RISK MAY BE GREATER FOR INVESTORS EXPECTING TO SELL THEIR SHARES IN A RELATIVELY SHORT PERIOD AFTER COMPLETION OF THE PUBLIC OFFERING. The Fund's common shares have been approved for listing on the New York Stock Exchange, subject to notice of issuance, under the symbol "FAM."
Investment Adviser and Sub-Adviser. First Trust Advisors L.P. ("First Trust Advisors" or the "Adviser") will be the Fund's investment adviser and will be responsible for selecting and supervising the Sub-Adviser (as defined below), the ongoing monitoring of the Fund's investment portfolio, managing the Fund's business affairs and providing certain clerical and bookkeeping and other administrative services. The Adviser, in consultation with the Sub-Adviser, is also responsible for determining the Fund's overall investment strategy and overseeing its implementation. Aberdeen Asset Management Inc. ("Aberdeen" or the "Sub-Adviser") will be the Fund's sub-adviser.
(continued on the following page)
INVESTING IN THE FUND'S COMMON SHARES INVOLVES CERTAIN RISKS THAT ARE
DESCRIBED IN THE "RISKS" SECTION BEGINNING ON PAGE 22 OF THIS PROSPECTUS.
PER SHARE TOTAL (1)
--------- -----
Public offering price $20.00 $
Sales load $.90 $
Estimated offering costs (2) (3) $.04 $
Proceeds, after expenses, to the Fund $19.06 $
(notes on following page)
|
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The common shares will be ready for delivery on or about , 2004.
MERRILL LYNCH & CO. A.G. EDWARDS WACHOVIA SECURITIES ADVEST, INC. ROBERT W. BAIRD & CO. FERRIS, BAKER WATTS FIXED INCOME SECURITIES, L.P. RBC CAPITAL MARKETS INCORPORATED SUNTRUST ROBINSON HUMPHREY WEDBUSH MORGAN SECURITIES INC. WELLS FARGO SECURITIES, LLC |
The date of this prospectus is , 2004.
Front Cover
(continued from previous page)
First Trust Advisors serves as investment adviser or portfolio supervisor to investment portfolios with approximately $14.0 billion in assets which it managed or supervised as of September 30, 2004. Aberdeen is a wholly owned subsidiary of Aberdeen Asset Management PLC ("Aberdeen PLC") which is the parent company of an asset management group managing approximately $39.99 billion of assets, including $7.96 billion in global fixed-income securities, as of September 30, 2004, for a range of pension funds, financial institutions, investment trusts, unit trusts, offshore funds, charities and private clients. See "Management of the Fund" in this prospectus and "Investment Adviser" and "Sub-Adviser" in the Fund's Statement of Additional Information (the "SAI").
Leverage. Within three months after the completion of the offering of common shares described in this prospectus, the Fund intends, subject to then favorable market conditions, to utilize leverage through the issuance of preferred shares of beneficial interest ("Preferred Shares"), commercial paper or notes and/or borrowings in an aggregate amount up to 33-1/3% of the Fund's Managed Assets after such issuance and/or borrowing. "Managed Assets" means the gross asset value of the Fund (including assets attributable to the Fund's Preferred Shares, if any, and the principal amount of borrowings) minus the sum of the Fund's accrued and unpaid dividends on any outstanding Preferred Shares and accrued liabilities (other than the principal amount of any borrowings incurred or of commercial paper or notes issued by the Fund). For purposes of determining Managed Assets, the liquidation preference of the Preferred Shares is not treated as a liability. The issuance of these instruments, which would be senior to the common shares, will result in the financial leveraging of the common shares. Whether to offer Preferred Shares or engage in another form of leveraging, and, if offered, the terms of such shares or leveraging and the timing and other terms of their offering or arrangement will be determined by the Fund's board of trustees ("Board of Trustees"). Through leveraging, the Fund will seek to obtain a higher return for the holders of common shares than if the Fund did not use leverage. Leverage is a speculative technique and investors should note that there are special risks and costs associated with the leveraging of the common shares. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed. See "Borrowings and Preferred Shares--Effects of Leverage," "Risks--Leverage Risk" and "Description of Shares."
You should read this prospectus, which contains important information about the Fund, before deciding whether to invest in the common shares, and retain it for future reference. This prospectus sets forth concisely the information about the Fund that a prospective investor ought to know before investing. The SAI dated , 2004, containing additional information about the Fund, has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this prospectus. You may request a free copy of the SAI, the table of contents of which is on page 41 of this prospectus, by calling (800) 988-5891 or by writing to the Fund, or obtain a copy (and other information regarding the Fund) from the Securities and Exchange Commission's web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation (the "FDIC"), the Federal Reserve Board or any other government agency.
(notes from previous page)
(1) The Fund has granted the underwriters an option to purchase up to additional common shares at the public offering price, less the sales load, within 45 days of the date of this prospectus solely to cover overallotments, if any. If such option is exercised in full, the total price to the public, sales load, estimated offering costs and proceeds, after expenses, to the Fund will be $ , $ , $ and $ , respectively. See "Underwriting."
(2) Total expenses of the offering of the common shares of the Fund paid by
the Fund (other than sales load, but including the partial
reimbursement of certain underwriter expenses described below) are
estimated to be $ , which represents .2% (or $.04 per common share) of
the Fund's offering price. The Fund's investment adviser, First Trust
Advisors L.P., has agreed to pay (i) all organizational expenses and
(ii) all offering costs of the Fund (other than sales load, but
including the partial reimbursement of expenses described below) that
exceed .2% (or $.04 per common share) of the Fund's offering price. The
Fund's sub-adviser, Aberdeen Asset Management Inc., has agreed to
reimburse the Fund's investment adviser for one-half of such
organizational expenses and offering costs of the Fund that exceed .2%
(or $.04 per common share) of the Fund's offering price.
(3) The Fund has agreed to pay the underwriters $.00667 per common share as a partial reimbursement of expenses incurred in connection with the offering and to pay certain fees to counsel to the underwriters. The Fund's investment adviser (not the Fund) will pay Merrill Lynch, Pierce, Fenner & Smith Incorporated additional compensation and will pay A.G. Edwards & Sons, Inc. an incentive fee. The total amount of the foregoing payments, together with any reimbursement to First Trust Portfolios, L.P. for distribution services, will not exceed 4.5% (or $.90 per common share) of the total price to the public of the common shares sold in this offering, but is in addition to the 4.5% (or $.90 per common share) sales load described in the table. See "Underwriting."
TABLE OF CONTENTS
Prospectus Summary ..................................................... 4 Summary of Fund Expenses ............................................... 15 The Fund ............................................................... 16 Use of Proceeds ........................................................ 16 The Fund's Investments ................................................. 16 Borrowings and Preferred Shares ........................................ 20 Risks .................................................................. 22 Management of the Fund ................................................. 29 Net Asset Value ........................................................ 31 Distributions .......................................................... 31 Dividend Reinvestment Plan ............................................. 32 Description of Shares .................................................. 32 Certain Provisions in the Declaration of Trust ......................... 34 Structure of the Fund; Common Share Repurchases and Conversion to Open-End Fund ......................................... 35 Tax Matters ............................................................ 36 Underwriting ........................................................... 38 Administrator, Custodian and Transfer Agent ............................ 40 Legal Opinions ......................................................... 40 |
Table of Contents for the Statement of Additional Information .......... 41
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR THE UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER ONLY.
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the information that you should consider before investing in the Fund's common shares. You should review the more detailed information contained in this prospectus and in the SAI, especially the information set forth in this prospectus under the heading "Risks."
THE FUND......................... First Trust/Aberdeen Global Opportunity
Income Fund (the "Fund") is a newly
organized, diversified, closed-end
management investment company. See "The
Fund."
|
THE OFFERING..................... The Fund is offering common shares of beneficial interest at $20.00 per share through a group of underwriters (the "Underwriters") led by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). The common shares of beneficial interest are called "Common Shares" in this prospectus. You must purchase at least 100 Common Shares in this offering. The Fund has given the Underwriters an option to purchase up to additional Common Shares to cover orders in excess of Common Shares. The Adviser has agreed to pay (i) all organizational expenses and (ii) all offering costs of the Fund (other than sales load, but including a partial reimbursement of certain underwriter expenses) that exceed .2% (or $.04 per Common Share) of the Fund's offering price.
The Sub-Adviser has agreed to reimburse the
Adviser for one-half of such organizational
expenses and offering costs of the Fund that
exceed .2% (or $.04 per Common Share) of the
Fund's offering price.
LISTING.......................... The Fund's Common Shares have been approved
for listing on the New York Stock Exchange,
subject to notice of issuance, under the
symbol "FAM."
|
INVESTMENT OBJECTIVES
AND POLICIES..................... The Fund's primary investment objective is
to seek a high level of current income. As a
secondary objective, the Fund will seek
capital appreciation. The Fund will pursue
these objectives by investing in the world
bond markets through a diversified portfolio
of investment grade and below-investment
grade government and corporate debt
securities. There can be no assurance that
the Fund's investment objectives will be
achieved.
The Fund may invest in both investment grade
and non-investment grade debt issues.
Non-investment grade debt issues are
commonly referred to as "high yield" or
"junk" bonds and are considered speculative
with respect to the issuer's capacity to pay
interest and repay principal. Investments in
government debt may also include bonds
issued by countries considered to be
emerging markets.
Under normal market conditions, the Fund
will invest substantially all of its Managed
Assets (as defined below) in a diversified
portfolio of fixed-income securities,
including government and corporate bonds, of
U.S. and non-U.S. issuers. Under normal
market conditions, the Fund expects to
invest in securities of issuers in at least
three countries (in addition to the United
States), however, securities of issuers in a
single country will not exceed 30% of the
Fund's Managed Assets. Percentage
limitations described in this prospectus are
as of the time of investment by the Fund and
may be exceeded on a going-forward basis as
a result of market value fluctuations of the
Fund's portfolio.
The Sub-Adviser will select securities for
the portfolio employing the investment
strategies established by Aberdeen's Global
Investment Grade and Global Emerging Market
Teams. Aberdeen's Investment Team
(consisting of the Global Investment Grade
and Global Emerging Market Teams) will
regularly monitor and make allocation
decisions among issuers of various regions,
countries and credit qualities in order to
achieve the Fund's investment objectives of
a high level of current income and capital
appreciation measured in U.S. dollars. The
Fund has no stated maturity strategy.
Rather, the Sub-Advisor will invest in
securities of various maturities which it
believes offer income and total return
opportunities to the Fund. The Sub-Adviser
will select government and corporate bonds
from a universe of over 65 countries,
focusing on high real yields and improving
credit conditions that offer income and
total return opportunities. Allocation
between investment grade and below-
investment grade securities will vary
according to relative value and opportunity
identified by Aberdeen's Investment Team,
with input from Aberdeen's Fixed Income
Strategy Group. The Fund's portfolio
positions will be undertaken according to
Page 4
the quality of their risk-adjusted
potential return. Aberdeen's Investment Team
will have daily responsibility for the
management of the portfolio and for the
implementation of the investment process,
monitored through weekly investment
committee meetings.
The Fund will invest at least 60% of its
Managed Assets in securities issued by
government, government-related and
supranational issuers ("government debt").
At least 25% of the Fund's Managed Assets
will be invested in U.S. dollar-denominated
securities or non-U.S. dollar-denominated
securities that have been fully hedged into
U.S. dollars. Government debt includes: debt
securities issued or guaranteed by
governments, governmental agencies or
instrumentalities and political
subdivisions; debt securities issued by
government owned, controlled or sponsored
entities; interests in entities organized
and operated for the purpose of
restructuring the investment characteristics
of instruments issued by the above-noted
issuers; or debt securities issued by
supranational entities such as the World
Bank or the European Union.
The Fund may invest up to 40% of its Managed
Assets in corporate debt obligations.
Corporate bonds generally are used by
corporations to borrow money from investors.
The issuer pays the investor a fixed or
variable rate of interest and normally must
repay the amount borrowed on or before
maturity. Certain corporate bonds are
"perpetual" in that they have no maturity
date. The Fund may invest in non-U.S.
corporate bonds which involve unique risks
compared to investing in the securities of
U.S. issuers. See "Risks--Non-U.S.
Securities Risk."
The Fund may invest up to 60% of its Managed
Assets in securities rated below "Baa3" by
Moody's Investors Service, Inc. ("Moody's"),
below "BBB-" by Standard & Poor's
Corporation, a division of The McGraw-Hill
Companies ("S&P"), or comparably rated by
another nationally recognized statistical
rating organization ("NRSRO") or, if
unrated, determined by the Sub-Adviser to be
of comparable credit quality. The Fund may
invest in high yield securities of any
rating. However, the Fund will not invest
more than 15% of its Managed Assets in
securities rated below "B-" by Moody's
and/or S&P. Accordingly, the Fund may invest
a significant portion of its Managed Assets
in securities that are rated non-investment
grade. Securities of non-investment grade
quality, typically referred to as "high
yield" or "junk" bonds, are regarded as
having predominately speculative
characteristics with respect to the issuer's
capacity to pay interest and repay
principal. See "Risks--Non-Investment Grade
Securities Risk."
The Fund may invest up to 15% of its Managed
Assets in asset-backed securities.
Asset-backed securities are securities that
represent a participation in, or are secured
by and payable from, a stream of payments
generated by particular assets, most often a
pool or pools of similar assets (e.g., trade
receivables). The credit quality of these
securities depends primarily upon the
quality of the underlying assets and the
level of credit support and/or enhancement
provided. The underlying assets (e.g.,
loans) are subject to prepayments which
shorten the securities' weighted average
maturity and may lower their return. Losses
or delays in payment may result if the
credit support or enhancement is exhausted
because the required payments of principal
and interest on the underlying assets are
not made. The value of these securities may
also change because of changes in the
market's perception of the creditworthiness
of the servicing agent for the pool, the
originator of the pool or the financial
institution or fund providing the credit
support or enhancement.
The Fund may invest up to 35% of its Managed
Assets in credit linked notes ("Credit
Linked Notes"), provided such securities are
issued by an institution with at least an
"A" credit rating by Moody's and/or S&P.
Credit Linked Notes are structured
securities typically issued by banks whose
principal and interest payments are
contingent on the performance of a specified
borrower company or companies (the
"Reference Issuer"). Credit Linked Notes are
created by embedding a credit default swap
in a funded asset to form an investment
whose credit risk and cash flow
characteristics resemble those of a bond or
loan. These notes pay an enhanced coupon to
the investor for taking on the added credit
risk of the Reference Issuer.
Page 5
The Fund may invest up to 10% of its Managed
Assets in securities that, at the time of
investment, are illiquid (determined using
the Securities and Exchange Commission's
standard applicable to investment companies,
i.e., securities that cannot be disposed of
within seven days in the ordinary course of
business at approximately the value at which
the Fund has valued the securities). The
Fund may also invest, without limit, in
securities that are unregistered (but are
eligible for purchase and sale by certain
qualified institutional buyers) or are held
by control persons of the issuer and
securities that are subject to contractual
restrictions on their resale ("restricted
securities"). However, restricted securities
determined by the Sub-Adviser, under the
supervision of the Board of Trustees, to be
illiquid are subject to the limitations set
forth above.
The Fund's investment objectives are
considered fundamental and may not be
changed without shareholder approval. The
remainder of the Fund's investment policies
(other than its investment restrictions
which are described in the SAI), including
its investment strategy, are considered
non-fundamental and may be changed by the
Board of Trustees without shareholder
approval. The Fund will provide investors
with at least 60 days' prior notice of any
change in the Fund's investment strategy.
There can be no assurance that the Fund's
investment objectives will be achieved. See
"The Fund's Investments" and "Risks" in this
prospectus and "Investment Policies and
Techniques" and "Additional Information
About the Fund's Investments and Investment
Risks" in the SAI.
INVESTMENT ADVISER
AND SUB-ADVISER.................. First Trust Advisors L.P. will be the Fund's
investment adviser and will be responsible
for supervising the Fund's Sub-Adviser,
monitoring the Fund's investment portfolio,
managing the Fund's business affairs and
providing certain clerical and bookkeeping
and other administrative services. The
Adviser, in consultation with the
Sub-Adviser, is also responsible for
determining the Fund's overall investment
strategy and overseeing its implementation.
Aberdeen Asset Management Inc. will be the
Fund's Sub-Adviser.
First Trust Advisors, a registered
investment adviser, is an Illinois limited
partnership formed in 1991. It serves as
investment adviser or portfolio supervisor
to investment portfolios with approximately
$14.0 billion in assets which it managed or
supervised as of September 30, 2004. See the
SAI under "Adviser."
Aberdeen is a registered investment adviser
and wholly owned subsidiary of Aberdeen PLC.
Aberdeen PLC is the parent company of an
asset management group managing
approximately $37.4 billion in assets,
including $7.4 billion in global
fixed-income securities, as of June 30,
2004, for a range of pension funds,
financial institutions, investment trusts,
unit trusts, offshore funds, charities and
private clients. In rendering investment
advisory services, the Sub-Adviser may use
the resources of wholly owned investment
adviser subsidiaries of Aberdeen PLC,
pursuant to a memorandum of understanding
with advisory affiliates of the Sub-Adviser.
See the SAI under "Sub-Adviser."
STRATEGIC TRANSACTIONS........... The Fund may, but is not required to, use
various strategic transactions (1) to seek
to reduce interest rate risks arising from
any use of financial leverage, (2) to
facilitate portfolio management and (3) to
mitigate risks, including interest rate,
currency and credit risks. The Fund may
purchase and sell derivative investments
such as exchange-listed and over-the-
counter put and call options on currencies,
securities, fixed-income, currency and
interest rate indices and other financial
instruments, purchase and sell financial
futures contracts and options thereon, and
enter into various interest rate and
currency transactions such as swaps, caps,
floors or collars or credit transactions and
credit derivative instruments. The Fund also
may purchase derivative instruments that
combine features of these instruments.
Collectively, all of the above are referred
to as "Strategic Transactions." The Fund
generally seeks to use these instruments and
transactions as a portfolio management or
hedging technique to protect against
possible adverse changes in the market value
of securities held in or to be purchased for
the Fund's portfolio, protect the value of
the Fund's portfolio, facilitate the sale of
certain securities for investment purposes,
manage the effective interest rate and
Page 6
currency exposure of the Fund, or establish
positions in the derivatives markets as a
substitute for purchasing or selling
particular securities.
BORROWINGS AND
PREFERRED SHARES................. The Fund intends to use leverage through the
issuance of Preferred Shares, commercial
paper or notes and/or borrowing (each a
"Leverage Instrument" and collectively, the
"Leverage Instruments") in an aggregate
amount up to 33-1/3% of the Fund's Managed
Assets after such issuance and/or borrowing.
The Fund may borrow from banks and other
financial institutions. Leverage creates a
greater risk of loss, as well as potential
for more gain, for the Common Shares than if
leverage is not used. The Fund's leveraging
strategy may not be successful. See
"Risks--Leverage Risk." Subject to market
conditions, approximately three months after
completion of this offering, the Fund
intends to establish a leverage program.
Leverage Instruments will have seniority
over the Common Shares. The use of Leverage
Instruments will leverage your investment in
the Common Shares. If the Fund uses Leverage
Instruments, associated costs will be borne
immediately by holders of Common Shares
("Common Shareholders") and result in a
reduction of the net asset value ("NAV") of
the Common Shares.
Preferred Shares will pay dividends based on
short-term rates, which will be reset
frequently. Borrowings may be at a fixed or
floating rate and generally will be based
upon short-term rates. So long as the rate
of return, net of applicable Fund expenses,
on the Fund's portfolio investments
purchased with leverage exceeds the then
current interest rate or dividend rate on
the Leverage Instruments, the Fund will
generate more return or income than will be
needed to pay such dividends or interest
payments. In this event, the excess will be
available to pay higher dividends to Common
Shareholders. When leverage is employed, the
NAV and market prices of the Common Shares
and the yield to Common Shareholders will be
more volatile.
DISTRIBUTIONS.................... The Fund's present distribution policy,
which may be changed at any time by the
Fund's Board of Trustees, is to distribute
monthly all or a portion of its net
investment income to Common Shareholders
(after the payment of interest and dividends
in connection with leverage). In addition,
the Fund intends to distribute any net
long-term capital gains to Common
Shareholders as long-term capital gain
dividends at least annually. Unless an
election is made to receive dividends in
cash, Common Shareholders will automatically
have all dividends and distributions
reinvested in Common Shares through the
Fund's Dividend Reinvestment Plan. See
"Dividend Reinvestment Plan."
If the Fund realizes a long-term capital
gain, it will be required to allocate such
gain between the Common Shares and the
Preferred Shares, if any, issued by the Fund
in proportion to the total dividends paid to
each class of shares for the year in which
the income is realized. See "Distributions"
and "Borrowings and Preferred Shares."
|
ADMINISTRATOR,
CUSTODIAN AND
TRANSFER AGENT................... The Fund has retained PFPC Trust Company as
custodian, and PFPC Inc. as administrator,
fund accountant and transfer agent for the
Fund. The Adviser and the Board of Trustees
will be responsible for monitoring the
activities of the custodian, administrator,
fund accountant and transfer agent. See
"Administrator, Custodian and Transfer
Agent."
CLOSED-END STRUCTURE............. Closed-end funds differ from open-end
management investment companies (commonly
referred to as mutual funds) in that
closed-end funds generally list their shares
for trading on a securities exchange and do
not redeem their shares at the option of the
shareholder. By comparison, mutual funds
issue securities redeemable at net asset
value at the option of the shareholder and
typically engage in a continuous offering of
their shares. Mutual funds are subject to
continuous asset in-flows and out-flows that
can complicate portfolio management, whereas
closed-end funds generally can stay more
fully invested in securities consistent with
the closed-end fund's investment objective
and policies. In addition, in comparison to
open-end funds, closed-end funds have
greater flexibility in their ability to make
certain types of investments, including
investments in illiquid securities.
Page 7
Shares of closed-end funds listed for
trading on a securities exchange frequently
trade at a discount from net asset value.
The market price of such shares may be
affected by net asset value, dividend or
distribution levels (which are dependent, in
part, on expenses), supply of and demand for
the shares, stability of dividends or
distributions, trading volume of the shares,
general market and economic conditions and
other factors beyond the control of a
closed-end fund. The foregoing factors may
result in the market price of the Common
Shares being greater than, less than or
equal to NAV.
The Board of Trustees has reviewed the
structure of the Fund in light of its
investment objectives and policies and
believes that the closed-end fund structure
is appropriate. As described in this
prospectus, however, the Board of Trustees
may review periodically the trading range
and activity of the Common Shares with
respect to its NAV and the Board of Trustees
may take certain actions to seek to reduce
or eliminate any such discount. Such actions
may include open market repurchases or
tender offers for the Common Shares or the
possible conversion of the Fund to an
open-end fund. There can be no assurance
that the Board of Trustees will decide to
undertake any of these actions or that, if
undertaken, such actions would result in the
Common Shares trading at a price equal to or
close to NAV per Common Share. Investors
should assume that it is highly unlikely
that the Board of Trustees would vote to
convert the Fund to an open-end management
investment company. See "Structure of the
Fund; Common Share Repurchases and
Conversion to Open-End Fund."
TAX MATTERS...................... Distributions with respect to the Common
Shares will constitute dividends to the
extent of the Fund's current and accumulated
earnings and profits, as calculated for U.S.
federal income tax purposes. Such dividends
generally will be taxable as ordinary income
to Common Shareholders. Distributions of net
capital gain that are designated by the Fund
as capital gain dividends will be treated as
long-term capital gains in the hands of
Common Shareholders receiving such
distributions. In addition, distributions
generally will not constitute "qualified
dividends" for federal income tax purposes
and thus will not be eligible for the new
lower tax rates on qualified dividends. See
"Tax Matters."
SPECIAL RISK
CONSIDERATIONS................... Risk is inherent in all investing. The
following discussion summarizes the
principal risks that you should consider
before deciding whether to invest in the
Fund. For additional information about the
risks associated with investing in the Fund,
|
see "Risks."
No Operating History. The Fund is a newly organized, diversified, closed-end management investment company with no operating history.
Investment and Market Risk. An investment in Common Shares is subject to investment risk, including the possible loss of the entire principal amount that you invest. Your investment in Common Shares represents an indirect investment in the securities owned by the Fund. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The value of the securities in which the Fund invests will affect the value of the Common Shares. Your Common Shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions.
Management Risk. The Fund is subject to management risk because it is an actively managed portfolio. The Adviser and the Sub-Adviser will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
Non-Investment Grade Securities Risk. The Fund may invest up to 60% of its Managed Assets in non-investment grade securities.
Non-investment grade securities are rated
below "Baa3" by Moody's, below "BBB-" by
S&P, or comparably rated by another NRSRO
or, if unrated, determined by the
Sub-Adviser to be of comparable credit
quality. Non-investment grade debt
instruments are commonly referred to as
"high yield" or "junk" bonds and are
considered speculative with respect to the
issuer's capacity to pay interest and
principal and are susceptible to default or
decline in market value due to adverse
economic and business developments. The
market values for high yield securities tend
to be very volatile, and these securities
are less liquid than investment grade debt
securities. For these reasons, your
investment in the Fund is subject to the
following specific risks:
o increased price sensitivity to changing interest rates and to a deteriorating economic environment;
o greater risk of loss due to default or declining credit quality;
o adverse company specific events are more likely to render the issuer unable to make interest and/or principal payments; and
o a negative perception of the high yield market may depress the price and liquidity of high yield securities.
Adverse changes in economic conditions are more likely to lead to a weakened capacity of a high yield issuer to make principal payments and interest payments than an investment grade issuer. An economic downturn could severely affect the ability of highly leveraged issuers to service their debt obligations or to repay their obligations upon maturity.
The secondary market for high yield
securities may not be as liquid as the
secondary market for more highly rated
securities, a factor which may have an
adverse effect on the Fund's ability to
dispose of a particular security. There are
fewer dealers in the market for high yield
securities than for investment grade
obligations. The prices quoted by different
dealers may vary significantly and the
spread between the bid and asked price is
generally much larger than for higher
quality instruments. Under adverse market or
economic conditions, the secondary market
for high yield securities could contract
further, independent of any specific adverse
changes in the condition of a particular
issuer and these securities may become
illiquid. As a result, the Fund could find
it more difficult to sell these securities
or may be able to sell the securities only
at prices lower than if such securities were
widely traded. Prices realized upon the sale
of such lower rated or unrated securities,
under these circumstances, may be less than
the prices used in calculating the Fund's
NAV.
Fixed-Income Securities Risk. In addition to
the risks discussed above, debt securities,
including high yield securities, are subject
to certain risks, including:
o Issuer Risk. The value of fixed-income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer's goods and services.
o Reinvestment Risk. Reinvestment risk is the risk that income from the Fund's portfolio will decline if the Fund invests the proceeds from matured, traded or called bonds at market interest rates that are below the Fund portfolio's current earnings rate. A decline in income could affect the Common Shares' market price or their overall returns.
o Prepayment Risk. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing the Fund to reinvest in lower yielding securities. This is known as call or prepayment risk. Debt securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem an obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer.
o Credit Risk. Credit risk is the risk that a security in the Fund's portfolio will decline in price or the issuer fails to make interest payments when due because the issuer of the security experiences a decline in its financial status.
Interest Rate Risk. Interest rate risk is the risk that fixed-income securities will decline in value because of changes in market interest rates. When market interest rates rise, the market value of such securities generally will fall. Because the Fund will invest in securities that pay a
fixed rate of return, the NAV and market
price of the Common Shares will tend to
decline if the market interest rates
applicable to such investments were to rise.
During periods of rising interest rates, the
average life of certain types of securities
may be extended because of slower than
expected prepayments pursuant to call
provisions. This may lock in a below market
yield, increase the security's duration and
reduce the value of the security.
Investments in debt securities with
long-term maturities may experience
significant price declines if long-term
interest rates increase. Market interest
rates in the United States and in certain
other countries in which the Fund may invest
currently are near historically low levels.
Non-U.S. Securities Risk. The Fund intends
to invest a substantial portion of its
assets in securities of non-U.S. issuers.
Investing in securities of non-U.S. issuers,
which are generally denominated in non-U.S.
currencies, may involve certain risks not
typically associated with investing in
securities of U.S. issuers. These risks
include: (i) there may be less publicly
available information about non-U.S. issuers
or markets due to less rigorous disclosure
or accounting standards or regulatory
practices; (ii) non-U.S. markets may be
smaller, less liquid and more volatile than
the U.S. market; (iii) potential adverse
effects of fluctuations in currency exchange
rates or controls on the value of the Fund's
investments; (iv) the economies of non-U.S.
countries may grow at slower rates than
expected or may experience a downturn or
recession; (v) the impact of economic,
political, social or diplomatic events; (vi)
certain non-U.S. countries may impose
restrictions on the ability of non-U.S.
issuers to make payments of principal and
interest to investors located in the United
States due to blockage of non-U.S. currency
exchanges or otherwise; and (vii)
withholding and other non-U.S. taxes may
decrease the Fund's return. These risks may
be more pronounced to the extent that the
Fund invests a significant amount of its
assets in companies located in one region
and to the extent that the Fund invests in
securities of issuers in emerging markets.
Government Securities Risk. The ability of a
government issuer, especially in an emerging
market country, to make timely and complete
payments on its debt obligations will be
strongly influenced by the government
issuer's balance of payments, including
export performance, its access to
international credits and investments,
fluctuations of interest rates and the
extent of its foreign reserves. A country
whose exports are concentrated in a few
commodities or whose economy depends on
certain strategic imports could be
vulnerable to fluctuations in international
prices of these commodities or imports. To
the extent that a country receives payment
for its exports in currencies other than
U.S. dollars, its ability to make debt
payments denominated in U.S. dollars could
be adversely affected. If a government
issuer cannot generate sufficient earnings
from foreign trade to service its external
debt, it may need to depend on continuing
loans and aid from foreign governments,
commercial banks, and multinational
organizations. There are no bankruptcy
proceedings similar to those in the United
States by which defaulted government debt
may be collected. Additional factors that
may influence a government issuer's ability
or willingness to service debt include, but
are not limited to, a country's cash flow
situation, the availability of sufficient
foreign exchange on the date a payment is
due, the relative size of its debt service
burden to the economy as a whole and the
issuer's policy towards the International
Monetary Fund, the International Bank for
Reconstruction and Development and other
international agencies to which a government
debtor may be subject.
Non-U.S. Government Securities Risk.
Economies and social and political climates
in individual countries may differ
unfavorably from the United States. Non-U.S.
economies may have less favorable rates of
growth of gross domestic product, rates of
inflation, currency valuation, capital
reinvestment, resource self-sufficiency and
balance of payments positions. Many
countries have experienced extremely high
rates of inflation for many years.
Unanticipated economic, political and social
developments may also affect the values of
the Fund's investments and limit the
availability of additional investments in
such countries. Furthermore, such
developments may significantly disrupt the
financial markets or interfere with the
Fund's ability to enforce its rights against
non-U.S. government issuers.
A substantial portion of the Fund's Managed
Assets are expected to be invested in debt
instruments of issuers located in countries
considered to be emerging markets, and
investments in such securities are
considered speculative. Heightened risks of
investing in emerging markets government
debt include: smaller market capitalization
of securities markets, which may suffer
periods of relative illiquidity; significant
price volatility; restrictions on foreign
investment; and possible repatriation of
investment income and capital. Furthermore,
foreign investors may be required to
register the proceeds of sales and future
economic or political crises could lead to
price controls, forced mergers,
expropriation or confiscatory taxation,
seizure, nationalization or creation of
government monopolies. The currencies of
emerging market countries may experience
significant declines against the U.S.
dollar, and devaluation may occur subsequent
to investments in these currencies by the
Fund. Inflation and rapid fluctuations in
inflation rates have had, and may continue
to have, negative effects on the economies
and securities markets of certain emerging
market countries.
Country Risk. This risk arises as the Fund
may have exposure of up to 30% of its
Managed Assets to issuers in any one
country. The impact on the Fund's NAV of
specific risks relating to investment in
non-U.S. issuers, such as political,
regulatory, interest rate, currency and
inflation, may be magnified due to the
concentration of the Fund's investments in a
particular country.
Currency Risk. The value of securities
denominated or quoted in foreign currencies
may be adversely affected by fluctuations in
the relative currency exchange rates and by
exchange control regulations. The Fund's
investment performance may be negatively
affected by a devaluation of a currency in
which the Fund's investments are denominated
or quoted. Further, the Fund's investment
performance may be significantly affected,
either positively or negatively, by currency
exchange rates because the U.S. dollar value
of securities denominated or quoted in
another currency will increase or decrease
in response to changes in the value of such
currency in relation to the U.S. dollar.
Certain of the Fund's non-U.S.
dollar-denominated securities may be hedged
into U.S. dollars. However, as discussed in
"Risks--Derivatives Risk," hedging may not
alleviate all currency risks.
Market Discount From Net Asset Value. Shares
of closed-end investment companies
frequently trade at a discount from their
net asset value. This characteristic is a
risk separate and distinct from the risk
that the Fund's NAV could decrease as a
result of its investment activities and may
be greater for investors expecting to sell
their Common Shares in a relatively short
period following completion of this
offering. The NAV of the Common Shares will
be reduced immediately following the
offering as a result of the payment of
certain offering costs. Although the value
of the Fund's net assets is generally
considered by market participants in
determining whether to purchase or sell
Common Shares, whether investors will
realize gains or losses upon the sale of the
Common Shares will depend entirely upon
whether the market price of the Common
Shares at the time of sale is above or below
the investor's purchase price for the Common
Shares. Because the market price of the
Common Shares will be determined by factors
such as net asset value, dividend and
distribution levels (which are dependent, in
part, on expenses), supply of and demand for
the Common Shares, stability of dividends or
distributions, trading volume of the Common
Shares, general market and economic
conditions and other factors beyond the
control of the Fund, the Fund cannot predict
whether the Common Shares will trade at,
below or above NAV or at, below or above the
initial public offering price.
Leverage Risk. The Fund may borrow an amount
up to 33-1/3% (or such other percentage as
permitted by law) of its Managed Assets
(including the amount borrowed) less all
liabilities other than borrowings. The Fund
may also issue Preferred Shares in an amount
up to 50% of the Fund's Managed Assets
(including the proceeds from Leverage
Instruments). However, the Fund intends,
under normal circumstances, to utilize
leverage in an amount up to 33-1/3% of the
Fund's Managed Assets. Borrowings and the
issuance of Preferred Shares are referred to
in this prospectus collectively as
"leverage." The Fund may use leverage for
investment purposes, to finance the
repurchase of its Common Shares and to meet
cash requirements. Although the use of
leverage by the Fund may create an
opportunity for increased return for the
Common Shares, it also results in additional
risks and can magnify the effect of any
losses. If the income and gains earned on
the securities and investments purchased
with leverage proceeds are greater than the
cost of the leverage, the Common Shares'
return will be greater than if leverage had
not been used. Conversely, if the income and
gains from the securities and investments
purchased with such proceeds does not cover
the cost of leverage, the return to the
Common Shares will be less than if leverage
had not been used. There is no assurance
that a leveraging strategy will be
successful. Leverage involves risks and
special considerations for Common
Shareholders including:
o the likelihood of greater volatility of NAV and market price of the Common Shares than a comparable portfolio without leverage;
o the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any Preferred Shares that the Fund may pay will reduce the return to the Common Shareholders or will result in fluctuations in the dividends paid on the Common Shares;
o the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the Common Shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the Common Shares; and
o when the Fund uses financial leverage, the investment advisory fee payable to the Adviser (and by the Adviser to the Sub-Adviser) will be higher than if the Fund did not use leverage.
The Sub-Adviser, in its judgment, nevertheless may determine to continue to use leverage if it expects that the benefits to the Fund's shareholders of maintaining the leveraged position will outweigh the current reduced return.
Derivatives Risk. The Fund's Strategic Transactions have risks, including the imperfect correlation between the value of such instruments and the underlying assets of the Fund, the possible default of the other party to the transaction or illiquidity of the derivative investments.
Furthermore, the ability to successfully use
hedging, currency and interest rate
transactions depends on the Sub-Adviser's
ability to predict pertinent market
movements, which cannot be assured. Thus,
the use of derivatives for hedging, currency
and interest rate management purposes may
result in losses greater than if they had
not been used, may require the Fund to sell
or purchase portfolio securities at
inopportune times or for prices other than
current market values, may limit the amount
of appreciation the Fund can realize on an
investment or may cause the Fund to hold a
security that it might otherwise sell.
Additionally, amounts paid by the Fund as
premiums and cash or other assets held in
margin accounts with respect to hedging and
strategic transactions are not otherwise
available to the Fund for investment
purposes. See "Risks--Derivatives Risk."
Credit Linked Notes Risk. The Fund may
invest in Credit Linked Notes. Credit Linked
Notes are securities that are collateralized
by one or more credit default swaps on
designated debt securities that are referred
to as "reference securities." Through the
purchase of a Credit Linked Note, the buyer
assumes the risk of the default or, in some
cases, other declines in credit quality of
the referenced securities. The buyer also
takes on exposure to the issuer of the
Credit Linked Note in the full amount of the
purchase price of the note. The issuer of a
Credit Linked Note normally will have hedged
its risk on the reference securities without
acquiring any additional credit exposure.
The Fund has the right to receive periodic
interest payments from the issuer of the
Credit Linked Note at an agreed upon
interest rate, and, if there has been no
default or, if applicable, other declines in
credit quality, a return of principal at the
maturity date.
Credit Linked Notes are subject to credit
risk of the reference securities underlying
the credit default swaps. If one of the
underlying reference securities defaults or
suffers certain other declines in credit
quality, the Fund may, instead of receiving
repayment of principal in whole or in part,
receive the security that has defaulted.
Credit Linked Notes typically are privately
negotiated transactions between two or more
parties. The Fund bears the risk that the
issuer of the credit linked note will
default or become bankrupt. The Fund bears
the risk of loss of the principal amount it
invested and the periodic interest payments
expected to be received for the duration of
its investment in the credit linked note.
The market for Credit Linked Notes may
suddenly become illiquid. The other parties
to the transaction may be the only investors
with sufficient understanding of the
derivative to be interested in bidding for
it. Changes in liquidity may result in
significant, rapid and unpredictable changes
in the prices for Credit Linked Notes. In
certain cases, a market price for a Credit
Linked Note may not be available.
Portfolio Turnover Risk. The Fund's annual
portfolio turnover rate may vary greatly
from year to year. Although the Fund cannot
accurately predict its annual portfolio
turnover rate, it is not expected to exceed
100% under normal circumstances. However,
portfolio turnover rate is not considered a
limiting factor in the execution of
investment decisions for the Fund. High
portfolio turnover may result in the Fund's
recognition of gains that will be taxable as
ordinary income to the Fund. A high
portfolio turnover may increase the Fund's
current and accumulated earnings and
profits, resulting in a greater portion of
the Fund's distributions being treated as a
dividend to the Fund's Common Shareholders.
In addition, a higher portfolio turnover
rate results in correspondingly greater
brokerage commissions and other
transactional expenses that are borne by the
Fund. See "The Fund's
Investments--Investment Practices--Portfolio
Turnover" and "Tax Matters."
Market Disruption Risk. The terrorist
attacks in the United States on September
11, 2001 had a disruptive effect on the
securities markets. The ongoing U.S.
military and related action in Iraq and
events in the Middle East, as well as the
continuing threat of terrorist attacks,
could have significant adverse effects on
the U.S. economy, the stock market and world
economies and markets generally. The Fund
cannot predict the effects of similar events
in the future on the U.S. and world
economies, the value of the Common Shares or
the NAV of the Fund.
Inflation Risk. Inflation risk is the risk
that the value of assets or income from
investments will be worth less in the future
as inflation decreases the value of money.
As inflation increases, the real value of
the Common Shares and distributions can
decline. In addition, during any periods of
rising inflation, the dividend rates or
borrowing costs associated with the Fund's
use of financial leverage would likely
increase, which would tend to further reduce
returns to Common Shareholders.
Illiquid/Restricted Securities Risk. The
Fund may invest up to 10% of its Managed
Assets in securities that, at the time of
investment, are illiquid (determined using
the Securities and Exchange Commission's
standard applicable to investment companies,
i.e., securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities). The Fund may also invest, without limit, in restricted securities. However, restricted securities determined by the Sub-Adviser to be illiquid are subject to the limitations set forth above. The Sub-Adviser, under the supervision of the Board of Trustees, will determine whether restricted securities are illiquid (that is, not readily marketable) and thus subject to the Fund's limit of investing no more than 10% of its Managed Assets in illiquid securities. Investments in restricted securities could have the effect of increasing the amount of the Fund's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase these securities. Illiquid and restricted securities may be difficult to dispose of at a fair price at the times when the Fund believes it is desirable to do so. The market price of illiquid and restricted securities generally is more volatile than that of more liquid securities, which may adversely affect the price that the Fund pays for or recovers upon the sale of such securities. Illiquid and restricted securities are also more difficult to value and the Sub-Adviser's judgment may play a greater role in the valuation process. Investment of the Fund's assets in illiquid and restricted securities may restrict the Fund's ability to take advantage of market opportunities. The risks associated with illiquid and restricted securities may be particularly acute in
situations in which the Fund's operations
require cash and could result in the Fund
borrowing to meet its short-term needs or
incurring losses on the sale of illiquid or
restricted securities. In order to dispose
of an unregistered security, the Fund, where
it has contractual rights to do so, may have
to cause such security to be registered. A
considerable period may elapse between the
time the decision is made to sell the
security and the time the security is
registered, therefore enabling the Fund to
sell it. Contractual restrictions on the
resale of securities vary in length and
scope and are generally the result of a
negotiation between the issuer and acquiror
of the securities. In either case, the Fund
would bear market risks during that period.
Certain Affiliations. Certain broker-dealers
may be considered to be affiliated persons
of the Fund or First Trust Advisors. Absent
an exemption from the Securities and
Exchange Commission or other regulatory
relief, the Fund is generally precluded from
effecting certain principal transactions
with affiliated brokers, and its ability to
utilize affiliated brokers for agency
transactions is subject to restrictions.
This could limit the Fund's ability to
engage in securities transactions and take
advantage of market opportunities. In
addition, unless and until the underwriting
syndicate is broken in connection with the
initial public offering of the Common
Shares, the Fund will be precluded from
effecting principal transactions with
brokers who are members of the syndicate.
Anti-Takeover Provisions. The Fund's
Declaration of Trust includes provisions
that could limit the ability of other
entities or persons to acquire control of
the Fund or convert the Fund to open-end
status. These provisions could have the
effect of depriving the Common Shareholders
of opportunities to sell their Common Shares
at a premium over the then current market
price of the Common Shares. See "Certain
Provisions in the Declaration of Trust" and
"Risks--Anti-Takeover Provisions."
Secondary Market for the Fund's Shares. The
issuance of Common Shares through the Fund's
Dividend Reinvestment Plan may have an
adverse effect on the secondary market for
the Fund's Common Shares. The increase in
the number of outstanding Common Shares
resulting from issuances pursuant to the
Fund's Dividend Reinvestment Plan and the
discount to the market price at which such
Common Shares may be issued, may put
downward pressure on the market price for
the Common Shares. Common Shares will not be
issued pursuant to the Dividend Reinvestment
Plan at any time when Common Shares are
trading at a lower price than the Fund's NAV
per Common Share. When the Fund's Common
Shares are trading at a premium, the Fund
may also issue Common Shares that may be
sold through private transactions effected
on the New York Stock Exchange ("NYSE") or
through broker-dealers. The increase in the
number of outstanding Common Shares
resulting from these offerings may put
downward pressure on the market price for
Common Shares.
Lending Portfolio Securities. To generate
additional income, the Fund may lend
portfolio securities in an amount up to
33-1/3% of Managed Assets to broker-dealers,
major banks or other recognized domestic
institutional borrowers of securities. As
with other extensions of credit, there are
risks of delay in the recovery or even loss
of rights in the collateral should a
borrower default or fail financially. The
Fund intends to engage in lending portfolio
securities only when such lending is fully
secured by investment grade collateral held
by an independent agent.
Certain Other Risks. An investment in the
Fund is subject to certain other risks
described in the "Risks" section of this
prospectus.
SUMMARY OF FUND EXPENSES
The following table assumes the issuance of leverage in the form of debt in an amount equal to 33-1/3% of the Fund's Managed Assets (after their issuance), and shows Fund expenses as a percentage of net assets attributable to Common Shares. The "Other expenses" shown in the table and related footnotes are based on estimated amounts.
SHAREHOLDER TRANSACTION EXPENSES
Sales load paid by you (as a percentage of offering price) .......................................... 4.50%
Offering expenses borne by the Fund (as a percentage of offering price).............................. .20%(1)
Dividend Reinvestment Plan fees...................................................................... None(2)
PERCENTAGE OF NET ASSETS ATTRIBUTABLE
TO COMMON SHARES (ASSUMES
DEBT IS USED)(3)
ANNUAL EXPENSES ----------------
Management fees(4) .................................................................................. 1.49%
Interest payments on borrowed funds.................................................................. 1.38%
Other expenses....................................................................................... .27%(5)
Total annual expenses........................................................................... 3.14%
=====
(1) The Adviser has agreed to pay (i) all organizational expenses and (ii)
all offering costs of the Fund (other than sales load, but including a
partial reimbursement of certain underwriter expenses) that exceed .2%
(or $.04 per Common Share) of the Fund's offering price. The
Sub-Adviser has agreed to reimburse the Adviser for one-half of such
organizational expenses and offering costs of the Fund that exceed .2%
(or $.04 per Common Share) of the Fund's offering price.
(2) You will pay brokerage charges if you direct PFPC Inc., as agent for
the Common Shareholders (the "Plan Agent"), to sell your Common Shares
held in a dividend reinvestment account.
(3) The table presented below in this footnote estimates what the Fund's
annual expenses would be stated as percentages of the Fund's net assets
attributable to Common Shares. Unlike the table above, this table
assumes that no debt and no other leverage is used. This will be the
case, for instance, prior to the Fund's expected issuance of debt or
the use of other Leverage Instruments. In accordance with these
assumptions, the Fund's expenses would be estimated to be as follows:
PERCENTAGE OF NET ASSETS ATTRIBUTABLE
TO COMMON SHARES (ASSUMES NO
DEBT IS USED OR OTHER
LEVERAGE INSTRUMENTS ARE USED)
ANNUAL EXPENSES ------------------------------
Management fees...................................................... 1.00%
Other expenses....................................................... .21%
Total annual expenses................................................ 1.21%
=====
(4) Represents the aggregate fee payable to the Adviser (and by the Adviser
to the Sub-Adviser).
(5) If the Fund uses Leverage Instruments in the form of debt, costs of the
issuance of debt, estimated to be approximately .15% of the total
dollar amount of the debt issuance, will be borne immediately by the
Common Shareholders and result in a reduction of the NAV of the Common
Shares. Assuming the issuance of debt in an amount equal to 33-1/3% of
the Fund's Managed Assets (immediately after the issuance of such
debt), those offering costs of the debt issuance are estimated to be
approximately $211,500 or $.014 per Common Share (.07% of the offering
price of the Common Shares).
|
The purpose of the table above and the example below is to help you understand all fees and expenses that you, as a holder of Common Shares, would bear directly or indirectly. The expenses shown in the table under "Other expenses" and "Total annual expenses" are based on estimated amounts for the Fund's first full year of operations. See "Management of the Fund" and "Dividend Reinvestment Plan."
The following example illustrates the expenses (including the sales load of $45, estimated offering expenses of this offering of $2 and the estimated offering costs of issuing debt assuming the Fund issues debt representing 33-1/3% of the Fund's capital (after their issuance) of $.71) that you would pay on a $1,000 investment in Common Shares, assuming (1) total net annual expenses of 3.14% of net assets attributable to Common Shares and (2) a 5% annual return*:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $78 $141 $207 $380 |
* THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The example assumes that the estimated "Other expenses" set forth in the Annual Expenses table are accurate and that all dividends and distributions are reinvested at net asset value. Moreover, the Fund's actual rate of return may be greater or less than the hypothetical 5% return shown in the example. In the event that the Fund does not utilize any leverage, an investor would pay the following expenses based on the assumptions in the example: one year, $59; three years, $84; five years, $111; and ten years, $188.
THE FUND
The Fund is a newly organized, diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund was organized on September 7, 2004 as a Massachusetts business trust pursuant to a Declaration of Trust (the "Declaration of Trust"). As a newly organized entity, the Fund has no operating history. The Fund's principal office is located at 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532, and its telephone number is (630) 241-4141. Investment in the Fund involves certain risks and special considerations, including risks associated with the Fund's use of leverage. See "Risks."
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately $ ($ if the Underwriters exercise the overallotment option in full) after payment of the estimated offering costs. The Adviser has agreed to pay (i) all organizational expenses and (ii) all offering costs of the Fund (other than sales load, but including a partial reimbursement of certain underwriter expenses) that exceed .2% (or $.04 per Common Share) of the Fund's offering price. The Sub-Adviser has agreed to reimburse the Adviser for one-half of such organizational expenses and offering costs of the Fund that exceed .2% (or $.04 per Common Share) of the Fund's offering price. The Fund will invest the net proceeds of the offering in accordance with the Fund's investment objectives and policies as stated below. The Fund expects it will be able to invest substantially all of the net proceeds in securities that meet the Fund's investment objectives and policies within two months after the completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in cash or cash equivalents.
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek a high level of current income. As a secondary objective, the Fund will seek capital appreciation. The Fund will pursue these objectives by investing in the world bond markets through a diversified portfolio of investment grade and below-investment grade government and corporate debt securities. There can be no assurance that the Fund's investment objectives will be achieved.
The Fund's investment objectives and the investment restrictions listed in the SAI are considered fundamental and may not be changed without approval by holders of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, which includes Common Shares and Preferred Shares, if any, voting together as a single class, and the holders of the outstanding Preferred Shares voting as a single class. The remainder of the Fund's investment policies, including its investment strategy, are considered non-fundamental and may be changed by the Board of Trustees without shareholder approval, provided that shareholders receive at least 60 days' prior written notice of any change. As defined in the 1940 Act, when used with respect to particular shares of the Fund, a "majority of the outstanding" shares means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
INVESTMENT PHILOSOPHY AND PROCESS
Under normal market conditions, the Fund will invest substantially all of its Managed Assets in a diversified portfolio of fixed-income securities, including government and corporate bonds, of U.S. and non-U.S. issuers.
The Sub-Adviser will select securities for the Fund's portfolio employing the investment strategies established by Aberdeen's Global Investment Grade and Global Emerging Market Teams. Aberdeen's Investment Team (consisting of the Global Investment Grade and Global Emerging Market Teams) will regularly monitor and make allocation decisions among issuers of various regions, countries and credit qualities in order to achieve the Fund's investment objectives of a high level of current income and capital appreciation measured in U.S. dollars. The Sub-Adviser will select government and corporate bonds from a universe of over 65 countries, focusing on high real yields and improving credit conditions that offer income and total return opportunities. Allocation between investment grade and below-investment grade securities will vary according to relative value and opportunity identified by Aberdeen's Investment Team, with input from Aberdeen's Fixed Income Strategy Group. The Fund's portfolio positions will be undertaken according to the quality of their risk-adjusted potential return. Aberdeen's Investment Team will have daily responsibility for the management of the Fund's portfolio and for the implementation of the investment process, monitored through weekly investment committee meetings.
Investment Grade Securities. A significant portion, but in no event less than 40%, of the Fund's Managed Assets will be invested in securities rated "Baa3" or better by Moody's, "BBB-" or better by S&P, or comparably rated by another NRSRO or, if unrated, determined by the Sub-Adviser to be of comparable credit quality. A portfolio containing investment grade securities that invests across many national markets has the opportunity to achieve returns in excess of a portfolio that invests in a single domestic bond market, as the global fixed-income marketplace is generally less efficient than domestic markets. This opportunity is derived from a variety of sources, including differing regulatory
environments, structural ownership patterns, less correlated economic cycles and other diverse local influences. Furthermore combining several investment grade country yield curves, that have different volatility and correlation to global events, usually results in lower overall portfolio volatility.
Aberdeen seeks to identify and invest in bond markets across the globe that offer high income, and in addition, offer the potential for capital gain due to an improvement in the fiscal, economic or structural environments of the respective issuers. The investment process is designed to consistently evaluate five sources of fixed-income performance: country, yield curve, duration, credit and currency allocation decisions.
Aberdeen's research process is internally driven and is predominantly top down in nature. Each country and bond market is analyzed from the perspectives of (1) long-term structural trends, (2) medium-term (strategic) bond market valuations and (3) short-term tactical views.
Long-term structural views are driven by an understanding of demographics, political systems/cycles, fiscal sustainability, international trade, capital market structures and regulatory regimes. These factors influence the demand/supply for capital, and therefore have a structural impact on long term yield patterns. Opportunities are identified by comparative country analysis, determining which countries are likely to benefit or suffer as economic and political cycles change.
Medium-term strategic views examine current market valuations in order to judge whether they are consistent with economic and political environments, and how they are likely to change given Aberdeen's forecasts over a three to 12 month period. This market evaluation is conducted by Aberdeen's Global Economics Team and the Fixed Income Strategy Group who use a combination of quantitative and qualitative techniques to highlight apparent imbalances between market valuations and underlying fundamentals. Such analysis will determine the bias of the construction of the investment grade portion of the Fund's portfolio.
Short-term tactical views are formed through continuous monitoring of market developments. Relative value, technical analysis, market positioning intelligence and portfolio flow data are used to determine the timing, implementation and scale of positions suggested by Aberdeen's strategic views.
Underlying the investment process is consistent risk management and stress testing of the portfolio using risk modeling and attribution techniques. The quantitative techniques are used to identify and test market observations and are a tool to assist in portfolio construction.
Emerging Markets and Non-Investment Grade Securities. As used in this prospectus, an "emerging market" country is any country determined to have an emerging markets economy, considering factors such as whether the country has a low-to-middle- income economy according to the World Bank or its related organizations, the country's credit rating, its political and economic stability and the development of its financial and capital markets. These countries generally include countries located in Latin America, the Caribbean, Asia, Africa, the Middle East and Eastern and Central Europe. Global emerging market countries must engage in political, structural and fiscal reform in order to reduce the cost and volatility of their sources of borrowing. If they successfully engage in such reform, investors in emerging market securities can achieve strong total return through a combination of high income and capital gain. Effective credit analysis and market structural awareness is central to long-term performance, and a selective and active approach can enhance return and reduce risk. Constructing a diversified portfolio means exposure to different regional economical cycles and less correlated events, therefore regional shifts can be exploited or avoided. Emerging market debt is one of the earliest mechanisms available to investors to benefit from an improvement in a country's outlook.
Aberdeen's Emerging Market Debt Team follows a disciplined investment process that applies daily information flow into investment recommendations, portfolio construction and risk management. The process is designed to highlight total return opportunities across all emerging debt markets, and the underlying philosophy is to only invest in "improving credits." Improving credits are issuers that, in the opinion of Aberdeen's Investment Team, are strengthening their credit quality due to improving fiscal, economic and funding conditions. Improving credits also include issuers engaging in regulatory and structural reform to strengthen their ability to manage their financing requirements through different interest rate and economic cycles.
There is a large variance in the return outcomes offered by different emerging market countries, as reform succeeds or fails according to political or economic variables. Early identification of structural strengths or weaknesses in order to respond to these variables is required as sometimes it is difficult to attempt to manage exposure in volatile market conditions. In addition, behavioral characteristics can vary greatly between different market countries, and market structural factors (volumes, demand/supply, relative security value) can have a large impact on total return outcomes. Effective and timely management of the flow of information is required to be in a position to make informed investment decisions.
Aberdeen's investment philosophy is therefore to pursue an active, total return and diversified approach to constructing the emerging debt portion of the Fund's investment portfolio. By only investing in improving credits, identified through a disciplined investment process, Aberdeen seeks to increase the probability of the Fund's absolute out-performance.
The building block for an investment decision is to gauge debt sustainability, and what events might improve or decrease that sustainability. Credit improvement means lower borrowing costs in the long-term, while deterioration in credit rarely does. Aberdeen draws on a variety of sources that include country research visits, dialogue with multilateral agencies/local investors/ government officials and discourse with other market participants to provide a snapshot of variables relevant to a particular issue that assists in making an investment decision.
Of equal importance is market structural and technical analysis (yield curves, relative security value, volume, demand/supply imbalances) as it is complementary to fundamental credit analysis. Either can indicate investment opportunities that may be confirmed or rejected by the other. These processes create the emerging market debt opportunity set.
Global market factors may enhance/negate those emerging market debt opportunities according to regional or macro trends. Although emerging market debt investment is credit oriented in nature, there are other factors (global interest rates, swap spreads, currency moves, risk appetite indicators) that will also contribute to performance, irrespective of underlying credit improvement, and therefore the timing of any investment allocation may have to be varied. The specialist teams within Aberdeen's Global Fixed Income Team exchange views through the Fixed Income Strategy Group, and the interaction of this global view with credit, structural and market analysis contributes to portfolio construction.
The Fund's portfolio is constructed to reflect the investment team's credit views, on a diversified basis, and in a manner to optimize exposure according to global market conditions. There is a specific buy/sell discipline that relates to improving/ deteriorating credits and relative valuations. Each investment idea requires a target return and a stop-loss so the risk/reward ratio is acceptable. Furthermore a list of qualifying indicators is used to determine what events may change the investment rationale, so they can be monitored on a continual basis. Underlying the investment process is consistent risk management and stress testing of the Fund's portfolio using risk modeling and attribution techniques, on a daily basis.
Aberdeen's philosophy is that there is continual development and refinement of the process, and that implementation is disciplined and of a high quality. The mechanisms for ensuring implementation consistently are weekly investment meetings and monthly reviews of performance attribution.
PORTFOLIO COMPOSITION
The Fund's portfolio will be composed principally of the following investments. A more detailed description of the Fund's investment policies and restrictions and more detailed information about the Fund's portfolio investments are contained in the SAI.
Government Debt Securities. The Fund will invest at least 60% of its Managed Assets in government debt securities. At least 25% of the Fund's Managed Assets will be invested in U.S. dollar-denominated securities or non-U.S. dollar-denominated securities that have been fully hedged into U.S. dollars. The Fund will invest in government debt securities, including those of emerging market issuers or of other non-U.S. issuers. These securities may be U.S. dollar-denominated or non-U.S. dollar-denominated and include: (a) debt obligations issued or guaranteed by foreign national, provincial, state, municipal or other governments with taxing authority or by their agencies or instrumentalities; and (b) debt obligations of supranational entities. Government debt securities include: debt securities issued or guaranteed by governments, governmental agencies or instrumentalities and political subdivisions; debt securities issued by government owned, controlled or sponsored entities; interests in entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by the above-noted issuers; or debt securities issued by supranational entities such as the World Bank or the European Union. The Fund may also invest in securities denominated in currencies of emerging market countries. Emerging market debt securities generally are rated in the lower rating categories of recognized credit rating agencies or are unrated and considered to be of comparable quality to lower rated debt securities. A non-U.S. issuer of debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and the Fund may have limited recourse in the event of a default. Some of these risks do not apply to issuers in larger, more developed countries. These risks are more pronounced in investments in issuers in emerging markets or if the Fund invests significantly in one country.
Corporate Bonds. The Fund may invest up to 40% of its Managed Assets in corporate bonds. Corporate bonds generally are used by corporations to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain bonds are "perpetual" in that they have no maturity date. The Fund may invest in non-U.S. corporate bonds which involve unique risks compared to investing in the securities of U.S. issuers. See "Risks--Non-U.S. Securities Risk."
Non-Investment Grade Securities. The Fund may invest up to 60% of its Managed Assets in securities that, at the time of investment, are not investment grade quality. However, the Fund will not invest more than 15% of its Managed Assets in securities rated below "B-" by Moody's and/or S&P. Accordingly, the Fund may invest a significant portion of its Managed Assets in securities that are rated non-investment grade or, if unrated, considered to be of comparable quality by the Sub-Adviser. Non-investment grade quality securities are regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal, and are commonly referred to as "high yield" or "junk" bonds. Issuers of high yield securities may be highly
leveraged and may not have available to them more traditional methods of financing. The prices of these lower grade securities typically are more sensitive to negative developments, such as a decline in the issuer's revenues or a general economic downturn, than the prices of higher grade securities. The secondary market for high yield securities may not be as liquid as the secondary market for more highly rated securities, a factor which may have an adverse effect on the Fund's ability to dispose of a particular security. See "Risks--Non-Investment Grade Securities Risk."
Asset-Backed Securities. The Fund may invest up to 15% of its Managed Assets in asset-backed securities. Asset-backed securities are securities that represent a participation in, or are secured by and payable from, a stream of payments generated by particular assets, most often a pool or pools of similar assets (e.g., trade receivables). The credit quality of these securities depends primarily upon the quality of the underlying assets and the level of credit support and/or enhancement provided. The underlying assets (e.g., loans) are subject to prepayments which shorten the securities' weighted average maturity and may lower their return. Losses or delays in payment may result if the credit support or enhancement is exhausted because the required payments of principal and interest on the underlying assets are not made. The value of these securities may also change because of changes in the market's perception of the creditworthiness of the servicing agent for the pool, the originator of the pool or the financial institution or fund providing the credit support or enhancement.
Credit Linked Notes. The Fund may invest up to 35% of its Managed Assets in Credit Linked Notes provided such securities are issued by an institution with at least an "A" credit rating by Moody's and/or S&P. Credit Linked Notes are structured securities typically issued by banks whose principal and interest payments are contingent on the performance of the Reference Issuer. Credit Linked Notes are created by embedding a credit default swap in a funded asset to form an investment whose credit risk and cash flow characteristics resemble those of a bond or loan. These notes pay an enhanced coupon to the investor for taking on the added credit risk of the Reference Issuer.
Illiquid/Restricted Securities. The Fund may invest up to 10% of its Managed Assets in securities that, at the time of investment, are illiquid (determined using the Securities and Exchange Commission's standard applicable to investment companies, i.e., securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities). The Fund may also invest, without limit, in restricted securities. However, restricted securities determined by the Sub-Adviser to be illiquid are subject to the limitations set forth above.
Short-Term Debt Securities; Temporary Defensive Position; Invest-Up Period. During the period during which the net proceeds of the offering of Common Shares are being invested, or during periods in which the Adviser or Sub-Adviser determines that it is temporarily unable to follow the Fund's investment strategy or that it is impractical to do so, the Fund may deviate from its investment strategy and invest all or any portion of its Managed Assets in cash or cash equivalents. The Adviser's or Sub-Adviser's determination that it is temporarily unable to follow the Fund's investment strategy or that it is impractical to do so will generally occur only in situations in which a market disruption event has occurred and where trading in the securities selected through application of the Fund's investment strategy is extremely limited or absent. In such a case, Common Shares of the Fund may be adversely affected and the Fund may not pursue or achieve its investment objectives. For a further description of these temporary investments, see the SAI under "Investment Policies and Techniques."
INVESTMENT PRACTICES
Strategic Transactions. The Fund may, but is not required to, use various strategic transactions (1) to seek to reduce interest rate risks arising from any use of financial leverage, (2) to facilitate portfolio management and (3) to mitigate risks, including interest rate, currency and credit risks. Strategic Transactions are generally accepted under modern portfolio management theory and are regularly used by many mutual funds and other institutional investors. Although the Sub-Adviser seeks to use such practices to further the Fund's investment objectives, no assurance can be given that the Sub-Adviser will engage in any of these practices or that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed and over-the-counter put and call options on currencies, securities, fixed-income, currency and interest rate indices and other financial instruments, purchase and sell financial futures contracts and options thereon and enter into various interest rate and currency transactions such as swaps, caps, floors or collars or credit derivative instruments. The Fund also may purchase derivative instruments that combine features of these instruments. Collectively, all of the above are referred to as "Strategic Transactions." The Fund generally seeks to use Strategic Transactions as a portfolio management or hedging technique to protect against possible adverse changes in the market value of securities held in or to be purchased for the Fund's portfolio, protect the value of the Fund's portfolio, facilitate the sale of certain securities for investment purposes, manage the effective interest rate and currency exposure of the Fund or establish positions in the derivative markets as a substitute for purchasing or selling particular securities.
Strategic Transactions have risks, including the imperfect correlation between the value of such instruments and the underlying assets, the possible default of the other party to the transactions or illiquidity of the derivative investments. Furthermore, the ability to successfully use Strategic Transactions depends on the Sub-Adviser's ability to predict pertinent market movements, which cannot be assured. Thus, the use of Strategic Transactions may result in losses greater than if they had not been used, may require the Fund to sell or
purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Fund can realize on an investment, or may cause the Fund to hold a security that it might otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Fund for investment purposes. See "Risks--Derivatives Risk" in this prospectus and "Other Investment Policies and Techniques" in the SAI for further information on Strategic Transactions and their risks.
Lending Portfolio Securities. To generate additional income, the Fund may lend portfolio securities in an amount up to 33-1/3% of Managed Assets to broker-dealers, major banks or other recognized domestic institutional borrowers of securities. As with other extensions of credit, there are risks of delay in the recovery or even loss of rights in the collateral should the borrower default or fail financially. The Fund intends to engage in lending portfolio securities only when such lending is fully secured by investment grade collateral held by an independent agent.
Portfolio Turnover. The Fund's annual portfolio turnover rate may vary greatly from year to year. Although the Fund cannot accurately predict its annual portfolio turnover rate, it is not expected to exceed 100% under normal circumstances. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. There are no limits on the rate of portfolio turnover, and investments may be sold without regard to length of time held when the Fund's investment strategy so dictates. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. High portfolio turnover may result in the realization of net short-term capital gains by the Fund which, when distributed to Common Shareholders, will be taxable as ordinary income. See "Tax Matters."
BORROWINGS AND PREFERRED SHARES
The Fund anticipates that under current market conditions it will issue Leverage Instruments representing no more than 33-1/3% of its Managed Assets approximately three months after the completion of this offering. If as a result of market conditions, or any other reason, the Fund does not issue Preferred Shares, the Fund will limit its borrowing to 33-1/3% (or such other percentage permitted by law) of its Managed Assets. Any use of Leverage Instruments by the Fund will, however, be consistent with the provisions of the 1940 Act. The Leverage Instruments would have complete priority upon distribution of assets over Common Shares. The issuance of Leverage Instruments would leverage the Common Shares. Although the timing and other terms of the offering of Leverage Instruments and the terms of the Leverage Instruments would be determined by the Fund's Board of Trustees, the Fund expects to invest the proceeds derived from any Leverage Instrument offering in securities consistent with the Fund's investment objectives and policies. If Preferred Shares are issued, they would pay adjustable rate dividends based on shorter-term interest rates, which would be redetermined periodically by an auction process. The adjustment period for Preferred Shares dividends could be as short as one day or as long as a year or more. So long as the Fund's portfolio is invested in securities that provide a higher rate of return than the dividend rate or interest rate of the Leverage Instruments, after taking expenses into consideration, the leverage will cause Common Shareholders to receive a higher rate of income than if the Fund were not leveraged.
Leverage creates risk for the Common Shareholders, including the likelihood of greater volatility of NAV and market price of the Common Shares, and the risk that fluctuations in interest rates on borrowings and debt or in the dividend rates on any Preferred Shares may affect the return to the Common Shareholders or will result in fluctuations in the dividends paid on the Common Shares. To the extent total return exceeds the cost of leverage, the Fund's return will be greater than if leverage had not been used. Conversely, if the total return derived from securities purchased with funds received from the use of leverage is less than the cost of leverage, the Fund's return will be less than if leverage had not been used, and therefore the amount available for distribution to Common Shareholders as dividends and other distributions will be reduced. In the latter case, the Sub-Adviser in its best judgment nevertheless may determine to maintain the Fund's leveraged position if it expects that the benefits to the Fund's Common Shareholders of maintaining the leveraged position will outweigh the current reduced return. Under normal market conditions, the Fund anticipates that it will be able to invest the proceeds from leverage at a higher rate than the costs of leverage, which would enhance returns to Common Shareholders. The fees paid to the Adviser (and by the Adviser to the Sub-Adviser) will be calculated on the basis of the Managed Assets including proceeds from borrowings for leverage and the issuance of Preferred Shares. During periods in which the Fund is utilizing financial leverage, the investment advisory fee payable to the Adviser (and by the Adviser to the Sub-Adviser) will be higher than if the Fund did not utilize a leveraged capital structure. The use of leverage creates risks and involves special considerations. See "Risks--Leverage Risk."
The Fund's Declaration of Trust authorizes the Fund, without prior approval of the Common Shareholders, to borrow money. In this connection, the Fund may issue notes or other evidence of indebtedness (including bank borrowings or commercial paper) and may secure any such borrowings by mortgaging, pledging or otherwise subjecting as security the Fund's assets. In connection with such borrowing, the Fund may be required to maintain minimum average balances with the lender or to pay a commitment or other fee to maintain a line of credit. Any such requirements will increase the cost of borrowing over the stated interest rate. Under the requirements of the 1940 Act, the Fund, immediately after any such borrowings, must have an "asset coverage" of at least 300% (33-1/3% of
Managed Assets after borrowings). With respect to such borrowing, asset coverage means the ratio which the value of the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of such borrowing represented by senior securities issued by the Fund.
The rights of lenders to the Fund to receive interest on and repayment of principal of any such borrowings will be senior to those of the Common Shareholders, and the terms of any such borrowings may contain provisions which limit certain activities of the Fund, including the payment of dividends to Common Shareholders in certain circumstances. Further, the 1940 Act does (in certain circumstances) grant to the lenders to the Fund certain voting rights in the event of default in the payment of interest on or repayment of principal. In the event that such provisions would impair the Fund's status as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), the Fund intends to repay the borrowings. Any borrowing will likely be ranked senior or equal to all other existing and future borrowings of the Fund.
Certain types of borrowings may result in the Fund being subject to covenants in credit agreements relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for the short-term corporate debt securities or Preferred Shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. It is not anticipated that these covenants or guidelines will impede the Sub-Adviser from managing the Fund's portfolio in accordance with the Fund's investment objectives and policies.
If Preferred Shares are issued, they would pay adjustable rate dividends based on shorter-term interest rates, which would be redetermined periodically by an auction process. The adjustment period for Preferred Shares dividends could be as short as one day or as long as a year or more.
Under the 1940 Act, the Fund is not permitted to issue Preferred Shares unless immediately after such issuance the value of the Fund's Managed Assets is at least 200% of the liquidation value of the outstanding Preferred Shares (i.e., the liquidation value may not exceed 50% of the Fund's Managed Assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless, at the time of such declaration, the value of the Fund's Managed Assets is at least 200% of such liquidation value. If Preferred Shares are issued, the Fund intends, to the extent possible, to purchase or redeem Preferred Shares from time to time to the extent necessary in order to maintain coverage of any Preferred Shares of at least 200%. In addition, as a condition to obtaining ratings on the Preferred Shares, the terms of any Preferred Shares issued are expected to include asset coverage maintenance provisions which will require the redemption of the Preferred Shares in the event of non-compliance by the Fund and may also prohibit dividends and other distributions on the Common Shares in such circumstances. In order to meet redemption requirements, the Fund may have to liquidate portfolio securities. Such liquidations and redemptions would cause the Fund to incur related transaction costs and could result in capital losses to the Fund. Prohibitions on dividends and other distributions on the Common Shares could impair the Fund's ability to qualify as a regulated investment company under the Code. If the Fund has Preferred Shares outstanding, two of the Fund's trustees will be elected by the holders of Preferred Shares as a class. The remaining trustees of the Fund will be elected by holders of Common Shares and Preferred Shares voting together as a single class. In the event the Fund failed to pay dividends on Preferred Shares for two years, holders of Preferred Shares would be entitled to elect a majority of the trustees of the Fund.
The Fund may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities.
EFFECTS OF LEVERAGE
Assuming that the Leverage Instruments will represent approximately 33-1/3% of the Fund's capital and pay dividends or interest at an annual combined average rate of 2.80%, the income generated by the Fund's portfolio (net of estimated expenses) must exceed .93% in order to cover the dividend or interest payments specifically related to the Leverage Instruments. Of course, these numbers are merely estimates used for illustration. Actual dividend or interest rates on the Leverage Instruments will vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the Securities and Exchange Commission. It is designed to illustrate the effect of leverage on Common Share total return, assuming investment portfolio total returns (comprised of income and changes in the value of securities held in the Fund's portfolio) of (10%), (5%), 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. See "Risks."
The table further reflects the issuance of Leverage Instruments representing 33-1/3% of the Fund's capital, net of expenses, and the Fund's currently projected annual dividend or interest on its Leverage Instruments of 2.80%.
Assumed Portfolio Total Return (Net of Expenses) ......... (10)% (5)% 0% 5% 10% Common Share Total Return ................................ (16.32)% (8.85)% (1.38)% 6.09% 13.55% |
Common Share total return is composed of two elements: the Common Share dividends paid by the Fund (the amount of which is largely determined by the net investment income of the Fund after paying dividends or interest on its Leverage Instruments) and gains or losses on the value of the securities the Fund owns. As required by Securities and Exchange Commission rules, the table above assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% the Fund must assume that the interest it receives on its debt security investments is entirely offset by losses in the value of those bonds.
RISKS
Risk is inherent in all investing. The following discussion summarizes the
principal risks that you should consider before deciding whether to invest in
the Fund. For additional information about the risks associated with investing
in the Fund, see "Additional Information About the Fund's Investments" in the
SAI.
NO OPERATING HISTORY
The Fund is a newly organized, diversified, closed-end management investment company with no operating history.
INVESTMENT AND MARKET RISK
An investment in Common Shares is subject to investment risk, including the possible loss of the entire principal amount that you invest. Your investment in Common Shares represents an indirect investment in the securities owned by the Fund. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The value of the securities in which the Fund invests will affect the value of the Common Shares. Your Common Shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions.
MANAGEMENT RISK
The Fund is subject to management risk because it is an actively managed portfolio. The Adviser and the Sub-Adviser will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
NON-INVESTMENT GRADE SECURITIES RISK
The Fund may invest up to 60% of its Managed Assets in non-investment grade securities. Non-investment grade securities are rated below "Baa3" by Moody's, below "BBB-" by S&P, or comparably rated by another NRSRO or, if unrated, determined by the Sub-Adviser to be of comparable credit quality. Non-investment grade debt instruments are commonly referred to as "high yield" or "junk" bonds and are considered speculative with respect to the issuer's capacity to pay interest and principal and are susceptible to default or decline in market value due to adverse economic and business developments. The market values for high yield securities tend to be very volatile, and these securities are less liquid than investment grade debt securities. For these reasons, your investment in the Fund is subject to the following specific risks:
o increased price sensitivity to changing interest rates and to a deteriorating economic environment;
o greater risk of loss due to default or declining credit quality;
o adverse company specific events are more likely to render the issuer unable to make interest and/or principal payments; and
o a negative perception of the high yield market may depress the price and liquidity of high yield securities.
Adverse changes in economic conditions are more likely to lead to a weakened capacity of a high yield issuer to make principal payments and interest payments than an investment grade issuer. An economic downturn could severely affect the ability of highly leveraged issuers to service their debt obligations or to repay their obligations upon maturity.
The secondary market for high yield securities may not be as liquid as the secondary market for more highly rated securities, a factor which may have an adverse effect on the Fund's ability to dispose of a particular security. There are fewer dealers in the market for high yield securities than for investment grade obligations. The prices quoted by different dealers may vary significantly and the spread between the bid and asked price is generally much larger than for higher quality instruments. Under adverse market or economic conditions, the secondary market for high yield securities could contract further, independent of any specific adverse changes in the condition of a particular issuer and these securities may become illiquid. As a result, the Fund could find it more
difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating the Fund's NAV.
FIXED-INCOME SECURITIES RISK
In addition to the risks discussed above, debt securities, including high yield securities, are subject to certain risks, including:
o Issuer Risk. The value of fixed-income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer's goods and services.
o Reinvestment Risk. Reinvestment risk is the risk that income from the Fund's portfolio will decline if the Fund invests the proceeds from matured, traded or called bonds at market interest rates that are below the Fund portfolio's current earnings rate. A decline in income could affect the Common Shares' market price or their overall returns.
o Prepayment Risk. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing the Fund to reinvest in lower yielding securities. This is known as call or prepayment risk. Debt securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem an obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer.
o Credit Risk. Credit risk is the risk that a security in the Fund's portfolio will decline in price or the issuer fails to make interest payments when due because the issuer of the security experiences a decline in its financial status.
INTEREST RATE RISK
Interest rate risk is the risk that fixed-income securities will decline in value because of changes in market interest rates. When market interest rates rise, the market value of such securities generally will fall. Because the Fund will invest in securities that pay a fixed rate of return, the NAV and market price of the Common Shares will tend to decline if the market interest rates applicable to such investments were to rise. During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected prepayments pursuant to call provisions. This may lock in a below market yield, increase the security's duration and reduce the value of the security. Investments in debt securities with long-term maturities may experience significant price declines if long-term interest rates increase. Market interest rates in the United States and in certain other countries in which the Fund may invest currently are near historically low levels.
NON-U.S. SECURITIES RISK
The Fund intends to invest a substantial portion of its assets in securities of non-U.S. issuers. Investing in securities of non-U.S. issuers, which are generally denominated in non-U.S. currencies, may involve certain risks not typically associated with investing in securities of U.S. issuers. These risks include: (i) there may be less publicly available information about non-U.S. issuers or markets due to less rigorous disclosure or accounting standards or regulatory practices; (ii) non-U.S. markets may be smaller, less liquid and more volatile than the U.S. market; (iii) potential adverse effects of fluctuations in currency exchange rates or controls on the value of the Fund's investments; (iv) the economies of non-U.S. countries may grow at slower rates than expected or may experience a downturn or recession; (v) the impact of economic, political, social or diplomatic events; (vi) certain non-U.S. countries may impose restrictions on the ability of non-U.S. issuers to make payments of principal and interest to investors located in the United States due to blockage of non-U.S. currency exchanges or otherwise; and (vii) withholding and other non-U.S. taxes may decrease the Fund's return. These risks may be more pronounced to the extent that the Fund invests a significant amount of its assets in companies located in one region and to the extent that the Fund invests in securities of issuers in emerging markets.
GOVERNMENT SECURITIES RISK
The ability of a government issuer, especially in an emerging market country, to make timely and complete payments on its debt obligations will be strongly influenced by the government issuer's balance of payments, including export performance, its access to international credits and investments, fluctuations of interest rates and the extent of its foreign reserves. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in international prices of these commodities or imports. To the extent that a country receives payment for its exports in currencies other than U.S. dollars, its ability to make debt payments denominated in U.S. dollars could be adversely affected. If a government issuer cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial banks, and multinational organizations. There are no bankruptcy proceedings similar to those in the United States by which defaulted government debt may be collected. Additional factors that may influence a government issuer's ability or willingness to service debt include, but are not limited to, a country's cash flow situation, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of its debt service burden to the economy as a whole, and the issuer's policy towards the International Monetary Fund, the International Bank for Reconstruction and Development and other international agencies to which a government debtor may be subject.
NON-U.S. GOVERNMENT SECURITIES RISK
Economies and social and political climates in individual countries may differ unfavorably from the United States. Non-U.S. economies may have less favorable rates of growth of gross domestic product, rates of inflation, currency valuation, capital reinvestment, resource self-sufficiency and balance of payments positions. Many countries have experienced extremely high rates of inflation for many years. Unanticipated economic, political and social developments may also affect the values of the Fund's investments and limit the availability of additional investments in such countries. Furthermore, such developments may significantly disrupt the financial markets or interfere with the Fund's ability to enforce its rights against non-U.S. government issuers.
A substantial portion of the Fund's Managed Assets are expected to be
invested in debt instruments of issuers located in countries considered to be
emerging markets, and investments in such securities are considered speculative.
Heightened risks of investing in emerging markets government debt include:
smaller market capitalization of securities markets, which may suffer periods of
relative illiquidity; significant price volatility; restrictions on foreign
investment; and possible repatriation of investment income and capital.
Furthermore, foreign investors may be required to register the proceeds of sales
and future economic or political crises could lead to price controls, forced
mergers, expropriation or confiscatory taxation, seizure, nationalization or
creation of government monopolies. The currencies of emerging market countries
may experience significant declines against the U.S. dollar, and devaluation may
occur subsequent to investments in these currencies by the Fund. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries.
COUNTRY RISK
This risk arises as the Fund may have exposure of up to 30% of its Managed Assets to issuers in any one country. The impact on the Fund's NAV of specific risks relating to investment in non-U.S. issuers, such as political, regulatory, interest rate, currency and inflation, may be magnified due to the concentration of the Fund's investments in a particular country.
CURRENCY RISK
The value of securities denominated or quoted in foreign currencies may be adversely affected by fluctuations in the relative currency exchange rates and by exchange control regulations. The Fund's investment performance may be negatively affected by a devaluation of a currency in which the Fund's investments are denominated or quoted. Further, the Fund's investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities denominated or quoted in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar. Certain of the Fund's non-U.S. dollar-denominated securities may be hedged into U.S. dollars. However, as discussed in "Risks--Derivatives Risk," hedging may not alleviate all currency risks.
MARKET DISCOUNT FROM NET ASSET VALUE
Shares of closed-end investment companies frequently trade at a discount from their net asset value. This characteristic is a risk separate and distinct from the risk that the Fund's NAV could decrease as a result of its investment activities and may be greater for investors expecting to sell their Common Shares in a relatively short period following completion of this offering. The NAV of the Common Shares will be reduced immediately following the offering as a result of the payment of certain offering costs. Although the value of the Fund's net assets is generally considered by market participants in determining whether to purchase or sell Common Shares, whether investors will realize gains or losses upon the sale of the Common Shares will depend entirely upon whether the market price of the Common Shares at the time of sale is above or below the investor's purchase price for the Common Shares. Because the market price of the Common Shares will be determined by factors such as net asset value, dividend and distribution levels (which are dependent, in part, on expenses), supply of and demand for the Common Shares, stability of dividends or distributions, trading volume of the Common Shares, general market and economic conditions and other factors beyond the control of the Fund, the Fund cannot predict whether the Common Shares will trade at, below or above NAV or at, below or above the initial public offering price.
LEVERAGE RISK
The Fund may borrow an amount up to 33-1/3% (or such other percentage as permitted by law) of its Managed Assets (including the amount borrowed) less all liabilities other than borrowings. The Fund may also issue Preferred Shares in an amount up to 50% of the Fund's Managed Assets (including the proceeds from Leverage Instruments). However, the Fund intends, under normal circumstances, to utilize leverage in an amount up to 33-1/3% of the Fund's Managed Assets. Borrowings and the issuance of Preferred Shares are referred to in this prospectus collectively as "leverage." The Fund may use leverage for investment
purposes, to finance the repurchase of its Common Shares, and to meet cash requirements. Although the use of leverage by the Fund may create an opportunity for increased return for the Common Shares, it also results in additional risks and can magnify the effect of any losses. If the income and gains earned on the securities and investments purchased with leverage proceeds are greater than the cost of the leverage, the Common Shares' return will be greater than if leverage had not been used. Conversely, if the income and gains from the securities and investments purchased with such proceeds does not cover the cost of leverage, the return to the Common Shares will be less than if leverage had not been used. There is no assurance that a leveraging strategy will be successful. Leverage involves risks and special considerations for Common Shareholders including:
o the likelihood of greater volatility of NAV and market price of the Common Shares than a comparable portfolio without leverage;
o the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any Preferred Shares that the Fund may pay will reduce the return to the Common Shareholders or will result in fluctuations in the dividends paid on the Common Shares;
o the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the Common Shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the Common Shares; and
o when the Fund uses financial leverage, the investment advisory fee payable to the Adviser (and by the Adviser to the Sub-Adviser) will be higher than if the Fund did not use leverage.
The Sub-Adviser, in its judgment, nevertheless may determine to continue to use leverage if it expects that the benefits to the Fund's shareholders of maintaining the leveraged position will outweigh the current reduced return.
The funds borrowed pursuant to a leverage borrowing program (such as a credit line or commercial paper program), or obtained through the issuance of Preferred Shares, constitute a substantial lien and burden by reason of their prior claim against the income of the Fund and against the net assets of the Fund in liquidation. The rights of lenders to receive payments of interest on and repayments of principal on any borrowings made by the Fund under a leverage borrowing program are senior to the rights of Common Shareholders and the holders of Preferred Shares, with respect to the payment of dividends or upon liquidation. The Fund may not be permitted to declare dividends or other distributions, including dividends and distributions with respect to Common Shares or Preferred Shares or purchase Common Shares or Preferred Shares, unless at the time thereof the Fund meets certain asset coverage requirements and no event of default exists under any leverage program. In addition, the Fund may not be permitted to pay dividends on Common Shares unless all dividends on the Preferred Shares and/or accrued interest on borrowings have been paid, or set aside for payment. In an event of default under a leverage borrowing program, the lenders have the right to cause a liquidation of collateral (i.e., sell securities and other assets of the Fund) and, if any such default is not cured, the lenders may be able to control the liquidation as well. Certain types of leverage may result in the Fund being subject to covenants relating to asset coverage and Fund composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for the Preferred Shares or other leverage securities issued by the Fund. These guidelines may impose asset coverage or Fund composition requirements that are more stringent than those imposed by the 1940 Act. The Sub-Adviser does not believe that these covenants or guidelines will impede it from managing the Fund's portfolio in accordance with the Fund's investment objectives and policies.
While the Fund may from time to time consider reducing leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and NAV associated with leverage, there can be no assurance that the Fund will actually reduce leverage in the future or that any reduction, if undertaken, will benefit the Common Shareholders. Changes in the future direction of interest rates are very difficult to predict accurately. If the Fund were to reduce leverage based on a prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in leverage would likely operate to reduce the income and/or total returns to Common Shareholders relative to the circumstance if the Fund had not reduced leverage. The Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and Common Share price if the prediction were to turn out to be correct, and determine not to reduce leverage as described above.
DERIVATIVES RISK
Strategic Transactions have risks, including the imperfect correlation between the value of such instruments and the underlying assets, the possible default of the other party to the transaction or illiquidity of the derivative investments. Furthermore, the ability to successfully use Strategic Transactions depends on the Sub-Adviser's ability to predict pertinent market movements, which cannot be assured. Thus, the use of Strategic Transactions may result in losses greater than if they had not been used, may require the Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Fund can realize on an investment or may cause the Fund to hold a security that it might otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions will not otherwise be available to the Fund for investment purposes.
There are several risks associated with transactions in options on securities. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
There are several risks associated with the use of futures contracts and futures options. The purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. While the Fund may enter into futures contracts and options on futures contracts for hedging purposes, the use of futures contracts and options on futures contracts might result in a poorer overall performance for the Fund than if it had not engaged in any such transactions. There may be an imperfect correlation between the Fund's portfolio holdings and futures contracts or options on futures contracts entered into by the Fund, which may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. The degree of imperfection of correlation depends on circumstances such as variations in market demand for futures, options on futures and their related securities, including technical influences in futures and futures options trading, and differences between the securities markets and the securities underlying the standard contracts available for trading. Further, the Fund's use of futures contracts and options on futures contracts to reduce risk involves costs and will be subject to the Sub-Adviser's ability to correctly predict changes in interest rate relationships or other factors.
Depending on whether the Fund would be entitled to receive net payments from the counterparty on a swap or cap, which in turn would depend on the general state of short-term interest rates at that point in time, a default by a counterparty could negatively impact the performance of the Common Shares. In addition, at the time an interest rate swap or cap transaction reaches its scheduled termination date, there is a risk that the Fund would not be able to obtain a replacement transaction or that the terms of the replacement would not be as favorable as on the expiring transaction. If this occurs, it could have a negative impact on the performance of the Common Shares. If the Fund fails to maintain any required asset coverage ratios in connection with any use by the Fund of financial leverage, the Fund may be required to redeem or prepay some or all of the financial leverage. Such redemption or prepayment would likely result in the Fund seeking to terminate early all or a portion of any swap or cap transaction. Early termination of a swap could result in a termination payment by or to the Fund. Early termination of a cap could result in a termination payment to the Fund. The Fund intends to maintain, in a segregated account, cash or liquid securities having a value at least equal to the Fund's net payment obligations under any swap transaction, marked to market daily. The Fund will not enter into interest rate swap or cap transactions having a notional amount that exceeds the outstanding amount of the Fund's leverage.
The Fund may purchase credit derivative instruments for the purposes of hedging the Fund's credit risk exposure to certain issuers of securities that the Fund owns. For example, the Fund may enter into credit swap default contracts for hedging purposes where the Fund would be the buyer of such a contract. The Fund would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract in the event of a default by a third party, such as a U.S. or foreign corporate issuer, on the debt obligation. In return, the Fund would pay to the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Fund would have spent the stream of payments and received no benefit from the contract.
The Fund may enter into currency exchange transactions to hedge the Fund's exposure to foreign currency exchange rate risk to the extent the Fund invests in non-U.S. denominated securities of non-U.S. issuers. The Fund's currency transactions will be limited to portfolio hedging involving portfolio positions. Portfolio hedging is the use of a forward contract with respect to a portfolio security position denominated or quoted in a particular currency. A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange dealers or broker-dealers, are not exchange-traded, and are usually for less than one year, but may be renewed.
At the maturity of a forward contract to deliver a particular currency, the Fund may either sell the portfolio security related to such contract and make delivery of the currency, or it may retain the security and either acquire the currency on the spot market or terminate its contractual obligation to deliver the currency by purchasing an offsetting contract with the same currency trader obligating it to purchase on the same maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a forward contract. Accordingly, it may be necessary for the Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of currency that the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the currency. Conversely, it may be necessary to sell on the spot market some of the currency received upon the sale of the portfolio security if its market value exceeds the amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the currency. Should forward prices decline during the period between the Fund's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. A default on the contract would deprive the Fund of unrealized profits or force the Fund to cover its commitments for purchase or sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to the Fund of engaging in currency exchange transactions varies with such factors as the currency involved, the length of the contract period, and prevailing market conditions. Since currency exchange transactions are usually conducted on a principal basis, no fees or commissions are involved.
The use of interest rate swaps and caps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions. Depending on market conditions in general, the Fund's use of swaps or caps could enhance or harm the overall performance of the Common Shares. To the extent there is a decline in interest rates, the value of the interest rate swap or cap could decline, and could result in a decline in the NAV of the Common Shares. In addition, if short-term interest rates are lower than the Fund's fixed rate of payment on the interest rate swap, the swap will reduce Common Share net earnings. If, on the other hand, short-term interest rates are higher than the fixed rate of payment on the interest rate swap, the swap will enhance Common Share net earnings. Buying interest rate caps could decrease the net earnings of the Common Shares in the event that the premium paid by the Fund to the counterparty exceeds the additional amount the Fund would have been required to pay had it not entered into the cap agreement. The Fund has no current intention of selling an interest rate swap or cap.
Interest rate swaps and caps do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that the Fund is contractually obligated to make. If the counterparty defaults, the Fund would not be able to use the anticipated net receipts under the swap or cap to offset any declines in the value of the Fund's portfolio assets being hedged. Depending on whether the Fund would be entitled to receive net payments from the counterparty on the swap or cap, which in turn would depend on the general state of the market rates at that point in time, such a default could negatively impact the performance of the Common Shares.
CREDIT LINKED NOTES RISK
The Fund may invest in Credit Linked Notes. Credit Linked Notes are securities that are collateralized by one or more credit default swaps on designated debt securities that are referred to as "reference securities." Through the purchase of a Credit Linked Note, the buyer assumes the risk of the default or, in some cases, other declines in credit quality of the referenced securities. The buyer also takes on exposure to the issuer of the Credit Linked Note in the full amount of the purchase price of the note. The issuer of a Credit Linked Note normally will have hedged its risk on the reference securities without acquiring any additional credit exposure. The Fund has the right to receive periodic interest payments from the issuer of the Credit Linked Note at an agreed upon interest rate, and, if there has been no default or, if applicable, other declines in credit quality, a return of principal at the maturity date.
Credit Linked Notes are subject to credit risk of the reference securities underlying the credit default swaps. If one of the underlying reference securities defaults or suffers certain other declines in credit quality, the Fund may, instead of receiving repayment of principal in whole or in part, receive the security that has defaulted.
Credit Linked Notes typically are privately negotiated transactions between two or more parties. The Fund bears the risk that the issuer of the credit linked note will default or become bankrupt. The Fund bears the risk of loss of the principal amount it invested and the periodic interest payments expected to be received for the duration of its investment in the credit linked note.
The market for Credit Linked Notes may suddenly become illiquid. The other parties to the transaction may be the only investors with sufficient understanding of the derivative to be interested in bidding for it. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for Credit Linked Notes. In certain cases, a market price for a Credit Linked Note may not be available.
PORTFOLIO TURNOVER RISK
The Fund's annual portfolio turnover rate may vary greatly from year to year. Although the Fund cannot accurately predict its annual portfolio turnover rate, it is not expected to exceed 100% under normal circumstances. However, portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. High portfolio turnover may result in the Fund's recognition of gains that will be taxable as ordinary income to the Fund. A high portfolio turnover may increase the Fund's current and accumulated earnings and profits, resulting in a greater portion of the Fund's distributions being treated as a dividend to the Fund's Common Shareholders. In addition, a higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. See "The Fund's Investments--Investment Practices--Portfolio Turnover" and "Tax Matters."
MARKET DISRUPTION RISK
The terrorist attacks in the United States on September 11, 2001 had a disruptive effect on the securities markets. The ongoing U.S. military and related action in Iraq and events in the Middle East, as well as the continuing threat of terrorist attacks, could have significant adverse effects on the U.S. economy, the stock market and world economies and markets generally. The Fund cannot predict the effects of similar events in the future on the U.S. and world economies, the value of the Common Shares or the NAV of the Fund.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares and distributions can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with the Fund's use of financial leverage would likely increase, which would tend to further reduce returns to Common Shareholders.
ILLIQUID/RESTRICTED SECURITIES RISK
The Fund may invest up to 10% of its Managed Assets in securities that, at the time of investment, are illiquid (determined using the Securities and Exchange Commission's standard applicable to investment companies, i.e., securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities). The Fund may also invest, without limit, in restricted securities. However, restricted securities determined by the Sub-Adviser to be illiquid are subject to the limitations set forth above. The Sub-Adviser, under the supervision of the Board of Trustees, will determine whether restricted securities are illiquid (that is, not readily marketable) and thus subject to the Fund's limit of investing no more than 10% of its Managed Assets in illiquid securities. Investments in restricted securities could have the effect of increasing the amount of the Fund's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase these securities. Illiquid and restricted securities may be difficult to dispose of at a fair price at the times when the Fund believes it is desirable to do so. The market price of illiquid and restricted securities generally is more volatile than that of more liquid securities, which may adversely affect the price that the Fund pays for or recovers upon the sale of such securities. Illiquid and restricted securities are also more difficult to value and the Sub-Adviser's judgment may play a greater role in the valuation process. Investment of the Fund's assets in illiquid and restricted securities may restrict the Fund's ability to take advantage of market opportunities. The risks associated with illiquid and restricted securities may be particularly acute in situations in which the Fund's operations require cash and could result in the Fund borrowing to meet its short-term needs or incurring losses on the sale of illiquid or restricted securities. In order to dispose of an unregistered security, the Fund, where it has contractual rights to do so, may have to cause such security to be registered. A considerable period may elapse between the time the decision is made to sell the security and the time the security is registered, therefore enabling the Fund to sell it. Contractual restrictions on the resale of securities vary in length and scope and are generally the result of a negotiation between the issuer and acquiror of the securities. In either case, the Fund would bear market risks during that period.
CERTAIN AFFILIATIONS
Certain broker-dealers may be considered to be affiliated persons of the Fund or First Trust Advisors. Absent an exemption from the Securities and Exchange Commission or other regulatory relief, the Fund is generally precluded from effecting certain principal transactions with affiliated brokers, and its ability to utilize affiliated brokers for agency transactions is subject to restrictions. This could limit the Fund's ability to engage in securities transactions and take advantage of market opportunities. In addition, unless and until the underwriting syndicate is broken in connection with the initial public offering of the Common Shares, the Fund will be precluded from effecting principal transactions with brokers who are members of the syndicate.
ANTI-TAKEOVER PROVISIONS
The Fund's Declaration of Trust includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status. These provisions could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares. See "Certain Provisions in the Declaration of Trust."
SECONDARY MARKET FOR THE FUND'S SHARES
The issuance of Common Shares through the Fund's Dividend Reinvestment Plan may have an adverse effect on the secondary market for the Fund's Common Shares. The increase in the number of outstanding Common Shares resulting from issuances pursuant to the Fund's Dividend Reinvestment Plan and the discount to the market price at which such Common Shares may be issued, may put downward pressure on the market price for the Common Shares. Common Shares will not be issued pursuant to the Dividend Reinvestment Plan at any time when Common Shares are trading at a lower price than the Fund's NAV per Common Share. When the Fund's Common Shares are trading at a premium, the Fund may also issue Common Shares that may be sold through private transactions effected on the NYSE or through broker-dealers. The increase in the number of outstanding Common Shares resulting from these offerings may put downward pressure on the market price for Common Shares.
LENDING PORTFOLIO SECURITIES
To generate additional income, the Fund may lend portfolio securities in an amount up to 33-1/3% of Managed Assets to broker-dealers, major banks or other recognized domestic institutional borrowers of securities. As with other extensions of credit, there are risks of delay in the recovery or even loss of rights in the collateral should a borrower default or fail financially. The Fund intends to engage in lending portfolio securities only when such lending is fully secured by investment grade collateral held by an independent agent.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the management of the Fund, including supervision of the duties performed by the Adviser and the Sub-Adviser. There are five trustees of the Fund, one of whom is an "interested person" (as defined in the 1940 Act) and four of whom are not "interested persons." The names and business addresses of the trustees and officers of the Fund and their principal occupations and other affiliations during the past five years are set forth under "Management of the Fund" in the SAI.
INVESTMENT ADVISER
First Trust Advisors, 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532, is the investment adviser to the Fund and is responsible for selecting and supervising the Sub-Adviser. First Trust Advisors serves as investment adviser or portfolio supervisor to investment portfolios with approximately $14.0 billion in assets which it managed or supervised as of September 30, 2004.
First Trust Advisors is also responsible for the ongoing monitoring of the Fund's investment portfolio, managing the Fund's business affairs and providing certain clerical, bookkeeping and other administrative services.
First Trust Advisors, a registered investment adviser, is an Illinois limited partnership formed in 1991 and an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 (the "Advisers Act"). First Trust Advisors is a limited partnership with one limited partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one general partner, The Charger Corporation. Grace Partners is a limited partnership with one general partner, The Charger Corporation, and a number of limited partners. Grace Partners' and The Charger Corporation's primary business is investment advisory and broker-dealer services through their interests. The Charger Corporation is an Illinois corporation controlled by the Robert Donald Van Kampen family. First Trust Advisors is controlled by Grace Partners and The Charger Corporation.
For additional information concerning First Trust Advisors, including a description of the services provided, see the SAI.
SUB-ADVISER
Aberdeen Asset Management Inc. will serve as the Fund's Sub-Adviser. Aberdeen was incorporated in 1993 and has been registered as an investment adviser under the Advisers Act since August 1995. Aberdeen's principal business focus is to provide investment management services with regard to investment in global securities. Aberdeen managed approximately $885 million of assets as of September 30, 2004. Aberdeen is located at 300 S.E. 2nd Street, Suite 820, Ft. Lauderdale, Florida 33301.
Aberdeen is a wholly owned subsidiary of Aberdeen Asset Management PLC, which is the parent company of an asset management group managing approximately $39.99 billion of assets for a range of pension funds, financial institutions, investment trusts, unit trusts, offshore funds, charities and private clients, in addition to U.S. registered investment companies as of September 30, 2004. Aberdeen PLC was formed in 1983 and was first listed on the London Stock Exchange in 1991 and obtained a secondary listing on the Singapore Stock Exchange in November 1997. At December 2003, the firm was 8.78% owned by management and staff.
Affiliates of Aberdeen manage three closed-end funds in the United States. The three U.S. funds, Aberdeen Asia-Pacific Income Fund, Inc. (AMEX: "FAX"), Aberdeen Australia Equity Fund, Inc. (AMEX: "IAF") and Aberdeen Global Income Fund, Inc. (AMEX: "FCO") have net assets of approximately $2.5 billion as of June 30, 2004.
In rendering investment advisory services, the Sub-Adviser may use the resources of wholly owned investment adviser subsidiaries of Aberdeen Asset Management PLC. In particular, the subsidiaries which may provide resources are Aberdeen Asset Management Asia Limited ("Aberdeen Singapore"), a Singapore corporation which is a U.S. registered investment adviser, and Aberdeen Asset Managers Limited ("Aberdeen UK"), which is not a U.S. registered adviser. Aberdeen UK and Aberdeen Singapore have entered into a Memorandum of Understanding ("MOU") with the Sub-Adviser pursuant to which both are considered "Participating Affiliates" of the Sub-Adviser as that term is used in relief granted by the staff of the Securities and Exchange Commission allowing U.S. registered advisers to use portfolio management and trading resources of advisory affiliates subject to the supervision of a registered adviser. Investment professionals from each affiliate may render portfolio management, research or trading services to clients of the Sub-Adviser, including the Fund, as Affiliated Associated Persons of the Sub-Adviser under the MOU, and are subject to supervision by the Sub-Adviser.
There is no one individual primarily responsible for portfolio management decisions for the Fund. Investments are made under the direction of a committee in accordance with the Fund's investment strategy. For additional information concerning Aberdeen, including a description of the services provided, see "Sub-Adviser" in the SAI.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between the Adviser and the Fund, the Fund has agreed to pay a fee for the services and facilities provided by the Adviser at the annual rate of 1.0% of Managed Assets.
For purposes of calculation of the management fee, the Fund's "Managed Assets" means the average daily gross asset value of the Fund (which includes assets attributable to the Fund's Preferred Shares, if any, and the principal amount of borrowings), minus the sum of the Fund's accrued and unpaid dividends on any outstanding Preferred Shares and accrued liabilities (other than the principal amount of any borrowings incurred, commercial paper or notes issued by the Fund).
In addition to the management fee, the Fund pays all other costs and expenses of its operations including the compensation of its trustees (other than those affiliated with the Adviser), custodian, transfer agency, administrative, accounting and dividend disbursing expenses, legal fees, leverage expenses, rating agency fees, listing fees and expenses, expenses of independent auditors, expenses of repurchasing Common Shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies and taxes, if any.
The Sub-Adviser receives a portfolio management fee at the annual rate of .50% of Managed Assets, which is paid by the Adviser out of the Adviser's management fee.
The Adviser has agreed to pay (i) all organizational expenses and (ii) all offering costs of the Fund (other than sales load, but including the partial reimbursement of certain underwriter expenses) that exceed .2% (or $.04 per Common Share) of the Fund's offering price. The Sub-Adviser has agreed to reimburse the Adviser for one-half of such organizational expenses and offering costs of the Fund that exceed .2% (or $.04 per Common Share) of the Fund's offering price. The Sub-Adviser has also agreed to reimburse the Adviser for one-half of the quarterly incentive fee payable by the Adviser to A.G. Edwards as described in "Underwriting--Additional Compensation and Other Relationships."
Because the fee paid to the Adviser (and by the Adviser to the Sub-Adviser) will be calculated on the basis of the Fund's Managed Assets, which include the proceeds of leverage, the dollar amount of the Adviser's and Sub-Adviser's fees will be higher (and the Adviser and Sub-Adviser will be benefited to that extent) when leverage is utilized. In this regard, if the Fund uses leverage in the amount equal to 33-1/3% of the Fund's Managed Assets (after their issuance), the Fund's management fee would be 1.49% of net assets attributable to Common Shares. See "Summary of Fund Expenses."
NET ASSET VALUE
The NAV of the Common Shares of the Fund will be computed based upon the value of the Fund's portfolio securities and other assets. The NAV will be determined as of the close of regular trading on the NYSE (normally 4:00 p.m. New York City time) on each day the NYSE is open for trading. Domestic debt securities and foreign securities will normally be priced using data reflecting the earlier closing of the principal markets for those securities. The Fund calculates NAV per Common Share by subtracting the Fund's liabilities (including accrued expenses, dividends payable and any borrowings of the Fund) and the liquidation value of any outstanding Preferred Shares from the Fund's Managed Assets (the value of the securities and other investments the Fund holds plus cash or other assets, including interest accrued but not yet received) and dividing the result by the total number of Common Shares outstanding.
The assets in the Fund's portfolio will be valued daily in accordance with valuation procedures adopted by the Board of Trustees. The Sub-Adviser anticipates that a majority of the Fund's assets will be valued using market information supplied by third parties. In the event that market quotations are not readily available, the pricing service does not provide a valuation for a particular asset, or the valuations are deemed unreliable, or if events occurring after the close of the principal markets for particular securities (e.g., domestic debt and foreign securities), but before the Fund values its assets, would call into doubt whether the earlier market quotations represent fair value, the Fund may use a fair value method in good faith to value the Fund's securities and investments. The use of fair value pricing by the Fund will be governed by valuation procedures established by the Fund's Board of Trustees, and in accordance with the provisions of the 1940 Act.
Fair Value. When applicable, fair value of securities of an issuer is determined by the Board or a committee of the Board or a designee of the Board. In fair valuing the Fund's investments, consideration is given to several factors, which may include, among others, the following:
o the fundamental business data relating to the issuer;
o an evaluation of the forces which influence the market in which the securities of the issuer are purchased and sold;
o the type, size and cost of the security;
o the financial statements of the issuer;
o the credit quality and cash flow of the issuer, based on the Sub-Adviser's or external analysis;
o the information as to any transactions in or offers for the security;
o the price and extent of public trading in similar securities (or equity securities) of the issuer, or comparable companies;
o the coupon payments;
o the quality, value and saleability of collateral, if any, securing the security;
o the business prospects of the issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the issuer's management;
o the prospects for the issuer's industry, and multiples (of earnings and/or cash flow) being paid for similar businesses in that industry; and
o other relevant factors.
Other Securities. Securities for which the primary market is a national securities exchange or the NASDAQ National Market System are valued at the last reported sale price (NASDAQ Official Closing Price for NASDAQ National Market Securities) on the day of valuation. Listed securities for which no sale was reported on that date are valued at the mean between the most recent bid and asked prices. Securities traded in the over-the-counter market are valued at their closing bid prices. Valuation of short-term cash equivalent investments will be at amortized cost.
DISTRIBUTIONS
The Fund's present policy, which may be changed at any time by the Fund's Board of Trustees, is to distribute to Common Shareholders monthly dividends of all or a portion of its net income after payment of dividends and interest in connection with leverage used by the Fund. It is expected that the initial monthly dividend on the Fund's Common Shares will be declared approximately 45 days, and paid approximately 60 to 90 days, after the completion of this offering, depending on market conditions. The Fund expects that all or a portion of any capital gains will be distributed at least annually.
Various factors will affect the level of the Fund's income, including the asset mix, the average maturity of the Fund's portfolio, the amount of leverage utilized by the Fund and the Fund's use of hedging. To permit the Fund to maintain a more stable monthly distribution, the Fund may from time to time distribute less than the entire amount of income earned in a particular period.
The undistributed income would be available to supplement future distributions. As a result, the distributions paid by the Fund for any particular monthly period may be more or less than the amount of income actually earned by the Fund during that period. Undistributed income will add to the Fund's NAV and, correspondingly, distributions from undistributed income will decrease the Fund's NAV. Shareholders will automatically have all dividends and distributions reinvested in Common Shares issued by the Fund or purchased in the open market in accordance with the Fund's dividend reinvestment plan unless an election is made to receive cash. See "Dividend Reinvestment Plan."
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 to receive cash distributions, all dividends, including any capital gain dividends, on your Common Shares will be automatically reinvested by PFPC 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 PFPC Inc., as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will receive will be determined as follows:
(1) If the Common Shares are trading at or above NAV at the time of valuation, the Fund will issue new shares at a price equal to the greater of (i) NAV per Common Share on that date or (ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the Plan Agent will receive the dividend or distribution in cash and will purchase Common Shares in the open market, on the NYSE 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 that time of valuation, resulting in the purchase of fewer shares than if the dividend or distribution had been paid in Common Shares issued by the Fund. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market within 30 days of the valuation date except where temporary curtailment or suspension of purchases is necessary to comply with federal securities laws. Interest will not be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving written notice to the Plan Agent, or by telephone at (800) 331-1710, in accordance with such reasonable requirements as the Plan Agent and Fund may agree upon. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Agent will sell your shares and send you the proceeds, minus brokerage commissions.
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 will not affect a Common Shareholder's tax liability on those dividends and distributions. See "Tax Matters."
If you hold your Common Shares with a brokerage firm that does not participate in the Plan, you will not be able to participate in the Plan and any dividend reinvestment may be effected on different terms than those described above. Consult your financial advisor for more information.
The Fund reserves the right to amend or terminate the Plan if in the judgment of the Board of Trustees the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan may be obtained from PFPC Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
DESCRIPTION OF SHARES
COMMON SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of Common Shares. The Common Shares being offered have a par value of $.01 per share and subject to the rights of the holders of Preferred Shares, if issued, have equal rights to the payment of dividends and the distribution of assets upon liquidation. The Common Shares being offered will, when issued, be fully
paid and, subject to matters discussed in "Certain Provisions in the Declaration of Trust," non-assessable, and currently have no preemptive or conversion rights (except as may otherwise be determined by the Board of Trustees in their sole discretion) or rights to cumulative voting.
The Fund's Common Shares have been approved for listing on the New York Stock Exchange, subject to notice of issuance, under the symbol "FAM." The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
NAV will be reduced immediately following the offering by the amount of the
sales load and offering expenses paid by the Fund. The Adviser has agreed to pay
(i) all organizational expenses and (ii) all offering costs of the Fund (other
than sales load, but including a partial reimbursement of certain underwriter
expenses) that exceed .2% (or $.04 per Common Share) of the Fund's offering
price. The Sub-Adviser has agreed to reimburse the Adviser for one-half of such
organizational expenses and offering costs of the Fund that exceed .2% (or $.04
per Common Share) of the Fund's offering price. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional Common Shares or sell shares already held, the shareholder may conveniently do so by trading on the exchange through a broker or otherwise. Shares of closed-end investment companies may frequently trade on an exchange at prices lower than net asset value. Shares of closed-end investment companies like the Fund have during some periods traded at prices higher than net asset value and during other periods have traded at prices lower than net asset value. Because the market value of the Common Shares may be influenced by such factors as dividend levels (which are in turn affected by expenses), dividend stability, portfolio credit quality, net asset value, relative demand for and supply of such shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, the Fund cannot assure you that Common Shares will trade at a price equal to or higher than NAV in the future. The Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes.
PREFERRED SHARES
The Declaration of Trust provides that the Fund's Board of Trustees may authorize and issue Preferred Shares with rights as determined by the Board of Trustees, by action of the Board of Trustees without the approval of the Common Shareholders. Common Shareholders have no preemptive right to purchase any Preferred Shares that might be issued.
The Fund may elect to issue Preferred Shares as part of its leverage strategy. The Fund currently intends to issue Leverage Instruments, which may include Preferred Shares, representing up to 33-1/3% of the Fund's Managed Assets immediately after the Leverage Instruments are issued. The Board of Trustees also reserves the right to issue Preferred Shares to the extent permitted by the 1940 Act, which currently limits the aggregate liquidation preference of all outstanding Preferred Shares plus the principal amount of any outstanding leverage consisting of debt to 50% of the value of the Fund's Managed Assets less liabilities and indebtedness of the Fund (other than leverage consisting of debt). We cannot assure you, however, that any Preferred Shares will be issued. Although the terms of any Preferred Shares, including dividend rate, liquidation preference and redemption provisions, will be determined by the Board of Trustees, subject to applicable law and the Declaration of Trust, it is likely that the Preferred Shares will be structured to carry a relatively short-term dividend rate reflecting interest rates on short-term bonds, by providing for the periodic redetermination of the dividend rate at relatively short intervals through an auction, remarketing or other procedure. The Fund also believes that it is likely that the liquidation preference, voting rights and redemption provisions of the Preferred Shares will be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Fund, the holders of Preferred Shares will be entitled to receive a preferential liquidating distribution, which is expected to equal the original purchase price per Preferred Share plus accrued and unpaid dividends, whether or not declared, before any distribution of assets is made to Common Shareholders. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of Preferred Shares will not be entitled to any further participation in any distribution of assets by the Fund.
Voting Rights. The 1940 Act requires that the holders of any Preferred Shares, voting separately as a single class, have the right to elect at least two trustees at all times. The remaining trustees will be elected by holders of Common Shares and Preferred Shares, voting together as a single class. In addition, subject to the prior rights, if any, of the holders of any other class of senior securities outstanding, the holders of any Preferred Shares have the right to elect a majority of the trustees of the Fund at any time two years' dividends on any Preferred Shares are unpaid. The 1940 Act also requires that, in addition to any approval by shareholders that might otherwise be required, the approval of the holders of a majority of any outstanding Preferred Shares, voting separately as a class, would be required to (1) adopt any plan of reorganization that would adversely affect the Preferred Shares, and (2) take any action requiring a vote of security holders under Section 13(a) of the 1940 Act, including, among other things, changes in the Fund's subclassification as a closed-end investment company or changes in its fundamental investment restrictions. See "Certain Provisions in the Declaration of Trust." As a result of these voting rights, the Fund's ability to take any such actions may be impeded to the extent that there are any Preferred Shares outstanding. The Board of Trustees presently intends that, except as otherwise indicated in this prospectus and except as otherwise required by applicable law or the Declaration of Trust, holders of Preferred Shares will have equal voting rights with Common Shareholders (one vote per share, unless otherwise required by the 1940 Act) and will vote together with Common Shareholders as a single class.
The affirmative vote of the holders of a majority of the outstanding Preferred Shares, voting as a separate class, will be required to amend, alter or repeal any of the preferences, rights or powers of holders of Preferred Shares so as to affect materially and adversely such preferences, rights or powers, or to increase or decrease the authorized number of Preferred Shares. The class vote of holders of Preferred Shares described above will in each case be in addition to any other vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Fund. The terms of any Preferred Shares issued are expected to provide that (1) they are redeemable by the Fund in whole or in part at the original purchase price per share plus accrued dividends per share, (2) the Fund may tender for or purchase Preferred Shares and (3) the Fund may subsequently resell any shares so tendered for or purchased. Any redemption or purchase of Preferred Shares by the Fund will reduce the leverage applicable to the Common Shares, while any resale of shares by the Fund will increase that leverage.
The discussion above describes the possible offering of Preferred Shares by the Fund. If the Board of Trustees determines to proceed with such an offering, the terms of the Preferred Shares may be the same as, or different from, the terms described above, subject to applicable law and the Fund's Declaration of Trust. The Board of Trustees, without the approval of the Common Shareholders, may authorize an offering of Preferred Shares or may determine not to authorize such an offering, and may fix the terms of the Preferred Shares to be offered.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders, in certain circumstances, could be held personally liable for the obligations of the Fund. However, the Declaration of Trust contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the Board of Trustees. The Declaration of Trust further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote.
The Declaration of Trust includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. Generally, the Declaration of Trust requires a vote by holders of at least two-thirds of the Common Shares and Preferred Shares, if any, voting together as a single class, except as described below and in the Declaration of Trust, to authorize: (1) a conversion of the Fund from a closed-end to an open-end investment company; (2) a merger or consolidation of the Fund with any corporation, association, trust or other organization, including a series or class of such other organization (subject to a limited exception if the acquiring fund is not an operating entity immediately prior to the transaction); (3) a sale, lease or exchange of all or substantially all of the Fund's assets (other than in the regular course of the Fund's investment activities, in connection with the termination of the Fund, and other limited circumstances set forth in the Declaration of Trust); (4) in certain circumstances, a termination of the Fund; (5) a removal of trustees by Common Shareholders; or (6) certain transactions in which a Principal Shareholder (as defined in the Declaration of Trust) is a party to the transaction. However, with respect to (1) above, if there are Preferred Shares outstanding, the affirmative vote of the holders of two-thirds of the Preferred Shares voting as a separate class shall also be required. With respect to (2) above, except as otherwise may be required, if the transaction constitutes a plan of reorganization which adversely affects Preferred Shares, if any, then an affirmative vote of two-thirds of the Preferred Shares voting together as a separate class is required as well. With respect to (1) through (3), if such transaction has already been authorized by the affirmative vote of two-thirds of the trustees, then the affirmative vote of the majority of the outstanding voting securities, as defined in the 1940 Act (a "Majority Shareholder Vote"), is required, provided that when only a particular class is affected (or, in the case of removing a trustee, when the trustee has been elected by only one class), only the required vote of the particular class will be required. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the Fund's shares otherwise required by law or any agreement between the Fund and any national securities exchange. Approval of Fund shareholders is not required, however, for any transaction, whether deemed a merger, consolidation, reorganization, exchange of shares or otherwise whereby the Fund issues shares in connection with the acquisition of assets (including those subject to liabilities) from any other investment company or similar entity. None of the foregoing provisions may be amended except by the vote of at least two-thirds of the Common Shares and Preferred Shares, if any, outstanding and entitled to vote. See the SAI under "Certain Provisions in the Declaration of Trust."
The provisions of the Declaration of Trust described above could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common
Shares by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's investment objectives and policies. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration of Trust on file with the Securities and Exchange Commission for the full text of these provisions.
STRUCTURE OF THE FUND; COMMON SHARE REPURCHASES
AND CONVERSION TO OPEN-END FUND
CLOSED-END STRUCTURE
Closed-end funds differ from open-end management investment companies (commonly referred to as mutual funds) in that closed-end funds generally list their shares for trading on a securities exchange and do not redeem their shares at the option of the shareholder. By comparison, mutual funds issue securities redeemable at net asset value at the option of the shareholder and typically engage in a continuous offering of their shares. Mutual funds are subject to continuous asset in-flows and out-flows that can complicate portfolio management, whereas closed-end funds generally can stay more fully invested in securities consistent with the closed-end fund's investment objective and policies. In addition, in comparison to open-end funds, closed-end funds have greater flexibility in their ability to make certain types of investments, including investments in illiquid securities.
However, shares of closed-end investment companies listed for trading on a securities exchange frequently trade at a discount from net asset value, but in some cases trade at a premium. The market price may be affected by trading volume of the shares, general market and economic conditions and other factors beyond the control of the closed-end fund. The foregoing factors may result in the market price of the Common Shares being greater than, less than or equal to net asset value. The Board of Trustees has reviewed the structure of the Fund in light of its investment objectives and policies and has determined that the closed-end structure is in the best interests of the shareholders. As described below, however, the Board of Trustees will review periodically the trading range and activity of the Fund's shares with respect to its net asset value and the Board may take certain actions to seek to reduce or eliminate any such discount. Such actions may include open market repurchases or tender offers for the Common Shares at net asset value or the possible conversion of the Fund to an open-end fund. There can be no assurance that the Board will decide to undertake any of these actions or that, if undertaken, such actions would result in the Common Shares trading at a price equal to or close to net asset value per Common Share. In addition, as noted above, the Board of Trustees has determined in connection with this initial offering of Common Shares of the Fund that the closed-end structure is desirable, given the Fund's investment objectives and policies. Investors should assume, therefore, that it is highly unlikely that the Board would vote to convert the Fund to an open-end investment company.
REPURCHASE OF COMMON SHARES AND TENDER OFFERS
In recognition of the possibility that the Common Shares might trade at a discount to net asset value and that any such discount may not be in the interest of shareholders, the Fund's Board of Trustees, in consultation with the Adviser, Sub-Adviser and any financial adviser that the Adviser may retain, from time to time will review possible actions to reduce any such discount. The Board of Trustees of the Fund will consider from time to time open market repurchases of and/or tender offers for Common Shares to seek to reduce any market discount from net asset value that may develop. In connection with its consideration from time to time of open-end repurchases of and/or tender offers for Common Shares, the Board of Trustees of the Fund will consider whether to commence a tender offer or share-repurchase program at the first quarterly Board meeting following a calendar year in which the Fund's Common Shares have traded at an average weekly discount from net asset value of more than 10% in the last 12 weeks of that calendar year. After any consideration of potential actions to seek to reduce any significant market discount, the Board may, subject to its fiduciary obligations and compliance with applicable state and federal laws, authorize the commencement of a share-repurchase program or tender offer. The size and timing of any such share repurchase program or tender offer will be determined by the Board of Trustees in light of the market discount of the Common Shares, trading volume of the Common Shares, information presented to the Board of Trustees regarding the potential impact of any such share repurchase program or tender offer, and general market and economic conditions. There can be no assurance that the Fund will in fact effect repurchases of or tender offers for any of its Common Shares. The Fund may, subject to its investment limitation with respect to borrowings, incur debt to finance such repurchases or a tender offer or for other valid purposes. Interest on any such borrowings would increase the Fund's expenses and reduce the Fund's net income.
There can be no assurance that repurchases of Common Shares or tender offers, if any, will cause the Common Shares to trade at a price equal to or in excess of their net asset value. Nevertheless, the possibility that a portion of the Fund's outstanding Common Shares may be the subject of repurchases or tender offers may reduce the spread between market price and net asset value that might
otherwise exist. In the opinion of the Fund, sellers may be less inclined to accept a significant discount in the sale of their Common Shares if they have a reasonable expectation of being able to receive a price of net asset value for a portion of their Common Shares in conjunction with an announced repurchase program or tender offer for the Common Shares.
Although the Board of Trustees believes that repurchases or tender offers generally would have a favorable effect on the market price of the Common Shares, the acquisition of Common Shares by the Fund will decrease the Managed Assets of the Fund and therefore will have the effect of increasing the Fund's expense ratio and decreasing the asset coverage with respect to any Preferred Shares outstanding. Because of the nature of the Fund's investment objectives, policies and portfolio, the Adviser and the Sub-Adviser do not anticipate that repurchases of Common Shares or tender offers should interfere with the ability of the Fund to manage its investments in order to seek its investment objectives, and do not anticipate any material difficulty in borrowing money or disposing of portfolio securities to consummate repurchases of or tender offers for Common Shares, although no assurance can be given that this will be the case.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time if approved by the holders of two-thirds of the Fund's shares outstanding and entitled to vote; provided, however, that such vote shall be by Majority Shareholder Vote if the action in question was previously approved by the affirmative vote of two-thirds of the Board of Trustees. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the shares otherwise required by law or any agreement between the Fund and any national securities exchange. In the event of conversion, the Common Shares would cease to be listed on the NYSE or other national securities exchange or market system. Any Preferred Shares or borrowings would need to be redeemed or repaid upon conversion to an open-end investment company. The Board of Trustees believes, however, that the closed-end structure is desirable, given the Fund's investment objectives and policies. Investors should assume, therefore, that it is unlikely that the Board of Trustees would vote to convert the Fund to an open-end investment company. Shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charge or contingent deferred sales charge, if any, as might be in effect at the time of a redemption. The Fund expects to pay all such redemption requests in cash, but intends to reserve the right to pay redemption requests in a combination of cash or securities. If such partial payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If the Fund were converted to an open-end fund, it is likely that new Common Shares would be sold at net asset value plus a sales load.
TAX MATTERS
The following discussion of federal income tax matters is based on the advice of Chapman and Cutler LLP, counsel to the Fund.
This section and the discussion in the SAI summarize some of the main U.S. federal income tax consequences of owning shares of the Fund. This section is current as of the date of this prospectus. Tax laws and interpretations change frequently, and this summary does not describe all of the tax consequences to all taxpayers. For example, this summary generally does not describe your situation or the tax consequences to you if you are a bank or a financial institution, an insurance company, a dealer in securities, a non-U.S. shareholder, a tax-exempt or tax-deferred plan, account or entity, a shareholder that is subject to the alternative minimum tax or a shareholder that holds its shares as or in a hedge against currency risk, constructive sale or a conversion transaction or other investor with special circumstances. In addition, this section does not describe your state, local or foreign taxes. Investors should consult their own tax advisors regarding the tax consequences of investing in the Fund.
Fund Status. The Fund intends to elect and to qualify annually as a "regulated investment company" under the federal tax laws. To qualify, the Fund must, among other things, satisfy certain requirements relating to the source and nature of its income and the diversification of its assets. If the Fund qualifies as a regulated investment company and distributes all of its income, the Fund generally will not pay federal income or excise taxes.
Distributions. Fund distributions will constitute dividends to the extent of the Fund's current and accumulated earnings and profits. After the end of each year, you will receive a tax statement that separates your Fund's distributions into two categories, ordinary income distributions and capital gains dividends. Ordinary income distributions are generally taxed at your ordinary tax rate, but, as further discussed below, if the Fund holds equity securities, under the "Jobs and Growth Tax Relief Reconciliation Act of 2003" (the "Tax Act"), certain ordinary income distributions received from the Fund may be taxed at new tax rates equal to those applicable to net capital gains. Generally, you will treat all capital gains dividends as long-term capital gains regardless of how long you have owned your shares. To determine your actual tax liability for your capital gains dividends, you must calculate your total net capital gain or loss for the tax year after considering all of your other taxable transactions, as described below. In addition, to the extent that the Fund makes distributions in excess of its current and accumulated earnings and profits, such distributions will represent a return of capital for tax purposes to the extent of your tax basis in the shares and thus will generally not be taxable to you and will thereafter constitute a capital gain. The tax status of your distributions from the Fund is not affected by whether you reinvest your distributions in additional shares or receive them in cash. The tax laws may require you to treat distributions made to you in January as if you had received them on December 31 of the previous year.
Dividends Received Deduction. A corporation that owns shares generally will not be entitled to the dividends received deduction with respect to dividends received from the Fund because the dividends received deduction is generally not available for distributions from regulated investment companies. However, if the Fund holds equity securities, certain ordinary income dividends on shares that are attributable to dividends received by the Fund from certain domestic corporations may be designated by the Fund as being eligible for the dividends received deduction but this amount is not expected to be significant.
If You Sell Shares. If you sell your shares, you will generally recognize a taxable gain or loss. To determine the amount of this gain or loss, you must subtract your tax basis in your shares from the amount you receive in the transaction. Your tax basis in your shares is generally equal to the cost of your shares, generally including sales charges. In some cases, however, you may have to adjust your tax basis after you purchase your shares. Any loss realized upon a taxable disposition of the shares may be disallowed if other substantially identical shares are acquired within a 61-day period beginning 30 days before and ending 30 days after the date the original shares are disposed of. If disallowed, the loss will be reflected by an upward adjustment to the basis of the shares acquired. In addition, the ability to deduct capital losses may otherwise be limited.
Taxation of Capital Gains and Losses and Certain Ordinary Income Dividends. Under the Tax Act, if you are an individual, the maximum marginal federal tax rate for net capital gain is generally 15% (generally 5% for certain taxpayers in the 10% and 15% tax brackets). These capital gains rates are generally effective for taxable years beginning before January 1, 2009. For periods not covered by the Tax Act, if you are an individual, the maximum marginal federal tax rate for capital gains is generally 20% (10% for certain taxpayers in the 10% and 15% tax brackets). For tax years not covered by the Tax Act, the 20% rate is reduced to 18% and the 10% rate is reduced to 8% for net capital gains from most property acquired after December 31, 2000, with a holding period of more than five years.
Net capital gain equals net long-term capital gain minus net short-term capital loss for the taxable year. Capital gain or loss is long-term if the holding period for the asset is more than one year and is short-term if the holding period for the asset is one year or less. You must exclude the date you purchase your shares to determine your holding period. However, if you receive a capital gain dividend from the Fund and sell your share at a loss after holding it for six months or less, the loss will be recharacterized as long-term capital loss to the extent of the capital gain dividend received. The tax rates for capital gains realized from assets held for one year or less are generally the same as for ordinary income. In addition, the Code treats certain capital gains as ordinary income in special situations.
Pursuant to the Tax Act, if the Fund holds equity securities, a portion of the ordinary income dividends received by an individual shareholder from a regulated investment company such as the Fund generally will be taxed at the same new rates that apply to net capital gain (as discussed above), but only if certain holding period requirements are satisfied and the dividends are attributable to qualified dividends received by the Fund itself. These special rules relating to the taxation of ordinary income dividends from regulated investment companies generally apply to taxable years beginning before January 1, 2009. The Fund generally does not expect to generate qualifying dividends eligible for the new capital gains tax rates.
Foreign Tax Credit. If the Fund invests in any foreign securities, the tax statement that you receive may include an item showing foreign taxes the Fund paid to other countries. In this case, dividends taxed to you will include your share of the taxes the Fund paid to other countries. You may be able to deduct or receive a tax credit for your share of these taxes.
Backup Withholding. The Fund may be required to withhold, for U.S. federal income taxes, a portion of all taxable dividends and redemption proceeds payable to shareholders who fail to provide the Fund with their correct taxpayer identification numbers or who otherwise fail to make required certifications, or if the Fund or a shareholder has been notified by the Internal Revenue Service that such shareholder is subject to backup withholding. Corporate shareholders and certain other shareholders under federal tax laws are generally exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld will be allowed as a refund or credit against the shareholder's federal income tax liability if the appropriate information is provided to the Internal Revenue Service.
Further Information. The SAI summarizes further federal income tax considerations that may apply to the Fund and its shareholders and may qualify the considerations discussed herein.
UNDERWRITING
Subject to the terms and conditions stated in a purchase agreement dated , 2004, each Underwriter named below, for which Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as representative, has severally agreed to purchase, and the Fund has agreed to sell to such Underwriter, the number of Common Shares set forth opposite the name of such Underwriter.
NUMBER OF
UNDERWRITER COMMON SHARES
----------- -------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ....................................
A.G. Edwards & Sons, Inc. ...................................
Wachovia Capital Markets, LLC ...............................
Advest, Inc. ...............................................
Robert W. Baird & Co. Incorporated ..........................
Ferris, Baker Watts, Incorporated ...........................
Fixed Income Securities, L.P. ...............................
RBC Capital Markets Corporation .............................
SunTrust Capital Markets, Inc. ..............................
Wedbush Morgan Securities Inc. ..............................
Wells Fargo Securities, LLC .................................
-------------
Total ...........................................
=============
|
The purchase agreement provides that the obligations of the Underwriters to purchase the Common Shares included in this offering are subject to the approval of certain legal matters by counsel and certain other conditions. The Underwriters are obligated to purchase all the Common Shares sold under the purchase agreement if any of the Common Shares are purchased. In the purchase agreement, the Fund, the Adviser and the Sub-Adviser have agreed to indemnify the Underwriters against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended, or to contribute to payments the Underwriters may be required to make for any of those liabilities.
COMMISSIONS AND DISCOUNTS
The Underwriters propose to initially offer some of the Common Shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the Common Shares to certain dealers at the public offering price less a concession not in excess of $ per Common Share. The sales load the Fund will pay of $.90 per Common Share is equal to 4.5% of the initial offering price. The Underwriters may allow, and the dealers may reallow, a discount not in excess of $ per Common Share on sales to other dealers. Notwithstanding the foregoing, certain Underwriters may pay up to an additional $ per Common Share from the sales load to certain dealers pursuant to existing arrangements with such dealers. After the initial public offering, the public offering price, concession and discount may be changed. Investors must pay for any Common Shares purchased on or before , 2004.
The following table shows the public offering price, estimated offering expenses, sales load and proceeds to the Fund. The information assumes either no exercise or full exercise by the Underwriters of their overallotment option.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price.................................... $20.00 $ $
Sales load............................................... $.90 $ $
Estimated offering expenses.............................. $.04 $ $
Proceeds, after expenses, to the Fund.................... $19.06 $ $
|
The Fund will pay its Common Share offering costs up to and including $.04 per Common Share. The Fund has agreed to pay the Underwriters $.00667 per Common Share as a partial reimbursement of expenses incurred in connection with the offering. The amount paid by the Fund as this partial reimbursement to the Underwriters will not exceed .03335% of the total price to the public of the Common Shares sold in this offering. The Fund has also agreed to pay certain fees to counsel to the Underwriters in an amount up to $7,500, which will not exceed % of the total price to the public of the Common Shares sold in this offering. The Adviser has agreed to pay (i) all organizational costs and (ii) all offering costs of the Fund (other than sales load, but including the partial reimbursement of certain underwriter expenses described above) that exceed .2% (or $.04 per Common Share) of the Fund's offering price. The Sub-Adviser has agreed to reimburse the Adviser for one-half of such organizational expenses and offering costs of the Fund that exceed .2% (or $.04 per Common Share) of the
Fund's offering price. To the extent that aggregate offering expenses are less than $.04 per Common Share, up to .10% of the public offering price of the securities sold in this offering, up to such expense limit, will be paid to First Trust Portfolios, L.P. as reimbursement for the distribution services it provides to the Fund (the "Contingent Reimbursement Amount"). First Trust Portfolios, L.P. is an affiliate of the Adviser.
OVERALLOTMENT OPTION
The Fund has granted the Underwriters an option to purchase up to additional Common Shares at the public offering price, less the sales load, within 45 days from the date of this prospectus solely to cover any overallotments. If the Underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreement, to purchase a number of additional Common Shares proportionate to that Underwriter's initial amount reflected in the above table.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the Common Shares is complete, Securities and Exchange Commission rules may limit Underwriters and selling group members from bidding for and purchasing the Common Shares. However, the representatives may engage in transactions that stabilize the price of the Common Shares, such as bids or purchases to peg, fix or maintain that price.
If the Underwriters create a short position in the Common Shares in connection with the offering, i.e., if they sell more Common Shares than are listed on the cover of this prospectus, the representative may reduce that short position by purchasing Common Shares in the open market. The representative may also elect to reduce any short position by exercising all or part of the overallotment option described above. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the Common Shares sold in this offering for their account may be reclaimed by the syndicate if such Common Shares are repurchased by the syndicate in stabilizing or covering transactions. Purchases of the Common Shares to stabilize the price or to reduce a short position may cause the price of the Common Shares to be higher than it might be in the absence of such purchases.
Neither the Fund nor any of the Underwriters makes any representations or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Shares. In addition, neither the Fund nor any of the Underwriters makes any representation that the representative will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
The Fund has agreed not to offer or sell any additional Common Shares for a period of 180 days after the date of the purchase agreement without the prior written consent of the Underwriters, except for the sale of the Common Shares to the Underwriters pursuant to the purchase agreement and certain transactions relating to the Fund's Dividend Reinvestment Plan.
The Fund anticipates that the Underwriters may from time to time act as brokers or, after they have ceased to be Underwriters, dealers in executing the Fund's portfolio transactions. The Underwriters are active Underwriters of, and dealers in, securities and act as market-makers in a number of such securities, and therefore can be expected to engage in portfolio transactions with the Fund.
Common Shares will be sold so as to ensure that New York Stock Exchange distribution standards (i.e., round lots, public shares and aggregate market value) will be met.
ADDITIONAL COMPENSATION AND OTHER RELATIONSHIPS
The Adviser (and not the Fund) has agreed to pay from its own assets additional compensation to Merrill Lynch. This additional compensation will be payable quarterly at the annual rate of .15% of the Fund's Managed Assets during the continuance of the Investment Management Agreement or other investment management agreement between the Adviser and the Fund. Merrill Lynch has agreed to provide, as requested by the Adviser, specified after-market support services designed to maintain the visibility of the Fund on an ongoing basis; relevant information, studies or reports regarding the Fund and the closed-end investment company industry; and consultation regarding market discounts of the Fund. The total amount of these additional compensation payments to Merrill Lynch, which are considered underwriting compensation, will not exceed % of the total price to the public of the Common Shares sold in this offering.
The Adviser (and not the Fund) has also agreed to pay from its own assets to A.G. Edwards & Sons, Inc. ("A.G. Edwards") a quarterly incentive fee at an annual rate of up to .10% of the Fund's Managed Assets attributable to Common Shares sold by A.G. Edwards in this offering, provided it meets a certain sales target established by the Adviser. This fee will be payable during the continuance of the Investment Management Agreement or other investment management agreement between the Adviser and the Fund. The amount of the quarterly incentive fee paid to A.G. Edwards, which is considered underwriting compensation, will not exceed % of the total price to the public of the Common Shares sold in this offering.
First Trust Portfolios, L.P., an affiliate of the Adviser, will provide distribution assistance in connection with the sale of the Common Shares of the Fund, and may pay compensation to its respective employees who assist in marketing securities. In connection with this distribution assistance, to the extent the offering expenses payable by the Fund are less than .2% (or $.04 per Common Share) of the Fund's offering price, the Fund will pay the Contingent Reimbursement Amount of up to .10% of the amount of the total price to the public of the Common Shares sold in this offering, up to such expense limit, to First Trust Portfolios, L.P. as reimbursement for its distribution assistance. Accordingly, the Contingent Reimbursement Amount will not exceed .10% of the total price to the public of the Common Shares sold in this offering. Any compensation paid by First Trust Portfolios, L.P. to its respective employees who assist in marketing securities will be paid first from the Contingent Reimbursement Amount, if any, and then from First Trust Portfolios, L.P.'s assets (and not the assets of the Fund).
The total amount of the additional compensation payments to Merrill Lynch and A.G. Edwards described above, plus the amounts paid by the Fund as the $.00667 per Common Share partial reimbursement to the Underwriters, the payment of certain fees to counsel to the Underwriters and the Contingent Reimbursement Amount payable to First Trust Portfolios, L.P., will not exceed 4.5% (or $.90 per Common Share) of the total price to the public of the Common Shares sold in this offering. The sum total of all compensation to or reimbursement of Underwriters and First Trust Portfolios, L.P. in connection with this public offering of Common Shares, including sales load and all forms of additional compensation to Underwriters, will be limited to 9% (or $1.80 per Common Share) of the total price to the public of the Common Shares sold in this offering.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated is 4 World Financial Center, New York, New York 10080. The address of A.G. Edwards & Sons, Inc. is One North Jefferson Avenue, St. Louis, Missouri 63101.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is PFPC Trust Company, 301 Bellevue Parkway, Wilmington, Delaware 19809. The Fund's transfer, shareholder services and dividend paying agent is PFPC Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809. Pursuant to an Administration and Accounting Services Agreement, PFPC Inc. also provides certain administrative and accounting services to the Fund, including maintaining the Fund's books of account, records of the Fund's securities transactions, and certain other books and records; acting as liaison with the Fund's independent registered public accounting firm by providing such accountant with various audit-related information with respect to the Fund; and providing other continuous accounting and administrative services. As compensation for these services, the Fund has agreed to pay PFPC Inc. an annual fee, calculated daily and payable on a monthly basis, of .06% of the Fund's first $250 million of average Managed Assets, subject to decrease with respect to additional Fund Managed Assets.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed upon for the Fund by Chapman and Cutler LLP, Chicago, Illinois, and for the Underwriters by Clifford Chance US LLP, New York, New York. Chapman and Cutler LLP and Clifford Chance US LLP may rely as to certain matters of Massachusetts law on the opinion of Bingham McCutchen LLP.
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds........................................................... 1 Investment Objectives..................................................... 1 Investment Restrictions................................................... 1 Investment Policies and Techniques........................................ 3 Additional Information About the Fund's Investments and Investment Risks....................................................... 11 Other Investment Policies and Techniques.................................. 28 Management of the Fund.................................................... 37 Investment Adviser........................................................ 42 Proxy Voting Procedures................................................... 45 Sub-Adviser............................................................... 45 Portfolio Transactions and Brokerage...................................... 47 Description of Shares..................................................... 49 Certain Provisions in the Declaration of Trust............................ 51 Repurchase of Fund Shares; Conversion to Open-End Fund.................... 53 Federal Income Tax Matters................................................ 55 Performance Related and Comparative Information........................... 60 Independent Registered Public Accounting Firm............................. 62 Custodian, Administrator and Transfer Agent............................... 62 Additional Information.................................................... 63 Report of Independent Registered Public Accounting Firm................... 64 Financial Statements...................................................... 65 Appendix A--Description of Ratings........................................ A-1 Appendix B--Aberdeen Asset Management Inc. Proxy Voting Policy............ B-1 |
THIS PAGE IS INTENTIONALLY LEFT BLANK.
[BLANK PAGE]
SHARES
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY
INCOME FUND
COMMON SHARES
$20.00 PER SHARE
MERRILL LYNCH & CO.
A.G. EDWARDS
WACHOVIA SECURITIES
ADVEST, INC.
ROBERT W. BAIRD & CO.
FERRIS, BAKER WATTS
INCORPORATED
FIXED INCOME SECURITIES, L.P.
RBC CAPITAL MARKETS
SUNTRUST ROBINSON HUMPHREY
WEDBUSH MORGAN SECURITIES INC.
WELLS FARGO SECURITIES, LLC
Back Cover
SUBJECT TO COMPLETION, DATED NOVEMBER 23, 2004
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
First Trust/Aberdeen Global Opportunity Income Fund (the "Fund") is a newly organized, closed-end, diversified management investment company.
This Statement of Additional Information relating to the common shares of beneficial interest of the Fund (the "Common Shares") is not a prospectus, but should be read in conjunction with the Fund's Prospectus dated November 23, 2004 (the "Prospectus"). This Statement of Additional Information does not include all information that a prospective investor should consider before purchasing Common Shares. Investors should obtain and read the Prospectus prior to purchasing such shares. A copy of the Fund's Prospectus may be obtained without charge by calling (800) 988-5891. You also may obtain a copy of the Prospectus on the Securities and Exchange Commission's web site (http://www.sec.gov). Capitalized terms used but not defined in this Statement of Additional Information have the meanings ascribed to them in the Prospectus.
This Statement of Additional Information is dated November 23, 2004.
TABLE OF CONTENTS
PAGE
USE OF PROCEEDS..............................................................1
INVESTMENT OBJECTIVES........................................................1
INVESTMENT RESTRICTIONS......................................................1
INVESTMENT POLICIES AND TECHNIQUES...........................................3
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS AND
INVESTMENT RISKS.........................................................11
OTHER INVESTMENT POLICIES AND TECHNIQUES....................................28
MANAGEMENT OF THE FUND......................................................37
INVESTMENT ADVISER..........................................................42
PROXY VOTING PROCEDURES.....................................................45
SUB-ADVISER.................................................................45
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................47
DESCRIPTION OF SHARES.......................................................49
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST..............................51
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND......................53
FEDERAL INCOME TAX MATTERS..................................................55
PERFORMANCE RELATED AND COMPARATIVE INFORMATION.............................60
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...............................62
-i-
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT.................................62
ADDITIONAL INFORMATION......................................................63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................... 64
FINANCIAL STATEMENTS....................................................... 65
|
APPENDIX A DESCRIPTION OF RATINGS..................................A-1
APPENDIX B ABERDEEN ASSET MANAGEMENT INC. PROXY VOTING POLICY......B-1
USE OF PROCEEDS
The net proceeds of the offering of Common Shares of the Fund will be approximately $_____________ ($_____________ if the Underwriters exercise the overallotment option in full) after payment of the estimated organizational expenses and offering costs. The Fund expects it will be able to invest substantially all of the net proceeds in securities and other instruments that meet the investment objective and policies within two months after completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in cash or cash equivalents.
For the Fund, First Trust Advisors L.P. ("First Trust Advisors" or "Adviser") has agreed to pay (i) all organizational expenses and (ii) all offering costs of the Fund (other than sales load, but including a partial reimbursement of underwriter expenses) that exceed $0.04 per Common Share. Aberdeen Asset Management Inc. ("Aberdeen" or "Sub-Adviser") has agreed to reimburse the Adviser for one-half of such organizational expenses and offering costs of the Fund that exceed $.04 per Common Share.
INVESTMENT OBJECTIVES
Investment Objectives. The Fund's primary investment objective is to seek a high level of current income. As a secondary objective, the Fund will seek capital appreciation. The Fund will pursue those objectives by investing in the world bond markets through a diversified portfolio of investment grade and below-investment grade government and corporate debt securities.
"Managed Assets" means the gross asset value of the Fund (including assets attributable to the Fund's Preferred Shares (defined below), if any, and the principal amount of borrowings) minus the sum of the Fund's accrued and unpaid dividends on any outstanding Preferred Shares and accrued liabilities (other than the principal amount of any borrowings incurred or of commercial paper or notes issued by the Fund). For purposes of determining Managed Assets, the liquidation preference of preferred shares of beneficial interest ("Preferred Shares") is not treated as a liability. Percentage limitations described in this Statement of Additional Information are as of the time of investment by the Fund and may be exceeded on a going-forward basis as a result of market value fluctuations of the Fund's portfolio and other events.
The Common Shares may trade at a discount or premium to net asset value ("NAV"). An investment in the Fund may not be appropriate for all investors and is not intended to be a complete investment program. No assurance can be given that the Fund will achieve its investment objectives. For further discussion of the Fund's portfolio composition and associated special risk considerations, see "The Fund's Investments" and "Risks" in the Prospectus.
INVESTMENT RESTRICTIONS
The Fund's investment objectives and certain investment policies of the Fund are described in the Prospectus. The Fund, as a fundamental policy, may not:
1. With respect to 75% of its total assets, purchase any securities if, as a result, more than 5% of the Fund's total assets would then be invested in securities of any single issuer or if, as a result, the Fund would hold more than 10% of the outstanding voting securities of any single issuer; provided, that Government securities (as defined in the Investment Company Act of 1940 (the "1940 Act")), securities issued by other investment companies and cash items (including receivables) shall not be counted for purposes of this limitation;
2. Purchase any security if, as a result of the purchase, 25% or more of the Fund's total assets (taken at current value) would be invested in the securities of Borrowers and other issuers having their principal business activities in the same industry; provided, that this limitation shall not apply with respect to obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities;
3. Borrow money, except as permitted by the 1940 Act, the rules thereunder and interpretations thereof or pursuant to a Securities and Exchange Commission exemptive order;
4. Issue senior securities, as defined in the 1940 Act,
other than: (i) Preferred Shares which immediately after issuance will
have asset coverage of at least 200%; (ii) indebtedness which
immediately after issuance will have asset coverage of at least 300%;
(iii) the borrowings permitted by investment restriction 3 above, or
(iv) pursuant to a Securities and Exchange Commission exemptive order;
5. Make loans of funds or other assets, other than by entering into repurchase agreements, lending portfolio securities and through the purchase of debt securities in accordance with its investment objectives, policies and limitations;
6. Act as underwriter of another issuer's securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of portfolio securities;
7. Purchase or sell real estate, but this shall not prevent the Fund from investing in securities of companies that deal in real estate or are engaged in the real estate business, including real estate investment trusts, and securities secured by real estate or interests therein and the Fund may hold and sell real estate or mortgages on real estate acquired through default, liquidation, or other distributions of an interest in real estate as a result of the Fund's ownership of such securities; and
8. Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts, derivative instruments or from investing in securities or other instruments backed by physical commodities).
For the purpose of applying the limitation set forth in subparagraph
(2) above, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly, in the case of a non-governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. When a municipal bond is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above.
Except as noted above, the foregoing fundamental investment policies, together with the investment objectives of the Fund, cannot be changed without approval by holders of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, which includes Common Shares and Preferred Shares, if any, voting together as a single class, and of the holders of the outstanding Preferred Shares voting as a single class. Under the 1940 Act a "majority of the outstanding voting securities" means the vote of: (A) 67% or more of the Fund's shares present at a meeting, if the holders of more than 50% of the Fund's shares are present or represented by proxy; or (B) more than 50% of the Fund's shares, whichever is less.
In addition to the foregoing investment policies, the Fund is also subject to the following non-fundamental restrictions and policies, which may be changed by the Board of Trustees. The Fund may not:
1. Sell securities short, unless the Fund owns or has the right to obtain securities equivalent in kind and amount to the securities sold at no added cost, and provided that transactions in options, futures contracts, options on futures contracts, or other derivative instruments are not deemed to constitute selling securities short; or
2. Purchase securities of listed companies for the purpose of exercising control.
The foregoing restrictions and limitations will apply only at the time of purchase of securities, and the percentage limitations will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of an acquisition of securities, unless otherwise indicated.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's investment objectives, policies, and techniques that are described in the Fund's Prospectus.
INVESTMENT PHILOSOPHY AND PROCESS
Under normal market conditions, the Fund will invest substantially all of its Managed Assets in a diversified portfolio of fixed income securities, including government and corporate bonds, of U.S. and non-U.S. issuers.
The Sub-Adviser will select securities for the portfolio employing the investment strategies established by Aberdeen's Global Investment Grade and Global Emerging Market teams. Aberdeen's Investment Team (consisting of the Global Investment Grade and Global Emerging Market Teams) will regularly monitor and make allocation decisions among issuers of various regions, countries and credit qualities in order to achieve the Fund's investment objectives of a high level of current income and capital appreciation measured in U.S. dollars. The Fund has no stated maturity strategy. Rather, the Sub-Advisor will invest in securities of various maturities which it believes offer income and total return opportunities to the Fund. The Sub-Adviser will select government and corporate bonds from a universe of over 65 countries, focusing on high real yields and improving credit conditions that offer income and total return opportunities. Allocation between investment grade and below-investment grade securities will vary according to relative value and opportunity identified by Aberdeen's Investment Team, with input from Aberdeen's Fixed Income Strategy Group. The Fund's portfolio positions will be undertaken according to the quality of their risk-adjusted potential return. Aberdeen's Investment Team will have daily responsibility for the management of the portfolio and for the implementation of the investment process, monitored through weekly investment committee meetings.
Investment Grade Securities. The Fund will invest no less than 40% of its Managed Assets in securities rated "Baa3" or better by Moody's Investors Service, Inc. ("Moody's"), "BBB-" or better by Standard & Poor's Corporation, a division of The McGraw-Hill Companies ("S&P"), or comparably rated by another nationally recognized statistical rating organization ("NRSRO") or, if unrated, determined by the Sub-Adviser to be of comparable credit quality. A portfolio containing investment grade securities that invests across many national markets has opportunity to achieve returns in excess of a portfolio that invests in a single domestic bond market, as the global fixed income market place is less efficient than domestic markets. This opportunity is derived from a variety of sources: differing regulatory environments, structural ownership patterns, less correlated economic cycles, and other diverse local influences. Furthermore combining several investment grade country yield curves, that have different volatility and correlation to global events, usually results in lower overall portfolio volatility.
Aberdeen seeks to identify and invest in bond markets across the globe that offer high income, and in addition, offer the potential for capital gain due to an improvement in the fiscal, economic or structural environments of the respective issuers.
Aberdeen's research process is internally driven and is predominantly top down in nature. Each country and bond market is analyzed from the perspectives of (1) long term structural trends, (2) medium term (strategic) bond market valuations and (3) short-term tactical views.
Long term structural views are driven by an understanding of demographics, political systems/cycles, fiscal sustainability, international trade, capital market structures and regulatory regimes. These factors influence the demand/supply for capital, and therefore have a structural impact on long term yield patterns. Opportunities are identified by comparative country analysis, determining which countries are likely to benefit or suffer as economic and political cycles change.
Strategic views examine current market valuations in order to judge whether they are consistent with economic and political environments, and how they are likely to change given Aberdeen's forecasts over a 3-12 month period. This market evaluation is conducted by Aberdeen's Global Economics Team and the Fixed Income Strategy Group who use a combination of quantitative and qualitative techniques to highlight apparent imbalances between market valuations and underlying fundamentals. Such analysis will determine the bias of the construction of the investment grade portion of the Fund's portfolio.
Tactical views are formed through continuous monitoring of market developments. Relative value, technical analysis, market positioning intelligence and portfolio flow data are used to determine the timing, implementation and scale of positions suggested by Aberdeen's strategic views.
Underlying the investment process is consistent risk management and stress testing of the portfolio using risk modeling and attribution techniques. The quantitative techniques are used to identify and test market observations and are a tool to assist in portfolio construction.
Emerging Markets and Non-Investment Grade Securities. As used in this Statement of Additional Information, an "emerging market" country is any country determined to have an emerging market economy, considering factors such as whether the country has a low-to-middle-income economy according to the World Bank or its related organizations, the country's credit rating, its political and economic stability and the development of its financial and capital markets. These countries generally include countries located in Latin America, the Caribbean, Asia, Africa, the Middle East and Eastern and Central Europe. Global emerging market countries must engage in political, structural and fiscal reform in order to reduce the cost and volatility of their sources of borrowing. If they successfully engage in such reform, investors in emerging market securities can achieve strong total return through a combination of high income and capital gain. Effective credit analysis and market structural awareness is central to long-term performance, and a selective and active approach can enhance return and reduce risk. Constructing a diversified portfolio means exposure to different regional economical cycles and less correlated events, therefore regional shifts can be exploited or avoided. Emerging market debt is one of the earliest mechanisms available to investors to benefit from an improvement in a country's outlook.
Aberdeen's Emerging Market Debt Team follows a disciplined investment process that applies daily information flow into investment recommendations, portfolio construction and risk management. The process is designed to highlight total return opportunities across all emerging debt markets, and the underlying philosophy is to only invest in "improving credits." Improving credits are issuers that, in the opinion of Aberdeen's Investment Team, are strengthening
their credit quality due to improving fiscal, economic and funding conditions. Improving credits also include issuers engaging in regulatory and structural reform to strengthen their ability to manage their financing requirements through differing interest rate and economic cycles.
There is a large variance in the return outcomes offered by different emerging market countries, as reform succeeds or fails according to political or economic variables. Early identification of structural strengths or weaknesses in order to respond to these variables is required as sometimes it is difficult to attempt to manage exposure in volatile market conditions. In addition, behavioral characteristics can vary greatly between different countries, and market structural factors (volumes, demand/supply, relative security value) can have a large impact on total return outcomes. Effective and timely management of the flow of information is required to be in a position to make informed investment decisions.
Aberdeen's investment philosophy is therefore to pursue an active, total return and diversified approach to constructing the emerging debt portion of the Fund's investment portfolio. By only investing in improving credits, identified through a disciplined investment process, Aberdeen seeks to increase the probability of the Fund's performance.
The building block for an investment decision is to gauge debt sustainability, and what events might improve or decrease that sustainability. Credit improvement means lower borrowing costs in the long-term, while deterioration in credit rarely does. Aberdeen's Country Investment Note is an internally researched document drawing on a variety of sources that include country research visits, dialogue with multilateral agencies/local investors/ government officials and discourse with other market participants. The purpose of the note is a snapshot of all variables relevant to a particular issue that assists in making an investment decision.
Of equal importance is market structural and technical analysis (yield curves, relative security value, volume, demand/supply imbalances) as it is complementary to fundamental credit analysis. Either can indicate investment opportunities that may be confirmed or rejected by the other. These processes create the emerging market debt opportunity set.
Global Market factors may enhance/negate those emerging market debt opportunities according to regional or macro trends. Although emerging market debt investment is credit oriented in nature, there are other factors (global interest rates, swap spreads, currency moves, risk appetite indicators) that will also contribute to performance, irrespective of underlying credit improvement, and therefore the timing of any investment allocation may have to be varied. The specialist teams within Aberdeen's Global Fixed Income team exchange views through the Fixed Income Strategy Group, and the interaction of this global view with credit, structural and market analysis contributes to portfolio construction.
The Fund's portfolio is constructed to reflect the investment team's credit views, on a diversified basis, and in a manner to optimize exposure according to global market conditions. There is a specific buy/sell discipline that relates to improving/deteriorating credits and relative valuations. Each investment idea requires a target return and a stop-loss so the risk/reward ratio is acceptable. Furthermore a list of qualifying indicators is used to determine what events may change the investment rationale, so they can be monitored on a continual basis. Underlying the investment process is consistent
risk management and stress testing of the Fund's portfolio using risk modeling and attribution techniques, on a daily basis.
Aberdeen's philosophy is that there is continual development and refinement of the process, and that implementation is disciplined and of a high quality. The mechanisms for ensuring implementation consistently are weekly investment meetings and monthly reviews of performance attribution.
PORTFOLIO COMPOSITION
The Fund's portfolio will be composed principally of the following investments:
Government Debt Securities. The Fund will invest at least 60% of its Managed Assets in securities issued by government, government-related and supranational issuers ("government debt"). At least 25% of the Fund's Managed Assets will be invested in U.S. dollar-denominated securities or non-U.S. dollar-denominated securities that have been fully hedged into U.S. dollars. The Fund will invest in government debt securities, including those of emerging market issuers. These securities may be U.S. dollar-denominated or non-U.S. dollar-denominated and include: (a) debt obligations issued or guaranteed by foreign national, provincial, state, municipal or other governments with taxing authority or by their agencies or instrumentalities; and (b) debt obligations of supranational entities. Government debt includes: debt securities issued or guaranteed by governments, governmental agencies or instrumentalities and political subdivisions; debt securities issued by government owned, controlled or sponsored entities; interests in entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by the above-noted issuers; or debt securities issued by supranational entities such as the World Bank or the European Union. The Fund may also invest in securities denominated in currencies of emerging market countries. Emerging market debt securities generally are rated in the lower rating categories of recognized credit rating agencies or are unrated and considered to be of comparable quality to lower rated debt securities. A non-U.S. issuer of debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and the Fund may have limited recourse in the event of a default. Some of these risks do not apply to issuers in larger, more developed countries. These risks are more pronounced in investments in issuers in emerging markets or if the Fund invests significantly in one country.
Corporate Bonds. The Fund may invest up to 40% of its Managed Assets in corporate debt obligations. Corporate bonds generally are used by corporations to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain bonds are "perpetual" in that they have no maturity date. The Fund may invest in non-U.S. corporate bonds which involve unique risks compared to investing in the securities of U.S. issuers. See "Additional Information about the Fund's Investments and Investment Risks--Non-U.S, Securities Risk."
Non-Investment Grade Securities. The Fund may invest up to 60% of its Managed Assets in securities that, at the time of investment, are not investment grade quality. However, the Fund will not invest more than 15% of its Managed Assets in securities rated below "B-" by Moody's and/or S&P or, if unrated,
determined by the Sub-Adviser to be of comparable credit quality. Accordingly, the Fund may invest a significant portion of its Managed Assets in securities that are rated non-investment grade or, if unrated, are considered to be of comparable quality by the Sub-Adviser. Non-investment grade quality securities are regarded as having predominately speculative characteristics with respect to the issuers to pay interest and repay principal, and are commonly referred to as "high yield" or "junk" bonds. Issuers of high yield securities may be highly leveraged and may not have available to them more traditional methods of financing. The prices of these lower grade securities typically are more sensitive to negative developments, such as a decline in the issuer's revenues or a general economic downturn, than the prices of higher grade securities. The secondary market for high yield securities may not be as liquid as the secondary market for more highly rated securities, a factor which may have an adverse effect on the Fund's ability to dispose of a particular security. See "Additional Information about the Fund's Investments and Investment Risks - Non-Investment Grade Securities Risks."
Asset-Backed Securities. The Fund may invest up to 15% of its Managed Assets in asset-backed securities. Asset-backed securities are securities that represent a participation in, or are secured by and payable from, a stream of payments generated by particular assets, most often a pool or pools of similar assets (e.g., trade receivables). The credit quality of these securities depends primarily upon the quality of the underlying assets and the level of credit support and/or enhancement provided. The underlying assets (e.g., loans) are subject to prepayments which shorten the securities' weighted average maturity and may lower their return. Losses or delays in payment may result if the credit support or enhancement is exhausted, because the required payments of principal and interest on the underlying assets are not made. The value of these securities may also change because of changes in the market's perception of the creditworthiness of the servicing agent for the pool the originator of the pool, or the financial institution or fund providing the credit support or enhancement.
Credit Linked Notes. The Fund may invest up to 35% of its Managed Assets in credit linked notes ("Credit Linked Notes"), provided such securities are issued by an institution with at least an "A" credit rating by Moody's and/or S&P. Credit Linked Notes are structured securities typically issued by banks whose principal and interest payments are contingent on the performance of a specified borrower company or companies (the "Reference Issuer"). Credit Linked Notes are created by embedding a credit default swap in a funded asset to form an investment whose credit risk and cash flow characteristics resemble those of a bond or loan. These notes pay an enhanced coupon to the investor for taking on the added credit risk of the Reference Issuer.
Illiquid/Restricted Securities. The Fund may invest up to 10% of its Managed Assets in securities that, at the time of investment, are illiquid (determined using the Securities and Exchange Commission's standard applicable to investment companies, i.e., securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities). The Fund may also invest, without limit, in securities that are unregistered (but are eligible for purchase and sale by certain qualified institutional buyers) or are held by control persons of the issuer and securities that are subject to contractual restrictions on
their resale ("restricted securities"). However, restricted securities determined by the Sub-Adviser to be illiquid are subject to the limitations set forth above.
Short-Term Debt Securities; Temporary Defensive Position; Invest-Up Period. During the period which the net proceeds of the offering of Common Shares are being invested, the issuance of Preferred Shares, if any, commercial paper or notes and/or borrowings are being invested or during periods in which the Adviser or the Sub-Adviser determines that it is temporarily unable to follow the Fund's investment strategy or that it is impractical to do so, the Fund may deviate from its investment strategy and invest all or any portion of its Managed Assets in cash and cash equivalents. The Fund's determination, in consultation with the Adviser and the Sub-Adviser, that it is temporarily unable to follow the Fund's investment strategy or that it is impracticable to do so will generally occur only in situations in which a market disruption event has occurred and where trading in the securities selected through application of the Fund's investment strategy is extremely limited or absent. In such a case, the Fund may not pursue or achieve its investment objectives.
The cash and cash equivalents are defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities. U.S. government agency securities include securities issued by: (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. government provides financial support to such U.S. government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. government, its agencies, and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Under current FDIC regulations, the maximum insurance payable as to any one certificate of deposit is $100,000, therefore, certificates of deposit purchased by the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for the Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Fund to invest temporarily available cash. Pursuant to the Fund's policies and procedures, the Fund may enter into repurchase agreements only with respect to obligations of the U.S. government, its agencies or instrumentalities; certificates of deposit; or bankers' acceptances in which the Fund may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the Fund is entitled to sell the underlying collateral. If the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss of both principal and interest. The Sub-Adviser monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The investment adviser does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by the Fund at any time. The Sub-Adviser will consider the financial condition of the corporation (e.g., earning power, cash flow, and other liquidity measures) and will continuously monitor the corporation's ability to meet all its financial obligations, because the Fund's liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to commercial paper rated in the highest categories by a nationally recognized statistical rating organization and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
(5) The Fund may invest in bankers' acceptances which are short-term credit instruments used to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an asset or it may be sold in the secondary market at the going rate of interest for a specific maturity.
(6) The Fund may invest in bank time deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest. There may be penalties for the early withdrawal of such time deposits, in which case the yields of these investments will be reduced.
(7) The Fund may invest in shares of money market funds in accordance with the provisions of the 1940 Act.
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS AND INVESTMENT RISKS
NO OPERATING HISTORY
The Fund is a newly organized, diversified, closed-end management investment company with no operating history.
INVESTMENT AND MARKET RISK
An investment in Common Shares is subject to investment risk, including the possible loss of the entire principal amount that you invest. Your investment in Common Shares represents an indirect investment in the securities owned by the Fund. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The value of the securities in which the Fund invests will affect the value of the Common Shares. Your Common Shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions.
MANAGEMENT RISK
The Fund is subject to management risk because it is an actively managed portfolio. The Adviser and the Sub-Adviser will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
NON-INVESTMENT GRADE SECURITIES RISK
The Fund may invest up to 60% of its Managed Assets in non-investment grade securities. Non-investment grade securities are rated below "Baa3" by Moody's, below "BBB-" by S&P, or comparably rated by another NRSRO or, if unrated, are of comparable credit quality. Non-investment grade debt instruments are commonly referred to as "high-yield" or "junk" bonds and are considered speculative with respect to the issuer's capacity to pay interest and principal and are susceptible to default or decline in market value due to adverse economic and business developments. The market values for high yield securities tend to be very volatile, and these securities are less liquid than investment grade debt securities.
Adverse changes in economic conditions are more likely to lead to a weakened capacity of a high yield issuer to make principal payments and interest payments than an investment grade issuer. The principal amount of non-investment grade securities outstanding has proliferated in the past decade as an increasing number of issuers have used non-investment grade securities for corporate financing. An economic downturn could severely affect the ability of highly leveraged issuers to service their debt obligations or to repay their obligations upon maturity. Similarly, down-turns in profitability in specific
industries, such as the energy industry, could adversely affect the ability of non-investment grade debt issuers in that industry to meet their obligations. The market values of lower quality debt securities tend to reflect individual developments of the issuer to a greater extent than do higher quality securities, which react primarily to fluctuations in the general level of interest rates. Factors having an adverse impact on the market value of lower quality securities may have an adverse effect on the Fund's NAV and the market value of its Common Shares. In addition, the Fund may incur additional expenses to the extent it is required to seek recovery upon a default in payment of principal or interest on its portfolio holdings. In certain circumstances, the Fund may be required to foreclose on an issuer's assets and take possession of its property or operations. In such circumstances, the Fund would incur additional costs in disposing of such assets and potential liabilities from operating any business acquired.
The secondary market for high yield securities may not be as liquid as the secondary market for more highly rated securities, a factor which may have an adverse effect on the Fund's ability to dispose of a particular security. There are fewer dealers in the market for high yield securities than for investment grade obligations. The prices quoted by different dealers may vary significantly and the spread between the bid and asked price is generally much larger than for higher quality instruments. Under adverse market or economic conditions, the secondary market for high yield securities could contract further, independent of any specific adverse changes in the condition of a particular issuer and these securities may become illiquid. As a result, the Fund could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating the Fund's NAV.
Because investors generally perceive that there are greater risks associated with lower quality debt securities of the type in which the Fund may invest a portion of its assets, the yields and prices of such securities may tend to fluctuate more than those for higher rated securities. In the lower quality segments of the debt securities market, changes in perceptions of an issuer's creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in higher quality segments of the debt securities market, resulting in greater yield and price volatility.
Ratings of securities represent the rating agencies' opinions regarding their credit quality and are not a guarantee of quality. Rating agencies attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer's current financial condition may be better or worse than a rating indicates. Therefore, the financial history, the financial condition, the prospects and the management of an issuer, among other things, also will be considered in selecting securities for the Fund's portfolio. See Appendix A to this Statement of Additional Information for a description of Moody's and S&P's ratings.
FIXED-INCOME SECURITIES RISK
In addition to the risks discussed above, debt securities, including high yield securities, are subject to certain risks, including:
o Issuer Risk. The value of fixed-income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer's goods and services.
o Reinvestment Risk. Reinvestment risk is the risk that income from the Fund's portfolio will decline if the Fund invests the proceeds from matured, traded or called bonds at market interest rates that are below the Fund portfolio's current earnings rate. A decline in income could affect the Common Shares' market price or their overall returns.
o Prepayment Risk. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing the Fund to reinvest in lower yielding securities. This is known as call or prepayment risk. Debt securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem an obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer.
o Credit Risk. Credit risk is the risk that a security in the Fund's portfolio will decline in price or the issuer fails to make interest payments when due because the issuer of the security experiences a decline in its financial status.
INTEREST RATE RISK
Interest rate risk is the risk that fixed-income securities will decline in value because of changes in market interest rates. When market interest rates rise, the market value of such securities generally will fall. Because the Fund will invest in securities that pay a fixed rate of return, the NAV and market price of the Common Shares will tend to decline if the market interest rates applicable to such investments were to rise. Market interest rates in the United States and in certain other countries in which the Fund may invest currently are near historically low levels.
NON-U.S. SECURITIES RISK
The Fund intends to invest a substantial portion of its assets in securities of non-U.S. issuers. Investing in securities of non-U.S. issuers, which are generally denominated in non-U.S. currencies, may involve certain risks not typically associated with investing in securities of U.S. issuers. "Foreign government securities" include debt securities issued or guaranteed, as to payment of principal and interest, by governments, semi-governmental entities, governmental agencies, supranational entities and other governmental entities (each a "Governmental Entity" and collectively, "Governmental Entities") of foreign countries denominated in the currencies of such countries
or in U.S. dollars (including debt securities of a Governmental Entity in any such country denominated in the currency of another such country).
A "supranational entity" is an entity constituted by the national governments of several countries to promote economic development. Examples of such supranational entities include, among others, the World Bank (International Bank for Reconstruction and Development), the European Investment Bank and the Asian Development Bank. Debt securities of "semi-governmental entities" are issued by entities owned by a national, state, or equivalent government or are obligations of a political unit that are not backed by the national government's "full faith and credit" and general taxing powers. Examples of semi-government issuers include, among others, the Province of Ontario and the City of Stockholm.
Investment in Government Debt Can Involve a High Degree of Risk. The Governmental Entity that controls the repayment of government debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of the debt. A Governmental Entity's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the Governmental Entity's policy toward the International Monetary Fund and the political constraints to which a Governmental Entity may be subject. Governmental Entities also may depend on expected disbursements from foreign governments, multilateral agencies and others to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make disbursements may be conditioned on a Governmental Entity's implementation of economic reforms and/or economic performance and the timely service of the debtor's obligations. Failure to implement such reforms, achieve the levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the Governmental Entity, which may further impair the debtor's ability or willingness to service its debts in a timely manner. Consequently, Governmental Entities may default on their government debt. Holders of government debt (including the Fund) may be requested to participate in the rescheduling of the debt and to extend further loans to Governmental Entities. There is no bankruptcy proceeding by which government debt on which Governmental Entities have defaulted may be collected in whole or in part.
Foreign Securities Involve Certain Risks. These risks include political or economic instability in the country of issue, the difficulty of predicting international trade patterns, the possibility of imposition of exchange controls, and the seizure or nationalization of foreign deposits. Such securities also may be subject to greater fluctuations in price than securities issued by United States corporations or issued or guaranteed by the U.S. government, its instrumentalities or agencies. In addition, there may be less publicly available information about a foreign issuer or government than about a domestic issuer or the U.S. government. Foreign issuers generally are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic issuers. There is generally less government regulation of securities exchanges, brokers and listed companies abroad than in the United States and, with respect to certain foreign countries, there is a possibility of confiscatory taxation and diplomatic developments which could affect investment. In many instances, foreign fixed-income
securities may provide higher yields than securities of domestic issuers which have similar maturities and quality. These securities may be less liquid than securities of U.S. issuers, its instrumentalities or agencies. Finally, in the event of a default of any foreign debt obligations, it may be more difficult for the Fund to obtain or to enforce a judgment against the issuers of these securities.
Investing in the fixed-income markets of developing countries involves exposure to economies that are generally less diverse and mature and to political systems which can be expected to have less stability than those of developed countries. Historical experience indicates that the markets of developing countries have been more volatile than the markets of developed countries. The risks associated with investments in foreign securities may be greater with respect to investments in developing countries and are certainly greater with respect to investments in the securities of financially and operationally troubled issuers.
Additional costs could be incurred in connection with the Fund's international investment activities. Foreign countries may impose taxes on income on foreign investments. Foreign brokerage commissions are generally higher than U.S. brokerage commissions. Increased custodian costs as well as administrative difficulties (such as the applicability of foreign laws to foreign custodians in various circumstances) may be associated with the maintenance of assets in foreign jurisdictions.
In addition, risks of investing in emerging markets securities include:
smaller market capitalization of securities markets, which may suffer periods of
relative illiquidity; significant price volatility; restrictions on foreign
investment; and possible repatriation of investment income and capital.
Furthermore, foreign investors may be required to register the proceeds of sale
and future economic or political crises could lead to price controls, forced
mergers, expropriation or confiscatory taxation, seizure, nationalization or
creation of government monopolies. The currencies of emerging market countries
may experience significant declines against the U.S. dollar, and devaluation may
occur subsequent to investments in these currencies by the Fund. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries.
COUNTRY RISK
This risk arises as the Fund may have exposure up to 30% of its Managed Assets to issuers in any one country. The impact on the Fund's NAV of specific risks relating to investment in non-U.S. issuers, such as political, regulatory, interest rate, currency and inflation, may be magnified due to the concentration of the Fund's investments in a particular country.
CURRENCY RISK
The value of securities denominated or quoted in foreign currencies may be adversely affected by fluctuations in the relative currency exchange rates and by exchange control regulations. The Fund's investment performance may be negatively affected by a devaluation of a currency in which the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities denominated or quoted in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar. Certain of the Fund's non-U.S. dollar-denominated securities may be hedged into U.S. dollars. However, as discussed in "Derivatives Risk" below, hedging may not alleviate all currency risks.
The Fund may enter into currency exchange transactions to hedge the Fund's exposure to foreign currency exchange rate risk. The Fund's currency transactions will be limited to portfolio hedging involving portfolio positions. Portfolio hedging is the use of a forward contract with respect to a portfolio security position denominated or quoted in a particular currency. A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange dealers or broker-dealers, are not exchange-traded, and are usually for less than one year, but may be renewed.
At the maturity of a forward contract to deliver a particular currency, the Fund may either sell the portfolio security related to such contract and make delivery of the currency, or it may retain the security and either acquire the currency on the spot market or terminate its contractual obligation to deliver the currency by purchasing an offsetting contract with the same currency trader obligating it to purchase on the same maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a forward contract. Accordingly, it may be necessary for the Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of currency that the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the currency. Conversely, it may be necessary to sell on the spot market some of the currency received upon the sale of the portfolio security if its market value exceeds the amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the currency. Should forward prices decline during the period between the Fund's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. A default on the contract would deprive the Fund of unrealized profits or force the Fund to cover its commitments for purchase or sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to the Fund of engaging in currency exchange transactions varies with such factors as the currency involved, the length of the contract period, and prevailing market conditions. Since currency exchange transactions are usually conducted on a principal basis, no fees or commissions are involved.
MARKET DISCOUNT FROM NET ASSET VALUE
Shares of closed-end investment companies frequently trade at a discount from their NAV. This characteristic is a risk separate and distinct from the risk that the Fund's NAV could decrease as a result of its investment activities and may be greater for investors expecting to sell their Common Shares in a relatively short period following completion of this offering. The NAV of the Common Shares will be reduced immediately following the offering as a result of the payment of certain offering costs. Although the value of the Fund's net assets is generally considered by market participants in determining whether to purchase or sell Common Shares, whether investors will realize gains or losses upon the sale of the Common Shares will depend entirely upon whether the market price of the Common Shares at the time of sale is above or below the investor's purchase price for the Common Shares. Because the market price of the Common Shares will be determined by factors such as NAV, dividend and distribution levels (which are dependent, in part, on expenses), supply of and demand for the Common Shares, stability of dividends or distributions, trading volume of the Common Shares, general market and economic conditions and other factors beyond the control of the Fund, the Fund cannot predict whether the Common Shares will trade at, below or above NAV or at, below or above the initial public offering price.
LEVERAGE RISK
The Fund may borrow an amount up to 33 1/3% (or such other percentage as permitted by law) of its Managed Assets (including the amount borrowed) less all liabilities other than borrowings. The Fund may also issue Preferred Shares in an amount up to 50% of the Fund's Managed Assets (including the proceeds from Preferred Shares, commercial paper or notes and/or borrowing (each a "Leverage Instrument" and collectively, the "Leverage Instruments")). However, the Fund intends, under normal circumstances, to utilize leverage in an amount up to 33 1/3% of the Fund's Managed Assets. Borrowings and the issuance of Preferred Shares or commercial paper or notes are referred to in this Statement of Additional Information collectively as "leverage." The Fund may use leverage for investment purposes, to finance the repurchase of its Common Shares and to meet cash requirements. Although the use of leverage by the Fund may create an opportunity for increased return for the Common Shares, it also results in additional risks and can magnify the effect of any losses. If the income and gains earned on the securities and investments purchased with leverage proceeds are greater than the cost of the leverage, the Common Shares' return will be greater than if leverage had not been used. Conversely, if the income or gains from the securities and investments purchased with such proceeds does not cover the cost of leverage, the return to the Common Shares will be less than if leverage had not been used. There is no assurance that a leveraging strategy
will be successful. Leverage involves risks and special considerations for Common Shareholders including:
o the likelihood of greater volatility of NAV and market price of the Common Shares than a comparable portfolio without leverage;
o the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any Preferred Shares that the Fund may pay will reduce the return to the Common Shareholders or will result in fluctuations in the dividends paid on the Common Shares;
o the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the Common Shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the Common Shares; and
o when the Fund uses financial leverage, the investment advisory fee payable to the Adviser (and by the Adviser to the Sub-Adviser) will be higher than if the Fund did not use leverage.
The Sub-Adviser, in its judgment, nevertheless may determine to continue to use leverage if it expects that the benefits to the Fund's shareholders of maintaining the leveraged position will outweigh the current reduced return.
The funds borrowed pursuant to a leverage borrowing program (such as a credit line or commercial paper program), or obtained through the issuance of Preferred Shares, constitute a substantial lien and burden by reason of their prior claim against the income of the Fund and against the net assets of the Fund in liquidation. The rights of lenders to receive payments of interest on and repayments of principal on any borrowings made by the Fund under a leverage borrowing program are senior to the rights of holders of Common Shares and the holders of Preferred Shares, with respect to the payment of dividends or upon liquidation. The Fund may not be permitted to declare dividends or other distributions, including dividends and distributions with respect to Common Shares or Preferred Shares or purchase Common Shares or Preferred Shares, unless at the time thereof the Fund meets certain asset coverage requirements and no event of default exists under any leverage program. In addition, the Fund may not be permitted to pay dividends on Common Shares unless all dividends on the Preferred Shares and/or accrued interest on borrowings have been paid, or set aside for payment. In an event of default under a leverage borrowing program, the lenders have the right to cause a liquidation of collateral (i.e., sell and other assets of the Fund) and, if any such default is not cured, the lenders may be able to control the liquidation as well. Certain types of leverage may result in the Fund being subject to covenants relating to asset coverage and Fund composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for the Preferred Shares or other leverage securities issued by the Fund. These guidelines may impose asset coverage or Fund composition requirements that are more stringent than those imposed by the 1940 Act. The Sub-Adviser does not believe that these covenants or guidelines will impede it from managing the Fund's portfolio in accordance with the Fund's investment objectives and policies.
While the Fund may from time to time consider reducing leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and NAV associated with leverage, there can be no assurance that the Fund will actually reduce leverage in the future or that any reduction, if undertaken, will benefit the Common Shareholders. Changes in the future direction of interest rates are very difficult to predict accurately. If the Fund were to reduce leverage based on a prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in leverage would likely operate to reduce the income and/or total returns to Common Shareholders relative to the circumstance if the Fund had not reduced leverage. The Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and Common Share price if the prediction were to turn out to be correct, and determine not to reduce leverage as described above.
DERIVATIVES RISK
The Fund may use various other investment management techniques that also involve certain risks and special considerations, including engaging in hedging and risk management transactions, including credit default swaps, Credit Linked Notes, interest rate options, futures, swaps, caps, floors, and collars, currency exchange transactions and other derivative transactions. These strategic transactions will be entered into to seek to manage the risks of the Fund's portfolio securities, but may have the effect of limiting the gains from favorable market movements.
A derivative is a financial instrument whose performance is derived at least in part from the performance of an underlying index, security or asset. The values of certain derivatives can be affected dramatically by even small market movements, sometimes in ways that are difficult to predict. There are many different types of derivatives, with many different uses. The Fund expects to enter into these transactions primarily to seek to preserve a return on a particular investment or portion of its portfolio, and also may enter into such transactions to seek to protect against decreases in the anticipated rate of return on floating or variable rate financial instruments the Fund owns or anticipates purchasing at a later date, or for other risk management strategies such as managing the effective dollar-weighted average duration of the Fund's portfolio. The Fund also may engage in hedging transactions to seek to protect the value of its portfolio against declines in NAV resulting from changes in interest rates or other market changes. Market conditions will determine whether and in what circumstances the Fund would employ any of the hedging and risk management techniques described below. The successful utilization of hedging and risk management transactions requires skills different from those needed in the selection of the Fund's portfolio securities. The Fund believes that the Sub-Adviser possesses the skills necessary for the successful utilization of hedging and risk management transactions. The Fund will incur brokerage and other costs in connection with its hedging transactions.
The Fund may enter into interest rate swaps or total rate of return swaps or purchase or sell interest rate caps or floors. Interest rate swaps involve the exchange by the Fund with another party of their respective obligations to pay or receive interest, e.g., an obligation to make floating rate payments for an obligation to make fixed rate payments.
The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest at the difference of the index and the predetermined rate on a notional principal amount (the reference amount with respect to which interest obligations are determined although no actual exchange of principal occurs) from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest at the difference of the index and the predetermined rate on a notional principal amount from the party selling the interest rate floor.
In circumstances in which the Sub-Adviser anticipates that interest rates will decline, the Fund might, for example, enter into an interest rate swap as the floating rate payor or, alternatively, purchase an interest rate floor. In the case of purchasing an interest rate floor, if interest rates declined below the floor rate, the Fund would receive payments from its counterparty which would wholly or partially offset the decrease in the payments it would receive in respect of the portfolio assets being hedged. In the case where the Fund purchases an interest rate swap, if the floating rate payments fell below the level of the fixed rate payment set in the swap agreement, the Fund's counterparty would pay the Fund amounts equal to interest computed at the difference between the fixed and floating rates over the notional principal amount. Such payments would offset or partially offset the decrease in the payments the Fund would receive in respect of floating rate portfolio assets being hedged.
The successful use of swaps, caps and floors to preserve the rate of return on a portfolio of financial instruments depends on the Sub-Adviser's ability to predict correctly the direction and extent of movements in interest rates.
The Fund may enter into currency exchange transactions to hedge the Fund's exposure to foreign currency exchange rate risk. The Fund's currency transactions will be limited to portfolio hedging involving portfolio positions. Portfolio hedging is the use of a forward contract with respect to a portfolio security position denominated or quoted in a particular currency. A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange dealers or broker-dealers, are not exchange-traded, and are usually for less than one year, but may be renewed.
At the maturity of a forward contract to deliver a particular currency, the Fund may either sell the portfolio security related to such contract and make delivery of the currency, or it may retain the security and either acquire the currency on the spot market or terminate its contractual obligation to deliver the currency by purchasing an offsetting contract with the same currency trader obligating it to purchase on the same maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a forward contract. Accordingly, it may be necessary for the Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of currency that the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the currency. Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the currency. Should forward prices decline during the period between the Fund's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. A default on the contract would deprive the Fund of unrealized profits or force the Fund to cover its commitments for purchase or sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to the Fund of engaging in currency exchange transactions varies with such factors as the currency involved, the length of the contract period, and prevailing market conditions. Since currency exchange transactions are usually conducted on a principal basis, no fees or commissions are involved.
Although the Fund believes that use of the hedging and risk management techniques described above will benefit the Fund, if the Sub-Adviser's judgment about the direction or extent of the movement in interest rates is incorrect, the Fund's overall performance would be worse than if it had not entered into any such transactions.
Because these hedging transactions are entered into for good-faith risk management purposes, the Sub-Adviser and the Fund believe these obligations do not constitute senior securities. The Fund usually will enter into interest rate swaps on a net basis, i.e., where the two parties make net payments with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap will be accrued and an amount of cash or liquid securities having an aggregate NAV at least equal to the accrued excess will be maintained in a segregated account by the Fund's custodian. If the Fund enters into a swap on other than a net basis, the Fund will maintain in the segregated account the full amount of the Fund's obligations under each swap. Accordingly, the Fund does not treat swaps as senior securities. The Fund may enter into swaps, caps and floors with member banks of the Federal Reserve System, members of the New York Stock Exchange or other entities determined by the Adviser, pursuant to procedures adopted and reviewed on an ongoing basis by the Board of Trustees, to be creditworthy. If a default occurs by the other party to the transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction but remedies may be subject to bankruptcy and insolvency laws which could affect the Fund's rights as a creditor. The swap market has grown substantially in recent
years with a large number of banks and financial services firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps and floors are more recent innovations and they are less liquid than swaps. There can be no assurance, however, that the Fund will be able to enter into interest rate swaps or to purchase interest rate caps or floors at prices or on terms the Sub-Adviser believes are advantageous to the Fund. In addition, although the terms of interest rate swaps, caps and floors may provide for termination, there can be no assurance that the Fund will be able to terminate an interest rate swap or to sell or offset interest rate caps or floors that it has purchased.
The Fund also may engage in credit derivative transactions. Default risk derivatives are linked to the price of reference securities or loans after a default by the issuer or borrower, respectively. Market spread derivatives are based on the risk that changes in market factors, such as credit spreads, can cause a decline in the value of a security, loan or index. There are three basic transactional forms for credit derivatives: swaps, options and structured instruments. The use of credit derivatives is a highly specialized activity which involves strategies and risks different from those associated with ordinary portfolio security transactions. If the Sub-Adviser is incorrect in its forecasts of default risks, market spreads or other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these techniques were not used. Moreover, even if the Sub-Adviser is correct in its forecasts, there is a risk that a credit derivative position may correlate imperfectly with the price of the asset or liability being hedged. Credit derivative transaction exposure will be limited to 50% of the Managed Assets of the Fund. Such exposure will be attained through the use of derivatives described above and through credit default swap transactions and credit linked securities, both of which are discussed below.
Credit Default Swap Transactions. The Fund may invest in credit default swap transactions (as measured by the notional amounts of the swaps), including credit linkednotes (described below) for hedging and investment purposes. The "buyer" in a credit default contract is obligated to pay the "seller" a periodic stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value, or "par value," of the reference obligation. Credit default swap transactions are either "physical delivery" settled or "cash" settled. Physical delivery entails the actual delivery of the reference asset to the seller in exchange for the payment of the full par value of the reference asset. Cash settled entails a net cash payment from the seller to the buyer based on the difference of the par value of the reference asset and the current value of the reference asset that may have, through default, lost some, most or all of its value. The Fund may be either the buyer or seller in a credit default swap transaction. If the Fund is a buyer and no event of default occurs, the Fund will have made a series of periodic payments and recover nothing of monetary value. However, if an event of default occurs, the Fund (if the buyer) will receive the full notional value of the reference obligation either through a cash payment in exchange for the asset or a cash payment in addition to owning the reference assets. As a seller, the Fund receives a fixed rate of income throughout the term of the contract, which typically is between six months and five years, provided that there is no event of default. The Fund will segregate assets in the form of cash and cash equivalents in an amount equal to the aggregate market value of the credit
default swaps of which it is the seller, marked to market on a daily basis. If an event of default occurs, the seller must pay the buyer the full notional value of the reference obligation through either physical settlement or cash settlement. Credit default swap transactions involve greater risks than if the Fund had invested in the reference obligation directly.
The Fund also may purchase credit default swap contracts in order to hedge against the risk of default of debt securities it holds, in which case the Fund would function as the counterparty referenced in the preceding paragraph. This would involve the risk that the swap may expire worthless and would only generate income in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial instability). It would also involve credit risk that the seller may fail to satisfy its payment obligations to the Fund in the event of a default.
Credit Linked Notes. The Fund may invest in Credit Linked Notes. Credit Linked Notes are securities that are collateralized by one or more credit default swaps on designated debt securities that are referred to as "reference securities". Through the purchase of a Credit Linked Note, the buyer assumes the risk of the default or, in some cases, other declines in credit quality of the referenced securities. The buyer also takes on exposure to the issuer of the Credit Linked Note in the full amount of the purchase price of the note. The issuer of a Credit Linked Note normally will have hedged its risk on the reference securities without acquiring any additional credit exposure. The Fund has the right to receive periodic interest payments from the issuer of the Credit Linked Note at an agreed-upon interest rate, and, if there has been no default or, if applicable, other declines in credit quality, a return of principal at the maturity date.
Credit Linked Notes are subject to credit risk of the reference securities underlying the credit default swaps. If one of the underlying reference securities defaults, or suffers certain other declines in credit quality, the Fund may, instead of receiving repayment of principal in whole or in part, receive the security that has defaulted.
Credit Linked Notes typically are privately negotiated transactions between two or more parties. The Fund bears the risk that the issuer of the credit linked note will default or become bankrupt. The Fund bears the risk of loss of the principal amount it invested, and the periodic interest payments expected to be received for the duration of its investment in the credit linked note.
The market for Credit Linked Notes may suddenly become illiquid. The other parties to the transaction may be the only investors with sufficient understanding of the derivative to be interested in bidding for it. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for Credit Linked Notes. In certain cases, a market price for a Credit Linked Note may not be available. The collateral for a Credit Linked Note is one or more credit default swaps, which, as described above, are subject to additional risk.
New financial products continue to be developed and the Fund may invest in any products that may be developed to the extent consistent with its investment objectives and the regulatory and federal tax requirements applicable to investment companies.
Risks and Special Considerations Concerning Derivatives. In addition to the foregoing, the use of derivative instruments involves certain general risks and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of the underlying assets may go up or down. Adverse movements in the value of an underlying asset can expose the Fund to losses. Market risk is the primary risk associated with derivative transactions. Derivative instruments may include elements of leverage and, accordingly, fluctuations in the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the Sub-Adviser's ability to predict correctly changes in the relationships of such hedge instruments to the Fund's portfolio holdings, and there can be no assurance the Sub-Adviser's judgment in this respect will be accurate. Consequently, the use of derivatives for hedging purposes might result in a poorer overall performance for the Fund, whether or not adjusted for risk, than if the Fund had not hedged its portfolio holdings.
(2) Credit Risk. Credit risk is the risk that a loss is sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivatives is generally less than for privately-negotiated or over-the-counter derivatives, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately-negotiated instruments, there is no similar clearing agency guarantee. In all transactions, the Fund will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transactions and possibly other losses to the Fund. The Fund will enter into transactions in derivative instruments only with counterparties that the Sub-Adviser reasonably believes are capable of performing under the contract.
(3) Correlation Risk. Correlation risk is the risk that there might be an imperfect correlation, or even no correlation, between price movements of a derivative instrument and price movements of investments being hedged. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged with any change in the price of the underlying asset. With an imperfect hedge, the value of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as buying a put option or selling a futures contract) increased by less than the decline in value of the hedged investments, the hedge would not be perfectly correlated. This might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. In addition, the Fund's success in using hedging instruments is subject to the Sub-Adviser's ability to correctly predict changes in relationships of such hedge instruments to the Fund's portfolio holdings, and there can be no assurance that the Sub-Adviser's judgment in this respect will be accurate. An imperfect
correlation may prevent the Fund from achieving the intended hedge or expose the Fund to a risk of loss.
(4) Liquidity Risk. Liquidity risk is the risk that a derivative instrument cannot be sold, closed out, or replaced quickly at or very close to its fundamental value. Generally, exchange contracts are liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. The Fund might be required by applicable regulatory requirements to maintain assets as "cover," maintain segregated accounts and/or make margin payments when it takes positions in derivative instruments involving obligations to third parties (i.e., instruments other than purchase options). If the Fund is unable to close out its positions in such instruments, it might be required to continue to maintain such accounts or make such payments until the position expires, matures, or is closed out. These requirements might impair the Fund's ability to sell a security or make an investment at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time. The Fund's ability to sell or close out a position in an instrument prior to expiration or maturity depends upon the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the counterparty to enter into a transaction closing out the position. Due to liquidity risk, there is no assurance that any derivatives position can be sold or closed out at a time and price that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the unenforceability of a party's obligations under the derivative. While a party seeking price certainty agrees to surrender the potential upside in exchange for downside protection, the party taking the risk is looking for a positive payoff. Despite this voluntary assumption of risk, a counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products.
(6) Systemic or "Interconnection" Risk. Systemic or interconnection risk is the risk that a disruption in the financial markets will cause difficulties for all market participants. In other words, a disruption in one market will spill over into other markets, perhaps creating a chain reaction. Much of the OTC derivatives market takes place among the OTC dealers themselves, thus creating a large interconnected web of financial obligations. This interconnectedness raises the possibility that a default by one large dealer could create losses for other dealers and destabilize the entire market for OTC derivative instruments.
PORTFOLIO TURNOVER RISK
The Fund's annual portfolio turnover rate may vary greatly from year to year. Although the Fund cannot accurately predict its annual portfolio turnover rate, it is not expected to exceed 100% under normal circumstances. However, portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. High portfolio turnover may result in the Fund's recognition of gains that will be taxable as ordinary income to the Fund.
A high portfolio turnover may increase the Fund's current and accumulated earnings and profits, resulting in a greater portion of the Fund's distributions being treated as a dividend to the Fund's Common Shareholders. In addition, a higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. See "Other Investment Policies and Techniques--Portfolio Turnover" and "Federal Income Tax Matters."
MARKET DISRUPTION RISK
The terrorist attacks in the United States on September 11, 2001 had a disruptive effect on the securities markets. The ongoing United States military and related action in Iraq and events in the Middle East, as well as the continuing threat of terrorist attacks, could have significant adverse effects on the U.S. economy, the stock market and world economies and markets generally. The Fund cannot predict the effects of similar events in the future on the U.S. and world economies, the value of the Common Shares or the NAV of the Fund.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares and distributions can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with the Fund's use of Financial Leverage would likely increase, which would tend to further reduce returns to Common Shareholders.
ANTI-TAKEOVER PROVISIONS
The Fund's Declaration of Trust (the "Declaration") includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status. These provisions could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares. See "Certain Provisions in the Declaration of Trust."
RESTRICTIVE COVENANTS AND 1940 ACT RESTRICTIONS
With respect to a leverage borrowing program instituted by the Fund, the credit agreements governing such a program (the "Credit Agreements") will likely include usual and customary covenants for this type of transaction, including, but not limited to, limits on the Fund's ability to: (i) issue Preferred Shares; (ii) incur liens or pledge portfolio securities or investments; (iii) change its investment objectives or fundamental investment restrictions without the approval of lenders; (iv) make changes in any of its business objectives, purposes or operations that could result in a material adverse effect; (v) make any changes in its capital structure; (vi) amend the Fund documents in a manner which could adversely affect the rights, interests or obligations of any of the lenders; (vii) engage in any business other than the business currently engaged in; (viii) create, incur, assume or permit to exist
certain debt except for certain specific types of debt; and (ix) permit any of its Employment Retirement Income Security Act ("ERISA") affiliates to cause or permit to occur an event that could result in the imposition of a lien under the Code or ERISA. In addition, the Credit Agreements would not permit the Fund's asset coverage ratio (as defined in the Credit Agreements) to fall below 300% at any time.
Under the requirements of the 1940 Act, the Fund must have asset coverage of at least 300% immediately after any borrowing, including borrowing under any leverage borrowing program the Fund implements. For this purpose, asset coverage means the ratio which the value of the total assets of the Fund, less liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of borrowings represented by senior securities issued by the Fund. The Credit Agreements would limit the Fund's ability to pay dividends or make other distributions on the Fund's Common Shares unless the Fund complies with the Credit Agreements' 300% asset coverage test. In addition, the Credit Agreements will not permit the Fund to declare dividends or other distributions or purchase or redeem Common Shares or Preferred Shares: (i) at any time that any event of default under the Credit Agreements has occurred and is continuing; or (ii) if, after giving effect to such declaration, the Fund would not meet the Credit Agreements' 300% asset coverage test set forth in the Credit Agreements.
SECONDARY MARKET FOR THE FUND'S SHARES
The issuance of Common Shares through the Fund's Dividend Reinvestment Plan may have an adverse effect on the secondary market for the Common Shares. The increase in the number of outstanding Common Shares resulting from issuances pursuant to the Fund's Dividend Reinvestment Plan and the discount to the market price at which such Common Shares may be issued, may put downward pressure on the market price for the Common Shares of the Fund. Common Shares will not be issued pursuant to the Dividend Reinvestment Plan at any time when Common Shares are trading at a lower price than the Fund's NAV per Common Share. When the Fund's Common Shares are trading at a premium, the Fund may also issue Common Shares that may be sold through private transactions effected on the New York Stock Exchange ("NYSE") or through broker-dealers. The increase in the number of outstanding Common Shares resulting from these offerings may put downward pressure on the market price for Common Shares.
LENDING PORTFOLIO SECURITIES
To generate additional income, the Fund may lend portfolio securities in an amount up to 33 1/3% of Managed Assets to broker-dealers, major banks or other recognized domestic institutional borrowers of securities. As with other extensions of credit, there are risks of delay in the recovery or even loss of rights in the collateral should a borrower default or fail financially. The Fund intends to engage in lending portfolio securities only when such lending is fully secured by investment grade collateral held by an independent agent.
ILLIQUID/RESTRICTED SECURITIES
The Fund may invest up to 10% of its Managed Assets in securities that, at the time of investment, are illiquid (determined using the Securities and Exchange Commission's standard applicable to investment companies, i.e., securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities). The Fund may also invest, without limit, in restricted securities. However, restricted securities determined by the Sub-Adviser, under the supervision of the Board of Trustees, to be illiquid, are subject to the limitations set forth above. As a result, restricted securities may be more difficult to value and the Fund may have difficulty disposing of such assets either in a timely manner or for a reasonable price. In order to dispose of an unregistered security, the Fund, where it has contractual rights to do so, may have to cause such security to be registered. A considerable period may elapse between the time the decision is made to sell the security and the time the security is registered in order for the Fund could sell it. Contractual restrictions on the resale of securities vary in length and scope and are generally the result of a negotiation between the issuer and acquiror of the securities. The Fund would, in either case, bear market risks during that period.
Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that have not been registered under the Securities Act are referred to as restricted securities and are purchased directly from the issuer or in the secondary market ("Direct Placement Securities"). Limitations on resale may have an adverse effect on the marketability of portfolio securities and the Fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices. The Fund might also have to register the restricted securities to dispose of them resulting in additional expense and delay. Adverse market conditions could impede the public offering of securities.
Over time, a large institutional market has developed for certain securities that are not registered under the Securities Act including repurchase agreements, commercial paper, foreign securities, municipal securities, convertible securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.
OTHER INVESTMENT POLICIES AND TECHNIQUES
HEDGING STRATEGIES
General Description of Hedging Strategies. The Fund may use derivatives or other transactions for the purpose of hedging the Fund's exposure to an increase in the price of a security prior to its anticipated purchase or a decrease in the price of a security prior to its anticipated sale, to seek to
reduce interest rate risks arising from the use of any Financial Leverage by the Fund and to mitigate risks, including interest rate, currency and credit risks. The specific derivative instruments to be used, or other transactions to be entered into, for such hedging purposes may include exchange-listed and over-the-counter put and call options on currencies, securities, fixed-income, currency and interest rate indices, and other financial instruments, financial futures contracts and options thereon (hereinafter referred to as "Futures" or "futures contracts"), interest rate and currency transactions such as swaps, caps, floors or collars or credit derivative instruments.
Hedging or derivative instruments on securities generally are used to hedge against price movements in one or more particular securities positions that the Fund owns or intends to acquire. Such instruments may also be used to "lock-in" recognized but unrealized gains in the value of portfolio securities. Hedging strategies, if successful, can reduce the risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the investments being hedged. However, hedging strategies can also reduce the opportunity for gain by offsetting the positive effect of favorable price movements in the hedged investments. The use of hedging instruments is subject to applicable regulations of the Securities and Exchange Commission, the several options and futures exchanges upon which they are traded, the CFTC and various state regulatory authorities. In addition, the Fund's ability to use hedging instruments may be limited by tax considerations.
General Limitations on Futures and Options Transactions. The Fund has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" with the CFTC and the National Futures Association, which regulate trading in the futures markets. Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act (the "CEA"), the Fund is not subject to regulation as a commodity pool under the CEA.
Various exchanges and regulatory authorities have undertaken reviews of options and Futures trading in light of market volatility. Among the possible actions that have been presented are proposals to adopt new or more stringent daily price fluctuation limits for Futures and options transactions and proposals to increase the margin requirements for various types of futures transactions.
Asset Coverage for Futures and Options Positions. The Fund will comply with the regulatory requirements of the Securities and Exchange Commission and the CFTC with respect to coverage of options and Futures positions by registered investment companies and, if the guidelines so require, will set aside cash, U.S. government securities, high grade liquid debt securities and/or other liquid assets permitted by the Securities and Exchange Commission and CFTC in a segregated custodial account in the amount prescribed. Securities held in a segregated account cannot be sold while the Futures or options position is outstanding, unless replaced with other permissible assets, and will be marked-to-market daily.
Options. As an anticipatory hedge, the Fund may purchase put and call options on stock or other securities. A put option embodies the right of its purchaser to compel the writer of the option to purchase from the option holder an underlying security or its equivalent at a specified price at any time during the option period. In contrast, a call option gives the purchaser the right to
buy the underlying security covered by the option or its equivalent from the writer of the option at the stated exercise price.
As a holder of a put option, the Fund will have the right to sell the securities underlying the option and as the holder of a call option, the Fund will have the right to purchase the securities underlying the option, in each case at their exercise price at any time prior to the option's expiration date. The Fund may seek to terminate its option positions prior to their expiration by entering into closing transactions. The ability of the Fund to enter into a closing sale transaction depends on the existence of a liquid secondary market. There can be no assurance that a closing purchase or sale transaction can be effected when the Fund so desires.
Certain Considerations Regarding Options. The hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the options markets. The purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The purchase of options involves the risk that the premium and transaction costs paid by the Fund in purchasing an option will be lost as a result of unanticipated movements in prices of the securities on which the option is based. Imperfect correlation between the options and securities markets may detract from the effectiveness of attempted hedging. Options transactions may result in significantly higher transaction costs and portfolio turnover for the Fund.
Some, but not all, of the derivative instruments may be traded and listed on an exchange. There is no assurance that a liquid secondary market on an options exchange will exist for any particular option, or at any particular time, and for some options no secondary market on an exchange or elsewhere may exist. If the Fund is unable to effect a closing sale transaction with respect to options on securities that it has purchased, it would have to exercise the option in order to realize any profit and would incur transaction costs upon the purchase and sale of the underlying securities.
Futures Contracts. The Fund may enter into securities-related futures contracts, including security futures contracts as an anticipatory hedge. The Fund's hedging may include sales of Futures as an offset against the effect of expected declines in securities prices and purchases of Futures as an offset against the effect of expected increases in securities prices. The Fund will not enter into futures contracts which are prohibited under the CEA and will, to the extent required by regulatory authorities, enter only into futures contracts that are traded on exchanges and are standardized as to maturity date and underlying financial instrument. A security futures contract is a legally binding agreement between two parties to purchase or sell in the future a specific quantity of shares of a security or of the component securities of a narrow-based security index, at a certain price. A person who buys a security futures contract enters into a contract to purchase an underlying security and is said to be "long" the contract. A person who sells a security futures contact enters into a contract to sell the underlying security and is said to be "short" the contract. The price at which the contract trades (the "contract price") is determined by relative buying and selling interest on a regulated exchange.
Transaction costs are incurred when a futures contract is bought or sold and margin deposits must be maintained. In order to enter into a security futures contract, the Fund must deposit funds with its custodian in the name of the futures commodities merchant equal to a specified percentage of the current market value of the contract as a performance bond. Moreover, all security futures contracts are marked-to-market at least daily, usually after the close of trading. At that time, the account of each buyer and seller reflects the amount of any gain or loss on the security futures contract based on the contract price established at the end of the day for settlement purposes.
An open position, either a long or short position, is closed or liquidated by entering into an offsetting transaction (i.e., an equal and opposite transaction to the one that opened the position) prior to the contract expiration. Traditionally, most futures contracts are liquidated prior to expiration through an offsetting transaction and, thus, holders do not incur a settlement obligation. If the offsetting purchase price is less than the original sale price, a gain will be realized. Conversely, if the offsetting sale price is more than the original purchase price, a gain will be realized; if it is less, a loss will be realized. The transaction costs must also be included in these calculations. There can be no assurance, however, that the Fund will be able to enter into an offsetting transaction with respect to a particular futures contract at a particular time. If the Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain the margin deposits on the futures contract and the Fund may not be able to realize a gain in the value of its future position or prevent losses from mounting. This inability to liquidate could occur, for example, if trading is halted due to unusual trading activity in either the security futures contract or the underlying security; if trading is halted due to recent news events involving the issuer of the underlying security; if systems failures occur on an exchange or at the firm carrying the position; or, if the position is on an illiquid market. Even if the Fund can liquidate its position, it may be forced to do so at a price that involves a large loss.
Under certain market conditions, it may also be difficult or impossible to manage the risk from open security futures positions by entering into an equivalent but opposite position in another contract month, on another market, or in the underlying security. This inability to take positions to limit the risk could occur, for example, if trading is halted across markets due to unusual trading activity in the security futures contract or the underlying security or due to recent news events involving the issuer of the underlying security.
There can be no assurance that a liquid market will exist at a time when the Fund seeks to close out a Futures contract position. The Fund would continue to be required to meet margin requirements until the position is closed, possibly resulting in a decline in the Fund's NAV. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist.
Security futures contracts that are not liquidated prior to expiration must be settled in accordance with the terms of the contract. Some security futures contracts are settled by physical delivery of the underlying security. At the expiration of a security futures contract that is settled through physical delivery, a person who is long the contract must pay the final settlement price set by the regulated exchange or the clearing organization and take delivery of the underlying shares. Conversely, a person who is short the
contract must make delivery of the underlying shares in exchange for the final settlement price. Settlement with physical delivery may involve additional costs.
Other security futures contracts are settled through cash settlement. In this case, the underlying security is not delivered. Instead, any positions in such security futures contracts that are open at the end of the last trading day are settled through a final cash payment based on a final settlement price determined by the exchange or clearing organization. Once this payment is made, neither party has any further obligations on the contract.
As noted above, margin is the amount of funds that must be deposited by the Fund in order to initiate Futures trading and to maintain the Fund's open positions in futures contracts. A margin deposit is intended to ensure the Fund's performance of the futures contract. The margin required for a particular futures contract is set by the exchange on which the futures contract is traded and may be significantly modified from time to time by the exchange during the term of the futures contract.
If the price of an open futures contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the respective Fund. In computing daily NAV, the Fund will mark to market the current value of its open futures contracts. The Fund expects to earn interest income on its margin deposits.
Because of the low margin deposits required, Futures contracts trading involves an extremely high degree of leverage. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss, as well as gain, to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit, if the futures contracts were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount initially invested in the futures contract. However, the Fund would presumably have sustained comparable losses if, instead of the futures contract, it had invested in the underlying financial instrument and sold it after the decline.
In addition to the foregoing, imperfect correlation between the futures contracts and the underlying securities may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. Under certain market conditions, the prices of security futures contracts may not maintain their customary or anticipated relationships to the prices of the underlying security or index. These pricing disparities could occur, for example, when the market for the security futures contract is illiquid, when the primary market for the underlying security is closed, or when the reporting of transactions in the underlying security has been delayed.
In addition, the value of a position in security futures contracts could be affected if trading is halted in either the security futures contract or the underlying security. In certain circumstances, regulated exchanges are required by law to halt trading in security futures contracts. For example, trading on a particular security futures contract must be halted if trading is halted on the listed market for the underlying security as a result of pending news, regulatory concerns, or market volatility. Similarly, trading of a security futures contract on a narrow-based security index must be halted under circumstances such as where trading is halted on securities accounting for at least 50% of the market capitalization of the index. In addition, regulated exchanges are required to halt trading in all security futures contracts for a specified period of time when the Dow Jones Industrial Average ("DJIA") experiences one-day declines of 10-, 20- and 30%. The regulated exchanges may also have discretion under their rules to halt trading in other circumstances - such as when the exchange determines that the halt would be advisable in maintaining a fair and orderly market.
A trading halt, either by a regulated exchange that trades security futures or an exchange trading the underlying security or instrument, could prevent the Fund from liquidating a position in security futures contracts in a timely manner, which could expose the Fund to a loss.
Each regulated exchange trading a security futures contract may also open and close for trading at different times than other regulated exchanges trading security futures contracts or markets trading the underlying security or securities. Trading in security futures contracts prior to the opening or after the close of the primary market for the underlying security may be less liquid than trading during regular market hours.
Swap Agreements. For hedging purposes, the Fund may enter into swap agreements. A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, commodity prices, non-U.S. currency rates, mortgage securities, corporate borrowing rates, security prices, indexes or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of the Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by the Fund, the Fund must be prepared to make such payments when due. In addition, if the counterparty's creditworthiness declines, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have fixed maturity dates that are agreed upon by the parties to the swap. The agreement can be terminated before the maturity date only under limited circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. The Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counterparty is unable to meet
its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, the Fund may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify the Fund's gains or losses. In order to reduce the risk associated with leveraging, the Fund may cover its current obligations under swap agreements according to guidelines established by the Securities and Exchange Commission. If the Fund enters into a swap agreement on a net basis, it will be required to segregate assets with a daily value at least equal to the excess, if any, of the Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If the Fund enters into a swap agreement on other than a net basis, it will be required to segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
Equity Swaps. In a typical equity swap, one party agrees to pay another party the return on a security, security index or basket of securities in return for a specified interest rate. By entering into an equity index swap, for example, the index receiver can gain exposure to securities making up the index of securities without actually purchasing those securities. Equity index swaps involve not only the risk associated with investment in the securities represented in the index, but also the risk that the performance of such securities, including dividends, will not exceed the interest that the Fund will be committed to pay under the swap.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its portfolio securities in any amount to brokers, dealers and financial institutions, provided that loans are callable at any time by the Fund and are at all times secured by cash or equivalent collateral that is equal to at least the market value, determined daily, of the loaned securities. During the time portfolio securities are on loan, the borrower will pay the Fund an amount equivalent to any dividend or interest paid on the securities and the Fund may invest the cash collateral and earn additional income, or it may receive an agreed-upon amount of interest income from the borrower. The advantage of the loans is that the Fund continues to receive payments in lieu of the interest and dividends of the loaned securities, while at the same time earning interest either directly from the borrower or on the collateral which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by the Fund at any time. If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates, and the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed to be creditworthy. On termination of the loan, the borrower is required to return the securities to the Fund, and any gain or loss in the market price during the loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loan, in whole or in part as may be appropriate, to permit the exercise of its rights if the matters involved would have a material effect on the Fund's investment in the securities which are the subject of the loan. The Fund will pay reasonable finders, administrative and custodial fees in connection with a loan of its securities or may share the interest earned on collateral with the borrower.
PORTFOLIO TURNOVER
The Fund's annual portfolio turnover rate may vary greatly from year to year. Although the Fund cannot accurately predict its annual portfolio turnover rate, it is not expected to exceed 100% under normal circumstances. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. There are no limits on the rate of portfolio turnover, and investments may be sold without regard to length of time held when the Fund's investment strategy so dictates. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. High portfolio turnover may result in the realization of net short-term capital gains by the Fund which, when distributed to Common Shareholders, will be taxable as ordinary income. See "Federal Income Tax Matters."
BORROWINGS AND PREFERRED SHARES
The Fund anticipates that under current market conditions it will issue Leverage Instruments representing no more than 33 1/3% of its Managed Assets approximately three months after the completion of this offering. If as a result of market conditions, or any other reason, the Fund does not issue Preferred Shares, the Fund will limit its borrowing to 33 1/3% (or such other percentage permitted by law) of its Managed Assets. The Leverage Instruments would have complete priority upon distribution of assets over Common Shares. The issuance of Leverage Instruments would leverage the Common Shares. Although the timing and other terms of the offering of Leverage Instruments and the terms of the Leverage Instruments would be determined by the Fund's Board of Trustees, the Fund expects to invest the proceeds derived from any Leverage Instrument offering in securities consistent with the Fund's investment objective and policies. If Preferred Shares are issued they would pay adjustable rate dividends based on shorter-term interest rates, which would be redetermined periodically by an auction process. The adjustment period for Preferred Shares dividends could be as short as one day or as long as a year or more. So long as the Fund's portfolio is invested in securities that provide a higher rate of return than the dividend rate or interest rate of the Leverage Instruments, after taking expenses into consideration, the leverage will cause Common Shareholders to receive a higher rate of income than if the Fund were not leveraged.
Leverage creates risk for holders of the Common Shares, including the likelihood of greater volatility of NAV and market price of the Common Shares, and the risk that fluctuations in interest rates on borrowings and debt or in the dividend rates on any Preferred Shares may affect the return to the holders of the Common Shares or will result in fluctuations in the dividends paid on the Common Shares. To the extent total return exceeds the cost of leverage, the Fund's return will be greater than if leverage had not been used. Conversely, if
the total return derived from securities purchased with funds received from the use of leverage is less than the cost of leverage, the Fund's return will be less than if leverage had not been used, and therefore the amount available for distribution to Common Shareholders as dividends and other distributions will be reduced. In the latter case, the Sub-Adviser in its best judgment nevertheless may determine to maintain the Fund's leveraged position if it expects that the benefits to the Fund's Common Shareholders of maintaining the leveraged position will outweigh the current reduced return. Under normal market conditions, the Fund anticipates that it will be able to invest the proceeds from leverage at a higher rate than the costs of leverage, which would enhance returns to Common Shareholders. The fees paid to the Adviser and Sub-Adviser will be calculated on the basis of the Managed Assets including proceeds from borrowings for leverage and the issuance of Preferred Shares. During periods in which the Fund is utilizing financial leverage, the investment advisory fee payable to the Adviser and Sub-Adviser will be higher than if the Fund did not utilize a leveraged capital structure. The use of leverage creates risks and involves special considerations.
The Fund's Declaration authorizes the Fund, without prior approval of the Common Shareholders, to borrow money. In this connection, the Fund may issue notes or other evidence of indebtedness (including bank borrowings or commercial paper) and may secure any such borrowings by mortgaging, pledging or otherwise subjecting as security the Fund's assets. In connection with such borrowing, the Fund may be required to maintain minimum average balances with the lender or to pay a commitment or other fee to maintain a line of credit. Any such requirements will increase the cost of borrowing over the stated interest rate. Under the requirements of the 1940 Act, the Fund, immediately after any such borrowings, must have an "asset coverage" of at least 300% (33 1/3% of Managed Assets after borrowings). With respect to such borrowing, asset coverage means the ratio which the value of the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of such borrowing represented by senior securities issued by the Fund.
The rights of lenders to the Fund to receive interest on and repayment of principal of any such borrowings will be senior to those of the Common Shareholders, and the terms of any such borrowings may contain provisions which limit certain activities of the Fund, including the payment of dividends to Common Shareholders in certain circumstances. Further, the 1940 Act does (in certain circumstances) grant to the lenders to the Fund certain voting rights in the event of default in the payment of interest on or repayment of principal. In the event that such provisions would impair the Fund's status as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), the Fund, subject to its ability to liquidate its relatively illiquid portfolio, intends to repay the borrowings. Any borrowing will likely be ranked senior or equal to all other existing and future borrowings of the Fund.
Certain types of borrowings may result in the Fund being subject to covenants in credit agreements relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for the short-term corporate debt securities or Preferred Shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. It is not anticipated that these covenants or guidelines will impede the
Sub-Adviser from managing the Fund's portfolio in accordance with the Fund's investment objective and policies.
Under the 1940 Act, the Fund is not permitted to issue Preferred Shares unless immediately after such issuance the value of the Fund's Managed Assets is at least 200% of the liquidation value of the outstanding Preferred Shares (i.e., the liquidation value may not exceed 50% of the Fund's Managed Assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless, at the time of such declaration, the value of the Fund's Managed Assets is at least 200% of such liquidation value. If Preferred Shares are issued, the Fund intends, to the extent possible, to purchase or redeem Preferred Shares from time to time to the extent necessary in order to maintain coverage of any Preferred Shares of at least 200%. In addition, as a condition to obtaining ratings on the Preferred Shares, the terms of any Preferred Shares issued are expected to include asset coverage maintenance provisions which will require the redemption of the Preferred Shares in the event of non-compliance by the Fund and may also prohibit dividends and other distributions on the Common Shares in such circumstances. In order to meet redemption requirements, the Fund may have to liquidate portfolio securities. Such liquidations and redemptions would cause the Fund to incur related transaction costs and could result in capital losses to the Fund. Prohibitions on dividends and other distributions on the Common Shares could impair the Fund's ability to qualify as a regulated investment company under the Code. If the Fund has Preferred Shares outstanding, two of the Fund's trustees will be elected by the holders of Preferred Shares as a class. The remaining trustees of the Fund will be elected by holders of Common Shares and Preferred Shares voting together as a single class. In the event the Fund failed to pay dividends on Preferred Shares for two years, holders of Preferred Shares would be entitled to elect a majority of the trustees of the Fund.
The Fund may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties performed for the Fund under the Investment Management Agreement, is the responsibility of the Board of Trustees. The trustees set broad policies for the Fund and choose the Fund's officers. The following is a list of the trustees and officers of the Fund and a statement of their present positions and principal occupations during the past five years, with the trustee who is an "interested person" (as such term is defined in the 1940 Act) of the Fund indicated by an asterisk.
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
OFFICE AND COMPLEX OTHER
POSITION AND YEAR FIRST PRINCIPAL OVERSEEN TRUSTEESHIPS
OFFICES WITH ELECTED OR OCCUPATIONS DURING BY TRUSTEE HELD BY
NAME, ADDRESS AND AGE FUND APPOINTED PAST 5 YEARS OR OFFICER TRUSTEE
--------------------- ------------ ---------- ------------- ---------- ------------
Trustee who is an
Interested Person of
the Fund
--------------------
James A. Bowen(1)* President, o One Year(2) President, First Trust 20 Portfolios None
1001 Warrenville Road, Chairman of Portfolios and First
Suite 300 the Board, Chief o 2004 Trust Advisors; Chairman
Lisle, IL 60532 Executive Officer of the Board of Directors
D.O.B.: 09/55 and Trustee Bond Wave, LLC
Trustees who are not
Interested Persons of
the Fund
--------------------
Richard E. Erickson Trustee o One Year(2) Physician, 20 Portfolios None
c/o First Trust Sportsmed/Wheaton
Advisors L.P. o 2004 Orthopedics
1001 Warrenville Road,
Suite 300
Lisle, IL 60532
D.O.B.: 04/51
Niel B. Nielson Trustee o One Year(2) President (2002 to 20 Portfolios Director of Good
c/o First Trust to Present), Covenant News Publishers -
Advisors L.P. o 2004 College; Pastor (1997 to Crossway Books;
1001 Warrenville Road, 2002), College Church Covenant Transport
Suite 300 in Wheaton Inc.
Lisle, IL 60532
D.O.B.: 03/54
Thomas R. Kadlec Trustee o One Year(2) Vice President, Chief 20 Portfolios None
c/o First Trust Financial Officer (1990
Advisors L.P. o 2004 to Present), ADM Investor
1001 Warrenville Road, Services, Inc. (Futures
Suite 300 Commission Merchant);
Lisle, IL 60532 Registered Representative
D.O.B.: 11/57 (2000 to Present), Segerdahl
& Company, Inc., an NASD
member (Broker-Dealer)
David M. Oster Trustee o One Year(2) Trader (Self-Employed) 9 Portfolios None
c/o First Trust (1987 to Present)
Advisors L.P. o 2004 (Options Trading and
1001 Warrenville Road, Market Making)
Suite 300
Lisle, IL 60532
D.O.B.: 03/64
Officers of the Fund
--------------------
Mark R. Bradley Treasurer, o Indefinite term Chief Financial 20 Portfolios N/A
1001 Warrenville Road, Controller, Officer, Managing
Suite 300 Chief Financial o 2004 Director, First Trust
Lisle, IL 60532 Officer and Portfolios and First
D.O.B.: 11/57 Chief Accounting Trust Advisors
Officer
Susan M. Brix Assistant o Indefinite term Representative, 20 Portfolios N/A
1001 Warrenville Road, Vice President First Trust Portfolios;
Suite 300 o 2004 Assistant Portfolio
Lisle, IL 60532 Manager, First
D.O.B.: 01/60 Trust Advisors
Robert F. Carey Vice President o Indefinite term Senior Vice President, 20 Portfolios N/A
1001 Warrenville Road, First Trust Portfolios
Suite 300 o 2004 and First Trust
Lisle, IL 60532 Advisors
D.O.B.: 07/63
-38-
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
OFFICE AND COMPLEX OTHER
POSITION AND YEAR FIRST PRINCIPAL OVERSEEN TRUSTEESHIPS
OFFICES WITH ELECTED OR OCCUPATIONS DURING BY TRUSTEE HELD BY
NAME, ADDRESS AND AGE FUND APPOINTED PAST 5 YEARS OR OFFICER TRUSTEE
--------------------- ------------ ---------- ------------- ---------- ------------
W. Scott Jardine Secretary and o Indefinite term General Counsel, First 20 Portfolios N/A
1001 Warrenville Road, Chief Compliance Trust Portfolios and
Suite 300 Officer o 2004 First Trust Advisors;
Lisle, IL 60532 Secretary, Bond Wave, LLC
D.O.B.: 05/60
Kristi A. Maher Assistant o Indefinite term Assistant General 20 Portfolios N/A
1001 Warrenville Road, Secretary Counsel (March 2004 to
Suite 300 o 2004 Present), First Trust
Lisle, IL 60532 Portfolios; Associate
D.O.B.: 12/66 (1995 to March 2004),
Chapman and Cutler LLP
Roger Testin Vice President o Indefinite term Vice President 20 Portfolios N/A
1001 Warrenville Road, (August 2001 to Present),
Suite 300 o 2004 First Trust Advisors;
Lisle, IL 60532 Analyst (1998 to 2001),
D.O.B.: 06/66 Dolan Capital Management
--------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
of President of First Trust Advisors, investment adviser of the Fund.
(2) Trustees are elected each year by shareholders and serve a one year term
until their successors are elected. Mr. Bowen's officer positions with the
Fund have an indefinite term.
|
The Board of Trustees of the Fund has four standing committees, the Executive Committee (and Pricing and Dividend Committee), the Nominating and Governance Committee, the Valuation Committee and the Audit Committee. The Executive Committee, which meets between Board meetings, is authorized to exercise all powers of and to act in the place of the Board of Trustees to the extent permitted by the Fund's Declaration and By-laws. The members of the Executive Committee shall also serve as a special committee of the Board known as the Pricing and Dividend Committee which is authorized to exercise all of the powers and authority of the Board in respect of the issuance and sale, through an underwritten public offering, of the Common Shares of the Fund and all other such matters relating to such financing, including determining the price at which such shares are to be sold and approval of the final terms of the underwriting agreement, including approval of the members of the underwriting syndicate. Such committee is also responsible for the declaration and setting of dividends. Messrs. Kadlec and Bowen are members of the Executive Committee. The Nominating and Governance Committee is responsible for appointing and nominating non-interested persons to the Fund's Board of Trustees. Messrs. Erickson, Nielson, Kadlec and Oster are members of the Nominating and Governance Committee. If there is no vacancy on the Board of Trustees, the Board will not actively seek recommendations from other parties, including Shareholders. When a vacancy on the Board occurs and nominations are sought to fill such vacancy, the Nominating and Governance Committee may seek nominations from those sources it deems appropriate in its discretion, including Shareholders of the Fund. To submit a recommendation for nomination as a candidate for a position on the Board, Shareholders of the Fund shall mail such recommendation to W. Scott Jardine at the Fund's address, 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532. Such recommendation shall include the following information: (a) evidence of Fund ownership of the person or entity recommending the candidate (if a Fund Shareholder); (b) a full description of the proposed candidate's background, including their education, experience, current employment and date of birth; (c)
names and addresses of at least three professional references for the candidate;
(d) information as to whether the candidate is an "interested person" in
relation to such Fund, as such term is defined in the 1940 Act, as amended, and
such other information that may be considered to impair the candidate's
independence; and (e) any other information that may be helpful to the Committee
in evaluating the candidate. If a recommendation is received with satisfactorily
completed information regarding a candidate during a time when a vacancy exists
on the Board or during such other time as the Nominating and Governance
Committee is accepting recommendations, the recommendation will be forwarded to
the Chair of the Nominating and Governance Committee and the outside counsel to
the independent trustees. Recommendations received at any other time will be
kept on file until such time as the Nominating and Governance Committee is
accepting recommendations, at which point they may be considered for nomination.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec and Oster are members of the
Valuation Committee. The Audit Committee is responsible for overseeing the
Fund's accounting and financial reporting process, the system of internal
controls, audit process and evaluating and appointing independent auditors
(subject also to Board approval). Messrs. Erickson, Nielson, Kadlec and Oster
serve on the Audit Committee. Because the Fund is newly organized, none of the
committees have met during the Fund's last fiscal year.
Messrs. Erickson, Nielson, Kadlec and Bowen are also trustees of First Defined Portfolio Fund, LLC, an open-end fund advised by First Trust Advisors with 11 portfolios. Messrs. Bowen, Erickson, Nielson, Kadlec and Oster are also trustees of the First Trust Value Line(R) 100 Fund, First Trust Value Line(R) Dividend Fund, First Trust/Four Corners Senior Floating Rate Income Fund, First Trust/Four Corners Senior Floating Rate Income Fund II, Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust/Value Line(R) & Ibbotson Equity Allocation Fund, Energy Income and Growth Fund, and the First Trust/Fiduciary Asset Management Covered Call Fund, closed-end funds advised by First Trust Advisors. None of the trustees who are not "interested persons" of the Fund, nor any of their immediate family members, has ever been a director, officer or employee of, or consultant to, First Trust Advisors, First Trust Portfolios or their affiliates. In addition, Mr. Bowen and the other officers of the Fund hold the same positions with the First Defined Portfolio Fund, LLC, First Trust Value Line(R) 100 Fund, First Trust Value Line(R) Dividend Fund, First Trust/Four Corners Senior Floating Rate Income Fund, First Trust/Four Corners Senior Floating Rate Income Fund II, Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust/Value Line(R) & Ibbotson Equity Allocation Fund, Energy Income and Growth Fund and First Trust/ Fiduciary Asset Management Covered Call Fund (collectively, the "First Trust Fund Complex") as they hold with the Fund.
Effective June 7, 2004, the trustees approved a revised compensation plan. Under the revised plan, each fund in the First Trust Fund Complex pays each trustee who is not an officer or employee of First Trust Advisors, any sub-adviser or any of their affiliates ("Independent Trustees") an annual retainer of $10,000 which includes compensation for all regular quarterly board meetings and regular committee meetings. No additional meeting fees are paid in connection with regular quarterly board meetings or regular committee meetings. Additional fees of $1,000 and $500 are paid to Independent Trustees for special board meetings and non-regular committee meetings, respectively. These additional fees are shared by the funds in the First Trust Fund Complex that
participate in the particular meeting and are not per fund fees. Trustees are also reimbursed for travel and out-of-pocket expenses in connection with all meetings. The trustees adopted the revised plan because the increase in the number of funds in the First Trust Fund Complex had the effect of rapidly increasing their compensation under the previous arrangements.
The following table sets forth estimated compensation to be paid by the Fund projected during the Fund's first full fiscal year to each of the trustees and estimated total compensation to be paid to each of the trustees by the First Trust Fund Complex for a full calendar year. The Fund has no retirement or pension plans.
ESTIMATED TOTAL
COMPENSATION
ESTIMATED AGGREGATE FROM FUND AND
NAME OF TRUSTEE COMPENSATION FROM FUND (1) FUND COMPLEX(2)
James A. Bowen $0 $0
Richard E. Erickson $10,000 $90,000
Thomas R. Kadlec $10,000 $90,000
Niel B. Nielson $10,000 $90,000
David M. Oster $10,000 $80,000
--------------------
|
(1) The compensation estimated to be paid by the Fund to the trustees for the
first full fiscal year for services to the Fund.
(2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec
and Nielson, Independent Trustees, from the Fund and Fund Complex for a
full calendar year is based on estimated compensation to be paid to these
trustees for a full calendar year for services as trustees to the First
Defined Portfolio Fund, LLC, an open-end fund (with 11 portfolios)
advised by First Trust Advisors plus estimated compensation to be paid to
these trustees by the First Value Line(R) 100 Fund, the First Trust Value
Line(R) Dividend Fund, the First Trust/Four Corners Senior Floating Rate
Income Fund, the First Trust/Four Corners Senior Floating Rate Income
Fund II, the Macquarie/First Trust Global Infrastructure/Utilities
Dividend & Income Fund, the First Trust/Value Line(R) & Ibbotson Equity
Allocation Fund, the Energy Income and Growth Fund, the First
Trust/Fiduciary Asset Management Covered Call Fund and the Fund for a
full calendar year. Mr. Oster is currently not a trustee of the First
Defined Portfolio Fund, LLC. Accordingly, his estimated total
compensation is based on the estimated compensation to be paid by the
First Trust Value Line(R) 100 Fund, the First Trust/Four Corners Senior
Floating Rate Income Fund II, the First Trust Value Line(R) Dividend
Fund, the First Trust/Four Corners Senior Floating Rate Income Fund, the
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income
Fund, the First Trust/Value Line(R) & Ibbotson Equity Allocation Fund,
the Energy Income and Growth Fund, the First Trust/Fiduciary Asset
Management Covered Call Fund and the Fund for a full calendar year.
The Fund has no employees. Its officers are compensated by First Trust Advisors. The Shareholders of the Fund will elect trustees at the next annual meeting of shareholders.
The following table sets forth the dollar range of equity securities beneficially owned by the trustees in the Fund and in other funds overseen by the trustees in the First Trust Fund Complex as of July 31, 2004:
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN ALL
DOLLAR RANGE OF REGISTERED INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN
TRUSTEE IN THE FUND FIRST TRUST FUND COMPLEX
------------ ----------------- --------------------------------
Mr. Bowen None Over $100,000
Mr. Erickson None $ 1-$10,000
Mr. Kadlec None $ 50,001-$100,000
Mr. Nielson None $10,001-$50,000
Mr. Oster None $ 50,001-$100,000
|
As of July 31, 2004, the trustees of the Fund who are not "interested persons" of the Fund and immediate family members do not own beneficially or of record any class of securities of an investment adviser or principal underwriter of the Fund or any person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund.
As of November 23, 2004, First Trust Portfolios L.P. owned both beneficially and of record all of the Common Shares of the Fund.
INVESTMENT ADVISER
First Trust Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532, is the investment adviser to the Fund. As investment adviser, First Trust Advisors provides the Fund with professional investment supervision and selects the Fund's Sub-Adviser (with the approval of the Board of Trustees) and permits any of its officers or employees to serve without compensation as trustees or officers of the Fund if elected to such positions. First Trust Advisors supervises the activities of the Fund's Sub-Adviser and provides the Fund with certain other services necessary with the management of the portfolio.
First Trust Advisors is an Illinois limited partnership formed in 1991 and an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 (the "Advisers Act"). First Trust Advisors is a limited partnership with one limited partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one general partner, The Charger Corporation. Grace Partners is a limited partnership with one general partner, The Charger Corporation, and a number of limited partners. Grace Partners' and The Charger Corporation's primary business is investment advisory and broker/dealer services through their interests. The Charger Corporation is an Illinois corporation controlled by the Robert Donald Van Kampen family. First Trust Advisors is controlled by Grace Partners and The Charger Corporation.
First Trust Advisors is also adviser or sub-adviser to eight mutual funds and seven closed-end funds (including the Fund) and is the portfolio supervisor of certain unit investment trusts sponsored by First Trust Portfolios. First Trust Portfolios specializes in the underwriting, trading and
distribution of unit investment trusts and other securities. First Trust Portfolios, an Illinois limited partnership formed in 1991, acts as sponsor for successive series of The First Trust Combined Series, FT Series (formerly known as The First Trust Special Situations Trust), the First Trust Insured Corporate Trust, The First Trust of Insured Municipal Bonds and The First Trust GNMA. First Trust Portfolios introduced the first insured unit investment trust in 1974 and to date, more than $48 billion in gross assets have been deposited in First Trust Portfolios unit investment trusts.
First Trust Advisors acts as investment adviser to the Fund pursuant to an Investment Management Agreement. The Investment Management Agreement continues in effect for the Fund from year to year after its initial two-year term so long as its continuation is approved at least annually by the trustees including a majority of the Independent Trustees, or the vote of a majority of the outstanding voting securities of the Fund. It may be terminated at any time without the payment of any penalty upon 60 days' written notice by either party, or by a majority vote of the outstanding voting securities of the Fund (accompanied by appropriate notice), and will terminate automatically upon assignment. The Investment Management Agreement also may be terminated, at any time, without payment of any penalty, by the Board or by vote of a majority of the outstanding voting securities of the Fund, in the event that it shall have been established by a court of competent jurisdiction that the Adviser, or any officer or director of the Adviser, has taken any action which results in a breach of the covenants of the Adviser set forth in the Investment Management Agreement. The Investment Management Agreement provides that First Trust Advisors shall not be liable for any loss sustained by reason of the purchase, sale or retention of any security, whether or not the purchase, sale or retention shall have been based upon the investigation and research made by any other individual, firm or corporation, if the recommendation shall have been selected with due care and in good faith, except loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser in performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties under the Investment Management Agreement. As compensation for its services, the Fund pays First Trust Advisors a fee as described in the Prospectus. Provisions regarding expense limitations are described in the Prospectus. See "Management of the Fund--Investment Management Agreement" in the Fund's Prospectus.
In addition to the fee of First Trust Advisors, the Fund pays all other costs and expenses of its operations, including: compensation of its trustees (other than those affiliated with First Trust Advisors); custodian, transfer agency, administrative, accounting and dividend disbursing expenses; legal fees; sub-licensing fee; expenses of independent auditors; expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies; and taxes, if any. All fees and expenses are accrued daily and deducted before payment of dividends to investors.
On October 3, 2004, the trustees of the Fund met with representatives of First Trust Advisors (the "Adviser") and the Sub-Adviser to consider, among other things, the possible approval of the Investment Management Agreement between the Fund and the Adviser and the Sub-Advisory Agreement between the Adviser, the Sub-Adviser and the Fund. The Adviser had described the Fund's development process at a September 2004 meeting of the Board. At the October meeting, the Sub-Adviser described its global fixed income philosophy and investment style and reviewed related materials that had been provided to the Board. The Sub-Adviser reviewed with the trustees the background of those who
would be involved in providing investment advisory services to the Fund, and the trustees met with one of the senior members of the investment team. The Sub-Adviser reviewed with the Board members the structure of the Fund and the process that would be used for managing the Fund's investments. The Sub-Adviser provided information on the performance of other similar accounts that it managed over one-, three- and five-year periods, including that of other closed-end funds, against the performance of a benchmark index. The trustees also reviewed the Sub-Adviser's registration as filed with the Securities and Exchange Commission and the brochure that the Sub-Adviser provides to clients.
The trustees reviewed data compiled by the Adviser from an independent source that showed advisory fees and expense ratios for comparable closed-end funds. The Independent Trustees then met in executive session with their independent legal counsel to review the terms of the proposed Investment Management Agreement and Sub-Advisory Agreement. They reviewed the services to be provided by the Adviser, the Adviser's affiliate, First Trust Portfolios, and the Sub-Adviser.
The Independent Trustees compared the proposed fees to be paid under the Investment Management Agreement with fees paid to the Adviser by other closed-end funds for which it acts as investment adviser, as well as the advisory fees paid by global fixed income closed-end funds. They concluded that the proposed advisory fee was reasonable, as it was in the middle of the range of fees paid by comparable funds. They also discussed the Adviser's estimated profitability for serving as the Adviser to the Fund. The Independent Trustees reviewed the fees charged by the Sub-Adviser to other closed-end funds as well as separate account clients with global fixed income and emerging market debt mandates, noting that the proposed fee was within this range. The Independent Trustees discussed other information that the Adviser had provided with respect to its services, the estimated expense ratio for the Fund as compared to the expense ratios of comparable funds and any "fall-out" benefits that the Adviser might receive from its relationship with the Fund. The Independent Trustees noted that the Adviser and Sub-Adviser had agreed to each pay one-half of the Fund's organizational costs as well as the offering costs of the Fund (other than the sales load, but including the reimbursement of underwriter expenses as described in the prospectus) that exceed $.04 per Common Share. The Independent Trustees noted that the fee schedule did not include breakpoints designed to reflect economies of scale as the Fund grows, but noted that the management fees for many comparable funds also did not include breakpoints. The trustees, including the Independent Trustees, determined that the terms of the Investment Management and Sub-Advisory Agreements are fair and reasonable and that the Agreements are in the Fund's best interest.
CODE OF ETHICS
The Fund, Adviser and Sub-Adviser have adopted codes of ethics under Rule 17j-1 under the 1940 Act. These codes permit personnel subject to the code to invest in securities, including securities that may be purchased or held by the Fund. These codes can be reviewed and copied at the Securities and Exchange Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at (202) 942-8090. The codes of ethics are available on the EDGAR Database on the Securities and Exchange Commission's web site
(http://www.sec.gov), and copies of these codes may be obtained, after paying a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Commission Public Reference Section,
Washington, D.C. 20549-0102.
PROXY VOTING PROCEDURES
The Fund has adopted a proxy voting policy that seeks to ensure that proxies for securities held by the Fund are voted consistently and solely in the best economic interests of the Fund.
The Board of Trustees is responsible for oversight of the Fund's proxy voting process. The Board has delegated day-to-day proxy voting responsibility to Aberdeen. Aberdeen's Proxy Voting Policy is set forth in Appendix B to this Statement of Additional Information.
When required by applicable regulations, information regarding how the Fund voted proxies relating to portfolio securities will be available without charge by calling (800) 988-5891 or by accessing the Securities and Exchange Commission's website at http://www.sec.gov.
SUB-ADVISER
Aberdeen will serve as the Fund's Sub-Adviser with responsibility for the overall management of the Fund. Its address is 300 SE 2nd Street, Suite 820, Fort Lauderdale, Florida 33301. Aberdeen Asset Management Inc. was incorporated in 1993 and has been registered as an investment adviser under the Advisers Act since August 1995. Aberdeen's principal business focus is to provide investment management services with regard to investment in global securities. Aberdeen managed approximately $885 million of assets as of September 30, 2004.
Aberdeen is a wholly owned subsidiary of Aberdeen Asset Management PLC which is the parent company of an asset management group managing $39.99 billion of assets for a range of pension funds, financial institutions, investment trusts, unit trusts, offshore funds, charities and private clients, in addition to US registered investment companies as of September 30, 2004. Aberdeen PLC was formed in 1983 and was first listed on the London Stock Exchange in 1991 and obtained a secondary listing on the Singapore Stock Exchange in November 1997. At December 2003, the firm was 8.78% owned by management and staff.
Affiliates of Aberdeen manage three closed-end funds in the United
States. The three U.S. funds, Aberdeen Asia-Pacific Income Fund, Inc. (AMEX:
"FAX"), Aberdeen Australia Equity Fund, Inc. (AMEX: "IAF") and Aberdeen Global
Income Fund, Inc. (AMEX: "FCO"), have net assets of approximately $2.5 billion
as of June 30, 2004.
In rendering investment advisory services, the Sub-Adviser may use the resources of wholly owned investment adviser subsidiaries of Aberdeen PLC. In particular, the subsidiaries which may provide resources are Aberdeen Asset Management Asia Limited ("Aberdeen Singapore"), a Singapore corporation which is a U.S. registered investment adviser, and Aberdeen Asset Managers Limited ("Aberdeen UK"), which is not a U.S. registered adviser. Aberdeen UK and
Aberdeen Singapore have entered into a Memorandum of Understanding ("MOU") with the Sub-Adviser pursuant to which both are considered "Participating Affiliates" of the Sub-Adviser as that term is used in relief granted by the staff of the SEC allowing U.S. registered advisers to use portfolio management and trading resources of advisory affiliates subject to the supervision of a registered adviser. Investment professionals from each affiliate may render portfolio management, research or trading services to clients of the Sub-Adviser, including the Fund, as Affiliated Associated Persons of the Sub-Adviser under the MOU, and are subject to supervision by the Sub-Adviser.
There is no one individual primarily responsible for portfolio management decisions for the Fund. Investments are made under the direction of a committee in accordance with the Fund's investment strategy.
The Sub-Adviser, subject to the Board of Trustees' and Adviser's supervision, provides the Fund with discretionary investment services. Specifically, the Sub-Adviser is responsible for managing the investments of the Fund in accordance with the Fund's investment objectives, policies, and restrictions as provided in the Prospectus and this Statement of Additional Information, as may be subsequently changed by the Board of Trustees. The Sub-Adviser further agrees to conform to all applicable laws and regulations of the Securities and Exchange Commission in all material respects and to conduct its activities under the Sub-Advisory Agreement in accordance with applicable regulations of any governmental authority pertaining to its investment advisory services. In the performance of its duties, the Sub-Adviser will satisfy its fiduciary duties to the Fund, will monitor the Fund's investments, and will comply with the provisions of the Fund's Declaration and By-laws, as amended from time to time, and the stated investment objectives, policies and restrictions of the Fund. The Sub-Adviser is responsible for effecting all security transactions for the Fund's assets. The Sub-Advisory Agreement provides that the Sub-Adviser shall not be liable for any loss suffered by the Fund or the Adviser (including, without limitation, by reason of the purchase, sale or retention of any security) in connection with the performance of the Sub-Adviser's duties under the Sub-Advisory Agreement, except for a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Sub-Adviser in performance of its duties under such Sub-Advisory Agreement, or by reason of its reckless disregard of its obligations and duties under such Sub-Advisory Agreement.
Pursuant to the Sub-Advisory Agreement between the Adviser, the Sub-Adviser and the Fund, the Adviser has agreed to pay for the services and facilities provided by the Sub-Adviser through sub-advisory fees, as set forth in the Fund's Prospectus.
The Sub-Advisory Agreement may be terminated without the payment of any penalty by the Adviser, First Trust Advisors, the Fund's Board of Trustees, or a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act), upon 60 days' written notice to the Sub-Adviser.
All fees and expenses are accrued daily and deducted before payment of dividends to investors. The Sub-Advisory Agreement has been approved by a majority of the Independent Trustees of the Fund and the sole shareholder of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, the Sub-Adviser shall have authority and discretion to select brokers and dealers to execute transactions initiated by the Sub-Adviser and to select the market in which the transactions will be executed. In placing orders for the sale and purchase of securities for the Fund, the Sub-Adviser's primary responsibility shall be to seek the best execution of orders at the most favorable prices. However, this responsibility shall not obligate the Sub-Adviser to solicit competitive bids for each transaction or to seek the lowest available commission cost to the Fund, so long as the Sub-Adviser reasonably believes that the broker or dealer selected by it can be expected to obtain a "best execution" market price on the particular transaction and determines in good faith that the commission cost is reasonable in relation to the value of the brokerage and research services (as defined in Section 28(e)(3) of the Securities Exchange Act of 1934) provided by such broker or dealer to the Sub-Adviser, viewed in terms of either that particular transaction or of the Sub-Adviser's overall responsibilities with respect to its clients, including the Fund, as to which the Sub-Adviser exercises investment discretion, notwithstanding that the Fund may not be the direct or exclusive beneficiary of any such services or that another broker may be willing to charge the Fund a lower commission on the particular transaction.
Subject to compliance with the policies and procedures adopted by the Board of Trustees for the Fund and communicated to the Sub-Adviser and to the extent permitted by and in conformance with applicable law (including Rule 17e-1 of the 1940 Act), the Sub-Adviser may select brokers or dealers affiliated with Sub-Adviser.
The Sub-Adviser's objective in selecting brokers and dealers and in effecting portfolio transactions is to seek to obtain the best combination of price and execution with respect to its clients' portfolio transactions. Steps associated with seeking best execution are: (1) determine each client's trading requirements; (2) select appropriate trading methods, venues, and agents to execute the trades under the circumstances; (3) evaluate market liquidity of each security and take appropriate steps to avoid excessive market impact; (4) maintain client confidentiality and proprietary information inherent in the decision to trade; and (5) review the results on a periodic basis.
In arranging for the purchase and sale of clients' portfolio securities, the Sub-Adviser takes numerous factors into consideration. The best net price, giving effect to brokerage commissions, spreads and other costs, is normally an important factor in this decision, but a number of other judgmental factors are considered as they are deemed relevant. The factors include, but are not limited to: the execution capabilities required by the transactions; the ability and willingness of the broker or dealer to facilitate the accounts' portfolio transactions by participating therein for its own account; the importance to the account of speed, efficiency and confidentiality; the broker or dealer's apparent familiarity with sources from or to whom particular securities might be purchased or sold; the reputation and perceived soundness of the broker or dealer; the Sub-Adviser's knowledge of negotiated commission rates and spreads currently available; the nature of the security being traded; the size and type of the transaction; the nature and character of the markets for the security to be purchased or sold; the desired timing of the trade; the activity existing and expected in the market for the particular security;
confidentiality; the execution, clearance and settlement capabilities as well as the reputation and perceived soundness of the broker-dealer selected and others which are considered; the Sub-Adviser's knowledge of actual or apparent operational problems of any broker-dealer; the broker-dealer's execution services rendered on a continuing basis and in other transactions; the reasonableness of spreads or commissions; as well as other matters relevant to the selection of a broker or dealer for portfolio transactions for any account. The Sub-Adviser does not adhere to any rigid formula in making the selection of the applicable broker or dealer for portfolio transactions, but weighs a combination of the preceding factors.
When buying or selling securities in dealer markets, the Sub-Adviser generally prefers to deal directly with market makers in the securities. The Sub-Adviser will typically effect these trades on a "net" basis, and will not pay the market maker any commission, commission equivalent or markup/markdown other than the "spread." Usually, the market maker profits from the "spread," that is, the difference between the price paid (or received) by the Sub-Adviser and the price received (or paid) by the market maker in trades with other broker-dealers or other customers.
The Sub-Adviser may use Electronic Communications Networks ("ECN") or Alternative Trading Systems ("ATS") to effect such over-the-counter trades when, in the Sub-Adviser's judgment, the use of an ECN or ATS may result in equal or more favorable overall executions for the transactions.
When appropriate under its discretionary authority and consistent its duty to obtain best execution and its adopted policies and procedures, the Sub-Adviser may direct brokerage transactions for client accounts to broker-dealers who provide the Sub-Adviser with research and brokerage products and services. The brokerage commissions used to acquire research in these arrangements are known as "soft dollars." While the Sub-Adviser currently does not utilize soft dollars for its clients, including the Fund, and does not anticipate doing so, the policy of the Sub-Adviser and its affiliates which are U.S. registered investment advisers (the "Sub-Adviser's Affiliates") for such transactions is set forth below. To the extent that the Sub-Adviser and the Sub-Adviser's Affiliates do utilize soft dollars to acquire research, this research may be shared across all of such advisers and any of their respective clients whose accounts may benefit from such research.
Consistent with obtaining best execution, brokerage commissions on accounts' portfolio transactions may be directed to broker-dealers in recognition of research services furnished by them, as well as for services rendered in the execution of orders by such broker-dealers. As a general matter, such research services are used to service all of the respective accounts of the Sub-Adviser and the Sub-Adviser's Affiliates. However, research obtained with soft dollars may not necessarily be utilized for the specific account that generated the soft dollars and every research service may not necessarily be used to service every account managed by the respective adviser. The Sub-Adviser and the Sub-Adviser's Affiliates do not usually attempt to allocate the relative costs or benefits of research among client accounts because they believe that, in the aggregate, the research received benefits clients and assists such advisers in fulfilling their overall duty to their respective clients. The Sub-Adviser will not enter into any agreement or understanding with any
broker-dealer who would obligate it to direct a specific amount of brokerage transactions or commissions in return for research services.
Portfolio transactions for each client account will generally be completed independently, except when the Sub-Adviser and the Sub-Adviser's Affiliates are in the position of buying or selling the same security for a number of clients at approximately the same time. Because of market fluctuations, the prices obtained on such transactions within a single day may vary substantially. In order to avoid having clients receive different prices for the same security on the same day, the Sub-Adviser endeavors, when possible, to use an "averaging" procedure.
Under this procedure, purchases or sales of a particular security for clients' accounts will at times be combined or "batched" with purchases or sales for other advisory clients by the Sub-Adviser and the Sub-Adviser's Affiliates unless the client has expressly directed otherwise. Such batched trades may be used to facilitate best execution, including negotiating more favorable prices, obtaining more timely or equitable execution or reducing overall commission charges. In such cases, the price shown on confirmations of clients' purchases or sales will be the average execution price on all of the purchases and sales that are aggregated for this purpose.
The Sub-Adviser may also consider the following when deciding on allocations: 1) cash flow changes (including available cash, redemptions, exchanges, capital additions and capital withdrawals) may provide a basis to deviate from a pre-established allocation as long as it does not result in an unfair advantage to specific accounts or types of accounts over time; 2) accounts with specialized investment objectives or restrictions emphasizing investment in a specific category of securities may be given priority over other accounts in allocating such securities; and 3) for bond trades, street convention and good delivery often dictate the minimum size and par amounts and may result in small deviations from pro rata distribution.
DESCRIPTION OF SHARES
COMMON SHARES
The beneficial interest of the Fund may be divided from time to time into shares of beneficial interest of such classes and of such designations and par value (if any) and with such rights, preferences, privileges and restrictions as shall be determined by the trustees in their sole discretion, without shareholder vote. The Fund's Declaration initially authorizes the issuance of an unlimited number of Common Shares. The Common Shares being offered have a par value of $0.01 per share and, subject to the rights of holders of Preferred Shares, if issued, have equal rights as to the payment of dividends and the distribution of assets upon liquidation of the Fund. The Common Shares being offered will, when issued, be fully paid and, subject to matters discussed in "Certain Provisions in the Declaration of Trust," non-assessable, and currently have no pre-emptive or conversion rights (except as may otherwise be determined by the trustees in their sole discretion) or rights to cumulative voting in the election of trustees.
The Fund's Common Shares have been approved for listing on the NYSE, subject to notice of issuance, under the symbol "FAM." The Fund intends to hold
annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Shares of closed-end investment companies may frequently trade at prices lower than NAV. NAV will be reduced immediately following the offering after payment of the sales load and organization and offering expenses. Although the value of the Fund's net assets is generally considered by market participants in determining whether to purchase or sell shares, whether investors will realize gains or losses upon the sale of Common Shares will depend entirely upon whether the market price of the Common Shares at the time of sale is above or below the original purchase price for the shares. Since the market price of the Fund's Common Shares will be determined by factors beyond the control of the Fund, the Fund cannot predict whether the Common Shares will trade at, below, or above NAV or at, below or above the initial public offering price. Accordingly, the Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes. See "Repurchase of Fund Shares; Conversion to Open-End Fund" below and "The Fund's Investments" in the Fund's Prospectus.
PREFERRED SHARE AUTHORIZATION
Under the terms of the Declaration, the Board of Trustees has the authority in its sole discretion, without shareholder vote, to authorize the issuance of Preferred Shares in one or more classes or series with such rights and terms, including voting rights, dividend rates, redemption provisions, liquidation preferences and conversion provisions as determined by the Board of Trustees.
BORROWINGS
The Declaration authorizes the Fund, without prior approval of the shareholders of Common Shares, to borrow money. In this connection, the Fund may issue notes or other evidence of indebtedness (including bank borrowings or commercial paper) ("Borrowings") and may secure any such borrowings by mortgaging, pledging or otherwise subjecting as security the Fund's assets. In connection with such borrowing, the Fund may be required to maintain average balances with the lender or to pay a commitment or other fee to maintain a line of credit. Any such requirements will increase the cost of borrowing over the stated interest rate.
Limitations on Borrowings. Under the requirements of the 1940 Act, the Fund, immediately after any Borrowings, must have an asset coverage of at least 300%. With respect to any Borrowings, asset coverage means the ratio which the value of the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of such Borrowings represented by senior securities issued by the Fund. Certain types of Borrowings may result in the Fund being subject to covenants in credit agreements relating to asset coverages or portfolio composition or otherwise. In addition, the Fund may be subject to certain restrictions imposed by guidelines of one or more NRSROs which may issue ratings for commercial paper or notes issued by the Fund. Such restrictions may be more stringent than those imposed by the 1940 Act.
Distribution Preference. The rights of lenders to the Fund to receive interest on and repayment of principal of any such Borrowings will be senior to those of the Common Shareholders, and the terms of any such Borrowings may contain provisions which limit certain activities of the Fund, including the payment of dividends to Common Shareholders in certain circumstances.
Voting Rights. The 1940 Act grants (in certain circumstances) to the lenders to the Fund certain voting rights in the event the asset coverage falls below specified levels. In the event that the Fund elects to be treated as a regulated investment company under the Code and such provisions would impair the Fund's status as a regulated investment company, the Fund, subject to its ability to liquidate its portfolio, intends to repay the Borrowings. Any Borrowings will likely be ranked senior or equal to all other existing and future borrowings of the Fund.
The discussion above describes the Fund's Board of Trustees' present intention with respect to an offering of Borrowings. If authorized by the Board of Trustees, the terms of any Borrowings may be the same as, or different from, the terms described above, subject to applicable law and the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders in certain circumstances, could be held personally liable for the obligations of the Fund. However, the Declaration contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the trustees. The Declaration further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for the obligations of the Fund solely by reason of his or her being a shareholder. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote.
The Declaration includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. Specifically, the Declaration requires the affirmative vote or consent by holders of at least two-thirds of the shares outstanding and entitled to vote, except as described below, to authorize (1) a conversion of the Fund from a closed-end to an open-end investment company, (2) a merger or consolidation of the Fund with any corporation, association, trust or other organization, including a series or class of such other organization (other than a merger, consolidation, reorganization or sale of assets with an acquiring fund that is not an operating entity immediately prior to the transaction), (3) a sale, lease or exchange of all or substantially all of the Fund's assets (other than in the regular course of business of the Fund, sales of assets in connection with the termination of the Fund as provided in the Declaration, or sale of assets with an acquiring fund that is not an operating entity immediately prior to the transaction), (4) in certain circumstances, a termination of the Fund, (5) removal of trustees by shareholders, or (6) certain transactions in which a Principal Shareholder (as defined below) is a party to the transactions. However, with respect to items (1), (2) and (3) above, if the applicable transaction has been already approved by the affirmative vote of
two-thirds of the trustees, then the majority of the outstanding voting securities as defined in the 1940 Act (a "Majority Shareholder Vote") is required. In addition, if there are then Preferred Shares outstanding, with respect to (1) above, two-thirds of the preferred shares voting as a separate class shall also be required unless the action has already been approved by two-thirds of the trustees, in which case then a Majority Shareholder Vote is required. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the shares otherwise required by law or by the terms of any class or series of preferred shares, whether now or hereafter authorized, or any agreement between the Fund and any national securities exchange. Further, in the case of items (2) or (3) that constitute a plan of reorganization (as such term is used in the 1940 Act) which adversely affects the Preferred Shares within the meaning of section 18(a)(2)(D) of the 1940 Act, except as may otherwise be required by law, the approval of the action in question will also require the affirmative vote of two-thirds of the Preferred Shares voting as a separate class provided, however, that such separate class vote shall be by a Majority Shareholder Vote if the action in question has previously been approved by the affirmative vote of two-thirds of the trustees.
Approval of shareholders is not required, however, for any transaction, whether deemed a merger, consolidation, reorganization or otherwise whereby the Fund issues shares in connection with the acquisition of assets (including those subject to liabilities) from any other investment company or similar entity. None of the foregoing provisions may be amended except by the vote of at least two-thirds of the Shares outstanding and entitled to vote.
As noted above, pursuant to the Declaration, the affirmative approval of two-thirds of the Shares outstanding and entitled to vote, subject to certain exceptions, shall be required for the following transactions in which a Principal Shareholder (as defined below) is a party: (i) the merger or consolidation of the Fund or any subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance of any securities of the Fund to any Principal Shareholder for cash other than pursuant to a dividend reinvestment or similar plan available to all shareholders; (iii) the sale, lease or exchange of all or any substantial part of the assets of the Fund to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period); (iv) the sale, lease or exchange to the Fund or any subsidiary thereof, in exchange for securities of the Fund, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period). However, shareholder approval for the foregoing transactions shall not be applicable to (i) any transaction, including, without limitation, any rights offering, made available on a pro rata basis to all shareholders of the Fund or class thereof unless the trustees specifically make such transaction subject to this voting provision, (ii) any transaction if the trustees shall by resolution have approved a memorandum of understanding with such Principal Shareholder with respect to and substantially consistent with such transaction or (iii) any such transaction with any corporation of which a majority of the outstanding shares of all classes of stock normally entitled to vote in elections of directors is owned of record or beneficially by the Fund and its subsidiaries. As described in the Declaration, a Principal Shareholder shall mean any corporation, person or other entity which is the beneficial owner, directly or indirectly, of more than 5% of the outstanding shares and shall include any affiliate or associate
(as such terms are defined in the Declaration) of a Principal Shareholder. The above affirmative vote shall be in addition to the vote of the shareholders otherwise required by law or by the terms of any class or series of preferred shares, whether now or hereafter authorized, or any agreement between the Fund and any national securities exchange.
The provisions of the Declaration described above could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over market value by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring persons seeking control of a Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's investment objective and policies. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the Securities and Exchange Commission for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not binding upon the trustees of the Fund individually, but only upon the assets and property of the Fund, and that the trustees shall not be liable to any person in connection with the Fund property or the affairs of the Fund or for any neglect or wrongdoing of any officer, employee or agent of the Fund or for the act or omission of any other trustee. Nothing in the Declaration, however, protects a trustee against any liability to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office with or on behalf of the Fund.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Fund's Common Shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), NAV, call protection, price, dividend stability, relative demand for and supply of such shares in the market, general market and economic conditions and other factors. Because shares of a closed-end investment company may frequently trade at prices lower than NAV, the trustees, in consultation with the Fund's Adviser, Sub-Adviser and any corporate finance services and consulting agent that the Adviser may retain, from time to time may review possible actions to reduce any such discount. Actions may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Fund to an open-end investment company. There can be no assurance, however, that the trustees will decide to take any of these actions, or that share repurchases or tender offers, if undertaken, will reduce a market discount. After any consideration of potential actions to seek to reduce any significant market discount, the trustees may, subject to their fiduciary obligations and compliance with applicable state and federal laws, authorize the commencement of
a share-repurchase program or tender offer. The size and timing of any such share repurchase program or tender offer will be determined by the trustees in light of the market discount of the Common Shares, trading volume of the Common Shares, information presented to the trustees regarding the potential impact of any such share repurchase program or tender offer, and general market and economic conditions. There can be no assurance that the Fund will in fact effect repurchases of or tender offers for any of its Common Shares. In addition, any service fees incurred in connection with any tender offer made by the Fund will be borne by the Fund and will not reduce the stated consideration to be paid to tendering Shareholders. Before deciding whether to take any action if the Fund's Common Shares trade below NAV, the trustees would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its Shareholders and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the trustees may determine that, in the interest of the Fund and its Shareholders, no action should be taken.
Subject to its investment limitations, the Fund may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Fund in anticipation of share repurchases or tenders will increase the Fund's expenses and reduce the Fund's net income. Any share repurchase, tender offer or borrowing that might be approved by the trustees would have to comply with the Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from NAV will be made by the trustees at the time they consider such issue, it is the trustees' present policy, which may be changed by the trustees, not to authorize repurchases of Common Shares or a tender offer for such shares if (1) such transactions, if consummated, would (a) result in the delisting of the Common Shares from the New York Stock Exchange, or (b) impair status as a registered closed-end investment company under the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities in an orderly manner and consistent with the Fund's investment objectives and policies in order to repurchase shares; or (3) there is, in the Board's judgment, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Fund, (b) general suspension of or limitation on prices for trading securities on the New York Stock Exchange, (c) declaration of a banking moratorium by Federal or state authorities or any suspension of payment by United States or state banks in which the Fund invests, (d) material limitation affecting the Fund or the issuers of its portfolio securities by Federal or state authorities on the extension of credit by lending institutions or on the exchange of non-U.S. currency, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States or (f) other event or condition which would have a material adverse effect (including any adverse tax effect) on the Fund or its shareholders if shares were repurchased. The trustees may in the future modify these conditions in light of experience with respect to the Fund.
Conversion to an open-end company would require the approval of the holders of at least two-thirds of the Fund's shares outstanding and entitled to vote; provided, however, that unless otherwise provided by law, if there are Preferred Shares outstanding, the affirmative vote of two-thirds of the
Preferred Shares voting as a separate class shall be required; provided, however, that such votes shall be by the affirmative vote of the majority of the outstanding voting securities, as defined in the 1940 Act, if the action in question was previously approved by the affirmative vote of two-thirds of the trustees. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the shares otherwise required by law or by the terms of any class or series of preferred shares, whether now or hereafter authorized, or any agreement between the Fund and any national securities exchange. See the Prospectus under "Closed-End Fund Structure" for a discussion of voting requirements applicable to conversion of the Fund to an open-end company. If the Fund converted to an open-end company, the Fund's Common Shares would no longer be listed on the New York Stock Exchange. Any Preferred Shares or other Borrowings would need to be redeemed or repaid upon conversion to an open-end investment company. Shareholders of an open-end investment company may require the company to redeem their shares on any business day (except in certain circumstances as authorized by or under the 1940 Act) at their NAV, less such redemption charge or contingent deferred sales change, if any, as might be in effect at the time of redemption. In order to avoid maintaining large cash positions or liquidating favorable investments to meet redemptions, open-end companies typically engage in a continuous offering of their shares. Open-end companies are thus subject to periodic asset in-flows and out-flows that can complicate portfolio management. The trustees may at any time propose conversion of the Fund to an open-end company depending upon their judgment as to the advisability of such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below NAV will result in an increase in the NAV of those shares that remain outstanding. However, there can be no assurance that share repurchases or tenders at or below NAV will result in the Fund's shares trading at a price equal to their NAV. Nevertheless, the fact that the Fund's shares may be the subject of repurchase or tender offers from time to time may reduce any spread between market price and NAV that might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease the Fund's Managed Assets which would likely have the effect of increasing the Fund's expense ratio.
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon the advice of Chapman and Cutler LLP, counsel to the Fund.
GENERAL
Set forth below is a discussion of certain U.S. federal income tax issues concerning the Fund and the purchase, ownership and disposition of Fund shares. This discussion does not purport to be complete or to deal with all aspects of federal income taxation that may be relevant to shareholders in light of their particular circumstances. This discussion also does not address the tax consequences to shareholders that are subject to special rules, including without limitation, banks or financial institutions, insurance companies, dealers in securities, non-U.S. shareholders, tax-exempt or tax-deferred plans,
accounts or entities, shareholders that are subject to the alternative minimum tax or shareholders that holds their shares as or in a hedge against currency risk, constructive sale or a conversion transaction. Unless otherwise noted, this discussion assumes you are a U.S. shareholder and that you hold your shares as a capital asset. This discussion is based upon present provisions of the Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities, all of which are subject to change, which change may be retroactive. In addition, this discussion does not address state, local or foreign tax consequences. Prospective investors should consult their own tax advisors with regard to the federal tax consequences of the purchase, ownership, or disposition of Fund shares, as well as the tax consequences arising under the laws of any state, locality, non-U.S. country, or other taxing jurisdiction.
The Fund intends to qualify annually and to elect to be treated as a regulated investment company under the Code and to comply with applicable distribution requirements so that it will not pay federal income tax on income and capital gains distributed to its shareholders.
To qualify for the favorable U.S. federal income tax treatment generally accorded to regulated investment companies, the Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies or other income derived with respect to its business of investing in such stock, securities or currencies; (b) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund's assets is represented by cash and cash items (including receivables), U.S. government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer generally limited for the purposes of this calculation to an amount not greater than 5% of the value of the Fund's total assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or the securities of other regulated investment companies) of any one issuer, or two or more issuers which the Fund controls and are engaged in the same, similar or related trades or businesses; and (c) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) and at least 90% of its net tax-exempt interest income each taxable year.
As a regulated investment company, the Fund generally will not be subject to U.S. federal income tax on its investment company taxable income (as that term is defined in the Code, but without regard to the deduction for dividends paid) and net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, that it distributes to shareholders. The Fund intends to distribute to its shareholders, at least annually, substantially all of its investment company taxable income and net capital gain. If the Fund retains any net capital gain or investment company taxable income, it will generally be subject to federal income tax at regular corporate rates on the amount retained. In addition, amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax unless, generally, the Fund distributes during each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the one-year period ending October 31 of the calendar year, and (3) any ordinary income and capital gains for previous years that were not distributed during those years. To prevent application of the excise tax, the Fund intends to make its distributions in accordance with the calendar year distribution requirement. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by the Fund in October, November or December with a record date in such a month and paid by the Fund during January of the following calendar year. These distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received.
If the Fund failed to qualify as a regulated investment company or failed to satisfy the 90% distribution requirement in any taxable year, the Fund would be taxed as an ordinary corporation on its taxable income (even if such income were distributed to its shareholders) and all distributions out of earnings and profits would be taxed to shareholders as ordinary income.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income generally are taxable to a shareholder as ordinary income to the extent of the Fund's earnings and profits, whether paid in cash or reinvested in additional shares. However, pursuant to the "Jobs and Growth Tax Relief Reconciliation Act of 2003" (the "Tax Act"), if the Fund holds equity securities, certain ordinary income distributions that are designated by the Fund and received from the Fund may be taxed at new lower tax rates. In particular, under the Tax Act, a portion of the ordinary income dividends received by an individual shareholder from a regulated investment company such as the Fund are generally taxed at the same new rates that apply to net capital gain, provided certain holding period requirements are satisfied and provided the dividends are attributable to "qualified dividends" received by the Fund itself (i.e., generally 15%, or 5% for taxpayers in the 10% and 15% tax brackets). Dividends received by the Fund from REITs and foreign corporations are qualified dividends eligible for this lower tax rate only in certain circumstances. These special rules relating to the taxation of ordinary income dividends from regulated investment companies generally apply to taxable years beginning before January 1, 2009. The Fund generally does not expect to generate qualified dividends eligible for the new lower tax rates.
Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, properly designated as capital gain dividends are taxable to a shareholder as long-term capital gains, regardless of how long the shareholder has held Fund shares. Shareholders receiving distributions in the form of additional shares, rather than cash, generally will have a cost basis in each such share equal to the value of a share of the Fund on the reinvestment date. A distribution of an amount in excess of the Fund's current and accumulated earnings and profits will be treated by a shareholder as a return of capital which is applied against and reduces the shareholder's tax basis in his or her shares. To the extent that the amount of any distribution exceeds the shareholder's basis in his or her shares, the excess will be treated by the shareholder as gain from a sale or exchange of the shares.
Shareholders will be notified annually as to the U.S. federal income tax status of distributions, and shareholders receiving distributions in the form of additional shares will receive a report as to the value of those shares.
DIVIDENDS RECEIVED DEDUCTION
A corporation that owns shares generally will not be entitled to the dividends received deduction with respect to dividends received from the Fund because the dividends received deduction is generally not available for distributions from regulated investment companies. However, if the Fund holds equity securities, certain ordinary income dividends on shares that are attributable to dividends received by the Fund from certain domestic corporations may be designated by the Fund as being eligible for the dividends received deduction but this amount is not expected to be significant.
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of shares of the Fund, which a shareholder holds as a capital asset, a shareholder may realize a capital gain or loss which will be long-term or short-term, depending upon the shareholder's holding period for the shares. Generally, a shareholder's gain or loss will be a long-term gain or loss if the shares have been held for more than one year.
Any loss realized on a sale or exchange will be disallowed to the extent that shares disposed of are replaced (including through reinvestment of dividends) within a period of 61 days beginning 30 days before and ending 30 days after disposition of shares or to the extent that the shareholder, during such period, acquires or enters into an option or contract to acquire, substantially identical stock or securities. In this case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of Fund shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gain received by the shareholder with respect to the shares.
NATURE OF THE FUND'S INVESTMENTS
Certain of the Fund's investment practices may be subject to special and complex federal income tax provisions that may, among other things, (1) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (2) convert lower taxed long-term capital gain into higher taxed short-term capital or ordinary income, (3) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (4) cause the Fund to recognize income or gain without a corresponding receipt of cash, (5) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur and (6) adversely alter the characterization of certain complex financial transactions. The Fund will monitor its transactions, will make the appropriate tax elections and take appropriate actions in order to mitigate the effect of these rules and prevent disqualification of the Fund from being taxed as a regulated investment company (including disposing of certain
investments to generate cash or borrowing cash to satisfy its distribution requirements). The ability to deduct capital losses may otherwise be limited.
INVESTMENT IN SECURITIES OF UNCERTAIN TAX CHARACTER
The Fund may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be subject to recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Fund, it could affect the timing or character of income recognized by the Fund, requiring the Fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to regulated investment companies under the Code.
INVESTMENT IN NON-U.S. SECURITIES
The Fund's investment in non-U.S. securities may be subject to non-U.S. withholding taxes. In that case, the Fund's yield on those securities would be decreased. Shareholders will generally not be entitled to claim a credit or deduction with respect to foreign taxes paid by the Fund. In addition, if the Fund acquires an equity interest in "passive foreign investment companies," which are generally certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties or capital gains) or that hold at least 50% of their assets in investments producing such passive income , the Fund could be subject to U.S. federal income tax and additional interest charges on gains and certain distributions with respect to those equity interests, even if all the income or gain is timely distributed to its shareholders. The Fund will not be able to pass through to its shareholders any credit or deduction for such taxes. An election would generally be available to ameliorate these adverse tax consequences, but any such election could require the Fund to recognize taxable income or gain without the concurrent receipt of cash. These investments could also result in the treatment of capital gains as ordinary income. The Fund intends to manage its holdings to limit the tax liability from these investments.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. federal income tax from all taxable distributions and sale proceeds payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. The withholding percentage is 28% until 2011, when the percentage will revert to 31% unless amended by Congress. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from backup withholding. This withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal income tax liability.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may compare certain aspects of its portfolio and structure to other substantially similar closed-end funds. In reports or other communications to shareholders of the Fund or in advertising materials, the Fund may compare its performance with that of (i) other investment companies listed in the rankings prepared by Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services; publications such as Barrons, Business Week, Forbes, Fortune, Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual Fund Values, The New York Times, The Wall Street Journal and USA Today; or other industry or financial publications or (ii) the Standard & Poor's Index of 500 Stocks, the Dow Jones Industrial Average, Nasdaq Composite Index and other relevant indices and industry publications. The Fund may also compare the historical volatility of its portfolio to the volatility of such indices during the same time periods. (Volatility is a generally accepted barometer of the market risk associated with a portfolio of securities and is generally measured in comparison to the stock market as a whole -- the beta -- or in absolute terms -- the standard deviation.) Comparison of the Fund to an alternative investment should be made with consideration of differences in features and expected performance. The Fund may obtain data from sources or reporting services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be generally accurate.
The Fund may, from time to time, show the standard deviation of either the Fund or the Fund's investment strategy and the standard deviation of the Fund's benchmark index. Standard deviation is a statistical measure of the historical volatility of a portfolio. Standard deviation is the measure of dispersion of historical returns around the mean rate of return.
From time to time, the Fund may quote the Fund's total return, aggregate total return or yield in advertisements or in reports and other communications to shareholders. The Fund's performance will vary depending upon market conditions, the composition of its portfolio and its operating expenses. Consequently any given performance quotation should not be considered representative of the Fund's performance in the future. In addition, because performance will fluctuate, it may not provide a basis for comparing an investment in the Fund with certain bank deposits or other investments that pay a fixed yield for a stated period of time. Investments comparing the Fund's performance with that of other investment companies should give consideration to the quality and type of the respective investment companies' portfolio securities.
The Fund's "average annual total return" is computed according to a formula prescribed by the Securities and Exchange Commission. The formula can be expressed as follows:
Average Annual Total Return will be computed as follows:
ERV = P(1+T)/n/
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-, 5-, or 10-year
periods at the end of the 1-, 5-, or 10-year periods (or
fractional portion).
|
The Fund may also quote after-tax total returns to show the impact of assumed federal income taxes on an investment in the Fund. The Fund's total return "after taxes on distributions" shows the effect of taxable distributions, but not any taxable gain or loss, on an investment in shares of the Fund for a specified period of time. The Fund's total return "after taxes on distributions and sale of Fund shares" shows the effect of both taxable distributions and any taxable gain or loss realized by the shareholder upon the sale of fund shares at the end of a specified period. To determine these figures, all income, short-term capital gain distributions, and long-term capital gains distributions are assumed to have been taxed at the highest marginal individualized federal tax rate then in effect. Those maximum tax rates are applied to distributions prior to reinvestment and the after-tax portion is assumed to have been reinvested in the Fund. State and local taxes are ignored.
Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects.
Average Annual Total Return (After Taxes on Distributions) will be computed as follows:
ATV/D/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV/D/ = ending value of a hypothetical $1,000 investment made
at the beginning of the period, at the end of the period
(or fractional portion thereof), after taxes on fund
distributions but not after taxes on redemptions.
|
Average Annual Total Return (After Taxes on Distributions and Sale of Fund Shares) will be computed as follows:
ATV/DR/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions
and redemption)
n = number of years
|
ATV/DR/ = ending value of a hypothetical $1,000 investment made at the beginning periods, at the end of the periods (or fractional portion thereof), after taxes on fund distributions and redemptions.
Quotations of yield for the Fund will be based on all investment income per share earned during a particular 30-day period (including dividends and interest), less expenses accrued during the period ("net investment income") and are computed by dividing net investment income by the maximum offering price per share on the last day of the period, according to the following formula:
Yield = 2 [( a-b/cd +1)/6/ - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
|
Past performance is not indicative of future results. At the time Common Shareholders sell their shares, they may be worth more or less than their original investment.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Financial Statements of the Fund as of ________________, appearing in this Statement of Additional Information have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and is included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. Deloitte & Touche LLP audits and reports on the Fund's annual financial statements, and performs other professional accounting, auditing and advisory services when engaged to do so by the Fund. The principal business address of Deloitte & Touche LLP is 180 North Stetson Avenue, Chicago, Illinois 60601.
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
PFPC Trust Company, 301 Bellevue Parkway, Wilmington, Delaware 19809, serves as custodian for the Fund. As such, PFPC Trust Company has custody of all securities and cash of the Fund and attends to the collection of principal and income and payment for and collection of proceeds of securities bought and sold by the Fund. PFPC Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809 is the transfer, registrar, dividend disbursing agent and shareholder servicing agent for the Fund and provides certain clerical, bookkeeping, shareholder servicing and administrative services necessary for the operation of the Fund and maintenance of shareholder accounts. PFPC Inc. also provides certain accounting and administrative services to the Fund pursuant to an Administration and Accounting Services Agreement, including maintaining the Fund's books of account, records of the Fund's securities transactions, and certain other books and records; acting as liaison with the Fund's independent registered public accounting firm by providing such accountant certain Fund accounting information; and providing other continuous accounting and administrative services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to the shares of the Fund offered hereby, has been filed by the Fund with the Securities and Exchange Commission. The Fund's Prospectus and this Statement of Additional Information do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Fund and the shares offered hereby, reference is made to the Fund's Registration Statement. Statements contained in the Fund's Prospectus and this Statement of Additional Information as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of the contract or other document filed as an exhibit to the Registration Statement, each statement being qualified in all respects by such reference. Copies of the Registration Statement may be inspected without charge at the Securities and Exchange Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Securities and Exchange Commission upon the payment of certain fees prescribed by the Securities and Exchange Commission.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholder of First Trust/Aberdeen Global Opportunity Income Fund:
We have audited the accompanying statement of assets and liabilities of First Trust/Global Opportunity Income Fund (the "Fund"), as of November 16, 2004. This statement of assets and liabilities is the responsibility of the Fund's management. Our responsibility is to express an opinion on this statement of assets and liabilities based on our audit.
We conducted our audit in accordance with 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 statement of assets and liabilities is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. Our procedures included confirmation of cash owned as of November 16, 2004, by correspondence with the Fund's custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of First Trust/Aberdeen Global Opportunity Income Fund as of November 16, 2004, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 19, 2004
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 16, 2004
ASSETS:
Cash $100,008
Offering costs $600,000
----------
$700,008
----------
LIABILITIES:
Offering costs payable $600,000
----------
Net Assets $100,008
----------
NET ASSETS - Applicable to 5,236 shares $100,008
----------
NET ASSET VALUE PER SHARE (net assets divided by
5,236 shares.) $19.10
==========
MAXIMUM OFFERING PRICE PER SHARE (net asset
value plus sales charge of 4.5% of offering price.) $20.00
----------
|
Notes to Statement of Assets and Liabilities:
Note 1. Organization
First Trust/Aberdeen Global Opportunity Income Fund (the "Fund") is a newly organized, diversified, closed-end management investment company registered under the Investment Company Act of 1940 (the "1940 Act"). The Fund was organized as a Massachusetts business trust on September 7, 2004, pursuant to a Declaration of Trust governed by the laws of the Commonwealth of Massachusetts. As a newly organized entity, the Fund has no operating history. The Fund has had no operations through November 16, 2004 other than those relating to organizational matters and the sale and issuance of 5,236 common shares of beneficial interest to First Trust Advisors L.P. (the "Adviser").
Note 2. Significant Accounting Policies
The Adviser has assumed organization costs estimated to be $50,000. The Adviser has also agreed to assume offering costs in excess of $.04 a share, if any.
The Fund's statement of assets and liabilities is prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts and disclosures in the statement of assets and liabilities. Actual results could differ from those estimates.
The Fund intends to comply in its initial fiscal year and thereafter with provisions of the Internal Revenue Code applicable to regulated investment companies and as such, will not be subject to federal income taxes on otherwise taxable income (including net realized capital gains) distributed to shareholders.
Offering costs will be charged to paid-in-capital in proportion to the number of shares sold during the offering period.
Note 3. Fees and Other Transactions with Affiliated Parties
On October 3 2004, the Fund's Board of Trustees approved an Investment Management Agreement with the Adviser. The Fund has agreed to pay an annual management fee for the services and facilities provided by the Adviser, payable on a monthly basis, equal to the annual rate of 1.00% of the Fund's average daily managed assets.
Aberdeen Asset Management Inc. (the "Sub-Adviser") receives a portfolio management fee equal to 0.50% of the Fund's average daily managed assets. The Sub-Adviser's fee is paid by the Adviser out of the Adviser's management fee.
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
________ COMMON SHARES
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 23, 2004
BACK COVER
APPENDIX A
DESCRIPTION OF RATINGS
Standard & Poor's Corporation -- A brief description of the applicable Standard & Poor's Corporation, a division of The McGraw-Hill Companies ("Standard & Poor's" or "S&P") rating symbols and their meanings (as published by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days-including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following considerations:
Likelihood of payment--capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
Nature of and provisions of the obligation; and
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
"AAA"
An obligation rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
"AA"
An obligation rated "AA" differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
"A"
An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
"BBB"
An obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
"BB", "B", "CCC", "CC", AND "C"
Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
"BB"
An obligation rated "BB" is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
"B"
An obligation rated "B" is more vulnerable to nonpayment than obligations rated "BB", but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
"CCC"
An obligation rated "CCC" is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
"CC"
An obligation rated "CC" is currently highly vulnerable to nonpayment.
"C"
The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.
"D"
An obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
PLUS ("+") OR MINUS ("-")
The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
"C"
The "c" subscript is used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer is below an investment-grade level and/or the issuer's bonds are deemed taxable.
"P"
The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.
"*"
Continuance of the ratings is contingent upon Standard & Poor's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.
"R"
The "r" highlights derivative, hybrid, and certain other obligations that Standard & Poor's believes may experience high volatility or high variability in expected returns as a result of noncredit risks. Examples of such obligations are securities with principal or interest return indexed to equities, commodities, or currencies; certain swaps and options; and interest-only and principal-only mortgage securities. The absence of an "r" symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.
"N.R."
Not rated.
Debt obligations of issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS
Under present commercial bank regulations issued by the Comptroller of the Currency, bonds rated in the top four categories ("AAA", "A", "A", "BBB", commonly known as investment-grade ratings) generally are regarded as eligible for bank investment. Also, the laws of various states governing legal investments impose certain rating or other standards for obligations eligible for investment by savings banks, trust companies, insurance companies, and fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
Notes. A Standard & Poor's note ratings reflects the liquidity factors and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
o Amortization schedule -- the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
o Source of payment -- the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
"SP-1"
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus ("+") designation.
"SP-2"
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
"SP-3"
Speculative capacity to pay principal and interest.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from "A-1" for the highest quality obligations to "D" for the lowest. These categories are as follows:
"A-1"
A short-term obligation rated "A-1" is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign ("+"). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
"A-2"
A short-term obligation rated "A-2" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
"A-3"
A short-term obligation rated "A-3" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
"B"
A short-term obligation rated "B" is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
"C"
A short-term obligation rated "C" is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
"D"
A short-term obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Moody's Investors Service, Inc. -- A brief description of the applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings (as published by Moody's) follows:
Municipal Ratings are opinions of the investment quality of issuers and issues in the US municipal and tax-exempt markets. As such, these ratings incorporate Moody's assessment of the default probability and loss severity of these issuers and issues. The default and loss content for Moody's municipal long-term rating scale differs from Moody's general long-term rating scale.
Municipal Ratings are based upon the analysis of four primary factors relating to municipal finance: economy, debt, finances, and administration/management strategies. Each of the factors is evaluated individually and for its effect on the other factors in the context of the municipality's ability to repay its debt.
MUNICIPAL LONG-TERM RATING DEFINITIONS
"Aaa"
Issuers or issues rated "Aaa" demonstrate the strongest creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"Aa"
Issuers or issues rated "Aa" demonstrate very strong creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"A"
Issuers or issues rated "A" present above-average creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"Baa"
Issuers or issues rated "Baa" represent average creditworthiness relative to other US municipal or tax- exempt issuers or issues.
"Ba"
Issuers or issues rated "Ba" demonstrate below-average creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"B"
Issuers or issues rated "B" demonstrate weak creditworthiness relative to other US municipal or tax- exempt issuers or issues.
"Caa"
Issuers or issues rated "Caa" demonstrate very weak creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"Ca"
Issuers or issues rated "Ca" demonstrate extremely weak creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"C"
Issuers or issues rated "C" demonstrate the weakest creditworthiness relative to other US municipal or tax-exempt issuers or issues.
Note: Moody's appends numerical modifiers "1", "2", and "3" to each generic rating category from "Aa" through "Caa." The modifier "1" indicates that the issuer or obligation ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates a ranking in the lower end of that generic rating category.
SHORT-TERM DEBT RATINGS
There are three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated as Municipal Investment Grade ("MIG") and are divided into three levels -- "MIG 1" through "MIG 3." In addition, those short-term obligations that are of speculative quality are designated "SG", or speculative grade. "MIG" ratings expire at the maturity of the obligation.
"MIG 1"
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
"MIG 2"
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
"MIG 3"
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
"SG"
This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
DEMAND OBLIGATION RATINGS
In the case of variable rate demand obligations ("VRDOs"), a two-component rating is assigned; a long or short-term debt rating and a demand obligation rating. The first element represents Moody's evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moody's evaluation of the degree of risk associated with the ability to receive purchase price upon demand ("demand feature"), using a variation of the "MIG" rating scale, the Variable Municipal Investment Grade or "VMIG" rating. When either the long- or short-term aspect of a "VRDO" is not rated, that piece is designated NR, e.g., "Aaa/NR" or "NR/VMIG 1." "VMIG" rating expirations are a function of each issue's specific structural or credit features.
"VMIG 1"
This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
"VMIG 2"
This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
"VMIG 3"
This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
"SG"
This designation denotes speculative-grade credit quality. Demand features rated in this category may supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.
COMMERCIAL PAPER
Moody's short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.
Moody's employs the following designations to indicate the relative repayment ability of rated issuers:
"P-1"
Issuers (or supporting institutions) rated "Prime-1" have a superior ability to repay short-term debt obligations.
"P-2"
Issuers (or supporting institutions) rated "Prime-2" have a strong ability to repay short-term debt obligations.
"P-3"
Issuers (or supporting institutions) rated "Prime-3" have an acceptable ability to repay short-term obligations.
"NP"
Issuers (or supporting institutions) rated "Not Prime" do not fall within any of the Prime rating categories.
Note: Canadian issuers rated "P-1" or "P-2" have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or support-provider.
Fitch Ratings -- A brief description of the applicable Fitch Ratings ("Fitch") ratings symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
International Long-Term Credit Ratings are more commonly referred to as simply "Long-Term Ratings." The following scale applies to foreign currency and local currency ratings.
International credit ratings assess the capacity to meet foreign or local currency commitments. Both foreign and local currency ratings are internationally comparable assessments. The local currency rating measures the probability of payment only within the sovereign state's currency and jurisdiction.
"AAA"
Highest credit quality. "AAA" ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
"AA"
Very high credit quality. "AA" ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
"A"
High credit quality. "A" ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
"BBB"
Good credit quality. "BBB" ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
"BB"
Speculative. "BB" ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
"B"
Highly speculative. "B" ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
"CCC", "CC", "C"
High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A "CC" rating indicates that default of some kind appears probable. "C" ratings signal imminent default.
"DDD", "DD", "D"
Default. The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. "DDD" obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. "DD" indicates potential recoveries in the range of 50%-90% and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their obligations. Entities rated "DDD" have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated "DD" and "D" are generally undergoing a formal reorganization or liquidation process; those rated "DD" are likely to satisfy a higher portion of their outstanding obligations, while entities rated "D" have a poor prospect of repaying all obligations.
SHORT-TERM CREDIT RATINGS
International Short-Term Credit Ratings are more commonly referred to as simply "Short-Term Ratings." The following scale applies to foreign currency and local currency ratings.
A short-term rating has a time horizon of less than 12 months for most obligations, or up to three years for U.S. public finance securities, and thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
International credit ratings assess the capacity to meet foreign or local currency commitments. Both foreign and local currency ratings are internationally comparable assessments. The local currency rating measures the probability of payment only within the sovereign state's currency and jurisdiction.
"F1"
Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
"F2"
Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
"F3"
Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade.
"B"
Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.
"C"
High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
"D"
Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the "AAA" long-term rating category, to categories below "CCC", or to short-term ratings other than "F1."
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive," indicating a potential upgrade, "Negative," for a potential downgrade, or "Evolving," if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over a one to two year period. Outlooks may be positive, stable, or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are "stable" could be downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Moody's may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
APPENDIX B
ABERDEEN U.S. REGISTERED ADVISERS
PROXY VOTING POLICIES AND PROCEDURES
The following are proxy voting policies and procedures ("Policies and
Procedures") adopted by affiliated investment advisers registered with the U.S.
Securities and Exchange Commission ("SEC") under the Investment Advisers Act of
1940, as amended ("Advisers Act"), that are subsidiaries of Aberdeen Asset
Management PLC ("AAM"); including, specifically, Aberdeen Asset Management Inc.,
a Delaware Corporation, ("Aberdeen FL"), Aberdeen Asset Management Asia Limited,
a Singapore Corporation ("Aberdeen Singapore"), Aberdeen Asset Management
Limited, an Australian Corporation ("Aberdeen AU"), and Aberdeen Asset Managers
(C.I.) Limited, a Channel Islands corporation ("Aberdeen Jersey") (collectively
referred to herein as "Aberdeen Advisers" and each an "Aberdeen Adviser")
(collectively with AAM, "Aberdeen").1 Pursuant to a Memorandum of Understanding
("MOU"), Aberdeen Asset Managers Limited ("Aberdeen UK"), a non-U.S. registered
adviser, and Aberdeen Jersey provide advisory resources to certain U.S. clients
of Aberdeen Asia and Aberdeen AU. In addition, Aberdeen UK provides advisory
resources to certain U.S. clients of Aberdeen FL pursuant to another MOU. Under
these MOUs, the affiliates of the Aberdeen Advisers may provide various
portfolio management resources, including substantive advice on voting proxies
for certain equity securities. To the extent that Aberdeen UK and Aberdeen
Jersey provide advisory services to any clients of Aberdeen FL or to U.S.
clients of Aberdeen Singapore or Aberdeen AU, Aberdeen UK and Aberdeen Jersey
will be subject to the control and supervision of the registered adviser and
will follow these Policies and Procedures as part of providing such advisory
services. These Policies and Procedures are adopted to ensure compliance by the
Aberdeen Advisers with Rule 206(4)-6 under the Advisers Act and other applicable
fiduciary obligations under rules and regulations of the SEC and interpretations
of its staff with respect to proxies for voting securities held by client
portfolios.
Procedures and the proxy voting policies and procedures adopted by the Funds and their Boards of Directors.
I. DEFINITIONS
A. "Best interest of clients". Clients' best economic interests over the long term -- that is, the common interest that all clients share in seeing the value of a common investment increase over time. Clients may have differing political or social interests, but their best economic interest is generally uniform.
B. "Material conflict of interest". Circumstances when an Aberdeen Adviser or any member of senior management, portfolio manager or portfolio analyst knowingly does business with a particular proxy issuer or closely affiliated entity, which may appear to create a material conflict between the interests of the Aberdeen Adviser and the interests of its clients in how proxies of that issuer are voted. A material conflict of interest might also exist in unusual circumstances when Aberdeen has actual knowledge of a material business arrangement between a particular proxy issuer or closely affiliated entity and an affiliate of an Aberdeen Adviser.
II. GENERAL VOTING POLICIES
A. Client's Best Interest. These Policies and Procedures are designed and implemented in a way that is reasonably expected to ensure that proxies are voted in the best interests of clients. Proxies are voted with the aim of furthering the best economic interests of clients, promoting high levels of corporate governance and adequate disclosure of company policies, activities and returns, including fair and equal treatment of stockholders.
B. Shareholder Activism. Aberdeen Advisers seek to develop relationships with the management of portfolio companies to encourage transparency and improvements in the treatment of employees, owners and stakeholders. Thus, Aberdeen Advisers may engage in dialogue with the management of portfolio companies with respect to pending proxy voting issues.
C. Case-by-Case Basis. These Policies and Procedures are guidelines. Each vote is ultimately cast on a case-by-case basis, taking into consideration the contractual obligations under the advisory agreement or comparable document, and all other relevant facts and circumstances at the time of the vote. Aberdeen Advisers may cast proxy votes in favor of management proposals or seek to change the views of management, considering specific issues as they arise on their merits. Aberdeen Advisers may also join with other investment managers in seeking to submit a shareholder proposal to a company or to oppose a proposal submitted by the company. Such action may be based on fundamental, social, environmental or human rights grounds.
D. Individualized. These Policies and Procedures are tailored to suit Aberdeen's advisory business and the types of securities portfolios Aberdeen Advisers manage. To the extent that clients (e.g., investment companies, corporations, pension plans) have adopted their own procedures, Aberdeen Advisers may vote the same securities differently depending upon clients' directions.
E. Material Conflicts of Interest. Material conflicts are resolved in the
best interest of clients. When a material conflict of interest between
an Aberdeen Adviser and its respective client(s) is identified, the
Aberdeen Adviser will choose among the procedures set forth in Section
IV.B.2. below, to resolve such conflict.
F. Limitations. The circumstances under which Aberdeen may take a limited role in voting proxies, include the following:
1. No Responsibility. Aberdeen Advisers will not vote proxies for client accounts in which the client contract specifies that Aberdeen will not vote. Under such circumstances, the clients' custodians are instructed to mail proxy material directly to such clients.
2. Limited Value. Aberdeen Advisers may abstain from voting a client proxy if the effect on shareholders' economic interests or the value of the portfolio holding is indeterminable or insignificant. Aberdeen Advisers may also abstain from voting the proxies of portfolio companies held in their passively managed funds. Proxies with respect to securities that have been sold before the date of the shareholders meeting and are no longer held by a client generally will not be voted.
3. Unjustifiable Costs. Aberdeen may abstain from voting a client proxy for cost reasons (e.g., non-U.S. securities).
4. Securities Lending Arrangements. If voting securities are part of a securities lending program, Aberdeen may be unable to vote while the securities are on loan.
5. Share Blocking. Certain jurisdictions may impose share blocking restrictions at various times which may prevent Aberdeen from exercising its voting authority.
6. Special Considerations. Aberdeen's responsibilities for voting proxies are determined generally by its obligations under each advisory contract or similar document. If a client requests in writing that an Aberdeen Adviser vote its proxy in a manner inconsistent with these Policies and Procedures, Aberdeen may follow the client's direction or may request that the client vote the proxy directly.
G. Sources of Information. Aberdeen may conduct research internally and/or use the resources of an independent research consultant. Aberdeen may consider legislative materials, studies of corporate governance and other proxy voting issues, and/or analyses of shareholder and management proposals by a certain sector of companies, e.g., Fortune 500 companies.
H. Subadvisers. To the extent that an Aberdeen Adviser may rely on subadvisers, whether affiliated or unaffiliated, to manage any client portfolio on a discretionary basis, the Aberdeen Adviser will delegate responsibility for voting proxies to the subadviser. However, such subadvisers will be required either to follow these Policies and Procedures or to demonstrate that their proxy voting policies and procedures are consistent with these Policies and Procedures or otherwise implemented in the best interests of Aberdeen clients.
I. Availability of Policies and Procedures. Aberdeen Advisers will provide clients with a copy of these Policies and Procedures, as revised from time to time, upon request.
J. Disclosure of Vote. As disclosed in Part II of each Aberdeen Adviser's Form ADV, a client may obtain information on how its proxies were voted by requesting such information from its Aberdeen Adviser. Aberdeen Advisers do not generally disclose client proxy votes to third parties, other than as required for Funds, unless specifically requested, in writing, by the client.
III. SPECIFIC VOTING POLICIES
A. General Philosophy.
o Support existing management on votes on the financial statements of a company and the election of the Board of Directors;
o Vote for the acceptance of the accounts unless there are grounds to suspect that either the accounts as presented or audit procedures used, do not present an accurate picture of company results; and
o Support routine issues such as the appointment of independent
auditors, allocation of income and the declaration of stock
(scrip) dividend proposals provided there is a cash
alternative.
B. Anti-takeover Measures. Aberdeen Advisers vote on anti-takeover measures on a case-by-case basis taking into consideration such factors as the long-term financial performance of the target company relative to its industry competition. Key measures of performance will include the growth rates for sales, operating income, net income and total shareholder returns. Other factors which will be considered include margin analysis, cash flow and debt levels.
C. Proxy Contests for Control. Aberdeen Advisers vote on proxy contests for control on a case-by-case basis taking into consideration such factors as long-term financial performance of the target company relative to its industry, management's track record, background to the proxy contest, qualifications of director nominees, evaluation of what each side is offering shareholders as well as the likelihood that the proposed objectives and goals can be met, and stock ownership positions.
D. Contested Elections. Aberdeen Advisers vote on contested elections on a case-by-case basis taking into consideration such factors as the qualifications of all director nominees. Aberdeen Advisers also consider the independence of board and key committee members and the corporate governance practices of the company.
E. Executive compensation proposals. Aberdeen Advisers consider such proposals on a case-by-case basis taking into consideration such factors as executive pay and spending perquisites, particularly in conjunction with sub-par performance and employee layoffs.
F. Shareholder Proposals. Aberdeen Advisers consider such proposals on a case-by-case basis. Aberdeen Advisers support those proposals which will improve the company's corporate governance or business profile at a reasonable cost, but may oppose proposals which result in significant cost being incurred with little or no benefit to the company or its shareholders.
IV. PROXY VOTING PROCEDURES
This section applies to each Aberdeen Adviser except to the extent that certain procedures are identified as applicable only to a specific Aberdeen Adviser.
A. Obtain Proxy. Registered owners of record, e.g., trustees or custodian banks, that receive proxy materials from the issuer or its information agent, are instructed to sign physical proxy cards in blank and forward directly to the relevant Aberdeen Adviser's proxy administrator ("PA"). Proxies may also be delivered electronically by custodians using proxy services such as ProxyEdge. Each proxy received is matched to the securities to be voted.
B. Material Conflicts of Interest.
1. Identify the existence of any material conflicts of interest relating to the securities to be voted or the issue at hand. Portfolio managers and research analysts (Analysts") and senior management of each Aberdeen Adviser have an affirmative duty to disclose to the relevant proxy committees any personal conflicts such as officer or director positions held by them, their spouses or close relatives in the portfolio company or attempts by the portfolio company to exert influence over such person with respect to their vote. Conflicts based on business relationships or dealings of affiliates of any Aberdeen Adviser will only be considered to the extent that the Aberdeen Adviser has actual knowledge of such business relationships.
2. When a material conflict of interest between an Aberdeen Adviser's interests and its clients' interests appears to exist, the Aberdeen Adviser may choose among the following options to eliminate such conflict: (1) vote in accordance with these Policies and Procedures if it involves little or no discretion; (2) vote as recommended by a third party service if the Aberdeen Adviser utilizes such a service; (3) "echo vote" or "mirror vote" the proxies in the same proportion as the votes of other proxy holders that are not Aberdeen clients; (4) if possible, erect information barriers around the person or persons making voting decisions sufficient to insulate the decision from the conflict; (5) if practical, notify affected clients of the conflict of interest and seek a waiver of the conflict; or (6) if agreed upon in writing with the client, forward the proxies to affected clients allowing them to vote their own proxies.
C. Analysts. The PA for each Aberdeen Adviser will ensure that each proxy statement is directed to the appropriate Analyst. If a third party recommendation service has been retained, the relevant PA will forward the proxy statement to the Analyst with the recommendation highlighted. The Analyst will determine whether to vote as recommended by the service provider or to recommend an alternative and shall advise the PA. The Analyst may consult with the PA as necessary. If the Analyst recommends voting against the third party recommendation, he or she is responsible for documenting the reasons for such recommendation and that no conflict of interest influenced such recommendation. If no third party recommendation service is utilized or if no recommendation is provided, the Analyst is responsible for documenting the rationale for his or her vote recommendation.
D. Vote. The following describes the breakdown of responsibilities between the PA and the Proxy Committee ("PC") of each Aberdeen Adviser in voting portfolio securities and the extent to which the Aberdeen Advisers rely on third party service providers.
1. Aberdeen FL
The PA for Aberdeen FL ("PA-FL"), who resides in Ft. Lauderdale, and the PA for Aberdeen UK ("PA-UK"), which is part of the Trade Processing Department resident in Aberdeen, Scotland, are responsible for ensuring that votes for Aberdeen FL clients are cast and cast in accordance with these Policies and Procedures. The PA-FL and the PA-UK are identified more specifically on Appendix A1. The PA-FL is primarily responsible for administering proxy votes for the Phoenix funds which are sub-advised by Aberdeen FL.
Responsibility for considering the substantive issues relating to any vote and for deciding how shares will be voted resides with the relevant Analyst whether located in Aberdeen FL, Aberdeen UK or Aberdeen Singapore. Under Aberdeen-FL's MOU with Aberdeen Singapore, the relevant Analyst for Far East equity securities will generally reside in Aberdeen Singapore.
In the event that a material conflict of interest is identified by any Analyst, whether in Aberdeen FL, Aberdeen UK or Aberdeen Singapore, decisions on how to vote will be referred to the Aberdeen FL proxy committee ("PC-FL/UK"). Under Aberdeen FL's MOU with Aberdeen UK, the PC-FL/UK is headquartered in Glasgow, Scotland, and includes the Chief Investment Officer or Deputy Chief Investment Officer, the head of the Socially Responsible Investing ("SRI") Team and a member of the Compliance team, who are more specifically identified on Appendix A1. The PC-FL/UK meets as needed to consider material conflicts of interest or any other items raising unique issues. If the PC-FL/UK determines that there is no material conflict of interest, the vote recommendation will be forwarded to the appropriate proxy administrator, either the PA-FL or PA-UK. If a material conflict of interest is identified, the PC-FL/UK will follow the conflict of interest procedures set forth in Section IV.B.2., above.
expressly changes the vote prior to the voting deadline with appropriate analyst documentation. In the event of a material conflict of interest, Aberdeen FL will follow the procedures outlined in Section IV.B.2, above.
2. Aberdeen Jersey, Aberdeen AU and Aberdeen Singapore
Aberdeen Jersey and Aberdeen AU are responsible for voting proxies for the Funds. The PA for Aberdeen Jersey and Aberdeen AU ("PA-Jersey") is the Trade Processing Department in Jersey, Channel Islands, members of which are more specifically identified on Appendix A2. The PA-Jersey is responsible for ensuring that votes are cast and cast in accordance with these Policies and Procedures. The PA-Jersey uses ProxyEdge to electronically cast votes for the Funds and to maintain electronic records of the votes cast.
Responsibility for considering the substantive issues relating to any Fund vote and for deciding how the shares will be voted resides with relevant equity and/or fixed income Analyst. Pursuant to the MOU among Aberdeen Jersey, Aberdeen AU and Aberdeen UK, the relevant Analyst may be a member of the Fund portfolio management team in London, England. In the event that a material conflict of interest is identified, decisions on how to vote will be referred to the proxy committee ("PC-AU") located in Aberdeen AU. The PC-AU includes the Heads of Equity and Fixed Income Portfolio Management and the Compliance Officer, who are more specifically identified on Appendix A2. The PC-AU meets as needed to consider a material conflict of interest or any other items raising unique issues. If the PC-AU determines there is no material conflict of interest, the vote recommendation will be forwarded to the PA-Jersey to be cast. If a material conflict of interest is identified, the PC-AU will follow the conflict of interest procedures set forth in Section IV.B.2., above, and in the Aberdeen Funds Proxy Voting Policy and Procedures.
Aberdeen Singapore currently provides advice to Aberdeen Jersey and Aberdeen AU only with respect to fixed income securities. In the event that Aberdeen Singapore later provides advice to either Aberdeen Jersey and Aberdeen AU with respect to equity securities, Aberdeen Singapore may designate its own PA and PC. At present, a member of the PC-AU already serves as an Aberdeen Singapore Analyst and this member will serve on the Aberdeen Singapore PC with respect to proxy voting advice rendered to Aberdeen Jersey and Aberdeen AU to the extent such a committee may be necessary.
E. Review. Each PA is responsible for ensuring that proxy materials are received in a timely manner and reconciled against holdings on the record date of client accounts over which the Aberdeen Adviser has voting authority to ensure that all shares held on the record date, and for which a voting obligation exists, are voted.
V. DOCUMENTATION, RECORDKEEPING AND REPORTING REQUIREMENTS
A. Documentation. The Aberdeen PAs are responsible for: 1. Implementing and updating these Policies and Procedures; 2. Overseeing the proxy voting process;
3. Consulting with portfolio managers/analysts for the relevant portfolio security; and
4. Maintaining manual proxy voting records, if any, and overseeing and reviewing voting execution and recordkeeping by third party providers such as ISS and ProxyEdge.
B. RecordKeeping.
1. Each Aberdeen Adviser maintains or procures the maintenance of records of all proxies it has voted. As permitted by Rule 204-2(c), electronic proxy statements and the record of each vote cast by each client account of Aberdeen FL will be maintained by either ISS and Proxy Edge, depending on the client account. Similarly, electronic proxy statements and the record of each vote cast by each U.S. client account of Aberdeen Jersey will be maintained by Proxy Edge.2 Aberdeen FL shall obtain and maintain undertakings from both ISS and Proxy Edge to provide it with copies of proxy voting records and other documents relating to its clients' votes promptly upon request. Aberdeen Jersey shall obtain and maintain an undertaking from Proxy Edge to provide it with copies of proxy voting records and other documents relating to votes for its U.S. clients promptly upon request. Aberdeen Advisers, ISS and Proxy Edge may rely on the SEC's EDGAR system to keep records of certain proxy statements if the proxy statements are maintained by issuers on that system (e.g., large U.S.-based issuers).
2. As required by Rule 204-2(c), such records will also include: (a) a copy of the Policies and Procedures; (b) a copy of any document created by the Aberdeen Adviser that was material to making a decision on how to vote proxies on behalf of a client or that memorializes the basis for that decision; and (c) each written client request for proxy voting records and the Aberdeen Adviser's written response to any (written or oral) client request for such records.
3. Duration. Proxy voting books and records will be maintained in an easily accessible place for a period of five years, the first two in an appropriate office of the Aberdeen Adviser.
C. Reporting. Aberdeen FL will initially inform clients of these Policies and Procedures and how a client may learn of the voting record for client's securities through disclosure of its full policies and procedures in Part II of its Form ADV. Aberdeen Jersey, Aberdeen AU and Aberdeen Singapore will initially inform clients of these Policies and Procedures by summary disclosure in Part II of their respective Forms ADV. Upon receipt of a client's request for more information, Aberdeen FL, Aberdeen Jersey, Aberdeen AU and Aberdeen Singapore will provide to the client a copy of these Policies and Procedures and/or, in accordance with the client's stated requirements, how the client's proxies were voted during the period requested subsequent to the adoption of these Policies and Procedures. Such periodic reports, other than those required for the Funds, will not be made available to third parties absent the express written request of the client. However, to the extent that any Aberdeen Adviser may serve as a subadviser to another adviser to a Client, such Aberdeen Adviser will be deemed to be authorized to provide proxy voting records on such Client accounts to such other adviser.
D. Review of Policies and Procedures. These Policies and Procedures will be subject to review on a periodic basis as deemed appropriate by the Aberdeen Advisers.
EFFECTIVE DATE: [JULY 1, 2003]
APPENDIX A1
PA-FL
Silvana Barrenechea
PA-UK
Members of Trade Processing Department in Scotland
---------------------------------- --------------------------------------------- Names: Titles: ---------------------------------- --------------------------------------------- Barry McAllister Investment Administration Supervisor ---------------------------------- --------------------------------------------- Eileen Reekie Investment Administrator ---------------------------------- --------------------------------------------- |
PC-FL/UK
Chief Investment Officer/Deputy CIO/Head of SRI/Compliance Officer***
---------------------------------- --------------------------------------------- Names: Titles: ---------------------------------- --------------------------------------------- Anne Richards Chief Investment Officer ---------------------------------- --------------------------------------------- Andrew Preston Head of Socially Responsible Investing (SRI) ---------------------------------- --------------------------------------------- Susan Connerney Compliance Officer ---------------------------------- --------------------------------------------- |
***From time to time one or more members of the committee may be represented by an authorized representative of their respective Department.
PA-JERSEY
Members of Trade Processing Department in Channel Islands, Jersey
---------------------------------- --------------------------------------------- Names: Titles: ---------------------------------- --------------------------------------------- Linda Baker ---------------------------------- --------------------------------------------- Heather Richard ---------------------------------- --------------------------------------------- Theresa Allo ---------------------------------- --------------------------------------------- |
PC-AU
Portfolio Managers/Research Analysts in Sydney, Australia
---------------------------------- --------------------------------------------- Names: Titles: ---------------------------------- --------------------------------------------- Steve Robinson Equities Fund Manager ---------------------------------- --------------------------------------------- Munib Madni Equities Fund Manager ---------------------------------- --------------------------------------------- James Blair Fixed Income Fund Manager ---------------------------------- --------------------------------------------- Alison Briggs Fixed Income Fund Manager ---------------------------------- --------------------------------------------- Chris Beard Compliance Officer ---------------------------------- --------------------------------------------- |
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Registrant has not conducted any business as of the date of this filing, other than in connection with its organization. Financial Statements indicating that the Registrant has met the net worth requirements of Section 14(a) of the 1940 Act will be filed by Pre-effective Amendment to the Registration Statement.
2. Exhibits:
a. Declaration of Trust dated September 2, 2004. Filed on September 17, 2004
as Exhibit a. to Registrant's Registration Statement on Form N-2 (File No.
333-119081) and incorporated herein by reference.
b. By-Laws of Fund. Filed on October 25, 2004 as Exhibit b. to Registrant's
Pre-Effective Amendment No. 1 to Registration Statement (File No.
333-119081) and incorporated herein by reference.
c. None.
d. Form of Share Certificate.
e. Terms and Conditions of the Dividend Reinvestment Plan.
f. None.
g.1 Form of Investment Management Agreement between Registrant and First Trust
Advisors L.P.
g.2 Form of Sub-Advisory Agreement between Registrant, First Trust Advisors
L.P. and Aberdeen Asset Management Inc.
h.1 Form of Purchase Agreement.
i. None.
j. Form of Custodian Services Agreement between Registrant and PFPC Trust
Company.
k.1 Form of Transfer Agency Services Agreement between Registrant and PFPC
Inc.
k.2 Form of Administration and Accounting Services Agreement.
l.1 Opinion and consent of Chapman and Cutler LLP.
Page 1
l.2 Opinion and consent of Bingham McCutchen LLP.
m. None.
n. Consent of Independent Registered Public Accounting Firm.
o. None.
p. Subscription Agreement between Registrant and First Trust Advisors L.P.
q. None.
r.1 Code of Ethics of Registrant.
r.2 Code of Ethics of First Trust Portfolios L.P.
r.3 Code of Ethics of First Trust Advisors L.P.
r.4 Code of Ethics of Aberdeen Asset Management Inc.
s. Powers of Attorney.
-------------------
|
Item 25: Marketing Arrangements
Reference is made to the Form of Purchase Agreement among the Registrant, First Trust Advisors L.P., Aberdeen Asset Management Inc. and the Underwriters for the Registrant's common shares of beneficial interest as filed herewith as exhibit h.1.
Item 26: Other Expenses of Issuance and Distribution
------------------------------------------------- ---------------------------- Securities and Exchange Commission Fees $ 47,513.00 ------------------------------------------------- ---------------------------- National Association of Securities Dealers, $ 30,500.00 Inc. Fees ------------------------------------------------- ---------------------------- Printing and Engraving Expenses $ 250,000.00 ------------------------------------------------- ---------------------------- Legal Fees $ 250,000.00 ------------------------------------------------- ---------------------------- Listing Fees $ 30,000.00 ------------------------------------------------- ---------------------------- Accounting Expenses $ 10,500.00 ------------------------------------------------- ---------------------------- Blue Sky Filing Fees and Expenses $ 0.00 ------------------------------------------------- ---------------------------- Miscellaneous Expenses $ 175,063.00 ------------------------------------------------- ---------------------------- Total $ 793,576.00 ------------------------------------------------- ---------------------------- --------- |
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At November 23, 2004:
------------------------------------------------- ----------------------------
Title of Class Number of Record Holders
------------------------------------------------- ----------------------------
Common Shares, $0.01 par value 1
------------------------------------------------- ----------------------------
|
Item 29: Indemnification
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
(a) Subject to the exceptions and limitations contained in paragraph (b) below:
(i) every person who is or has been a Trustee or officer of the Trust (hereinafter referred to as a "Covered Person") shall be indemnified by the Trust against all liability and against all expenses reasonably incurred or paid by him or her in connection with any claim, action, suit or proceeding in which that individual becomes involved as a party or otherwise by virtue of being or having been a Trustee or officer and against amounts paid or incurred by that individual in the settlement thereof; and
(ii) the words "claim," "action," "suit" or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal, administrative or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement or compromise, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) against any liability to the Trust or the Shareholders by reason of a final adjudication by the court or other body before which the proceeding was brought that the Covered Person engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of that individual's office;
(ii) with respect to any matter as to which the Covered Person shall have been finally adjudicated not to have acted in good faith in the reasonable belief that that individual's action was in the best interest of the Trust; or
(iii) in the event of a settlement involving a payment by a Trustee, Trustee Emeritus or officer or other disposition not involving a final adjudication as provided in paragraph (b)(i) or (b)(ii) above resulting in a payment by a Covered Person, unless there has been either a determination that such Covered Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of that individual's office by the court or other body approving the settlement or other disposition or by a reasonable determination, based upon a review of readily available facts (as opposed to a full trial-type inquiry) that that individual did not engage in such conduct:
(A) by vote of a majority of the Disinterested Trustees (as defined below) acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter); or
(B) by written opinion of (i) the then-current legal counsel to the Trustees who are not Interested Persons of the Trust or (ii) other
legal counsel chosen by a majority of the Disinterested Trustees (or if there are no Disinterested Trustees with respect to the matter in question, by a majority of the Trustees who are not Interested Persons of the Trust) and determined by them in their reasonable judgment to be independent.
(c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be a Covered Person and shall inure to the benefit of the heirs, executors and administrators of such person. Nothing contained herein shall limit the Trust from entering into other insurance arrangements or affect any rights to indemnification to which Trust personnel, including Covered Persons, may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceeding of the character described in paragraph (a) of this
Section 5.3 shall be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the Covered Person to repay
such amount if it is ultimately determined that the Covered Person is not
entitled to indemnification under this Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some other appropriate security or the Trust shall be insured against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter) or legal counsel meeting the requirement in Section 5.3(b)(iii)(B) above in a written opinion, shall determine, based upon a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the Covered Person ultimately will be found entitled to indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one (i) who is not an "Interested Person" of the Trust (including anyone who has been exempted from being an "Interested Person" by any rule, regulation or order of the Commission), and (ii) against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the same or similar grounds is then or had been pending.
(e) With respect to any such determination or opinion referred to in clause (b)(iii) above or clause (d)(ii) above, a rebuttable presumption shall be afforded that the Covered Person has not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office in accordance with pronouncements of the Commission.
Section 6 of the Purchase Agreement provides as follows:
Section 6 Indemnification.
(a) Indemnification of Underwriters. The Fund and the Advisers, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, as follows:
(1) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(2) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(e) below) any such settlement is effected with the written consent of the Fund and each Adviser; and
(3) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Fund or an Adviser by any Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); provided, further, that the indemnity agreement contained in this Section 6(a) shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) from whom the person asserting any such loss, liability, claim, damage and expense purchased the Securities which are the subject thereof if the Prospectus corrected any such alleged untrue statement or omission and if such Prospectus was delivered to such Underwriter in a timely manner and if such Underwriter failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Securities to such person.
(b) Indemnification of the Fund, Advisers, Trustees, Directors and Officers. Each Underwriter severally agrees to indemnify and hold harmless the Fund and the Advisers, their respective trustees and directors, each of the Fund's officers who signed the Registration Statement, and each person, if any, who controls the Fund or an Adviser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Fund or the Advisers by such Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto).
(c) Indemnification for Marketing Materials. In addition to the foregoing
indemnification, the Fund and the Advisers also, jointly and severally, agree to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act, against any and all loss, liability, claim, damage
and expense described in the indemnity contained in Section 6(a), as limited by
the proviso set forth therein, with respect to any sales material.
(d) Actions against Parties; Notification. Each indemnified party shall give
notice as promptly as reasonably practicable to each indemnifying party of any
action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Fund or an Adviser, as applicable.
In each case such counsel shall be reasonably satisfactory to the indemnified
party, and the indemnifying party shall have the right to assume the defense of
such action. An indemnified party may participate at its own expense in the
defense of any such action; provided, however, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the indemnifying party be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from its own counsel for all indemnified parties in connection
with any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(e) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.
Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
Item 30: Business and Other Connections of Investment Advisers
a) First Trust Advisors L.P. ("First Trust Advisors") serves as investment adviser to the fund and the First Defined Portfolio Fund, LLC and also serves as subadviser to 38 mutual funds and is the portfolio supervisor of certain unit investment trusts. Its principal address is 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532.
The principal business of certain of First Trust Advisors' principal executive officers involves various activities in connection with the family of unit investment trusts sponsored by First Trust Portfolios L. P. ("First Trust Portfolios"). The principal address of First Trust Portfolios is 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532.
Other Business, Profession, Vocation or Employment During Past Two Years
Name and Position with First Trust Advisors L.P. Employment During Past Two Years
James A. Bowen, Managing Director/President Managing Director/President, First Trust Portfolios
Ronald Dean McAlister, Managing Director Managing Director, First Trust Portfolios
Mark R. Bradley, Chief Financial Officer and Chief Financial Officer and Managing Director,
Managing Director First Trust Portfolios and Chief Financial Officer, Bondwave LLC
Robert W. Bredemeier, Chief Operating Officer Chief Operations Officer and Managing Director,
and Managing Director First Trust Portfolios
Robert Franklin Carey, Chief Investment Officer Senior Vice President, First Trust Portfolios
and Senior Vice President
William Scott Jardine, General Counsel General Counsel, First Trust Portfolios and Secretary of Bondwave LLC
Scott Hall, Managing Director Managing Director, First Trust Portfolios
Andy Roggensack, Managing Director Managing Director, First Trust Portfolios
Jon Carl Erickson, Senior Vice President Vice President, First Trust Portfolios
Jason Henry, Senior Vice President Senior Vice President, First Trust Portfolios
David McGarel, Senior Vice President Senior Vice President, First Trust Portfolios
Bob Porcellino, Senior Vice President Senior Vice President, First Trust Portfolios
Mark Sullivan, Senior Vice President Senior Vice President, First Trust Portfolios
Al Davis, Vice President Vice President, First Trust Portfolios
James P. Koeneman, Vice President Vice President, First Trust Portfolios since December 2003;
President, Burr Oak Advisors, Inc., June 2000 to December 2003
Daniel J. Lindquist, Vice President Vice President, First Trust Portfolios since April 2004;
Chief Operating Officer, Mina Capital Management, LLC,
January 2004 to April 2004; Chief Operating Officer,
Samaritan Asset Management Services, Inc.
Mitch Mohr, Vice President Vice President, First Trust Portfolios
David Pinsen, Vice President Vice President, First Trust Portfolios
Jonathan Steiner, Vice President Vice President, First Trust Portfolios
Walter E. Stubbings, Jr., Vice President Vice President, First Trust Portfolios since July 2004; Assistant Vice
President, Kansas City Life Insurance Company, May 1999 to July 2004
Rick Swiatek, Vice President Vice President, First Trust Portfolios
Douglas Tichenor, Vice President Vice President, First Trust Portfolios
Roger Testin, Vice President Vice President, First Trust Portfolios
Kitty Collins, Assistant Vice President Assistant Vice President, First Trust Portfolios
Charles Bradley, Assistant Vice President Assistant Vice President, First Trust Portfolios
|
b) Sub-Advisers. Aberdeen Asset Management Inc. ("Aberdeen Asset Management") serves as an investment sub-adviser of the Fund. Reference is made to: (i) the
information set forth under "Management of the Fund" in the Prospectus and "Sub-Adviser" in the Statement of Additional Information; and (ii) the Form ADV of Aberdeen Asset Management (File No. 801-49966) filed with the Commission, all of which are incorporated herein by reference.
Item 31: Location of Accounts and Records.
First Trust Advisors L.P. maintains the Declaration of Trust, By-Laws, minutes of trustees and shareholders meetings and contracts of the Registrant, all advisory material of the investment adviser, all general and subsidiary ledgers, journals, trial balances, records of all portfolio purchases and sales, and all other required records.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it amends its prospectus if (1) subsequent to the effective date of its Registration Statement, the net asset value declines more than 10 percent from its net asset value as of the effective date of the Registration Statement, or (2) the net asset value increases to an amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of the Registration Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in this City of Lisle, and State of Illinois, on the 23rd day of November, 2004.
FIRST TRUST/ABERDEEN GLOBAL
OPPORTUNITY INCOME FUND
By: /s/ James A. Bowen
-----------------------------
James A. Bowen, President
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
---------------------- ------------------------------- ------------------------- Signature Title Date ---------------------- ------------------------------- ------------------------- /s/ James A. Bowen President, Chairman of the November 23, 2004 ------------------- Board and Trustee James A. Bowen (Principal Executive Officer) ---------------------- ------------------------------- ------------------------- /s/ Mark R. Bradley Chief Financial Officer and November 23, 2004 -------------------- Treasurer (Principal Financial Mark R. Bradley and Accounting Officer) ---------------------- ------------------------------- ------------------------- ---------------------- ------------------------------- ------------------------- Richard E. Erickson* Trustee ) ---------------------- ------------------------------- By: /s/ W. Scott Jardine Thomas R. Kadlec* Trustee ) -------------------- ---------------------- ------------------------------- W. Scott Jardine Niel B. Nielson* Trustee ) Attorney-In-Fact ---------------------- ------------------------------- November 23, 2004 David M. Oster* Trustee ) ---------------------- ------------------------------- ------------------------- |
* Original powers of attorney authorizing James A. Bowen, W. Scott Jardine and Eric F. Fess to execute this Registration Statement, and Amendments thereto, for each of the trustees of the Registrant on whose behalf this Registration Statement is filed, were previously executed and are filed as an exhibit hereto.
INDEX TO EXHIBITS
d. Form of Share Certificate.
e. Terms and Conditions of the Dividend Reinvestment Plan.
g.1 Form of Investment Management Agreement between Registrant and First Trust
Advisors L.P.
g.2 Form of Sub-Advisory Agreement between Registrant, First Trust Advisors
L.P. and Aberdeen Asset Management Inc.
h.1 Form of Purchase Agreement.
j. Form of Custodian Services Agreement between Registrant and PFPC Trust
Company.
k.1 Form of Transfer Agency Services Agreement between Registrant and PFPC
Inc.
k.2 Form of Administration and Accounting Services Agreement.
l.1 Opinion and consent of Chapman and Cutler LLP.
l.2 Opinion and consent of Bingham McCutchen LLP.
n. Consent of Independent Registered Public Accounting Firm.
p. Form of Subscription Agreement between Registrant and First Trust
Advisors L.P.
r.1 Code of Ethics of Registrant.
r.2 Code of Ethics of First Trust Portfolios L.P.
r.3 Code of Ethics of First Trust Advisors L.P.
r.4 Code of Ethics of Aberdeen Asset Management Inc.
s. Powers of Attorney.
|
CERTIFICATE OF SHARES
COMMON SHARES
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
Organized under the laws of
the Commonwealth of Massachusetts
This Certificate is transferable in Boston, MA and New York, NY
See reverse for certain definitions
SHARES: _________ CUSIP: 337319 10 7
NUMBER FAM
THIS CERTIFIES THAT __________________________ is the Owner of ___________ fully paid and non-assessable Common Shares of beneficial interest $.01 par value of First Trust/Aberdeen Global Opportunity Income Fund (herein called the "Fund") transferable on the books of the Fund by the holder hereof in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Declaration of Trust of the Fund establishing the Fund as a Massachusetts business trust, and all amendments thereto (copies of which are on file with the Secretary of the Commonwealth of Massachusetts) and the Fund's By-Laws, (copies of which are on file at the principal office of the Fund), to all of which the holder by acceptance hereof expressly assents. This Certificate is executed on behalf of the Fund by the officers as officers and not individually and the obligations hereof are not binding upon any of the Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile signatures of the duly authorized officers of the Fund.
Dated ___________________
FIRST TRUST/ABERDEEN GLOBAL
OPPORTUNITY INCOME FUND
/s/ James A. Bowen
-------------------------------------
Chairman of the Board
/s/ W. Scott Jardine
-------------------------------------
Secretary
|
COUNTERSIGNED AND REGISTERED:
PFPC INC.
Transfer Agent and Registrar
By__________________________________
Authorized Officer
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
First Trust/Aberdeen Global Opportunity Income Fund (the "Fund") will furnish to any shareholder, upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of beneficial interest of each class or series of the Fund authorized to be issued, so far as they have been determined, and the authority of the Board of Trustees to determine the relative rights and preferences of subsequent classes or series. Any such request should be addressed to the Secretary of the Fund.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-......Custodian.......
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to
of survivorship and not as Minors Act............
tenants in common (State)
|
Additional abbreviations may also be used though not in the above list.
For Value Received _____________________ hereby sell, assign and transfer unto
__________________________________________________________________ Common Shares of Beneficial Interest represented by the within Certificate and do hereby irrevocably constitute and appoint
__________________________________________________________________ Attorney to transfer the said shares on the books of the within-named Fund, with full power of substitution in the premises.
Dated ___________________
X ________________________________________________
X ________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By _________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN
This Dividend Reinvestment Plan ("Plan") for the closed-end investment companies advised by First Trust Advisors, L.P. (each a "Fund") provides for reinvestment of Fund distributions, consisting of income dividends, returns of capital and capital gain distributions paid by the Fund, on behalf of all shareholders participating in the Plan ("Participants"), by the plan agent for the respective Fund set forth in Appendix A (the "Plan Agent"), in accordance with the following terms:
1. The Plan Agent will act as Agent for Participants and will open an account for each Participant under the Dividend Reinvestment Plan in the same name as the Participant's shares are registered, and will put into effect for each Participant the distribution reinvestment option of the Plan as of the first record date for a distribution to shareholders as set forth in the Fund's prospectus. In the case of shareholders who hold shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Shares certified from time to time by the record shareholder as representing the total amount registered in the record shareholder's name and held for the account of beneficial owners who are Participants.
2. Whenever the Fund declares a distribution payable in shares or cash at the option of the shareholders, each Participant shall take such distribution entirely in shares and the Plan Agent shall automatically receive such shares, including fractions, for the Participant's account, except in circumstances described in Paragraph 3 below. Except in such circumstances, the number of additional shares to be credited to each Participant's account shall be determined by dividing the dollar amount of the distribution payable on the Participant's shares by the greater of net asset value or 95% of current market price per share on the payable date for such distribution.
3. Should the net asset value per Fund share exceed the market price per share on the day for which trades will settle on the payment date for such distribution (the "Valuation Date"), for a distribution payable in shares or in cash at the option of the shareholder, or should the Fund declare a distribution payable only in cash, each Participant shall take such distribution in cash and the Plan Agent shall apply the amount of such distribution to the purchase on the open market of shares of the Fund for the Participant's account. Such Plan purchases shall be made as early as the Valuation Date, under the supervision of the investment adviser. The Plan Agent shall complete such Plan purchases no more than 30 days after the Valuation Date, except where temporary curtailment or suspension of purchases is necessary to comply with applicable provisions of federal securities law.
4. For the purpose of this Plan, the market price of the Fund's shares on a particular date shall be the last sale price on the exchange where it is traded on that date, or if there is no sale on such exchange on that date, then the mean between the closing bid and asked quotations for such shares on such exchange on such date.
5. Open-market purchases provided for above may be made on any securities exchange where the Fund's shares are traded, in the over-the-counter market or in negotiated transactions and may be on such terms as to price, delivery and otherwise as the Plan Agent shall determine. Participants' funds held uninvested by the Plan Agent will not bear interest, and it is understood that, in any event, the Plan Agent shall have no liability in connection with any inability to purchase shares within 30 days after the Valuation Date as herein provided, or with the timing of any purchase affected. The Plan Agent shall have no responsibility as to the value of the Fund's shares acquired for Participants' accounts. The Plan Agent may commingle all Participants' amounts to be used for open-market purchase of Fund shares and the price per share allocable to each Participant in connection with such purchases shall be the average price (including brokerage commissions and other related costs) of all Fund shares purchased by the Plan Agent as Agent.
6. The Plan Agent may hold each Participant's shares acquired pursuant to this Plan, together with the shares of other Participants, in non-certificated form in the Plan Agent's name or that of its nominee. 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.
7. The Plan Agent will confirm to each Participant each acquisition made for the Participant's account as soon as practicable but not later than 60 days after the date thereof. The Plan Agent will deliver to any Participant upon request, without charge, a certificate or certificates for his full shares. Although a Participant may from time to time have an undivided fractional interest (computed to three decimal places) in a share of the Fund, and distributions on fractional shares will be credited to the Participant's account, no certificates for a fractional share will be issued. In the event of termination of a Participant's account under the Plan, the Plan Agent will adjust for any such undivided fractional interest at the market value of the Fund's shares at the time of termination.
8. Any stock dividends or split shares distributed by the Fund on full and fractional shares held by the Plan Agent for a Participant will be credited to the Participant's account. In the event that the Fund makes available to its shareholders rights to purchase additional shares or other securities, the shares held for each Participant under the Plan will be added to other shares held by the Participant in calculating the number of rights to be issued to that Participant.
9. The Plan Agent's service fee (if any) for handling reinvestment of distributions pursuant hereto will be paid by the Fund. Participants will be charged their pro rata shares of brokerage commissions on all open market purchases.
10. Each Participant may terminate his or her account under the Plan by notifying the Plan Agent of his or her intent so to do, such notice to be provided either in writing duly executed by the Participant or by telephone in accordance with such reasonable requirements as the Plan Agent and the Fund may agree. Such termination will be effective immediately if notice is received by the Plan Agent not less than ten days prior to any distribution record date for the
next succeeding distribution; otherwise such termination will be effective shortly after the investment of such distribution with respect to all subsequent distributions. The Plan may be terminated by the Fund or the Plan Agent upon at least 90 days prior notice. Upon any termination, the Plan Agent will cause a certificate or certificates for the full shares held for each Participant under the Plan and cash adjustment for any fraction to be delivered to the Participant without charge. If any Participant elects in advance of such termination to have the Plan Agent sell part or all of his shares, the Plan Agent is authorized to deduct brokerage commissions incurred for the transaction.
11. These terms and conditions may be amended or supplemented by the Plan Agent or the Fund at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to each Participant appropriate written notice at least 90 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by each Participant unless, prior to the effective date thereof, the Plan Agent receives notice of the termination of such Participant's account under the Plan in accordance with the terms hereof. Any such amendment may include an appointment by the Plan Agent in its place and stead of a successor Agent under these terms and conditions. Upon any such appointment of any Agent for the purpose of receiving distributions, the Fund will be authorized to pay to such successor Agent, for each Participant's account, all dividends and distributions payable on shares of the Fund held in the Participant's name or under the Plan for retention or application by such successor Agent as provided in these terms and conditions.
12. The Plan Agent shall at all times act in good faith and agree to use its best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement and to comply with applicable law, but assumes no responsibility and shall not be liable for loss or damage due to errors unless such error is caused by its negligence, bad faith or willful misconduct or that of its employees.
13. These terms and conditions shall be governed by the laws of the Commonwealth of Massachusetts.
APPENDIX A
Fund Plan Agent ---- ---------- Energy Income and Growth Fund PFPC Inc. First Trust/Aberdeen Global Opportunity Income Fund PFPC Inc. First Trust/Fiduciary Asset Management Covered Call Fund PFPC Inc. First Trust Value Line(R) 100 Fund PFPC Inc. First Trust Value Line(R) Dividend Fund PFPC Inc. First Trust/Value Line(R) & Ibbotson Equity Allocation Fund PFPC Inc. First Trust/Four Corners Senior Floating Rate Income Fund PFPC Inc. First Trust/Four Corners Senior Floating Rate Income Fund II PFPC Inc. Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund PFPC Inc. |
INVESTMENT MANAGEMENT AGREEMENT
INVESTMENT MANAGEMENT AGREEMENT made this 23rd day of November, 2004, by and between FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND, a Massachusetts business trust (the "Fund"), and FIRST TRUST ADVISORS, L.P., an Illinois limited partnership (the "Adviser").
WITNESSETH:
In consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows:
1. The Fund hereby engages the Adviser to act as the investment adviser for, and to manage the investment and reinvestment of the assets of the Fund in accordance with the Fund's investment objective and policies and limitations, and to administer the Fund's affairs to the extent requested by and subject to the supervision of the Board of Trustees of the Fund for the period and upon the terms herein set forth. The investment of the Fund's assets shall be subject to the Fund's policies, restrictions and limitations with respect to securities investments as set forth in the Fund's then current registration statement under the Investment Company Act of l940 (the "1940 Act"), and all applicable laws and the regulations of the Securities and Exchange Commission relating to the management of registered closed-end management investment companies.
The Adviser accepts such employment and agrees during such period to render such services, to furnish office facilities and equipment and clerical, bookkeeping and administrative services (other than such services, if any, provided by the Fund's transfer agent, administrator or other service providers) for the Fund, to permit any of its officers or employees to serve without compensation as trustees or officers of the Fund if elected to such positions, and to assume the obligations herein set forth for the compensation herein provided. The Adviser shall at its own expense furnish all executive and other personnel, office space, and office facilities required to render the investment management and administrative services set forth in this Agreement. In the event that the Adviser pays or assumes any expenses of the Fund not required to be paid or assumed by the Adviser under this Agreement, the Adviser shall not be obligated hereby to pay or assume the same or similar expense in the future; provided that nothing contained herein shall be deemed to relieve the Adviser of any obligation to the Fund under any separate agreement or arrangement between the parties.
2. The Adviser shall, for all purposes herein provided, be deemed to be an independent contractor and, unless otherwise expressly provided or authorized, shall have no authority to act for nor represent the Fund in any way, nor otherwise be deemed an agent of the Fund.
3. For the services and facilities described in Section 1, the Fund will pay to the Adviser, at the end of each calendar month, and the Adviser agrees to accept as full compensation therefore, an investment management fee equal to the annual rate of [1.00]% of the Fund's Managed Assets, as such term is defined herein. "Managed Assets" means the average daily gross value of the
Fund which includes assets attributable to the Fund's Preferred Shares (as such term is defined in the Fund's prospectus), if any, and the principal amount of borrowings), minus the sum of the Fund's accrued and unpaid dividends on any outstanding Preferred Shares and accrued liabilities (other than the principal amount of any borrowings incurred, commercial paper or notes issued by the Fund and the liquidation preference of outstanding Preferred Shares).
For the month and year in which this Agreement becomes effective, or terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement shall have been in effect during the month and year, respectively. The services of the Adviser to the Fund under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby.
4. The Adviser shall arrange for suitably qualified officers or employees of the Adviser to serve, without compensation from the Fund, as trustees, officers or agents of the Fund, if duly elected or appointed to such positions, and subject to their individual consent and to any limitations imposed by law.
5. For purposes of this Agreement, brokerage commissions paid by the Fund upon the purchase or sale of the Fund's portfolio securities shall be considered a cost of securities of the Fund and shall be paid by the Fund.
6. Adviser is authorized to select the brokers or dealers that will execute the purchases and sales of the Fund's securities on behalf of the Fund, and is directed to use its commercially reasonable efforts to obtain best execution, which includes most favorable net results and execution of the Fund's orders, taking into account all appropriate factors, including price, dealer spread or commission, size and difficulty of the transaction and research or other services provided. Subject to approval by the Fund's Board of Trustees and to the extent permitted by and in conformance with applicable law (including Rule 17e-1 of the 1940 Act), Adviser may select brokers or dealers affiliated with Adviser. It is understood that Adviser will not be deemed to have acted unlawfully, or to have breached a fiduciary duty to the Fund, or be in breach of any obligation owing to the Fund under this Agreement, or otherwise, solely by reason of its having caused the Fund to pay a member of a securities exchange, a broker or a dealer a commission for effecting a securities transaction for the Fund in excess of the amount of commission another member of an exchange, broker or dealer would have charged if Adviser determined in good faith that the commission paid was reasonable in relation to the brokerage or research services provided by such member, broker or dealer, viewed in terms of that particular transaction or Adviser's overall responsibilities with respect to its accounts, including the Fund, as to which it exercises investment discretion.
In addition, Adviser may, to the extent permitted by applicable law, aggregate purchase and sale orders of securities with similar orders being made simultaneously for other accounts managed by Adviser or its affiliates, if in Adviser's reasonable judgment such aggregation shall result in an overall economic benefit to the Fund, taking into consideration the selling or purchase price, brokerage commissions and other expenses. In the event that a purchase or
sale of an asset of the Fund occurs as part of any aggregate sale or purchase orders, the objective of Adviser and any of its affiliates involved in such transaction shall be to allocate the securities so purchased or sold, as well as expenses incurred in the transaction, among the Fund and other accounts in an equitable manner. Nevertheless, the Fund acknowledges that under some circumstances, such allocation may adversely affect the Fund with respect to the price or size of the securities positions obtainable or salable. Whenever the Fund and one or more other investment advisory clients of Adviser have available funds for investment, investments suitable and appropriate for each will be allocated in a manner believed by Adviser to be equitable to each, although such allocation may result in a delay in one or more client accounts being fully invested that would not occur if such an allocation were not made. Moreover, it is possible that due to differing investment objectives or for other reasons, Adviser and its affiliates may purchase securities of an issuer for one client and at approximately the same time recommend selling or sell the same or similar types of securities for another client.
Adviser will not arrange purchases or sales of securities between the Fund and other accounts advised by Adviser or its affiliates unless (a) such purchases or sales are in accordance with applicable law (including Rule 17a-7 of the 1940 Act) and the Fund's policies and procedures, (b) Adviser determines the purchase or sale is in the best interests of the Fund, and (c) the Fund's Board of Trustees have approved these types of transactions.
To the extent the Fund seeks to adopt, amend or eliminate any objectives, policies, restrictions or procedures in a manner that modifies or restricts Adviser's authority regarding the execution of the Fund's portfolio transactions, the Fund agrees to use reasonable commercial efforts to consult with the Adviser regarding the modifications or restrictions prior to such adoption, amendment or elimination.
Adviser will communicate to the officers and trustees of the Fund such information relating to transactions for the Fund as they may reasonably request. In no instance will portfolio securities be purchased by or sold to Adviser or any affiliated person of either the Fund or Adviser, except as may be permitted under the 1940 Act.
Adviser further agrees that it:
(a) will use the same degree of skill and care in providing such services as it uses in providing services to fiduciary accounts for which it has investment responsibilities;
(b) will conform in all material respects to all applicable Rules and Regulations of the Securities and Exchange Commission and comply in all material respects with all policies and procedures adopted by the Board of Trustees for the Fund and communicated to Adviser and, in addition, will conduct its activities under this Agreement in all material respects in accordance with any applicable regulations of any governmental authority pertaining to its investment advisory activities;
(c) will report regularly to the Board of Trustees of the Fund (generally on a quarterly basis) and will make appropriate persons available for the purpose of reviewing with representatives of the
Board of Trustees on a regular basis at reasonable times the management of the Fund, including, without limitation, review of the general investment strategies of the Fund, the performance of the Fund's investment portfolio in relation to relevant standard industry indices and general conditions affecting the marketplace and will provide various other reports from time to time as reasonably requested by the Board of Trustees of the Fund; and
(d) will prepare and maintain such books and records with respect to the Fund's securities and other transactions as required under applicable law and will prepare and furnish the Fund's Board of Trustees such periodic and special reports as the Board of Trustees may reasonably request. Adviser further agrees that all records which it maintains for the Fund are the property of the Fund and Adviser will surrender promptly to the Fund any such records upon the request of the Fund (provided, however, that Adviser shall be permitted to retain copies thereof); and shall be permitted to retain originals (with copies to the Fund) to the extent required under Rule 204-2 of the Investment Advisers Act of 1940 or other applicable law.
7. Adviser agrees to pay (i) all organizational costs and (ii) all offering costs of the Fund (other than sales load but including the reimbursement of underwriting expenses as described in the Fund's prospectus) that exceed $.04 per Common Share (as described in the Fund's prospectus). The term "organizational costs" and "offering costs" shall have the meanings ascribed to them in Sections 8.18-8.25 of the AICPA Audit and Accounting Guide, Audits for Investment Companies, with Conforming Changes as of May 1, 2002.
8. Subject to applicable statutes and regulations, it is understood that officers, trustees, or agents of the Fund are, or may be, interested persons (as such term is defined in the 1940 Act and rules and regulations thereunder) of the Adviser as officers, directors, agents, shareholders or otherwise, and that the officers, directors, shareholders and agents of the Adviser may be interested persons of the Fund otherwise than as trustees, officers or agents.
9. The Adviser shall not be liable for any loss sustained by reason of the purchase, sale or retention of any security, whether or not such purchase, sale or retention shall have been based upon the investigation and research made by any other individual, firm or corporation, if such recommendation shall have been selected with due care and in good faith, except loss resulting from willful misfeasance, bad faith, or gross negligence on the part of the Adviser in the performance of its obligations and duties, or by reason of its reckless disregard of its material obligations and duties under this Agreement.
10. Subject to obtaining the initial and periodic approvals required under Section 15 of the 1940 Act, the Adviser may retain one or more sub-advisers at the Adviser's own cost and expense for the purpose of furnishing one or more of the services described in Section 1 hereof with respect to the Fund. Retention of a sub-adviser shall in no way reduce the responsibilities or obligations of the Adviser under this Agreement and the Adviser shall be responsible to the Fund for all acts or omissions of any sub-adviser in connection with the performance of the Adviser's duties hereunder.
11. The Fund acknowledges that Adviser now acts, and intends in the future to act, as an investment adviser to other managed accounts and as investment adviser or sub-investment adviser to one or more other investment companies that are not a series of the Fund. In addition, the Fund acknowledges that the persons employed by Adviser to assist in Adviser's duties under this Agreement will not devote their full time to such efforts. It is also agreed that Adviser may use any supplemental research obtained for the benefit of the Fund in providing investment advice to its other investment advisory accounts and for managing its own accounts.
12. This Agreement shall be effective on the date provided above, provided it has been approved by a vote of a majority of the outstanding voting securities of the Fund in accordance with the requirements of the 1940 Act. This Agreement shall continue in effect until the two-year anniversary of the date of its effectiveness, unless and until terminated by either party as hereinafter provided, and shall continue in force from year to year thereafter, but only as long as such continuance is specifically approved, at least annually, in the manner required by the 1940 Act.
This Agreement shall automatically terminate in the event of its assignment, and may be terminated at any time without the payment of any penalty by the Fund or by the Adviser upon sixty (60) days' written notice to the other party. The Fund may effect termination by action of the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund, accompanied by appropriate notice. This Agreement may be terminated, at any time, without the payment of any penalty, by the Board of Trustees of the Fund, or by vote of a majority of the outstanding voting securities of the Fund, in the event that it shall have been established by a court of competent jurisdiction that the Adviser, or any officer or director of the Adviser, has taken any action which results in a breach of the material covenants of the Adviser set forth herein. Termination of this Agreement shall not affect the right of the Adviser to receive payments on any unpaid balance of the compensation, described in Section 3, earned prior to such termination and for any additional period during which Adviser serves as such for the Fund, subject to applicable law. The terms "assignment" and "vote of the majority of outstanding voting securities" shall have the same meanings set forth in the 1940 Act and the rules and regulations thereunder.
13. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder shall not be thereby affected.
14. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for receipt of such notice.
15. All parties hereto are expressly put on notice of the Fund's Agreement and Declaration of Trust and all amendments thereto, a copy of which is on file with the Secretary of the Commonwealth of Massachusetts and the limitation of shareholder and trustee liability contained therein. This Agreement is executed on behalf of the Fund by the Fund's officers as officers and not individually and the obligations imposed upon the Fund by this Agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund, and
persons dealing with the Fund must look solely to the assets of the Fund and those assets belonging to the subject Fund, for the enforcement of any claims.
16. This Agreement shall be construed in accordance with applicable federal law and (except as to Section 15 hereof which shall be construed in accordance with the laws of Massachusetts) the laws of the State of Illinois.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be executed on the day and year above written.
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY
INCOME FUND
By: _____________________________
Name: James A. Bowen
Title: President
ATTEST: ___________________________
Name: Mark R. Bradley
Title: Chief Financial Officer
FIRST TRUST ADVISORS, L.P.
|
By: _____________________________ Name: James A. Bowen Title: President
ATTEST: ___________________________
Name: Mark R. Bradley
Title: Chief Financial Officer
INVESTMENT SUB-ADVISORY AGREEMENT
AGREEMENT made as of this 23rd day of November, 2004 by and among First Trust/Aberdeen Global Opportunity Income Fund, a Massachusetts business trust (the "Fund"), First Trust Advisors L.P., an Illinois limited partnership (the "Manager") and a registered investment adviser with the Securities and Exchange Commission ("SEC"), and Aberdeen Asset Management Inc., a Delaware company and a registered investment adviser with the SEC (the "Sub-Adviser").
WHEREAS, the Fund is a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund has retained the Manager to serve as the investment manager for the Fund pursuant to an Investment Management Agreement between the Manager and the Fund (as such agreement may be modified from time to time, the "Management Agreement");
WHEREAS, the Management Agreement provides that the Manager may, subject to the initial and periodic approvals required under Section 15 of the 1940 Act, appoint a sub-adviser at its own cost and expense for the purpose of furnishing certain services required under the Management Agreement;
WHEREAS, the Fund and the Manager desire to retain the Sub-Adviser to furnish investment advisory services for the Fund's investment portfolio, upon the terms and conditions hereafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows:
1. Appointment. The Fund and the Manager hereby appoint the Sub-Adviser to provide certain sub-investment advisory services to the Fund for the period and on the terms set forth in this Agreement. The Sub-Adviser accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. The Sub-Adviser shall, for all purposes herein provided, be deemed an independent contractor and, unless otherwise expressly provided or authorized, shall have no authority to act for nor represent the Fund or the Manager in any way, nor otherwise be deemed an agent of the Fund or the Manager.
2. Services to Be Performed. Subject always to the supervision of the Fund's Board of Trustees and the Manager, the Sub-Adviser will act as sub-adviser for, and manage on a discretionary basis the investment and reinvestment of the assets of the Fund, furnish an investment program in respect of, make investment decisions for, and place all orders for the purchase and sale of securities for the Fund's investment portfolio, all on behalf of the Fund and as described in the Fund's initial registration statement on Form N-2 (File No. 333-119081) as declared effective by the SEC, and as the same may thereafter be amended from time to time. In the performance of its duties, the Sub-Adviser will in all material respects (a) satisfy any applicable fiduciary duties it may have to the Fund, (b) monitor the Fund's investments, and (c) comply with the provisions of the Fund's Declaration of Trust and By-laws, as
amended from time to time and communicated by the Fund or the Manager to the Sub-Adviser in writing, and the stated investment objectives, policies and restrictions of the Fund as such objectives, policies and restrictions may subsequently be changed by the Fund's Board of Trustees and communicated by the Fund or the Manager to the Sub-Adviser in writing. The Fund or the Manager has provided the Sub-Adviser with current copies of the Fund's Declaration of Trust, By-laws, prospectus, statement of additional information and any amendments thereto, and any objectives, policies or limitations not appearing therein as they may be relevant to the Sub-Adviser's performance under this Agreement.
The Sub-Adviser shall have authority and discretion to select brokers
and dealers to execute portfolio transactions for the Fund initiated by the
Sub-Adviser and to select the markets on or in which the transactions will be
executed. In placing orders for the sale and purchase of securities for the
Fund, the Sub-Adviser's primary responsibility shall be to seek the best
execution of orders at the most favorable prices. However, this responsibility
shall not obligate the Sub-Adviser to solicit competitive bids for each
transaction or to seek the lowest available commission cost to the Fund, so long
as the Sub-Adviser reasonably believes that the broker or dealer selected by it
can be expected to obtain a "best execution" market price on the particular
transaction and determines in good faith that the commission cost is reasonable
in relation to the value of the brokerage and research services (as defined in
Section 28(e)(3) of the Securities Exchange Act of 1934) provided by such broker
or dealer to the Sub-Adviser, viewed in terms of either that particular
transaction or of the Sub-Adviser's overall responsibilities with respect to its
clients, including the Fund, as to which the Sub-Adviser exercises investment
discretion, notwithstanding that the Fund may not be the direct or exclusive
beneficiary of any such services or that another broker may be willing to charge
the Fund a lower commission on the particular transaction.
Subject to compliance with the policies and procedures adopted by the Board of Trustees for the Fund and to the extent permitted by and in conformance with applicable law (including Rule 17e-1 of the 1940 Act), the Sub-Adviser may select brokers or dealers affiliated with the Sub-Adviser. It is understood that the Sub-Adviser will not be deemed to have acted unlawfully, or to have breached a fiduciary duty to the Fund, or be in breach of any obligation owing to the Fund under this Agreement, or otherwise, solely by reason of its having caused the Fund to pay a member of a securities exchange, a broker or a dealer a commission for effecting a securities transaction for the Fund in excess of the amount of commission another member of an exchange, broker or dealer would have charged if the Sub-Adviser determined in good faith that the commission paid was reasonable in relation to the brokerage or research services provided by such member, broker or dealer, viewed in terms of that particular transaction or the Sub-Adviser's overall responsibilities with respect to its accounts, including the Fund, as to which it exercises investment discretion.
The Sub-Adviser has adopted Best Execution policies and procedures which detail the factors considered in brokerage selection. The Sub-Adviser's objective in selecting brokers and dealers and in effecting portfolio transactions is to seek to obtain the best combination of price and execution with respect to its clients' portfolio transactions. The best net price, giving effect to brokerage commissions, spreads and other costs, is normally an important factor in this decision, but a number of other judgmental factors are considered as they are deemed relevant. Steps associated with seeking best
execution are: (1) determine each client's trading requirements; (2) select appropriate trading methods, venues, and agents to execute the trades under the circumstances; (3) evaluate market liquidity of each security and take appropriate steps to avoid excessive market impact; (4) maintain client confidentiality and proprietary information inherent in the decision to trade; and (5) review the results on a periodic basis.
Portfolio transactions for the Fund will generally be completed independently of transactions of other Sub-Adviser's clients, except when the Sub-Adviser is in the position of buying or selling the same security for a number of its clients (including the Fund) at approximately the same time. Because of market fluctuations, the prices obtained on such transactions within a single day may vary substantially. In order to avoid having clients receive different prices for the same security on the same day, the Sub-Adviser endeavors, when possible, to use an "averaging" procedure.
Under this procedure, purchases or sales of a particular security for the Fund will at times be combined or "batched" with purchases or sales for other advisory clients by the Sub-Adviser unless the Fund has expressly directed otherwise. Such batched trades may be used to facilitate best execution, including negotiating more favorable prices, obtaining more timely or equitable execution or reducing overall commission charges. In such cases, the price shown on confirmations of the Fund's purchases or sales will be the average execution price on all of the purchases and sales that are aggregated for this purpose.
In accordance with its written policies and procedures, the Sub-Adviser may also consider the following when deciding on allocations: (1) cash flow changes (including available cash, redemptions, exchanges, capital additions and capital withdrawals) may provide a basis to deviate from a pre-established allocation as long as it does not result in an unfair advantage to specific accounts or types of accounts over time; (2) accounts with specialized investment objectives or restrictions emphasizing investment in a specific category of securities may be given priority over other accounts in allocating such securities; and (3) for bond trades, street convention and good delivery often dictate the minimum size and par amounts and may result in small deviations from pro rata distribution.
The Sub-Adviser will vote all proxies solicited by or with respect to the issuers of securities which assets of the Fund's investment portfolio allocated by the Manager to the Sub-Adviser are invested, consistent with the Sub-Adviser's written Proxy Policies and Procedures. The Sub-Adviser will maintain appropriate records in accordance with applicable law detailing its voting of proxies on behalf of the Fund and upon request will provide a report setting forth the proposals voted on and how the Fund's shares were voted, including the name of the corresponding issuers.
The Sub-Adviser will not arrange purchases or sales of securities
between the Fund and other accounts advised by the Sub-Adviser or its affiliates
unless (a) such purchases or sales are in accordance with applicable law
(including Rule 17a-7 of the 1940 Act) and the Fund's policies and procedures,
(b) the Sub-Adviser determines the purchase or sale is in the best interests of
the Fund, and (c) the Fund's Board of Trustees have approved these types of
transactions.
The Fund may adopt policies and procedures that modify or restrict the Sub-Adviser's authority regarding the execution of the Fund's portfolio transactions provided herein.
The Sub-Adviser will communicate to the officers and trustees of the Fund such information relating to transactions for the Fund as they may reasonably request. In no instance will portfolio securities be purchased from or sold to the Manager, the Sub-Adviser or any affiliated person of either the Fund, the Manager, or the Sub-Adviser, except as may be permitted under the 1940 Act.
The Sub-Adviser further agrees that it:
(a) will use the same degree of skill and care in providing such services as it uses in providing services to fiduciary accounts for which it has investment responsibilities;
(b) will conform in all material respects to all applicable Rules and Regulations of the Securities and Exchange Commission and comply in all material respects with all policies and procedures adopted by the Board of Trustees for the Fund and communicated to the Sub-Adviser in writing and, in addition, will conduct its activities under this Agreement in all material respects in accordance with any applicable regulations of any governmental authority pertaining to its investment advisory activities;
(c) will report to the Manager and to the Board of Trustees of the Fund on a quarterly basis and will make appropriate persons available for the purpose of reviewing with representatives of the Manager and the Board of Trustees on a regular basis at such times as the Manager and the Board of Trustees may reasonably request in writing regarding the management of the Fund, including, without limitation, review of the general investment strategies of the Fund, the performance of the Fund's investment portfolio in relation to relevant standard industry indices and general conditions affecting the marketplace and will provide various other reports from time to time as reasonably requested by the Manager or the Board of Trustees of the Fund; and
(d) will prepare and maintain such books and records with respect to the Fund's securities and other transactions for the Fund's investment portfolio as required for registered investment advisers under applicable law or as otherwise reasonably requested by the Manager and will prepare and furnish the Manager and Fund's Board of Trustees such periodic and special reports as the Board or the Manager may reasonably request. The Sub-Adviser further agrees that all records that it maintains for the Fund are the property of the Fund and the Sub-Adviser will surrender promptly to the Fund any such records upon the request of the Manager or the Fund (provided, however, that the Sub-Adviser shall be permitted to retain copies thereof); and shall be permitted to retain originals (with copies to the Fund) to the extent required under Rule 204-2 of the Investment Advisers Act of 1940 or other applicable law.
3. Expenses. During the term of this Agreement, the Sub-Adviser will pay all expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other assets (including brokerage commission, if any) purchased for the Fund.
4. Additional Sub-Advisers. Subject to obtaining the initial and periodic approvals required under Section 15 of the 1940 Act and the approval of the Manager, the Sub-Adviser may retain one or more additional sub-advisers at the Sub-Adviser's own cost and expense for the purpose of furnishing one or more of the services described in Section 2 hereof with respect to the Fund. Retention of a sub-adviser hereunder shall in no way reduce the responsibilities or obligations of the Sub-Adviser under this Agreement and the Sub-Adviser shall be responsible to the Fund for all acts or omissions of any sub-adviser in connection with the performance of the Sub-Adviser's duties hereunder.
5. Compensation. For the services provided and the expenses assumed pursuant to this Agreement, the Manager will pay the Sub-Adviser, and the Sub-Adviser agrees to accept as full compensation therefor, a portfolio management fee (the "Management Fee") equal to the annual rate of .50% of the Fund's Managed Assets (as defined below), subject to paragraph 6 below. For purposes of calculating the Management Fee, Managed Assets means the average daily gross asset value of the Fund (which includes assets attributable to the Fund's Preferred Shares (as such term is defined in the Fund's prospectus), if any, and the principal amount of borrowings), minus the sum of the Fund's accrued and unpaid dividends on any outstanding Preferred Shares and accrued liabilities (other than the principal amount of any borrowings incurred, commercial paper or notes issued by the Fund and the liquidation preference of any outstanding Preferred Shares of the Fund). The Management Fee shall be payable in arrears on or about the first day of each month during the term of this Agreement.
For the month and year in which this Agreement becomes effective or terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement is in effect during the month and year, respectively.
6. Expense Reimbursement. The Sub-Adviser agrees to pay the Manager one-half of (i) all organizational costs and (ii) all offering costs of the Fund (other than sales load, but including the reimbursement of underwriting expenses as described in the Fund's prospectus) that exceed $0.04 per Common Share (as such term is defined in the Fund's prospectus). The term "organizational costs" and "offering costs" shall have the meanings ascribed to them in Sections 8.18-8.25 of the AICPA Audit and Accounting Guide, Audits for Investment Companies, with Conforming Changes as of May 1, 2002.
7. Services to Others. The Fund and the Manager acknowledge that the Sub-Adviser now acts, or may in the future act, as an investment adviser to other managed accounts and as investment adviser or sub-investment adviser to one or more other investment companies that are not a series of the Fund. In addition, the Fund and the Manager acknowledge that the persons employed by the Sub-Adviser to assist in the Sub-Adviser's duties under this Agreement will not devote their full time to such efforts. It is also agreed that the Sub-Adviser may use any supplemental research obtained for the benefit of the Fund in providing investment advice to its other investment advisory accounts and for managing its own accounts.
8. Limitation of Liability. The Sub-Adviser shall not be liable for, and the Fund and the Manager will not take any action against the Sub-Adviser to hold the Sub-Adviser liable for, any error of judgment or mistake of law or for any loss suffered by the Fund or the Manager (including, without limitation, by reason of the purchase, sale or retention of any security) in connection with the performance of the Sub-Adviser's duties under this Agreement, except for a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Sub-Adviser in the performance of its duties under this Agreement, or by reason of its reckless disregard of its material obligations and duties under this Agreement.
9. Term; Termination; Amendment. This Agreement shall become effective with respect to the Fund on the same date as the Management Agreement between the Fund and the Manager becomes effective (it being understood that the Manager shall notify the Sub-Adviser of the date of effectiveness of the Management Agreement as soon as reasonably practical after effectiveness), provided that it has been approved by a vote of a majority of the outstanding voting securities of the Fund in accordance with the requirements of the 1940 Act, and shall remain in full force until the two-year anniversary of the date of its effectiveness unless sooner terminated as hereinafter provided. This Agreement shall continue in force from year to year thereafter, but only as long as such continuance is specifically approved for the Fund at least annually in the manner required by the 1940 Act and the rules and regulations thereunder; provided, however, that if the continuation of this Agreement is not approved for the Fund, the Sub-Adviser may continue to serve in such capacity for the Fund in the manner and to the extent permitted by the 1940 Act and the rules and regulations thereunder.
This Agreement shall automatically terminate in the event of its assignment and may be terminated at any time without the payment of any penalty by the Manager or the Sub-Adviser upon sixty (60) days' written notice to the other parties. This Agreement may also be terminated by the Fund by action of the Board of Trustees or by a vote of a majority of the outstanding voting securities of such Fund upon sixty (60) days' written notice to the Sub-Adviser by the Fund without payment of any penalty.
This Agreement may be terminated at any time without the payment of any penalty by the Manager, the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund in the event that it shall have been established by a court of competent jurisdiction that the Sub-Adviser or any officer or director of the Sub-Adviser has taken any action that results in a breach of the material covenants of the Sub-Adviser set forth herein.
The terms "assignment" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth in the 1940 Act and the rules and regulations thereunder.
Termination of this Agreement shall not affect the right of the Sub-Adviser to receive payments on any unpaid balance of the compensation described in Section 5 earned prior to such termination and for any additional period during which the Sub-Adviser serves as such for the Fund, subject to applicable law.
10. Notice. Any notice under this Agreement shall be sufficient in all respects if given in writing and delivered by commercial courier providing proof
of delivery and addressed as follows or addressed to such other person or address as such party may designate for receipt of such notice.
If to the Manager or the Fund: If to the Sub-Adviser:
First Trust/Aberdeen Opportunity Income Fund Aberdeen Asset Management Inc.
First Trust Advisors 300 SE 2nd Street, Suite 820
1001 Warrenville Road, Suite 300 Fort Lauderdale, Florida 33301
Lisle, Illinois 60532 Attention: Bev Hendry
Attention: General Counsel
If by Facsimile: (954) 767-6006
If by Facsimile: (630) 241-8650
|
11. Limitations on Liability. All parties hereto are expressly put on notice of the Fund's Agreement and Declaration of Trust and all amendments thereto, a copy of which is on file with the Secretary of the Commonwealth of Massachusetts, and the limitation of shareholder and trustee liability contained therein and a certified copy of which has been provided to the Sub-Adviser prior to the date hereof. This Agreement is executed on behalf of the Fund by the Fund's officers in their capacity as officers and not individually and are not binding upon any of the Trustees, officers, or shareholders of the Fund individually but the obligations imposed upon the Fund by this Agreement are binding only upon the assets and property of the Fund, and persons dealing with the Fund must look solely to the assets of the Fund and those assets belonging to the subject the Fund, for the enforcement of any claims.
12. Miscellaneous. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Agreement will be binding upon and shall inure to the benefit of the parties hereto and their respective successors.
13. Applicable Law. This Agreement shall be construed in accordance with applicable federal law and (except as to Section 11 hereof which shall be construed in accordance with the laws of Massachusetts) the laws of the State of Illinois.
14. Amendment, Etc. This Agreement may only be amended, or its provisions modified or waived, in a writing signed by the party against which such amendment, modification or waiver is sought to be enforced.
15. Authority. Each party represents to the others that it is duly authorized and fully empowered to execute, deliver and perform this Agreement. The Fund represents that engagement of the Sub-Adviser has been duly authorized by the Fund and is in accordance with the Fund's Declaration of Trust and other governing documents of the Fund.
16. Severability. Each provision of this Agreement is intended to be severable from the others so that if any provision or term hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remaining provisions and terms hereof; provided,
-7
however, that the provisions governing payment of the Management Fee described in Section 5 are not severable.
17. Entire Agreement. This Agreement constitutes the sole and entire agreement of the parties hereto with respect to the subject matter expressly set forth herein.
IN WITNESS WHEREOF, the Fund, the Manager and the Sub-Adviser have caused this Agreement to be executed as of the day and year first above written.
FIRST TRUST ADVISORS L.P. ABERDEEN ASSET MANAGEMENT INC.
By____________________________________ By___________________________________
Title:___________________________ Title:___________________________
|
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY
INCOME FUND
By____________________________________
Title:___________________________
First Trust/Aberdeen Global Opportunity Income Fund
(a Massachusetts business trust)
[______] Common Shares of Beneficial Interest
(Par Value $.01 Per Share)
FORM OF PURCHASE AGREEMENT
November [ ], 2004
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
[Co-Managers]
c/o Merrill Lynch, Pierce, Fenner & Smith
Incorporated
4 World Financial Center
New York, New York 10080
Ladies and Gentlemen:
Each of First Trust/Aberdeen Global Opportunity Income Fund, a
Massachusetts business trust (the "Fund"), its investment adviser, First Trust
Advisors L.P., an Illinois limited partnership (the "Investment Adviser" or
"First Trust") and its investment sub-adviser, Aberdeen Asset Management Inc., a
Delaware corporation (the "Sub-Adviser" or "Aberdeen") (each, an "Adviser" and
together, the "Advisers"), confirms its agreement with Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), [other
co-managers] and each of the other Underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch, and [other representatives] are acting as representatives (in such
capacity, the "Representatives"), with respect to the issue and sale by the Fund
and the purchase by the Underwriters, acting severally and not jointly, of the
respective number of common shares of beneficial interest, par value $.01 per
share, of the Fund ("Common Shares") set forth in said Schedule A, and with
respect to the grant by the Fund to the Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of [______] additional Common Shares for the sole purpose of covering
overallotments, if any. The aforesaid [______] Common Shares (the "Initial
Securities") to be purchased by the Underwriters and all or any part of the
[______] Common Shares subject to the option described in Section 2(b) hereof
(the "Option Securities") are hereinafter called, collectively, the
"Securities."
The Fund understands that the Underwriters propose to make a public offering of the Securities as soon as the Representatives deem advisable after this Agreement has been executed and delivered.
The Fund has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form N-2 (No. 333-119081 and No. 811-21636) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses, and a notification on Form N-8A of registration of the Fund as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations of the Commission under the 1933 Act and the 1940 Act (the "Rules and Regulations"). Promptly after execution and delivery of this Agreement, the Fund will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A")
of the Rules and Regulations and paragraph (c) or (h) of Rule 497 ("Rule 497")
of the Rules and Regulations or (ii) if the Fund has elected to rely upon Rule
434 ("Rule 434") of the Rules and Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 497. The
information included in any such prospectus or in any such Term Sheet, as the
case may be, that was omitted from such registration statement at the time it
became effective but that is deemed to be part of such registration statement at
the time it became effective, if applicable, (a) pursuant to paragraph (b) of
Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph
(d) of Rule 434 is referred to as "Rule 434 Information." Each prospectus used
before such registration statement became effective, and any prospectus that
omitted, as applicable, the Rule 430A Information or the Rule 434 Information,
that was used after such effectiveness and prior to the execution and delivery
of this Agreement, including in each case any statement of additional
information incorporated therein by reference, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the Rules and Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final prospectus in
the form first furnished to the Underwriters for use in connection with the
offering of the Securities, including the statement of additional information
incorporated therein by reference, is herein called the "Prospectus." If Rule
434 is relied on, the term "Prospectus" shall refer to the preliminary
prospectus dated October [ ], 2004 together with the Term Sheet and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the Prospectus or any Term
Sheet or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement, any preliminary prospectus or the Prospectus (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, any preliminary prospectus or the Prospectus, as the case may be.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Fund and the Advisers. The
Fund and the Advisers jointly and severally represent and warrant to each
Underwriter as of the date hereof and as of the Closing Time referred to in
Section 2(c) hereof, will jointly and severally represent and warrant to each
Underwriter as of each Date of Delivery (if any) referred to in Section 2(b)
hereof, and agree with each Underwriter, as follows, except that the
representations and warranties set forth in paragraphs (xiii), (xv), (xvii) and
(xxii) below are made by the Sub-Adviser based on their reasonable belief after
due inquiry:
(i) Compliance with Registration Requirements. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act, or order of suspension or revocation of registration pursuant to Section 8(e) of the 1940 Act, and no proceedings for any such purpose have been instituted or are pending or, to the knowledge of the Fund or the Advisers, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with in all material respects.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time, the Registration Statement,
the Rule 462(b) Registration Statement, the notification on Form N-8A
and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither the Prospectus nor any amendments or supplements thereto, at the time the Prospectus or any such amendment or supplement was issued and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), included or will include any untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Fund will comply with the requirements of Rule 434 and the Prospectus shall not be "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective.
Each preliminary prospectus delivered to the Underwriters for use in connection with this offering and the prospectus filed as part of the effective Registration Statement or as part of any amendment thereto, or filed pursuant to Rule 497 under the 1933 Act, complied when so filed in all material respects with the Rules and Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
If a Rule 462(b) Registration Statement is required in connection with the offering and sale of the Securities, the Fund has complied or will comply with the requirements of Rule 111 under the 1933 Act Regulations relating to the payment of filing fees thereof.
The foregoing representations in this Section 1(a)(i) do not apply to statements or omissions relating to the Underwriters made in reliance on and in conformity with information furnished in writing to the Fund by or on behalf of the Underwriters or their agents expressly for use in the Registration Statement, the 462(b) Registration Statement, the Prospectus or the preliminary prospectus (or any amendment or supplement to any of the foregoing), or the descriptions of each of the Advisers (referred to in Sections (1)(b)(iii) and 1(c)(iii) of this Agreement) contained in the foregoing.
(ii) Independent Accountants. As of the date of the report of the independent accountants contained in the Registration Statement, the accountants who certified the statement of assets and liabilities included in the Registration Statement are independent public accountants as required by the 1933 Act and the Rules and Regulations.
(iii) Financial Statements. The statement of assets and liabilities included in the Registration Statement and the Prospectus, together with the related notes, presents fairly in all material respects the financial position of the Fund at the date indicated; said statement has been prepared in conformity with U.S. generally accepted accounting principles ("GAAP").
(iv) Expense Summary. The information set forth in the Prospectus in the fee table contained in the section of the Prospectus entitled "Summary of Fund Expenses" has been prepared in accordance with the requirements of Form N-2 and to the extent estimated or projected, such estimates or projections are reasonably believed to be attainable and reasonably based.
(v) No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the financial condition, earnings or business affairs of the Fund, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been
no transactions entered into by the Fund, other than those in the ordinary course of business, which are material with respect to the Fund, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Fund on any class of its capital shares.
(vi) Good Standing of the Fund. The Fund has been duly organized and is validly existing as a business trust in good standing under the laws of The Commonwealth of Massachusetts and has power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement; and the Fund is duly qualified to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not be expected to result in a Material Adverse Effect.
(vii) No Subsidiaries. The Fund has no subsidiaries.
(viii) Investment Company Status. The Fund is duly registered with the Commission under the 1940 Act as a closed-end diversified management investment company, and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or, to the knowledge of the Fund or any Adviser, threatened by the Commission.
(ix) Officers and Trustees. No person is serving or acting as an officer, trustee or investment adviser of the Fund except in accordance with the provisions of the 1940 Act and the Rules and Regulations and the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the rules and regulations of the Commission promulgated under the Advisers Act (the "Advisers Act Rules and Regulations"). Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), no trustee of the Fund is (A) an "interested person" (as defined in the 1940 Act) of the Fund or (B) an "affiliated person" (as defined in the 1940 Act) of any Underwriter. For purposes of this Section 1(a)(ix), the Advisers shall be entitled to rely on written representations from such officers and trustees.
(x) Capitalization. The authorized, issued and outstanding shares of beneficial interest of the Fund are as set forth in the Prospectus. All issued and outstanding common shares of beneficial interest of the Fund have been duly authorized and validly issued and are fully paid and non-assessable and have been offered and sold or exchanged by the Fund in compliance with all applicable laws (including, without limitation, federal and state securities laws); none of the outstanding common shares of beneficial interest of the Fund was issued in violation of the preemptive or other similar rights of any securityholder of the Fund.
(xi) Authorization and Description of Securities. The Securities to be purchased by the Underwriters from the Fund have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Fund pursuant to this Agreement when paid for by the Underwriters, will be validly issued and fully paid and non-assessable. In all material respects, the Common Shares conform to all statements relating thereto contained in the Prospectus and such statements conform to the rights set forth in the instruments defining the same, to the extent such rights are set forth; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to preemptive or other similar rights of any securityholder of the Fund.
(xii) Absence of Defaults and Conflicts. The Fund is not in violation of its declaration of trust or by-laws, each as amended from time to time, or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which it is a party or by
which it may be bound, or to which any of the property or assets of the Fund is subject (collectively, "Agreements and Instruments") except for such violations or defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Investment Management Agreement, the Sub-Advisory Agreement, the Administration and Accounting Services Agreement, the Custodian Services Agreement and the Transfer Agency Services Agreement referred to in the Registration Statement (as used herein, the "Management Agreement," the "Sub-Advisory Agreement," the "Administration Agreement," the "Custodian Agreement" and the "Transfer Agency Agreement," respectively) and the consummation of the transactions contemplated herein and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds") and compliance by the Fund with its obligations hereunder have been duly authorized by all necessary Fund actions and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the declaration of trust or by-laws of the Fund, each as amended from time to time, or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Fund or any of its assets, properties or operations, except for such violations that would not have a Material Adverse Effect. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Fund.
(xiii) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Fund or any Adviser, threatened, against or affecting the Fund, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which would reasonably be expected to result in a Material Adverse Effect, or which would prohibit or materially delay the consummation of the transactions contemplated in this Agreement or the performance by the Fund of its obligations hereunder.
(xiv) Exhibits. There are no contracts or documents which are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits thereto by the 1933 Act, the 1940 Act or by the Rules and Regulations which have not been so described and filed as required.
(xv) Possession of Intellectual Property. The Fund owns or possesses, or can acquire on reasonable terms, or otherwise has rights to, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by the Fund, and the Fund has not received any notice or is not otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property that has, or could reasonably be expected to have, a material adverse effect.
(xvi) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or
agency is or will be necessary or required for the performance by the Fund of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement, except such as have been already obtained, or with respect to which the failure to so obtain would not have a Material Adverse Effect, or as may be required under the 1933 Act, the 1940 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), or state securities laws.
(xvii) Possession of Licenses and Permits. The Fund possesses such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to operate its properties and to conduct the business as contemplated in the Prospectus, the Fund is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure to so possess or comply would not have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and the Fund has not received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.
(xviii) Advertisements. Any advertising, sales literature or other promotional material (including "prospectus wrappers" and "broker kits") authorized in writing by or prepared by the Fund or the Advisers used in connection with the public offering of the Securities (collectively, "Sales Material") does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. Moreover, all sales material complied and will comply in all material respects with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations and the rules and interpretations of the NASD, Inc. (the "NASD").
(xix) Subchapter M. The Fund intends to direct the investment of the proceeds of the offering described in the Registration Statement in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended ("Subchapter M of the Code" and the "Code," respectively), and intends to qualify as a regulated investment company under Subchapter M of the Code.
(xx) Distribution of Offering Materials. The Fund has not distributed and, prior to the later to occur of (A) the Closing Time and (B) completion of the distribution of the Common Shares, will not distribute any offering material in connection with the offering and sale of the Common Shares other than the Registration Statement, a preliminary prospectus, the Prospectus or the Sales Materials; provided, however, that in no event shall this provision be applicable with respect to any offering material distributed by any Underwriter without the consent of the Fund or either Adviser.
(xxi) Accounting Controls. The Fund maintains a system of
internal accounting controls sufficient to provide reasonable
assurances that (A) transactions are executed in accordance with
management's general or specific authorization and with the applicable
requirements of the 1940 Act, the Rules and Regulations and the Code;
(B) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain
accountability for assets and to maintain compliance with the books and
records requirements under the 1940 Act and the Rules and Regulations;
(C) access to assets is permitted only in accordance with the
management's general or specific authorization; and (D) the recorded
accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(xxii) Absence of Undisclosed Payments. To the Fund's knowledge, neither the Fund nor any employee or agent of the Fund has made any payment of funds of the Fund or received or retained any funds, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus (except as disclosed therein).
(xxiii) Material Agreements. This Agreement, the Management Agreement, the Sub-Advisory Agreement, the Administration Agreement, the Custodian Agreement and the Transfer Agency Agreement have each been duly authorized by all requisite action on the part of the Fund, executed and delivered by the Fund, as of the dates noted therein and each complies with all applicable provisions of the 1940 Act in all material respects. Assuming due authorization, execution and delivery by the other parties thereto, each such agreement constitutes a valid and binding agreement of the Fund, enforceable against the Fund in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and public policy and except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights and remedies generally (whether considered in a proceeding in equity or at law).
(xxiv) Registration Rights. There are no persons with registration rights or other similar rights to have any securities of the Fund registered pursuant to the Registration Statement or otherwise registered by the Fund under the 1933 Act.
(xxv) New York Stock Exchange Listing. The Securities have been duly authorized for listing, upon notice of issuance, on the New York Stock Exchange ("NYSE") and the Fund's registration statement on Form 8-A under the 1934 Act has become effective.
(b) Representations and Warranties by the Investment Adviser. The Investment Adviser represents and warrants to each Underwriter, and in the case of paragraph (iii) also represents to the Fund, as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof as follows:
(i) Good Standing of the Investment Adviser. The Investment Adviser has been duly organized and is validly existing and in good standing as a limited partnership under the laws of the state of Illinois, with full limited partnership power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each other jurisdiction in which such qualification is required, except where failure to so qualify or to be in good standing would not result in a material adverse effect.
(ii) Investment Adviser's Status. The Investment Adviser is duly registered and in good standing with the Commission as an investment adviser under the Advisers Act, and is not prohibited by the Advisers Act or the 1940 Act, or the rules and regulations under such acts, from acting under the Management Agreement for the Fund as contemplated by the Prospectus.
(iii) Descriptions of the Investment Adviser. The descriptions of the Investment Adviser in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) complied and comply in all material respects with the provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations and are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
(iv) Capitalization. The Investment Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus, this Agreement and under the Management Agreement and the Sub-Advisory Agreement.
(v) Authorization of Agreements; Absence of Defaults and Conflicts. This Agreement, the Management Agreement and the Sub-Advisory Agreement have each been duly authorized, executed and delivered by the Investment Adviser, and, assuming due authorization, execution and delivery by the other parties thereto, each agreement constitutes a valid and binding obligation of the Investment Adviser, enforceable in accordance with its respective terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and public policy and except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law); and neither the execution and delivery of this Agreement, the Management Agreement or the Sub-Advisory Agreement nor the performance by the Investment Adviser of its obligations hereunder or thereunder will conflict with, or result in a breach of any of the terms and provisions of, or constitute, with or without the giving of notice or lapse of time or both, a default under, any agreement or instrument to which the Investment Adviser is a party or by which it is bound, the organizational documents of the Investment Adviser, or to the Investment Adviser's knowledge, by any law, order, decree, rule or regulation applicable to it of any jurisdiction, court, federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Investment Adviser or its properties or operations; and no consent, approval, authorization or order of any court or governmental authority or agency is required for the consummation by the Investment Adviser of the transactions contemplated by this Agreement, the Management Agreement or the Sub-Advisory Agreement, except as have been obtained or may be required under the 1933 Act, the 1940 Act, the 1934 Act or state securities laws.
(vi) No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, there has not occurred any event which should reasonably be expected to have a material adverse effect on the ability of the Investment Adviser to perform its obligations under this Agreement, the Management Agreement and each of the Sub-Advisory Agreements.
(vii) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Investment Adviser, threatened against or affecting the Investment Adviser or any "affiliated person" (as such term is defined in the 1940 Act) of the Investment Adviser or any partners, directors, officers or employees of the foregoing, whether or not arising in the ordinary course of business, which might reasonably be expected to result in any material adverse change in the financial condition or earnings, business affairs or business prospects of the Investment Adviser, materially and adversely affect the properties or assets of the Investment Adviser or materially impair or adversely affect the ability of the Investment Adviser to function as an investment adviser or perform its obligations under the Management Agreement and each of the Sub-Advisory Agreements, or which is required to be disclosed in the Registration Statement and the Prospectus.
(viii) Absence of Violation or Default. The Investment Adviser is not in violation of its organizational documents or in default under any agreement, indenture or instrument, where such violation or default would reasonably be expected to have a material adverse effect on the ability of the Investment Adviser to function as an investment adviser or perform its obligations under the Management Agreement and each of the Sub-Advisory Agreements.
(c) Representations and Warranties by the Sub-Adviser. The Sub-Adviser represents and warrants to each Underwriter, and in the case of paragraph (iii) also represents to the Fund, as of the date hereof and as of the Closing Time referred to in Section 2(c) hereof, and will represent and warrant to each Underwriter as of each Date of Delivery (if any) referred to in Section 2(b) hereof, as follows:
(i) Good Standing of the Sub-Adviser. The Sub-Adviser has been duly organized and is validly existing and in good standing as a corporation under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and the Sub-Adviser is duly qualified to transact business and is in good standing in each other jurisdiction in which such qualification is required; except where the failure to so qualify or to be in good standing would not have a material adverse effect on the ability of the Sub-Adviser to function as an investment adviser or to perform its obligations under the Sub-Advisory Agreement to which it is a party.
(ii) The Sub-Adviser's Status. The Sub-Adviser is duly registered and in good standing with the Commission as an investment adviser under the Advisers Act, and is not prohibited by the Advisers Act or the 1940 Act, or the rules and regulations under such acts, from acting under the Sub-Advisory Agreement for the Fund as contemplated by the Prospectus.
(iii) Descriptions of the Sub-Adviser. The descriptions of the Sub-Adviser in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) complied and comply in all material respects with the provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations and do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
(iv) Capitalization. The Sub-Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus, this Agreement and under the Sub-Advisory Agreement.
(v) Authorization of Agreements; Absence of Defaults and Conflicts. This Agreement and the Sub-Advisory Agreement have each been duly authorized, executed and delivered by the Sub-Adviser, and, assuming due authorization, execution and delivery by the other parties thereto, each agreement constitutes a valid and binding obligation of the Sub-Adviser, enforceable against the Sub-Adviser in accordance with its respective terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and public policy and except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights and remedies generally (whether considered in a proceeding in equity or at law); and neither the execution and delivery of this Agreement or the Sub-Advisory Agreement nor the performance by the Sub-Adviser of its obligations hereunder or thereunder will conflict with, or result in a breach of any of the terms and provisions of, or constitute, with or without the giving of notice or lapse of time or both, a default under any agreement or instrument to which the Sub-Adviser is a party or by which it is bound, the organizational documents of the Sub-Adviser or, to the Sub-Adviser's knowledge, by any law, order, decree, rule or regulation applicable to it of any jurisdiction, court, federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Sub-Adviser or its respective properties or operations; and no consent, approval, authorization or order of any court or governmental authority or agency is required for the consummation by the Sub-Adviser of the transactions contemplated by this Agreement or the Sub-Advisory Agreement to which it is a party, except as have been obtained or may be required under the 1933 Act, the 1940 Act, the 1934 Act or state securities laws.
(vi) No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, there has not occurred any event which should reasonably be expected to have a material adverse effect on the ability of the Sub-Adviser to perform its obligations under this Agreement and the Sub-Advisory Agreement.
(vii) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Sub-Adviser, threatened against or affecting the Sub-Adviser or any "affiliated person" (as such term is defined in the 1940 Act) of the Sub-Adviser or any partners, directors, officers or employees of the foregoing, whether or not arising in the ordinary course of business, which would reasonably be expected to have a material adverse effect on the ability of the Sub-Adviser to function as an investment adviser or perform its obligations under the Sub-Advisory Agreement, or which is required to be disclosed in the Registration Statement and the Prospectus.
(viii) Absence of Violation or Default. The Sub-Adviser is not in violation of its organizational documents or in default under any agreement, indenture or instrument, where such violation or default would reasonably be expected to have a material adverse effect on the ability of the Sub-Adviser to function as an investment adviser or perform its obligations under the Sub-Advisory Agreement.
(d) Officers' Certificates. Any certificate signed by any officer of the Fund or an Adviser delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Fund or such Adviser, as the case may be, to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Fund agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Fund, at the price per share set forth in Schedule B, the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter, plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Fund hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional [______] Common Shares in the aggregate at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Fund and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted will expire 45 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering overallotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representatives to the Fund setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Representatives, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total number of Initial Securities, subject in each case to such adjustments as Merrill Lynch in its discretion shall make to eliminate any sales
or purchases of a fractional number of Option Securities plus any additional number of Option Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof.
(c) Payment. Payment of the purchase price for, and delivery of certificates, if any, for, the Initial Securities shall be made at the offices of Clifford Chance US LLP, 31 West 52nd Street, New York, New York 10019, or at such other place as shall be agreed upon by the Representatives and the Fund, at 10:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be reasonably agreed upon by the Representatives and the Fund (such time and date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Representatives and the Fund, on each Date of Delivery as specified in the notice from the Representatives to the Fund.
Payment shall be made to the Fund by wire transfer of immediately available funds to a bank account designated by the Fund, against delivery to the Representatives for the respective accounts of the Underwriters of certificates for the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations and registered in such names as the Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial Securities and the Option Securities, if any, will be made available for examination and packaging by the Representatives in the City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants.
(a) The Fund and the Advisers, jointly and severally, covenant with each Underwriter as follows:
(i) Compliance with Securities Regulations and Commission Requests. The Fund, subject to Section 3(a)(ii), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Representatives promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Fund will promptly effect the
filings necessary pursuant to Rule 497 and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 497 was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Fund will make reasonable commercial efforts to prevent the issuance of any stop order, or order of suspension or revocation of registration pursuant to Section 8(e) of the 1940 Act, and, if any such stop order or order of suspension or revocation of registration is issued, to obtain the lifting thereof at the earliest possible moment.
(ii) Filing of Amendments. The Fund will give the Representatives notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, will furnish the Representatives with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representatives or counsel for the Underwriters shall reasonably object in writing.
(iii) Delivery of Registration Statements. The Fund has furnished or will deliver to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and a signed copy of all consents and certificates of experts, and will also deliver to the Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(iv) Delivery of Prospectuses. The Fund hereby consents to the use by each Underwriter of any preliminary prospectus delivered by the Fund to the Underwriter for purposes permitted by the 1933 Act. The Fund will furnish to each Underwriter, without charge, during a period up to 180 days following the Closing Date, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(v) Continued Compliance with Securities Laws. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the reasonable opinion of counsel for the Underwriters or for the Fund, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the Rules and Regulations, the Fund will promptly prepare and file with the Commission, subject to Section 3(a)(ii), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements, and the Fund will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request.
(vi) Blue Sky Qualifications. The Fund will use its reasonable
best efforts, subject to the reasonable cooperation of the
Underwriters, to qualify the Securities for offering and sale under the
applicable securities laws of such states and other jurisdictions of
the United States as the Representatives and the Fund may designate and
to maintain such qualifications in effect for a period of not less than
one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided,
however, that in no event shall the Fund be obligated to file any
general consent to service of process or to qualify as a foreign
business trust or as a dealer in securities in any jurisdiction in
which it is not so qualified or to subject itself to taxation in
respect of doing business in any jurisdiction in which it is not
otherwise so subject. In each jurisdiction in which the Securities have
been so qualified, the Fund will file such statements and reports as
may be required by the laws of such jurisdiction to continue such
qualification, if any, in effect for a period of not less than one year
from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(vii) Rule 158. The Fund will make generally available to its securityholders as soon as practicable an earnings statement, if applicable, for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(viii) Use of Proceeds. The Fund will use the net proceeds received by it from the sale of the Securities substantially in the manner specified in the Prospectus under "Use of Proceeds".
(ix) Listing. The Fund will use its reasonable best efforts to effect the listing of the Securities on the NYSE, subject to notice of issuance, concurrently with the effectiveness of the Registration Statement.
(x) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectus, the Fund will not, without the prior written consent of Merrill Lynch, (A) directly or indirectly, offer, pledge, sell, contract to sell, sell any option, rights or warrant to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares or file any registration statement under the 1933 Act with respect to any of the foregoing or (B) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Shares, whether any such swap or transaction described in clause (A) or (B) above is to be settled by delivery of Common Shares or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (1) the Securities to be sold hereunder or (2) Common Shares issued or, for avoidance of doubt, purchased in the open market pursuant to any dividend reinvestment plan.
(xi) Reporting Requirements. The Fund, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1940 Act and the 1934 Act within the time periods required by the 1940 Act and the Rules and Regulations and the 1934 Act and the rules and regulations of the Commission thereunder, respectively.
(xii) Subchapter M. The Fund intends to comply with the requirements of Subchapter M of the Code to qualify as a regulated investment company under the Code.
(xiii) No Manipulation of Market for Securities. The Fund will not (a) take, directly or indirectly, any action designed to cause or to result in, or that might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Fund to facilitate the sale or resale of the Securities in violation of federal or state securities laws, and (b) except for share repurchases permitted in accordance with applicable laws and purchases of
Securities in the open market pursuant to the Fund's dividend reinvestment plan, until the Closing Date, or the Date of Delivery, if any, (i) sell, bid for or purchase the Securities or pay any person any compensation for soliciting purchases of the Securities or (ii) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Fund .
(xiv) Rule 462(b) Registration Statement. If the Fund elects to rely upon Rule 462(b), the Fund shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Fund shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the 1933 Act.
SECTION 4. Payment of Expenses.
(a) Expenses. The Fund will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Fund's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(a)(vi) hereof, including filing fees and the reasonable
fees and disbursements of counsel for the Underwriters in connection therewith
and in connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, Prospectus and any amendments or supplements thereto,
(vii) the preparation, printing and delivery to the Underwriters of copies of
the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of
any transfer agent or registrar for the Securities, (ix) the filing fees
incident to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the NASD of the terms of the sale
of the Securities in an amount up to $7,500 (which will not exceed [______]% of
the total price to the public of the Common Shares sold in this offering), (x)
the fees and expenses incurred in connection with the listing of the Securities
on the NYSE and (xi) the printing of any sales material. In addition, the Fund
shall pay to the Underwriters $.00667 per Common Share as partial reimbursement
of expenses incurred in connection with the offering. The amount paid by the
Fund as this partial reimbursement to the Underwriters will not exceed .03335%
of the total price to the public of the Common Shares sold in this offering. The
Investment Adviser has agreed to pay (i) all organizational expenses of the
Fund, and (ii) offering costs (other than sales load, but including the partial
reimbursement of expenses described above) of the Fund that exceed $.04 per
Common Share. The Sub-Adviser has agreed to reimburse the Investment Adviser for
one-half of such organizational expenses and offering costs of the Fund that
exceed $.04 per Common Share. To the extent that aggregate offering expenses are
less than $.04 per Common Share, up to .10% of the public offering price of the
Common Shares sold in this offering will be paid to First Trust Portfolios,
L.P., an affiliate of the Investment Adviser, as reimbursement for the
distribution services it provides to the Fund. The sum total of all compensation
received by the Underwriters and First Trust Portfolios, L.P. in connection with
this offering, including sales load and all forms of compensation to and
reimbursement of Underwriters and First Trust Portfolios, L.P., will not exceed
9.0% of the total price to the public of the Common Shares sold in this
offering.
(b) Termination of Agreement. If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5 or Section 9(a) hereof, the Fund and each of the Advisers, jointly and severally, agree that
they shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations.
The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Fund and each of the Advisers contained in Section 1 hereof or in certificates of any officer of the Fund or either of the Advisers delivered pursuant to the provisions hereof, to the performance by the Fund and each of the Advisers of their respective covenants and other obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective or will have become effective by 5:30 p.m., New York City time on the date hereof, and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act, no notice or order pursuant to Section 8(e) of the 1940 Act shall have been issued, and no proceedings with respect to either shall have been initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with or waived to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 497 (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A or a certificate must have been filed in accordance with Rule 497(j)) or, if the Fund has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 497.
(b) Opinions of Counsel for Fund and Advisers. At Closing Time, the Representatives shall have received the favorable opinions, dated as of Closing Time, of Chapman and Cutler LLP, counsel for the Fund and First Trust, substantially in the forms set forth in Exhibit A with respect to the Fund and Exhibit B with respect to First Trust, and of [______], counsel for Aberdeen, substantially in the form set forth in Exhibit C, together with signed or reproduced copies of such letters for each of the other Underwriters. In giving such opinion such counsel may rely, as to matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States, upon the opinions of counsel satisfactory to the Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Fund and the Advisers and certificates of public officials.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Clifford Chance US LLP, counsel for the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters
with respect to the matters set forth in clauses (i), (ii), (vi), (vii) (solely
as to preemptive or other similar rights arising by operation of law or under
the charter or by-laws of the Fund), (viii) through (x), inclusive, (xii), (xiv)
(solely as to the information in the Prospectus under "Description of Shares")
and the last paragraph of Exhibit A hereto. In giving such opinion such counsel
may rely, as to all matters governed by the laws of jurisdictions other than the
law of the State of New York and the federal law of the United States, upon the
opinions of counsel satisfactory to the Representatives. Such counsel may also
state that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the Fund and
the Advisers and certificates of public officials.
(d) Officers' Certificates. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the financial condition, earnings or business affairs of the Fund, whether or not arising in the ordinary course of business, and the Representatives shall have received a certificate of a duly authorized officer of the Fund and of the chief financial or chief accounting officer of the Fund and of the President or a Vice President or Managing Director of each Adviser, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Sections 1(a), (b) and (c) hereof, as
applicable, are true and correct with the same force and effect as though
expressly made at and as of Closing Time, (iii) such Fund or Adviser, as
applicable, has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to Closing Time, (iv) with respect
to the certificate by an officer of each Adviser only, there has been no
material adverse change in the financial condition, earnings or business affairs
of such Adviser, whether or not arising in the ordinary course of business, and
(v) with respect to the Fund only, no stop order suspending the effectiveness of
the Registration Statement, or order of suspension or revocation of registration
pursuant to Section 8(e) of the 1940 Act, has been issued and no proceedings for
any such purpose have been instituted or are pending or are contemplated by the
Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Representatives shall have received from Deloitte & Touche LLP a letter dated such date, in form and substance satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives shall have received from Deloitte & Touche LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the NYSE, subject only to official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.
(i) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Fund contained herein and the statements in any certificates furnished by the Fund hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representatives shall have received:
(i) Officers' Certificates. Certificates, dated such Date of Delivery, of a duly authorized officer of the Fund and of the chief financial or chief accounting officer of the Fund and of the President or a Vice President or Managing Director of each Adviser confirming that the information contained in the certificate delivered by each of them at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery.
(ii) Opinions of Counsel for the Fund and the Advisers. The favorable opinions of counsel for the Fund and the Advisers, substantially in the forms set forth in Exhibit A, Exhibit B and Exhibit C hereto, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof.
(iii) Opinion of Counsel for the Underwriters. The favorable opinion of Clifford Chance US LLP, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Deloitte & Touche LLP, in form and substance satisfactory to the Representatives and dated such Date of Delivery, substantially in the same form and
substance as the letter furnished to the Representatives pursuant to
Section 5(f) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more than
three business days prior to such Date of Delivery.
(j) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the Underwriters shall have been furnished with such other documents as they may require and as are customarily provided for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Fund and the Advisers in connection with the organization and registration of the Fund under the 1940 Act and the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Representatives and counsel for the Underwriters.
(k) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled by the Fund or the Advisers when and as
required to be fulfilled, this Agreement, or, in the case of any condition to
the purchase of Option Securities, on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters to purchase the
relevant Option Securities, may be terminated by the Representatives by notice
to the Fund and each Adviser at any time at or prior to Closing Time or such
Date of Delivery, as the case may be, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 6, 7, 8 and 12 shall survive any such termination and
remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Fund and the Advisers, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(e) below) any such settlement is effected with the written consent of the Fund and each Adviser; and
(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Fund or an Adviser by any Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); provided, further, that the indemnity agreement contained in this Section 6(a) shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) from whom the person asserting any such loss, liability, claim, damage and expense purchased the Securities which are the subject thereof if the Prospectus corrected any such alleged untrue statement or omission and if such Prospectus was delivered to such Underwriter in a timely manner and if such Underwriter failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Securities to such person.
(b) Indemnification of the Fund, Advisers, Trustees, Directors and Officers. Each Underwriter severally agrees to indemnify and hold harmless the Fund and the Advisers, their respective trustees and directors, each of the Fund's officers who signed the Registration Statement, and each person, if any, who controls the Fund or an Adviser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Fund or the Advisers by such Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto).
(c) Indemnification for Marketing Materials. In addition to the foregoing indemnification, the Fund and the Advisers also, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 6(a), as limited by the proviso set forth therein, with respect to any sales material.
(d) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Fund or an Adviser, as applicable. In each case such counsel shall be reasonably satisfactory to the indemnified party, and the indemnifying party shall have the right to assume the defense of such action. An indemnified party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying party be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from its own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(e) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.
SECTION 7. Contribution.
If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund or the Advisers on the one hand and the Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund and the Advisers on the one hand and of the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Advisers on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Fund and the total underwriting discount received by the Underwriters (whether from the Fund or otherwise), in each case as set forth on the cover of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the Securities as set forth on such cover.
The relative fault of the Fund and the Advisers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Fund or the Advisers or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
The Fund, the Advisers and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each trustee of the Fund and each director of an Adviser, respectively, each officer of the Fund who signed the Registration Statement, and each person, if any, who controls the Fund or any Adviser, within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, shall have the same rights to contribution as the Fund and such Adviser, respectively. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and covenants contained in this Agreement or in certificates of officers of the Fund or an Adviser submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Fund or an Adviser, and shall survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this Agreement, by notice to the Fund, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Fund or an Adviser, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representatives, impracticable or inadvisable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in the Common Shares of the Fund has been suspended or materially limited by the Commission or the NYSE, or if trading generally on the NYSE or the American Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the NASD or any other governmental authority, or a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States, or (iv) if a banking moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7, 8 and 12 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters.
If one or more of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the Underwriters to purchase and of the Fund to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the Underwriters to purchase and the Fund to sell the relevant Option Securities, as the case may be, either the Representatives or the Fund shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10.
SECTION 11. Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Underwriters shall be directed to the
Representatives, c/o Merrill Lynch & Co., 4 World Financial Center, New York,
New York 10080, attention of Equity Capital Markets; notices to the Fund or the
First Trust shall be directed, as appropriate, to the office of First Trust
Advisors L.P. at 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532,
Attention: W. Scott Jardine; and notices to Aberdeen shall be directed to it at
300 S.E. 2nd Street, Suite 820, Ft. Lauderdale, Flordia 33301, Attention:
[______].
SECTION 12. Parties.
This Agreement shall inure to the benefit of and be binding upon each of the Underwriters, the Fund, the Advisers and each of their respective partners and successors and controlling persons referred to herein. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Fund, the Advisers and their respective successors and the controlling persons and officers, trustees and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters, the Fund, the Advisers and each of their respective partners and successors, and said controlling persons and officers, trustees and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of
Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE. UNLESS OTHERWISE EXPLICITLY PROVIDED, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings.
The Article and Section headings herein are for convenience only and shall not affect the construction hereof.
SECTION 15. Massachusetts Business Trust
A copy of the declaration of trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this Agreement is executed on behalf of the Fund by an officer or trustee of the Fund in his or her capacity as an officer or trustee of the Fund and not individually and that the obligations of or arising out of this instrument are not binding upon any of the trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund.
[Signatures on Following Pages]
If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters, the Fund and each of the Advisers in accordance with its terms.
Very truly yours,
First Trust/Aberdeen Global Opportunity Income Fund
Title:
First Trust Advisors L.P.
Title:
Aberdeen Asset Management Inc.
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
[CO-MANAGERS]
By: Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
For themselves and as Representatives of the other Underwriters named in Schedule A hereto.
SCHEDULE A
Number of
Name of Underwriter Initial Securities
------------------- ------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... [______]
[other Underwriters]........................................ [______]
Total.............................................. [______]
|
Sch A-1
SCHEDULE B
First Trust/Aberdeen Global Opportunity Fund Common Shares of Beneficial Interest
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $20.00.
2. The purchase price per share for the Securities to be paid by the several Underwriters shall be $19.10, being an amount equal to the initial public offering price set forth above less $.90 per share; provided that the purchase price per share for any Option Securities purchased upon the exercise of the overallotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Fund and payable on the Initial Securities but not payable on the Option Securities.
Sch B-1
Exhibit A
FORM OF OPINION OF FUND'S
COUNSEL TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Fund has been duly organized and is validly existing as a business trust in good standing under the laws of The Commonwealth of Massachusetts.
(ii) The Fund has business trust power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus and to enter into and perform its obligations under the Purchase Agreement.
(iii) The Fund is duly qualified as a foreign business trust to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.
(iv) To the best of our knowledge, the Fund does not have any subsidiaries.
(v) The authorized, issued and outstanding shares of beneficial interest of the Fund are as set forth in the Prospectus under the caption "Description of Shares--Common Shares"; all issued and outstanding shares of beneficial interest of the Fund have been duly authorized and validly issued and are fully paid and non-assessable and have been offered and sold or exchanged by the Fund in compliance with all applicable laws (including, without limitation, federal and state securities laws); the Common Shares conform as to legal matters to all statements relating thereto contained in the Prospectus and such description conforms to the rights set forth in the instruments defining the same; and none of the outstanding shares of beneficial interest of the Fund was issued in violation of the preemptive or other similar rights of any securityholder of the Fund.
(vi) The Securities to be purchased by the Underwriters from the Fund have been duly authorized for issuance and sale to the Underwriters pursuant to the Purchase Agreement and, when issued and delivered by the Fund pursuant to the Purchase Agreement against payment of the consideration set forth in the Purchase Agreement, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder.
(vii) The issuance of the Securities is not subject to preemptive or other similar rights of any securityholder of the Fund.
(viii) The Purchase Agreement has been duly authorized, executed and delivered by the Fund.
(ix) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 497(c) or Rule 497(h) has been made in the manner and within the time period required by Rule 497; and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act, and, to the best of our knowledge, no order of suspension or revocation of registration pursuant to Section 8(e) of the 1940 Act has been issued, and no proceedings for any such purpose have been instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectus and each amendment or supplement to the Registration
Statement and Prospectus as of their respective effective or issue dates (except for financial statements, supporting schedules and other financial data included therein or omitted therefrom, as to which we need express no opinion), and the notification on Form N-8A, complied as to form in all material respects with the requirements of the 1933 Act, the 1940 Act and the Rules and Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective.
(xii) The form of certificate used to evidence the Common Shares complies in all material respects with all applicable statutory requirements, with any applicable requirements of the declaration of trust and by-laws of the Fund and the requirements of the New York Stock Exchange.
(xiii) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Fund is a party, or to which the property of the Fund is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets of the Fund or the consummation of the transactions contemplated in the Purchase Agreement or the performance by the Fund of its obligations thereunder.
(xiv) The information in the Prospectus under "Description of Shares" and "Tax Matters" and in the Registration Statement under Item 29 (Indemnification), to the extent that it constitutes matters of law, summaries of legal matters, the Fund's declaration of trust and by-laws or legal proceedings, or legal conclusions is correct in all material respects.
(xv) Each of the Management Agreement, the Sub-Advisory Agreement, the Administration Agreement, the Custodian Agreement, the Transfer Agency Agreement and the Purchase Agreement comply in all material respects with all applicable provisions of the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations.
(xvi) The Fund is duly registered with the Commission under the 1940 Act as a closed-end diversified management investment company; and, to the best of our knowledge, no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or threatened by the Commission.
(xvii) To the best of our knowledge, no person is serving as an officer, trustee or investment adviser of the Fund except in accordance with the 1940 Act and the Rules and Regulations and the Investment Advisers Act and the Advisers Act Rules and Regulations. Except as disclosed in the Registration Statement and Prospectus (or any amendment or supplement to either of them), to the best of our knowledge, no trustee of the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or an "affiliated person" (as defined in the 1940 Act) of an Underwriter.
(xviii) There are no statutes or regulations that are required to be described in the Prospectus that are not described as required.
(xix) All descriptions in the Registration Statement of contracts and other documents to which the Fund is a party are accurate in all material respects. To the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or
filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects.
(xx) To the best of our knowledge, the Fund is not in violation of its declaration of trust or by-laws and no default by the Fund exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed or incorporated by reference as an exhibit to the Registration Statement.
(xxi) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency (other than under the 1933 Act, the 1934 Act, the 1940 Act and the Rules and Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement or for the offering, issuance or sale of the Securities or the consummation of the transactions contemplated by this Agreement.
(xxii) The execution, delivery and performance of the Purchase Agreement and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds") and compliance by the Fund with its obligations under the Purchase Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(xii) of the Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Fund is a party or by which it or any of them may be bound, or to which any of the property or assets of the Fund is subject, nor will such action result in any violation of the provisions of the charter or by-laws of the Fund, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Fund or any of its properties, assets or operations.
(xxiii) The Purchase Agreement, the Management Agreement, the Administration Agreement, the Sub-Advisory Agreement, the Custodian Agreement and the Transfer Agency Agreement have each been duly authorized by all requisite action on the part of the Fund, executed and delivered by the Fund, as of the dates noted therein. Assuming due authorization, execution and delivery by the other parties thereto, each such agreement constitutes a valid and binding agreement of the Fund, enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and public policy and except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing.
In addition, we have participated in the preparation of the Registration Statement and the Prospectus and participated in discussions with certain officers, trustees and employees of the Fund, representatives of Deloitte & Touche LLP, the independent accountants who examined the statement of assets and liabilities of the Fund included or incorporated by reference in the Registration Statement and the Prospectus, and you and your representatives and we have reviewed certain Fund records and documents. While we have not independently verified and are not passing upon, and do not assume any
responsibility for, the accuracy, completeness or fairness of the information contained in the Registration Statement and the Prospectus, except to the extent necessary to enable us to give the opinions with respect to the Fund in paragraphs (A)(v), (xiv) and (xix), on the basis of such participation and review, nothing has come to our attention that would lead us to believe that the Registration Statement (except for financial statements, supporting schedules and other financial data included therein or omitted therefrom, as to which we do not express any belief), at the time such Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (except for financial statements, supporting schedules and other financial data included therein or omitted therefrom, as to which we do not express any belief), at the time the Prospectus was issued, or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
Exhibit B
FORM OF OPINION OF INVESTMENT ADVISER'S
COUNSEL TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Investment Adviser has been duly organized and is validly existing as a limited partnership in good standing under the laws of the State of Illinois.
(ii) The Investment Adviser has full limited partnership power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Purchase Agreement.
(iii) The Investment Adviser is duly qualified to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not result in a material adverse effect.
(iv) The Investment Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the Rules and Regulations from acting under the Management Agreement and each of the Sub-Advisory Agreements.
(v) The Purchase Agreement, the Management Agreement and the Sub-Advisory Agreement have been duly authorized, executed and delivered by the Investment Adviser, and each of the Management Agreement and the Sub-Advisory Agreement constitutes a valid and binding obligation of the Investment Adviser, enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and public policy and except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law).
(vi) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Investment Adviser is a party, or to which the property of the Investment Adviser is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in any material adverse change in the financial condition, earnings or business affairs of the Investment Adviser, materially and adversely affect the properties or assets of the Investment Adviser or materially impair or adversely affect the ability of the Investment Adviser to function as an investment adviser or perform its obligations under the Management Agreement and the Sub-Advisory Agreement, or which is required to be disclosed in the Registration Statement or the Prospectus.
(vii) To the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects.
(viii) To the best of our knowledge, the Investment Adviser is not in violation of its limited partnership agreement, by-laws or other organizational documents and no default by the Investment Adviser exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed or incorporated by reference as an exhibit to the Registration Statement.
(ix) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act, the 1940 Act and the Rules and Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement.
(x) The execution, delivery and performance of the Purchase Agreement and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement and compliance by the Investment Adviser with its obligations under the Purchase Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(xii) of the Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Investment Adviser pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Investment Adviser is a party or by which it or any of them may be bound, or to which any of the property or assets of the Investment Adviser is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a material adverse effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Investment Adviser, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Investment Adviser or any of its properties, assets or operations (except for such violations that would not have a material adverse effect).
In addition, we have participated in the preparation of the portions of the Registration Statement and Prospectus describing the Investment Adviser and participated in discussions with certain officers, trustees and employees of the Fund and representatives of the Investment Adviser. While we have not independently verified and are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the information contained in such portions of the Registration Statement and the Prospectus, on the basis of such participation and review, nothing has come to our attention that would lead us to believe that such portions of the Registration Statement (except for financial statements, supporting schedules and other financial data included therein or omitted therefrom, as to which we do not express any belief), at the time such Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that such portions of the Prospectus (except for financial statements, supporting schedules and other financial data included therein or omitted therefrom, as to which we do not express any belief), at the time the Prospectus was issued, or at the Closing Time, included or include an untrue statement of a material fact or omitted or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
Exhibit C
FORM OF OPINION OF INVESTMENT SUB-ADVISER'S COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)
(i) The Sub-Adviser has been duly organized and is validly existing as a corporation and in good standing under the laws of the State of Delaware.
(ii) The Sub-Adviser has full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Purchase Agreement and the Sub-Advisory Agreement.
(iii) The Sub-Adviser is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not result in a material adverse effect.
(iv) The Sub-Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the Rules and Regulations from acting under the Sub-Advisory Agreement.
(v) The Purchase Agreement and the Sub-Advisory Agreement have been duly authorized, executed and delivered by the Sub-Adviser, and each of the Purchase Agreement and the Sub-Advisory Agreement constitutes a valid and binding obligation of the Sub-Adviser, enforceable against it in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law).
(vi) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Sub-Adviser is a party, or to which the property of the Sub-Adviser is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, in the earnings, business affairs or business prospects of the Sub-Adviser, materially and adversely affect the properties or assets of the Sub-Adviser or materially impair or adversely affect the ability of the Sub-Adviser to function as an investment adviser or perform its obligations under the Sub-Advisory Agreement, or which is required to be disclosed in the Registration Statement or the Prospectus.
(vii) To the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments to which the Sub-Adviser is a party required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects.
(viii) To the best of our knowledge, the Sub-Adviser is not in violation of its certificate of incorporation, by-laws or other organizational documents and no default by the Sub-Adviser exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed or incorporated by reference as an exhibit to the Registration Statement.
(ix) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act, the 1940 Act and the Rules and Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement.
(x) The execution, delivery and performance of the Purchase Agreement
and the Sub-Advisory Agreement and the consummation of the transactions
contemplated in the Purchase Agreement and the Sub-Advisory Agreement and in the
Registration Statement and compliance by the Sub-Adviser with its obligations
under the Purchase Agreement and the Sub-Advisory Agreement do not and will not,
whether with or without the giving of notice or lapse of time or both, conflict
with or constitute a breach of, or default or Repayment Event (as defined in
Section 1(a)(xii) of the Purchase Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Sub-Adviser pursuant to any contract, indenture, mortgage, deed of trust, loan
or credit agreement, note, lease or any other agreement or instrument, known to
us, to which the Sub-Adviser is a party or by which it or any of them may be
bound, or to which any of the property or assets of the Sub-Adviser is subject
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not have a material adverse effect), nor will such
action result in any violation of the provisions of the charter or by-laws of
the Sub-Adviser, or any applicable law, statute, rule, regulation, judgment,
order, writ or decree, known to us, of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Sub-Adviser or any of its properties, assets or operations.
In addition, we have participated in the preparation of the portions of the Registration Statement and Prospectus describing the Sub-Adviser and participated in discussions with certain officers, trustees and employees of the Fund and representatives of the Sub-Adviser. While we have not independently verified and are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the information contained in such portions of the Registration Statement and the Prospectus, on the basis of such participation and review, nothing has come to our attention that would lead us to believe that such portions of the Registration Statement (except for financial statements, supporting schedules and other financial data included therein or omitted therefrom, as to which we do not express any belief), at the time such Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that such portions of the Prospectus (except for financial statements, supporting schedules and other financial data included therein or omitted therefrom, as to which we do not express any belief), at the time the Prospectus was issued, or at the Closing Time, included or include an untrue statement of a material fact or omitted or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
CUSTODIAN SERVICES AGREEMENT
THIS AGREEMENT is made as of November 16, 2004 by and between PFPC TRUST COMPANY, a limited purpose trust company incorporated under the laws of Delaware ("PFPC Trust"), and FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND, a Massachusetts business trust (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as a closed-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund wishes to retain PFPC Trust to provide custodian services, and PFPC Trust wishes to furnish custodian services, either directly or through an affiliate or affiliates, as more fully described herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(c) "Authorized Person" means any officer of the Fund and any other person authorized by the Fund to give Oral or Written Instructions on behalf of the Fund. An Authorized Person's scope of authority may be limited by setting forth such limitation in a written document signed by both parties hereto.
(d) "Book-Entry System" means the Federal Reserve Treasury
book-entry system for United States and federal agency securities, its successor or successors, and its nominee or nominees and any book-entry system registered with the SEC under the 1934 Act.
(e) "Oral Instructions" mean oral instructions received by PFPC Trust from an Authorized Person or from a person reasonably believed by PFPC Trust to be an Authorized Person. PFPC Trust may, in its sole discretion in each separate instance, consider and rely upon instructions it receives from an Authorized Person via electronic mail as Oral Instructions.
(f) "PFPC Trust" means PFPC Trust Company or a subsidiary or affiliate of PFPC Trust Company.
(g) "SEC" means the Securities and Exchange Commission.
(h) "Securities Laws" mean the 1933 Act, the 1934 Act and the 1940 Act.
(i) "Shares" mean the shares of beneficial interest of any series or class of the Fund.
(j) "Property" means:
(i) any and all securities and other investment items which the Fund may from time to time deposit, or cause to be deposited, with PFPC Trust or which PFPC Trust may from time to time hold for the Fund;
(ii) all income in respect of any of such securities or other investment items;
(iii) all proceeds of the sale of any of such securities or investment items; and (iv) all proceeds of the sale of securities issued by the Fund, which are received by PFPC Trust from time to time, from or on behalf of the Fund.
(k) "Written Instructions" mean (i) written instructions signed by two Authorized Persons and received by PFPC Trust or (ii)
trade instructions transmitted by means of an electronic transaction reporting system which requires the use of a password or other authorized identifier in order to gain access. The instructions may be delivered electronically or by hand, mail or facsimile sending device.
2. APPOINTMENT. The Fund hereby appoints PFPC Trust to provide custodian services to the Fund and PFPC Trust accepts such appointment and agrees to furnish such services.
3. COMPLIANCE WITH LAWS.
PFPC Trust undertakes to comply with material applicable requirements of the Securities Laws and material laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC Trust hereunder. Except as specifically set forth herein, PFPC Trust assumes no responsibility for such compliance by the Fund or any other entity.
4. INSTRUCTIONS.
(a) Unless otherwise provided in this Agreement, PFPC Trust shall act only upon Oral Instructions or Written Instructions.
(b) PFPC Trust shall be entitled to rely upon any Oral Instruction or Written Instruction it receives from an Authorized Person (or from a person reasonably believed by PFPC Trust to be an Authorized Person) pursuant to this Agreement. PFPC Trust may assume that any Oral Instructions or Written Instructions received hereunder are not in any way inconsistent with the provisions of organizational documents of the Fund or of any vote, resolution or proceeding of the Fund's board of directors or of the Fund's shareholders, unless and until PFPC Trust receives Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Trust Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC Trust or its affiliates) so that PFPC Trust receives the Written Instructions by the close of business on the same day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PFPC Trust or differ from the Oral Instructions shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions or PFPC Trust's ability to rely upon such Oral Instructions.
5. RIGHT TO RECEIVE ADVICE.
(a) Advice of the Fund. If PFPC Trust is in doubt as to any action it should or should not take, PFPC Trust may request directions or advice, including Oral Instructions or Written Instructions, from the Fund. The Fund shall pay the reasonable cost of any counsel retained by PFPC Trust with prior notice to the Fund.
(b) Advice of Counsel. If PFPC Trust shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC Trust may request advice from counsel of its own choosing (who may be counsel for the Fund, the Fund's investment adviser or PFPC Trust, at the option of PFPC Trust).
(c) Conflicting Advice. In the event of a conflict between directions or advice or Oral Instructions or Written Instructions PFPC Trust receives from the Fund, and the advice it receives from counsel, PFPC Trust shall be entitled to rely upon and follow the advice of counsel.
(d) Protection of PFPC Trust. PFPC Trust shall be indemnified by the Fund and without liability for any action PFPC Trust takes or does not take in reliance upon directions or advice or Oral Instructions or Written Instructions PFPC Trust receives from or on behalf of the Fund or from counsel and which PFPC Trust believes, in good faith, to be consistent with those directions or advice or Oral Instructions or Written Instructions. Nothing in this section shall be construed so as to impose an obligation upon PFPC Trust (i) to seek such directions or advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions or advice or Oral Instructions or Written Instructions.
6. RECORDS; VISITS.
(a) The books and records pertaining to the Fund, which are in the possession or under the control of PFPC Trust, shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations provided the Fund provides PFPC Trust with written notice of such laws, rules and regulations provided the Fund provides PFPC Trust with written notice of such laws, rules and regulations, other than the 1940 Act And The Internal Revenue Code Of 1986, as amended, that are applicable. The Fund and Authorized Persons shall have access to such books and records at all times during PFPC Trust's normal business hours upon reasonable advance notice. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC Trust to the Fund or to an authorized representative of the Fund, at the Fund's expense.
(b) PFPC Trust shall keep the following records:
(i) all books and records as are customarily maintained by the custodian for a registered investment company.
7. CONFIDENTIALITY. Each party shall keep confidential any information relating to the other party's business ("Confidential Information"). Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or PFPC Trust, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or PFPC Trust a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be subject to such confidentiality obligations if: (a) it is already known to the receiving party at the time it is obtained; (b) it is or becomes publicly known or available through no wrongful act of the receiving party; (c) it is rightfully received from a third party who, to the best of the receiving party's knowledge, is not under a duty of confidentiality; (d) it is released by the
protected party to a third party without restriction; (e) it is required to be disclosed by the receiving party pursuant to a requirement of a court order, subpoena, governmental or regulatory agency or law (provided the receiving party will provide the other party written notice of such requirement, to the extent such notice is permitted); (f) it is relevant to the defense of any claim or cause of action asserted against the receiving party; or (g) it has been or is independently developed or obtained by the receiving party.
8. COOPERATION WITH ACCOUNTANTS. PFPC Trust shall cooperate with the Fund's independent public accountants and shall take all reasonable action to make any requested information available to such accountants as reasonably requested by the Fund.
9. PFPC SYSTEM. PFPC Trust shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by PFPC Trust in connection with the services provided by PFPC Trust to the Fund.
10. DISASTER RECOVERY. PFPC Trust shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, PFPC Trust shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. PFPC Trust shall have no liability with respect to the loss of data or service interruptions caused by equipment failure provided such loss or interruption is not caused by PFPC Trust's own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement.
11. COMPENSATION. As compensation for custody services rendered by PFPC Trust during the term of this Agreement, the Fund will pay to PFPC Trust a fee or fees as may be agreed to in writing from time to time by the Fund and PFPC Trust. The Fund acknowledges that PFPC Trust may receive float benefits in connection with maintaining certain accounts required to provide services under this Agreement.
12. INDEMNIFICATION.
(a) The Fund agrees to indemnify, defend and hold harmless PFPC Trust and its affiliates, including their respective officers, directors, agents and employees from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, reasonable attorneys' fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) ("Claims") arising directly or indirectly from any action or omission to act which PFPC Trust takes in connection with the provision of services to the Fund. Neither PFPC Trust, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) caused by PFPC Trust's or its affiliates' own willful misfeasance, bad faith, negligence or reckless disregard in the performance of PFPC Trust's activities under this Agreement. The provisions of this Section 13 shall survive termination of this Agreement.
(b) Indemnification of the Fund. PFPC agrees to defend, indemnify and hold the Fund and its officers, directors and employees harmless from any and all Claims arising directly or indirectly from the negligence, bad faith or willful misfeasance of PFPC in the performance of its duties
hereunder. Notwithstanding the foregoing, the Fund shall not be indemnified against any Claim caused by the Fund's or the Fund's other service providers' willful misfeasance, bad faith or negligence.
(c) Indemnification Procedure.
(i) Notice of the Action. A party that seeks indemnification under this Agreement must promptly give the other party notice of any legal action; provided, however, that a delay in notice does not relieve an indemnifying party of any liability to an indemnified party, except to the extent the indemnifying party shows that the delay prejudiced the defense of the action.
(ii) Participating in or Assuming the Defense. The indemnifying party may participate in the defense at any time or it may assume the defense by giving notice to the other party. After assuming the defense, the indemnifying party:
(1) must select an attorney that is satisfactory to the other party;
(2) is not liable to the other party for any later attorney's fees or for any other later expenses that the other party incurs, except for reasonable investigation costs;
(3) must not compromise or settle the action without the other party's consent (but the other party must not unreasonably withhold its consent); and
(4) is not liable for any compromise or settlement made without its consent.
(iii) Failing to Assume the Defense. If the indemnifying party fails to participate in or assume the defense within 15 days after receiving notice of the action, the indemnifying party is bound by any determination made in the action or by any compromise or settlement made by the other party.
13. RESPONSIBILITY OF PFPC TRUST.
(a) PFPC Trust shall be under no duty to take any action hereunder on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PFPC Trust and the Fund in a written amendment hereto. PFPC Trust shall be obligated to exercise commercially reasonable care and diligence in the performance of its duties hereunder and to act in good faith in performing services provided for under this Agreement. PFPC Trust shall be liable only for any damages arising out of PFPC Trust's failure to perform its duties under this Agreement to the extent such damages arise out of PFPC Trust's willful misfeasance, bad faith, negligence or reckless disregard of its duties under this Agreement.
(b) Notwithstanding anything in this Agreement to the contrary,
(i) PFPC Trust shall not be liable for losses, delays,
failure, errors, interruption or loss of data occurring
directly or indirectly by reason of circumstances beyond its
reasonable control, including without limitation acts of God;
action or inaction of civil or military authority; public
enemy; war; terrorism; riot; fire; flood; sabotage; epidemics;
labor disputes; civil commotion; interruption, loss or
malfunction of utilities, transportation, computer or
communications capabilities; insurrection; elements of nature;
or non-performance by a third party; and (ii) PFPC Trust shall not be under any duty or obligation to inquire into and shall not be liable for the validity or invalidity, authority or lack thereof, or truthfulness or accuracy or lack thereof, of any instruction, direction, notice, instrument or other information which PFPC Trust reasonably believes to be genuine.
(c) Notwithstanding anything in this Agreement to the contrary, neither PFPC Trust nor its affiliates shall be liable for any consequential, special or indirect losses or damages, whether or not the likelihood of such losses or damages was known by PFPC Trust or its affiliates.
(d) Each party shall have a duty to mitigate damages for which the other party may become responsible.
(e) Notwithstanding anything in this Agreement to the contrary (other than as specifically provided in Section 15(h)(ii)(B)(4) and Section 15(h)(iii)(A) of this Agreement), the Fund shall be responsible for all filings, tax returns and reports on any transactions undertaken pursuant to this Agreement, or in respect of the Property or any collections undertaken pursuant to this Agreement, which may be requested by any relevant authority. In addition, the Fund shall be responsible for the payment of all taxes and similar items (including without limitation penalties and interest related thereto).
(f) The provisions of this Section 14 shall survive termination of this Agreement.
14. DESCRIPTION OF SERVICES.
(a) Delivery of the Property. The Fund will deliver or arrange for delivery to PFPC Trust, all the Property owned by the Fund,
including cash received as a result of the distribution of Shares, during the term of this Agreement. PFPC Trust will not be responsible for such property until actual receipt.
(b) Receipt and Disbursement of Money. PFPC Trust, acting upon Written Instructions, shall open and maintain separate accounts in the Fund's name using all cash received from or for the account of the Fund, subject to the terms of this Agreement.
PFPC Trust shall make cash payments from or for the Account of the Fund only for:
(i) purchases of securities in the name of the Fund, PFPC Trust, PFPC Trust's nominee or a sub-custodian or nominee thereof as provided in sub-section (j) and for which PFPC Trust has received a copy of the broker's or dealer's confirmation or payee's invoice, as appropriate;
(ii) purchase or redemption of Shares of the Fund delivered to PFPC Trust;
(iii) payment of, subject to Written Instructions, interest, taxes (provided that tax which PFPC Trust considers is required to be deducted or withheld "at source" will be governed by Section 15(h)(iii)(B) of this Agreement), administration, accounting, distribution, advisory, license and management fees which are to be borne by the Fund;
(iv) payment to, subject to receipt of Written Instructions, the Fund's transfer agent, as agent for the shareholders, of an amount equal to the amount of dividends and distributions stated in the Written Instructions to be distributed in cash by the transfer agent to shareholders, or, in lieu of paying the Fund's transfer agent, PFPC Trust may arrange for the direct payment of cash dividends and distributions to shareholders in accordance with procedures mutually agreed upon from time to time by and among the Fund, PFPC Trust and the Fund's transfer agent;
(v) payments, upon receipt of Written Instructions, in connection with the conversion, exchange or surrender of securities owned or subscribed to by the Fund and held by or delivered to PFPC Trust;
(vi) payments of the amounts of dividends received with respect to securities sold short;
(vii) payments to PFPC Trust for its services hereunder;
(viii) payments to a sub-custodian pursuant to provisions in sub-section (c) of this Section; and
(ix) other payments, upon Written Instructions.
PFPC Trust is hereby authorized to endorse and collect all checks, drafts or other orders for the payment of money received as custodian for the Account.
(c) Receipt of Securities; Subcustodians.
(i) PFPC Trust shall hold all securities received by it for the Account in a separate account that physically segregates such securities from those of any other persons, firms or corporations, except for securities held in a Book-Entry System or through a sub-custodian or depository. All such securities shall be held or disposed of only upon Written Instructions of the Fund pursuant to the terms of this Agreement. PFPC Trust shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such securities or investment, except upon the express terms of this Agreement or upon Written Instructions authorizing the transaction. In no case may any member of the Fund's board of directors, or any officer, employee or agent of the Fund withdraw any securities.
At PFPC Trust's own expense and for its own convenience, PFPC Trust may enter into sub-custodian agreements with other banks or trust companies to perform duties described in this sub-section (c) with respect to domestic assets. Such bank or trust company shall have an aggregate capital, surplus and undivided profits, according to its last published report, of at least one million dollars ($1,000,000), if it is a subsidiary or affiliate of PFPC Trust, or at least twenty million dollars ($20,000,000) if such bank or trust company is not a subsidiary or affiliate of PFPC Trust. In addition, such bank or trust company must be qualified to act as custodian and agree to comply with the relevant provisions of applicable rules and regulations. Any such arrangement will not be entered into without prior written notice to the Fund (or as otherwise provided in the 1940 Act).
In addition, PFPC Trust may enter into arrangements with sub-custodians with respect to services
regarding foreign assets. Any such arrangement will not be entered into without prior written notice to the Fund (or as otherwise provided in the 1940 Act).
PFPC Trust shall remain responsible for the acts and omissions of any sub-custodian chosen by PFPC Trust under the terms of this sub-section (c) to the same extent that PFPC Trust is responsible for its own acts and omissions under this Agreement.
(d) Transactions Requiring Instructions. Upon receipt of Oral Instructions or Written Instructions and not otherwise, PFPC Trust shall:
(i) deliver any securities held for the Fund against the receipt of payment for the sale of such securities or otherwise in accordance with standard market practice;
(ii) execute and deliver to such persons as may be designated in such Oral Instructions or Written Instructions, proxies, consents, authorizations, and any other instruments whereby the authority of the Fund as owner of any securities may be exercised;
(iii) deliver any securities to the issuer thereof, or its agent, when such securities are called, redeemed, retired or otherwise become payable at the option of the holder; provided that, in any such case, the cash or other consideration is to be delivered to PFPC Trust;
(iv) deliver any securities held for the Fund against receipt of other securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, tender offer, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege;
(v) deliver any securities held for the Fund to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, and receive and hold under the terms of this Agreement such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery;
(vi) make such transfer or exchanges of the assets of the Fund and take such other steps as shall be stated in said Oral Instructions or Written Instructions to be for the purpose of effectuating a duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Fund;
(vii) release securities belonging to the Fund to any bank or trust company for the purpose of a pledge or hypothecation to secure any loan incurred by the Fund; provided, however, that securities shall be released only upon payment to PFPC Trust of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made subject to proper prior authorization, further securities may be released for that purpose; and repay such loan upon redelivery to it of the securities pledged or hypothecated therefor and upon surrender of the note or notes evidencing the loan;
(viii) release and deliver securities owned by the Fund in connection with any repurchase agreement entered into by the Fund, but only on receipt of payment therefor; and pay out monies of the Fund in connection with such repurchase agreements, but only upon the delivery of the securities;
(ix) release and deliver or exchange securities owned by the Fund in connection with any conversion of such securities, pursuant to their terms, into other securities;
(x) release and deliver securities to a broker in connection with the broker's custody of margin collateral relating to futures and options transactions;
(xi) release and deliver securities owned by the Fund for the purpose of redeeming in kind shares of the Fund upon delivery thereof to PFPC Trust; and
(xii) release and deliver or exchange securities owned by the Fund for other purposes.
PFPC Trust must also receive a certified resolution describing the nature of the corporate purpose and the name and address of the person(s) to whom delivery shall be made when such action is pursuant to sub-paragraph d(xii).
(e) Use of Book-Entry System or Other Depository. PFPC Trust is authorized and instructed, on a continuous basis, to deposit in Book-Entry Systems and other depositories all securities belonging to the Fund eligible for deposit therein and to utilize Book-Entry Systems and other depositories to the extent possible in connection with settlements of purchases
and sales of securities by the Fund, and deliveries and returns of securities loaned, subject to repurchase agreements or used as collateral in connection with borrowings. PFPC Trust shall continue to perform such duties until it receives Written Instructions or Oral Instructions authorizing contrary actions. Notwithstanding anything in this Agreement to the contrary, PFPC Trust's use of a Book-Entry System shall comply with the requirements of Rule 17f-4 under the 1940 Act.
PFPC Trust shall administer a Book-Entry System or other depository as follows:
(i) With respect to securities of the Fund which are maintained in a Book-Entry System or another depository, the records of PFPC Trust shall identify by book-entry or otherwise those securities belonging to the Fund.
(ii) Assets of the Fund deposited in a Book-Entry System or another depository will (to the extent consistent with applicable law and standard practice) at all times be segregated from any assets and cash controlled by PFPC Trust in other than a fiduciary or custodian capacity but may be commingled with other assets held in such capacities.
PFPC Trust will provide the Fund with such reports on its own system of internal control as the Fund may reasonably request from time to time.
(f) Registration of Securities. All Securities held for the Fund which are issued or issuable only in bearer form, except such securities held in the Book-Entry System or in another depository, shall be held by PFPC Trust in bearer form; all other securities held for the Fund may be registered in the name of the Fund, PFPC Trust, a Book-Entry System, another depository, a sub-custodian, or any duly appointed nominee of the Fund, PFPC Trust, Book-Entry System, depository or sub-custodian. The Fund reserves the right to instruct PFPC
Trust as to the method of registration and safekeeping of the securities of the Fund. The Fund agrees to furnish to PFPC Trust appropriate instruments to enable PFPC Trust to hold or deliver in proper form for transfer, or to register in the name of its nominee or in the name of the Book-Entry System or in the name of another appropriate entity, any securities which it may hold for the Account.
(g) Voting and Other Action. Neither PFPC Trust nor its nominee shall vote any of the securities held pursuant to this Agreement by or for the account of the Fund, except in accordance with Written Instructions. PFPC Trust, directly or through the use of another entity, shall execute in blank and promptly deliver all notices, proxies and proxy soliciting materials received by PFPC Trust as custodian of the Property to the registered holder of such securities. If the registered holder is not the Fund, then Written Instructions or Oral Instructions must designate the person who owns such securities.
(h) Transactions Not Requiring Instructions. In the absence of contrary Written Instructions, PFPC Trust is authorized to take the following actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of the Fund, all income, dividends, distributions, coupons, option premiums, other payments and similar items, included or to be included in the Property, and, in addition, promptly advise the Fund of such receipt and credit such income to the Fund's custodian account;
(B) endorse and deposit for collection, in the name of the Fund, checks, drafts, or other orders for the payment of money;
(C) receive and hold for the account of the Fund all securities received as a distribution on
the Fund's securities as a result of a stock
dividend, share split-up or reorganization,
recapitalization, readjustment or other
rearrangement or distribution of rights or
similar securities issued with respect to
any securities belonging to the Fund and
held by PFPC Trust hereunder;
(D) present for payment and collect the amount
payable upon all securities which may mature
or be called, redeemed, retired or otherwise
become payable (on a mandatory basis) on the
date such securities become payable; and
(E) take any action which may be necessary and
proper in connection with the collection and
receipt of such income and other payments
and the endorsement for collection of
checks, drafts, and other negotiable
instruments.
(ii) Miscellaneous Transactions.
(A) PFPC Trust is authorized to deliver or cause to be delivered Property against payment or other consideration or written receipt therefor in the following cases:
(1) for examination by a broker or dealer selling for the account of the Fund in accordance with street delivery custom;
(2) for the exchange of interim receipts or temporary securities for definitive securities; and
(3) for transfer of securities into the name of the Fund or PFPC Trust or a sub-custodian or a nominee of one of the foregoing, or for exchange of securities for a different number of bonds, certificates, or other evidence, representing the same aggregate face amount or number of units bearing the same interest rate, maturity date and call provisions, if any; provided that, in any such case, the new securities are to be delivered to PFPC Trust.
(B) unless and until PFPC Trust receives Oral Instructions or Written Instructions to the contrary, PFPC Trust shall:
(1) pay all income items held by it which call for payment upon presentation and hold the cash received by it upon such payment for the account of the Fund;
(2) collect interest and cash dividends received, with notice to the Fund, to the account of the Fund;
(3) hold for the account of the Fund all stock dividends, rights and similar securities issued with respect to any securities held by PFPC Trust; and
(4) subject to receipt of such documentation and information as PFPC Trust may request, execute as agent on behalf of the Fund all necessary ownership certificates required by a national governmental taxing authority or under the laws of any U.S. state now or hereafter in effect, inserting the Fund's name on such certificate as the owner of the securities covered thereby, to the extent it may lawfully do so.
(iii) Other Matters.
(A) subject to receipt of such documentation and information as PFPC Trust may request, PFPC Trust will, in such jurisdictions as PFPC Trust may agree from time to time, seek to reclaim or obtain a reduction with respect to any withholdings or other taxes relating to assets maintained hereunder (provided that PFPC Trust will not be liable for failure to obtain any particular relief in a particular jurisdiction); and
(B) PFPC Trust is authorized to deduct or withhold any sum in respect of tax which PFPC Trust considers is required to be deducted or withheld "at source" by any relevant law or practice.
(i) Segregated Accounts.
(i) PFPC Trust shall upon receipt of Written Instructions or Oral Instructions establish and maintain segregated accounts on its records for and on behalf of the Fund. Such accounts may be used to transfer cash and securities, including securities in a Book-Entry System or other depository:
(A) for the purposes of compliance by the Fund with the procedures required by a securities or option exchange, providing such procedures comply with the 1940 Act and any releases of the SEC relating to the
maintenance of segregated accounts by
registered investment companies; and
(B) upon receipt of Written Instructions, for
other purposes.
(ii) PFPC Trust shall arrange for the establishment of IRA custodian accounts for such shareholders holding Shares through IRA accounts, in accordance with the Fund's prospectuses, the Internal Revenue Code of 1986, as amended (including regulations promulgated thereunder), and with such other procedures as are mutually agreed upon from time to time by and among the Fund, PFPC Trust and the Fund's transfer agent.
(j) Purchases of Securities. PFPC Trust shall settle purchased securities upon receipt of Oral Instructions or Written Instructions that specify:
(i) the name of the issuer and the title of the securities, including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through whom the purchase was made. PFPC Trust shall upon receipt of securities purchased by or for the Fund (or otherwise in accordance with standard market practice) pay out of the monies held for the account of the Fund the total amount payable to the person from whom or the broker through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Oral Instructions or Written Instructions.
(k) Sales of Securities. PFPC Trust shall settle sold securities upon receipt of Oral Instructions or Written Instructions that specify:
(i) the name of the issuer and the title of the security, including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and accrued interest, if any;
(iii) the date of trade and settlement;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to whom the sale was made; and
(vii) the location to which the security must be delivered and delivery deadline, if any.
PFPC Trust shall deliver the securities upon receipt of the total amount payable to the Fund upon such sale, provided that the total amount payable is the same as was set forth in the Oral Instructions or Written Instructions. Notwithstanding the other provisions thereof, PFPC Trust may accept payment in such form as is consistent with standard industry practice and may deliver securities and arrange for payment in accordance with the customs prevailing among dealers in securities.
(l) Reports; Proxy Materials.
(i) PFPC Trust shall furnish to the Fund the following reports:
(A) such periodic and special reports as the Fund may reasonably request;
(B) a monthly statement summarizing all transactions and entries for the account of the Fund, listing each portfolio security belonging to the Fund (with the corresponding security identification number) held at the end of such month and stating the cash balance of the Fund at the end of such month.
(C) the reports required to be furnished to the Fund pursuant to Rule 17f-4 of the 1940 Act; and
(D) such other information as may be agreed upon from time to time between the Fund and PFPC Trust.
(ii) PFPC Trust shall transmit promptly to the Fund any proxy statement, proxy material, notice of a call or conversion or similar communication received by it as custodian of the Property. PFPC Trust shall be under no other obligation to inform the Fund as to such actions or events. For clarification, upon termination of this Agreement PFPC Trust shall have no responsibility to transmit such material or to inform the Fund or any other person of such actions or events.
(m) Crediting of Accounts. PFPC Trust may in its sole discretion credit an Account with respect to income, dividends, distributions, coupons, option premiums, other payments or similar items prior to PFPC Trust's actual receipt thereof, and in addition PFPC Trust may in its sole discretion credit or debit the assets in an Account on a contractual settlement date with respect to any sale, exchange or purchase applicable to the Account; provided that nothing herein or otherwise shall require PFPC Trust to make any advances or to credit any amounts until PFPC Trust's actual receipt thereof. If PFPC Trust in its sole discretion credits an Account with respect to (a) income, dividends, distributions, coupons, option premiums, other payments or similar items on a contractual payment date or otherwise in advance of PFPC Trust's actual receipt of the amount due, (b) the proceeds of any sale or other disposition of assets on the contractual settlement date or otherwise in advance of PFPC Trust's actual receipt of the amount due or (c) provisional crediting of any amounts due, and (i) PFPC Trust is subsequently unable to collect full and
final payment for the amounts so credited within a reasonable time period using reasonable efforts or (ii) pursuant to standard industry practice, law or regulation PFPC Trust is required to repay to a third party such amounts so credited, or if any Property has been incorrectly credited, PFPC Trust shall have the absolute right in its sole discretion without demand to reverse any such credit or payment, to debit or deduct the amount of such credit or payment from the Account, and to otherwise pursue recovery of any such amounts so credited from the Fund. The Fund hereby grants a first priority contractual possessory security interest in and a right of setoff against the assets maintained in an Account hereunder in the amount necessary to secure the return and payment to PFPC Trust of any advance or credit made by PFPC Trust (including charges related thereto) to such Account.
(n) Collections. All collections of monies or other property in respect, or which are to become part, of the Property (but not the safekeeping thereof upon receipt by PFPC Trust) shall be at the sole risk of the Fund. If payment is not received by PFPC Trust within a reasonable time after proper demands have been made, PFPC Trust shall notify the Fund in writing, including copies of all demand letters, any written responses and memoranda of all oral responses and shall await instructions from the Fund. PFPC Trust shall not be obliged to take legal action for collection unless and until reasonably indemnified to its satisfaction. PFPC Trust shall also notify the Fund as soon as reasonably practicable whenever income due on securities is not collected in due course and shall provide
the Fund with periodic status reports of such income collected after a reasonable time.
(o) Foreign Exchange.
PFPC Trust and/or sub-custodians may enter into or arrange foreign exchange transactions (at such rates as they may consider appropriate) in order to facilitate transactions under this Agreement, and such entities and/or their affiliates may receive compensation in connection with such foreign exchange transactions.
15. DURATION AND TERMINATION.
(a) This Agreement shall have an initial term of five (5) years from the date of execution. (the "Initial Term").
(b) Upon the expiration of the Initial Term, this Agreement shall automatically renew for successive terms of one (1) year ("Renewal Terms") each, unless the Fund or PFPC provides written notice to the other of its intent not to renew. Such notice must be received not less than ninety (90) days prior to the expiration of the Initial Term or the then current Renewal Term.
(c) If a party hereto is guilty of a material failure to perform its duties and obligations hereunder (a "Defaulting Party") the other party (the "Non-Defaulting Party") may give written notice thereof to the Defaulting Party, and if such material breach shall not have been remedied within thirty (30) days after such written notice is given, then the Non-Defaulting Party may terminate this Agreement by giving thirty (30) days written notice of such termination to the Defaulting Party. In all cases, termination by the Non-Defaulting Party shall not
constitute a waiver by the Non-Defaulting Party of any other rights it might have under this Agreement or otherwise against the Defaulting Party.
In the event this Agreement is terminated (pending appointment of a successor to PFPC Trust or vote of the shareholders of the Fund to dissolve or to function without a custodian of its cash, securities or other property), PFPC Trust shall not deliver cash, securities or other property of the Fund to the Fund. It may deliver them to a bank or trust company of PFPC Trust's choice, having an aggregate capital, surplus and undivided profits, as shown by its last published report, of not less than twenty million dollars ($20,000,000), as a custodian for the Fund to be held under terms similar to those of this Agreement. PFPC Trust shall not be required to make any delivery or payment of assets upon termination until full payment shall have been made to PFPC Trust of all of its fees, compensation, costs and expenses (such expenses include, without limitation, expenses associated with movement (or duplication) of records and materials and conversion thereof to a successor service provider, or to a bank or trust company pending appointment of such successor, and all trailing expenses incurred by PFPC Trust). PFPC Trust shall have a security interest in and shall have a right of setoff against the Property as security for the payment of such fees, compensation, costs and expenses.
16. NOTICES. Notices shall be addressed (a) if to PFPC Trust at 8800 Tinicum Boulevard, 3rd Floor, Philadelphia, Pennsylvania 19153, Attention: Sam Sparhawk; (b) if to the Fund, at 1001 Warrenville Road, Lisle, IL 60532, Attention: W. Scott Jardine; or (c) if to neither of
the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party. If notice is sent by confirming electronic, hand or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given five days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.
17. AMENDMENTS. This Agreement, or any term hereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.
18. DELEGATION; ASSIGNMENT. PFPC Trust may assign its rights and delegate its duties hereunder to any affiliate of PFPC Trust or of The PNC Financial Services Group, Inc., provided that PFPC Trust gives the Fund 30 days' prior written notice of such assignment or delegation.
19. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
20. MISCELLANEOUS.
(a) Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties.
(b) No Representations or Warranties. Except as expressly provided in this Agreement, PFPC Trust hereby disclaims all representations and warranties, express or implied, made to the Fund or any other person, including, without limitation, any warranties regarding quality, suitability, merchantability, fitness for a particular purpose or otherwise (irrespective of any course of dealing, custom or usage of trade), of any services or any goods provided incidental to services provided under this Agreement. PFPC Trust disclaims any warranty of title or non-infringement except as otherwise set forth in this Agreement.
(c) No Changes that Materially Affect Obligations. Notwithstanding anything in this Agreement to the contrary, the Fund agrees not to make any modifications to its registration statement or adopt any policies which would affect materially the obligations or responsibilities of PFPC Trust hereunder without the prior written approval of PFPC Trust, which approval shall not be unreasonably withheld or delayed.
(d) Captions. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
(e) Information. The Fund will provide such information and documentation as PFPC Trust may reasonably request in connection with services provided by PFPC Trust to the Fund.
(f) Governing Law. This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.
(g) Partial Invalidity. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
(h) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.
(i) Facsimile Signatures. The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.
(j) The Fund and PFPC Trust agree that the obligations of the Fund under the Agreement shall not be binding upon any of the directors, shareholders, nominees, officers, employees or agents, whether past, present or future, of the Fund individually, but are binding only upon the assets and property of the Fund (or applicable series thereof), as provided in the Declaration of Trust. The execution and delivery of this Agreement have been authorized by the directors of the Fund, and signed by an authorized officer of the Fund, acting as such, and neither such authorization by such directors nor such execution and delivery by such officer shall be deemed to have been made by any of them or any shareholder of the Fund individually or to impose any liability on any of them or any shareholder of the Fund personally, but shall bind only the assets and property of the Fund (or applicable series thereof), as provided in the Articles of Incorporation or Declaration of Trust.
(k) Customer Identification Program Notice. To help the U.S. government fight the funding of terrorism and money laundering activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain information that identifies each person who initially opens an account with that financial institution on or after October 1, 2003. Consistent with this requirement, PFPC Trust may request (or may have already requested) the Fund's name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party's date of birth. PFPC Trust may also ask (and may have already asked) for additional identifying information, and PFPC Trust may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.
PFPC TRUST COMPANY
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY
INCOME FUND
TRANSFER AGENCY SERVICES AGREEMENT
THIS AGREEMENT is made as of November 23, 2004 by and between PFPC INC., a Massachusetts corporation ("PFPC"), FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND, a Massachusetts business trust (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as a closed-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(c) "Authorized Person" means any officer of the Fund and any other person duly authorized by the Fund to give Oral Instructions and Written Instructions on behalf of the Fund. An Authorized Person's scope of authority may be limited by setting forth such limitation in a written document signed by both parties hereto.
(d) "Oral Instructions" mean oral instructions received by PFPC from an Authorized Person or from a person reasonably believed by PFPC to be an Authorized Person. PFPC may, in its sole discretion in each separate instance, consider and rely upon instructions it receives from an Authorized Person via electronic mail as Oral Instructions.
(e) "SEC" means the Securities and Exchange Commission.
(f) "Securities Laws" mean the 1933 Act, the 1934 Act and the 1940 Act.
(g) "Shares" mean the shares of beneficial interest of any series or class of the Fund.
(h) "Written Instructions" mean (i) written instructions signed by an Authorized Person and received by PFPC or (ii) trade instructions transmitted (and received by PFPC) by means of an electronic transaction reporting system access to which requires use of a password or other authorized identifier. The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device.
2. APPOINTMENT. The Fund hereby appoints PFPC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to the Fund in accordance with the terms set forth in this Agreement. PFPC accepts such appointment and agrees to furnish such services.
3. COMPLIANCE WITH RULES AND REGULATIONS. PFPC undertakes to comply with all applicable requirements of the Securities Laws and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC hereunder. Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by the Fund or any other entity.
4. INSTRUCTIONS.
(a) Unless otherwise provided in this Agreement, PFPC shall act only upon Oral Instructions or Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instruction or Written Instruction it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized
Person) pursuant to this Agreement. PFPC may assume that any
Oral Instruction or Written Instruction received hereunder is
not in any way inconsistent with the provisions of
organizational documents or this Agreement or of any vote,
resolution or proceeding of the Fund's board of directors or
of the Fund's shareholders, unless and until PFPC receives
Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the Written
Instructions by the close of business on the same day that
such Oral Instructions are received. The fact that such
confirming Written Instructions are not received by PFPC or
differ from the Oral Instructions shall in no way invalidate
the transactions or enforceability of the transactions
authorized by the Oral Instructions or PFPC's ability to rely
upon such Oral Instructions.
5. RIGHT TO RECEIVE ADVICE.
(a) Advice of the Fund. If PFPC is in doubt as to any action it
should or should not take, PFPC may request directions or
advice, including Oral Instructions or Written Instructions,
from the Fund. The Fund shall pay the reasonable cost of any
counsel retained by PFPC with prior notice to the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any
question of law pertaining to any action it should or should
not take, PFPC may request advice from counsel of its own
choosing (who may be counsel for the Fund, the Fund's
investment adviser or PFPC, at the option of PFPC).
|
(c) Conflicting Advice. In the event of a conflict between directions or advice or Oral Instructions or Written Instructions PFPC receives from the Fund, and the advice it receives from counsel, PFPC may rely upon and follow the advice of counsel.
(d) Protection of PFPC. PFPC shall be indemnified by the Fund and without liability for any action PFPC takes or does not take in reliance upon directions or advice or Oral Instructions or Written Instructions PFPC receives from or on behalf of the Fund or from counsel and which PFPC believes, in good faith, to be consistent with those directions or advice or Oral Instructions or Written Instructions. Nothing in this section shall be construed so as to impose an obligation upon PFPC (i) to seek such directions or advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions or advice or Oral Instructions or Written Instructions.
6. RECORDS; VISITS.
(a) The books and records pertaining to the Fund, which are in the possession or under the control of PFPC, shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations provided the Fund provides PFPC with written notice of such laws, rules and regulations, other than the 1940 Act and the Internal Revenue Code of 1986, as amended, that are applicable. The Fund and Authorized Persons shall have access to such books and records at all times during PFPC's normal business hours upon reasonable advance notice. Upon the reasonable request of the Fund, copies of any such books and records shall be provided
by PFPC to the Fund or to an Authorized Person, at the Fund's expense.
(b) PFPC shall keep the following records:
(i) all books and records as are customarily maintained by the transfer agent for a registered investment company.
7. CONFIDENTIALITY. Each party shall keep confidential any information relating to the other party's business ("Confidential Information"). Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or PFPC, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or PFPC a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be subject to such confidentiality obligations if: (a) release of such information is necessary or desirable in connection with PFPC's provision of services under this Agreement; (b) it is already known to the receiving party at the time it is obtained; (c) it is or becomes publicly known or available through no wrongful act of the receiving party; (d) it is rightfully received from a third party who, to the best of the receiving party's knowledge, is not under a duty of
confidentiality; (e) it is released by the protected party to a third
party without restriction; (f) it is required to be disclosed by the
receiving party pursuant to a requirement of a court order, subpoena,
governmental or regulatory agency or law (provided the receiving party
will provide the other party written notice of such requirement, to the
extent such notice is permitted); (g) it is relevant to the defense of
any claim or cause of action asserted against the receiving party; or
(h) it has been or is independently developed or obtained by the
receiving party.
8. COOPERATION WITH ACCOUNTANTS. PFPC shall cooperate with the Fund's independent public accountants and shall take all reasonable actions in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund.
9. PFPC SYSTEM. PFPC shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by PFPC in connection with the services provided by PFPC to the Fund.
10. DISASTER RECOVERY. PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, PFPC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. PFPC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PFPC's own willful misfeasance, bad
faith, negligence or reckless disregard of its duties or obligations under this Agreement.
11. COMPENSATION. As compensation for services rendered by PFPC during the term of this Agreement, the Fund will pay to PFPC a fee or fees as may be agreed to from time to time in writing by the Fund and PFPC. The Fund acknowledges that PFPC may receive float benefits and/or investment earnings in connection with maintaining certain accounts required to provide services under this Agreement.
12. INDEMNIFICATION.
(a) The Fund agrees to indemnify, defend and hold harmless PFPC and its affiliates, including their respective officers, directors, agents and employees, from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, reasonable attorneys' fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) ("Claims") arising directly or indirectly from any action or omission to act which PFPC takes in connection with the provision of services to the Fund. Neither PFPC, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) caused by PFPC's or its affiliates' own willful misfeasance, bad faith, negligence or reckless disregard in the performance of PFPC's activities under this Agreement, provided that in the absence of a finding to the contrary the acceptance, processing and/or negotiation of a fraudulent payment for the purchase of Shares shall be presumed not to have been the result of PFPC's or its affiliates own willful misfeasance, bad faith, negligence or reckless disregard of such duties and obligations. The provisions of this Section 12 shall survive termination of this Agreement.
(b) Indemnification of the Fund. PFPC agrees to defend, indemnify and hold the Fund and its officers, directors and employees harmless from any and all Claims arising directly or indirectly from the negligence, bad faith or willful misfeasance of PFPC in the performance of its duties hereunder. Notwithstanding the foregoing, the Fund shall not be indemnified against any Claim caused by the Fund's or the Fund's other service providers' willful misfeasance, bad faith or negligence.
(c) Indemnification Procedure.
(i) Notice of the Action. A party that seeks indemnification under this Agreement must promptly give the other party notice of any legal action; provided, however, that a delay in notice does not relieve an indemnifying party of any liability to an indemnified party, except to the extent the indemnifying party shows that the delay prejudiced the defense of the action.
(ii) Participating in or Assuming the Defense. The indemnifying party may participate in the defense at any time or it may assume the defense by giving notice to the other party. After assuming the defense, the indemnifying party:
(1) must select an attorney that is satisfactory to the other party;
(2) is not liable to the other party for any later attorney's fees or for any other later expenses that the other party incurs, except for reasonable investigation costs;
(3) must not compromise or settle the action without the other party's consent (but the other party must not unreasonably withhold its consent); and
(4) is not liable for any compromise or settlement made without its consent.
(iii) Failing to Assume the Defense. If the indemnifying party fails to participate in or assume the defense within 15 days after receiving notice of the action, the indemnifying party is bound by any determination made in the action or by any compromise or settlement made by the other party.
13. RESPONSIBILITY OF PFPC.
(a) PFPC shall be under no duty to take any action hereunder on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PFPC and the Fund in a written amendment hereto. PFPC shall be obligated to exercise commercially reasonable care and diligence in the performance of its duties hereunder and to act in good faith in performing services provided for under this Agreement. PFPC shall be liable only for any damages arising out of PFPC's failure to perform its duties under this Agreement to the extent such damages arise out of PFPC's willful misfeasance, bad faith, negligence or reckless disregard of such duties.
(b) Notwithstanding anything in this Agreement to the contrary,
(i) PFPC shall not be liable for losses, delays, failure,
errors, interruption or loss of data occurring directly or
indirectly by reason of circumstances beyond its reasonable
control, including without limitation acts of God; action or
inaction of civil or military authority; public enemy; war;
terrorism; riot; fire; flood; sabotage; epidemics; labor
disputes; civil commotion; interruption, loss or malfunction
of utilities, transportation, computer or communications
capabilities; insurrection; elements of nature; or
non-performance by a third party; and (ii) PFPC shall not be
under any duty or obligation to inquire into and shall not be liable for the validity or invalidity, authority or lack thereof, or truthfulness or accuracy or lack thereof, of any instruction, direction, notice, instrument or other information which PFPC reasonably believes to be genuine.
(c) Notwithstanding anything in this Agreement to the contrary, neither PFPC nor its affiliates shall be liable for any consequential, special or indirect losses or damages, whether or not the likelihood of such losses or damages was known by PFPC or its affiliates.
(d) Each party shall have a duty to mitigate damages for which the other party may become responsible.
(e) The provisions of this Section 13 shall survive termination of this Agreement.
14. DESCRIPTION OF SERVICES.
(a) Services Provided on an Ongoing Basis, If Applicable.
(i) Maintain shareholder registrations;
(ii) Provide toll-free lines for shareholders relating to shareholder accounts;
(iii) Provide periodic shareholder lists and statistics;
(iv) Mailing of year-end tax information; and
(v) Periodic mailing of shareholder dividend reinvestment plan account information and Fund financial reports.
(b) Dividends and Distributions. PFPC must receive a resolution of the Fund's board of directors authorizing the declaration and payment of dividends and distributions. Upon receipt of the resolution, PFPC shall issue the dividends and distributions in cash, or, if the resolution so provides, pay such dividends
and distributions in Shares. Such issuance or payment shall be made after deduction and payment of the required amount of funds to be withheld in accordance with any applicable tax laws or other laws, rules or regulations. PFPC shall timely send to the Fund's shareholders tax forms and other information, or permissible substitute notice, relating to dividends and distributions, paid by the Fund as are required to be filed and mailed by applicable law, rule or regulation.
PFPC shall maintain and file with the United States Internal Revenue Service and other appropriate taxing authorities reports relating to all dividends above a stipulated amount (currently $10.00 accumulated yearly dividends) paid by the Fund to its shareholders as required by tax or other law, rule or regulation.
In accordance with the Prospectus and such procedures and controls as are mutually agreed upon from time to time by and among the Fund, PFPC and the Fund's Custodian, PFPC shall process applications from Shareholders relating to the Fund's Dividend Reinvestment Plan ("Dividend Reinvestment Plan") and will effect purchases of Shares in connection with the Dividend Reinvestment Plan. As the dividend disbursing agent, PFPC shall, on or before the payment date of any such dividend or distribution, notify the fund accounting agent of the estimated amount required to pay any portion of said dividend or distribution which is payable in cash, and on or before the payment date of such distribution, the Fund shall instruct the custodian to make available to the dividend disbursing agent sufficient funds for the cash amount to be paid out. If a shareholder is entitled to receive additional Shares, by virtue of any distribution or dividend, appropriate credits will be made to his or her account and/or certificates
delivered where requested, all in accordance with the Dividend Reinvestment Plan.
(c) Communications to Shareholders. Upon timely written instructions, PFPC shall mail all communications by the Fund to its shareholders, including:
(i) Reports to shareholders;
(ii) Monthly or quarterly dividend reinvestment plan statements;
(iii) Dividend and distribution notices;
(iv) Proxy material; and
(v) Tax form information.
PFPC will receive and tabulate the proxy cards for the meetings of the Fund's shareholders.
(d) Records. PFPC shall maintain records of the accounts for each shareholder showing the following information:
(i) Name, address and United States Tax Identification or Social Security number;
(ii) Number and class of shares held and number and class of shares for which certificates, if any, have been issued, including certificate numbers and denominations;
(iii) Historical information regarding the account of each shareholder, including dividends and distributions paid and the date and price for all transactions on a shareholder's account;
(iv) Any stop or restraining order placed against a shareholder's account;
(v) Any correspondence relating to the current maintenance of a shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for the transfer agent to perform any calculations contemplated or required by this Agreement.
(e) Shareholder Inspection of Stock Records. Upon requests from Fund shareholders to inspect stock records, PFPC will notify the Fund and require instructions granting or denying each such request. Unless PFPC has acted contrary to the Fund's instructions, the Fund agrees to release PFPC from any liability for refusal of permission for a particular shareholder to inspect the Fund's shareholder records.
15. DURATION AND TERMINATION.
(a) This Agreement shall have an initial term of five (5) years from the date of execution. (the "Initial Term").
(b) Upon the expiration of the Initial Term, this Agreement shall automatically renew for successive terms of one (1) year ("Renewal Terms") each, unless the Fund or PFPC provides written notice to the other of its intent not to renew. Such notice must be received not less than ninety (90) days prior to the expiration of the Initial Term or the then current Renewal Term.
(c) In the event a termination notice is given by the Fund, all expenses associated with movement of records and materials and conversion thereof to a successor transfer agent(s) (and any other service provider(s)), and all trailing expenses incurred by PFPC, will be borne by the Fund.
(d) If a party hereto is guilty of a material failure to perform its duties and obligations hereunder (a "Defaulting Party") the other party (the "Non-Defaulting Party") may give written notice thereof to the Defaulting Party, and if such material breach shall not have been remedied within thirty (30) days after such written notice is given, then the Non-Defaulting Party may terminate this Agreement by giving thirty (30) days
written notice of such termination to the Defaulting Party. In all cases, termination by the Non-Defaulting Party shall not constitute a waiver by the Non-Defaulting Party of any other rights it might have under this Agreement or otherwise against the Defaulting Party.
16. NOTICES. Notices shall be addressed (a) if to PFPC, at 400 Bellevue Parkway, Wilmington, Delaware 19809, Attention: President; (b) if to the Fund, at 1001 Warrenville Road, Lisle, IL 60532, Attention: W. Scott Jardine or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.
17. AMENDMENTS. This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.
18. DELEGATION; ASSIGNMENT. PFPC may assign its rights and delegate its duties hereunder to any majority-owned direct or indirect subsidiary of PFPC or of The PNC Financial Services Group, Inc., provided that PFPC gives the Fund 30 days prior written notice of such assignment or delegation. In addition, PFPC may, in its sole discretion, engage subcontractors to perform any of the obligations contained in this Agreement to be performed by PFPC, provided, however, PFPC shall remain responsible for the acts or omissions of any such sub-contractors.
19. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
20. FURTHER ACTIONS. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.
21. MISCELLANEOUS.
(a) Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties.
(b) No Changes that Materially Affect Obligations. Notwithstanding anything in this Agreement to the contrary, the Fund agrees not to make any modifications to its registration statement or adopt any policies which would affect materially the obligations or responsibilities of PFPC hereunder without the prior written approval of PFPC, which approval shall not be unreasonably withheld or delayed.
(c) Captions. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
(d) Information. The Fund will provide such information and documentation as PFPC may reasonably request in connection with services provided by PFPC to the Fund.
(e) Governing Law. This Agreement shall be deemed to be a contract
made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.
(f) Partial Invalidity. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
(g) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.
(h) No Representations or Warranties. Except as expressly provided in this Agreement, PFPC hereby disclaims all representations and warranties, express or implied, made to the Fund or any other person, including, without limitation, any warranties regarding quality, suitability, merchantability, fitness for a particular purpose or otherwise (irrespective of any course of dealing, custom or usage of trade), of any services or any goods provided incidental to services provided under this Agreement. PFPC disclaims any warranty of title or non-infringement except as otherwise set forth in this Agreement.
(i) Facsimile Signatures. The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.
(j) The Fund and PFPC agree that the obligations of the Fund under the Agreement shall not be binding upon any of the directors, shareholders, nominees, officers, employees or agents, whether past, present or future, of the Fund individually, but are binding only upon the assets and property of the Fund (or applicable series thereof), as provided in the Declaration of Trust. The execution and delivery of this Agreement have been
authorized by the directors of the Fund, and signed by an authorized officer of the Fund, acting as such, and neither such authorization by such directors nor such execution and delivery by such officer shall be deemed to have been made by any of them or any shareholder of the Fund individually or to impose any liability on any of them or any shareholder of the Fund personally, but shall bind only the assets and property of the Fund (or applicable series thereof), as provided in the Articles of Incorporation or Declaration of Trust.
(k) Customer Identification Program Notice. To help the U.S. government fight the funding of terrorism and money laundering activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain information that identifies each person who initially opens an account with that financial institution on or after October 1, 2003. Certain of PFPC's affiliates are financial institutions, and PFPC may, as a matter of policy, request (or may have already requested) the Fund's name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party's date of birth. PFPC may also ask (and may have already asked) for additional identifying information, and PFPC may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.
PFPC TRUST COMPANY
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY
INCOME FUND
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made as of November 23, 2004 by and between PFPC INC., a Massachusetts corporation ("PFPC"), FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND, a Massachusetts business trust (the "Fund").
W I T N E S S E T H :
WHEREAS, the Fund is registered as a closed-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund wishes to retain PFPC to provide administration and accounting services and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby the parties hereto agree as follows:
1. DEFINITIONS. As used in this Agreement:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(c) "Authorized Person" means any officer of the Fund and any other person duly authorized by the Fund to give Oral Instructions and Written Instructions on behalf of the Fund. An Authorized Person's scope of authority may be limited by setting forth such limitation in a written document signed by both parties hereto.
(d) "Shares" mean the shares of beneficial interest of the Fund.
(e) "Oral Instructions" mean oral instructions received by PFPC from an Authorized Person or from a person reasonably believed by PFPC to be an Authorized Person. PFPC may, in its sole discretion in each separate instance, consider and rely upon
instructions it receives from an Authorized Person via electronic mail as Oral Instructions.
(f) "SEC" means the Securities and Exchange Commission.
(g) "Securities Laws" means the 1933 Act, the 1934 Act and the 1940 Act.
(h) "Written Instructions" mean (i) written instructions signed by an Authorized Person and received by PFPC or (ii) trade instructions transmitted (and received by PFPC) by means of an electronic transaction reporting system access to which requires use of a password or other authorized identifier. The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device.
2. APPOINTMENT. The Fund hereby appoints PFPC to provide administration and accounting services to the Fund, in accordance with the terms set forth in this Agreement. PFPC accepts such appointment and agrees to furnish such services.
3. COMPLIANCE WITH RULES AND REGULATIONS.
PFPC undertakes to comply with all applicable requirements of the Securities Laws, and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC hereunder. Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by the Fund or other entity.
4. INSTRUCTIONS.
(a) Unless otherwise provided in this Agreement, PFPC shall act only upon Oral Instructions or Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instruction or Written Instruction it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized Person) pursuant to this Agreement. PFPC may assume that any
Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund's board of directors or of the Fund's shareholders, unless and until PFPC receives Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC or its affiliates) so that PFPC receives the Written Instructions by the close of business on the same day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PFPC or differ from the Oral Instructions shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions or PFPC's ability to rely upon such Oral Instructions.
5. RIGHT TO RECEIVE ADVICE.
(a) Advice of the Fund. If PFPC is in doubt as to any action it should or should not take, PFPC may request directions or advice, including Oral Instructions or Written Instructions, from the Fund. The Fund shall pay the reasonable cost of any counsel retained by PFPC with prior notice to the Fund
(b) Advice of Counsel. If PFPC shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC may request advice from counsel of its own choosing (who may be counsel for the Fund, the Fund's investment adviser or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between directions or advice or Oral Instructions or Written Instructions PFPC receives from the Fund and the advice PFPC receives from counsel, PFPC may rely upon and follow the advice of counsel.
(d) Protection of PFPC. PFPC shall be indemnified by the Fund and without liability for any action PFPC takes or does not take in reliance upon directions or advice or Oral Instructions or Written Instructions PFPC receives from or on behalf of the Fund or from counsel and which PFPC believes, in good faith, to be consistent with those directions or advice and Oral Instructions or Written Instructions. Nothing in this section shall be construed so as to impose an obligation upon PFPC (i) to seek such directions or advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions or advice or Oral Instructions or Written Instructions.
6. RECORDS; VISITS.
(a) The books and records pertaining to the Fund which are in the possession or under the control of PFPC shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations provided the Fund provides PFPC with written notice of such laws, rules and regulations, other than the 1940 Act and The Internal Revenue Code of 1986, as amended, that are applicable. The Fund and Authorized Persons shall have access to such books and records
at all times during PFPC's normal business hours upon reasonable advance notice. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC to the Fund or to an Authorized Person, at the Fund's expense.
(b) PFPC shall keep the following records:
(i) all books and records with respect to the Fund's books of account;
(ii) records of the Fund's securities transactions; and
(iii) all other books and records as PFPC is required to maintain pursuant to Rule 31a-1 of the 1940 Act in connection with the services provided hereunder.
7. CONFIDENTIALITY. Each party shall keep confidential any information relating to the other party's business ("Confidential Information"). Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or PFPC, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or PFPC a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be subject to such confidentiality obligations if: (a) release of such information is necessary or desirable in connection with PFPC's provision of services under this Agreement; (b) it is already known to
the receiving party at the time it is obtained; (c) it is or becomes
publicly known or available through no wrongful act of the receiving
party; (d) it is rightfully received from a third party who, to the
best of the receiving party's knowledge, is not under a duty of
confidentiality; (e) it is released by the protected party to a third
party without restriction; (f) it is required to be disclosed by the
receiving party pursuant to a requirement of a court order, subpoena,
governmental or regulatory agency or law (provided the receiving party
will provide the other party written notice of such requirement, to the
extent such notice is permitted); (g) it is relevant to the defense of
any claim or cause of action asserted against the receiving party; or
(h) it has been or is independently developed or obtained by the
receiving party.
8. LIAISON WITH ACCOUNTANTS. PFPC shall act as liaison with the Fund's independent public accountants and shall provide account analyses, fiscal year summaries, and other audit-related schedules with respect to the Fund. PFPC shall take all reasonable action in the performance of its duties under this Agreement to assure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund.
9. PFPC SYSTEM. PFPC shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by PFPC in connection with the services provided by PFPC to the Fund.
10. DISASTER RECOVERY. PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, PFPC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. PFPC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PFPC's own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement.
11. COMPENSATION. As compensation for services rendered by PFPC during the term of this Agreement, the Fund will pay to PFPC a fee or fees as may be agreed to in writing by the Fund and PFPC.
12. INDEMNIFICATION.
(a) The Fund agrees to indemnify, defend and hold harmless PFPC and its affiliates, including their respective officers, directors, agents and employees, from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, reasonable attorneys' fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) ("Claims") arising directly or indirectly from any action or omission to act which PFPC takes in connection with the provision of services to the Fund. Neither PFPC, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) caused by PFPC's or its affiliates' own willful misfeasance, bad faith, negligence or reckless disregard in the performance of PFPC's activities under this Agreement. The provisions of this Section 12 shall survive termination of this Agreement.
(b) Indemnification of the Fund. PFPC agrees to defend, indemnify and hold the Fund and its officers, directors and employees harmless from any and all Claims arising directly or indirectly from the negligence, bad faith or willful misfeasance of PFPC in the performance of its duties hereunder. Notwithstanding the foregoing, the Fund shall not be indemnified against any Claim caused by the Fund's or the Fund's other service providers' willful misfeasance, bad faith or negligence.
(c) Indemnification Procedure.
(i) Notice of the Action. A party that seeks indemnification under this Agreement must promptly give the other party notice of any legal action; provided, however, that a delay in notice does not relieve an indemnifying party of any liability to an indemnified party, except to the extent the indemnifying party shows that the delay prejudiced the defense of the action.
(ii) Participating in or Assuming the Defense. The indemnifying party may participate in the defense at any time or it may assume the defense by giving notice to the other party. After assuming the defense, the indemnifying party:
(1) must select an attorney that is satisfactory to the other party;
(2) is not liable to the other party for any later attorney's fees or for any other later expenses that the other party incurs, except for reasonable investigation costs;
(3) must not compromise or settle the action without the other party's consent (but the other party must not unreasonably withhold its consent); and
(4) is not liable for any compromise or settlement made without its consent.
(iii) Failing to Assume the Defense. If the indemnifying party fails to participate in or assume the defense within 15 days after receiving notice of the action, the indemnifying party is bound by any determination made in the action or by any compromise or settlement made by the other party.
13. RESPONSIBILITY OF PFPC.
(a) PFPC shall be under no duty to take any action hereunder on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PFPC and the Fund in a written amendment hereto. PFPC shall be obligated to exercise commercially reasonable care and diligence in the performance of its duties hereunder and to act in good faith in performing services provided for under this Agreement. PFPC shall be liable only for any damages arising out of PFPC's failure to perform its duties under this Agreement to the extent such damages arise out of PFPC's willful misfeasance, bad faith, negligence or reckless disregard of such duties.
(b) Notwithstanding anything in this Agreement to the contrary,
(i) PFPC shall not be liable for losses, delays, failure,
errors, interruption or loss of data occurring directly or
indirectly by reason of circumstances beyond its reasonable
control, including without limitation acts of God; action or
inaction of civil or military authority; public enemy; war;
terrorism; riot; fire; flood; sabotage; epidemics; labor
disputes; civil commotion; interruption, loss or malfunction
of utilities, transportation, computer or communications
capabilities; insurrection; elements of nature; or
non-performance by a third party; and (ii) PFPC shall not be under any duty or obligation to inquire into and shall not be liable for the validity or invalidity, authority or lack thereof, or truthfulness or accuracy or lack thereof, of any instruction, direction, notice, instrument or other information which PFPC reasonably believes to be genuine.
(c) Notwithstanding anything in this Agreement to the contrary, neither PFPC nor its affiliates shall be liable for any consequential, special or indirect losses or damages, whether or not the likelihood of such losses or damages was known by PFPC or its affiliates.
(d) Each party shall have a duty to mitigate damages for which the other party may become responsible.
(e) The provisions of this Section 13 shall survive termination of this Agreement.
14. DESCRIPTION OF ACCOUNTING SERVICES ON A CONTINUOUS BASIS.
PFPC will perform the following accounting services with respect to the Fund:
(i) Journalize investment, capital share and income and expense activities;
(ii) Verify investment buy/sell trade tickets when received from the investment adviser for the Fund (the "Adviser") and transmit trades to the Fund's custodian (the "Custodian") for proper settlement;
(iii) Maintain individual ledgers for investment securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of the Fund with the Custodian, and provide the Adviser with the beginning cash balance available for investment purposes;
(vi) Update the cash availability throughout the day as required by the Adviser;
(vii) Post to and prepare the Statement of Assets and Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g., advisory and custody fees);
(ix) Monitor the expense accruals and notify an officer of the Fund of any proposed adjustments;
(x) Control all disbursements and authorize such disbursements upon Written Instructions;
(xi) Calculate capital gains and losses;
(xii) Determine net income;
(xiii) Obtain security market quotes from independent pricing services approved by the Adviser, or if such quotes are unavailable, then obtain such prices from the Adviser, and in either case calculate the market value of the Fund's Investments;
(xiv) Transmit or mail a copy of the daily portfolio valuation to the Adviser;
(xv) Compute net asset value; and
(xvi) As appropriate, compute yields, total return, expense ratios, portfolio turnover rate, and, if required, portfolio average dollar-weighted maturity.
15. DESCRIPTION OF ADMINISTRATION SERVICES ON A CONTINUOUS BASIS.
PFPC will perform the following administration services with respect to the Fund:
(i) Prepare quarterly broker security transactions summaries;
(ii) Prepare monthly security transaction listings;
(iii) Supply various normal and customary Fund statistical data as requested on an ongoing basis;
(iv) Prepare for execution and file the Fund's Federal and state tax returns;
(v) Monitor the Fund's status as a regulated investment company under Sub-chapter M of the Internal Revenue Code of 1986, as amended;
(vi) Prepare the Fund's annual and semi-annual shareholder reports;
(vii) Prepare and coordinate with the Fund's counsel post-effective amendments to the Fund's registration statement on Form N-2, as needed, and coordinate with the Fund's financial printer to
file such amendments; and prepare and file semi-annual reports on Form N-SAR, subject to the review of Fund management;
(viii) Assist in the preparation of notices of annual or special meetings of shareholders and proxy materials relating to such meetings;
(ix) Assist in obtaining the fidelity bond and directors' and officers'/errors and omissions insurance policies for the Fund in accordance with the requirements of Rule 17g-1 and 17d-1(d)(7) under the 1940 Act as such bond and policies are approved by the Fund's board of directors;
(x) Monitor the Fund's assets to assure adequate fidelity bond coverage is maintained;
(xi) Draft agendas, resolutions and materials for quarterly and special board meetings and draft written consents of the board;
(xii) Coordinate the preparation, assembly and mailing of board materials;
(xiii) Attend board meetings and draft minutes thereof;
(xiv) Maintain a calendar to assure compliance with various SEC filing and board approval deadlines;
(xv) Assist the Fund in the handling of SEC examinations and responses thereto;
(xvi) If the chief executive officer or chief financial officer of
the Fund is required to provide a certification as part of the
Fund's Form N-SAR or Form N-CSR filing pursuant to regulations
promulgated by the Securities and Exchange Commission under
Section 302 of the Sarbanes-Oxley Act of 2002, PFPC will
provide (to such person or entity as agreed between the Fund
and PFPC) a sub-certification in support of certain matters
set forth in the aforementioned certification, such
sub-certification to be in such form and relating to such
matters as agreed between the Fund and PFPC from time to time.
PFPC shall be required to provide the sub-certification only
during the term of the Agreement and only if it receives such
cooperation as it may request to perform its investigations
with respect to the sub-certification. For clarity, the
sub-certification is not itself a certification under the
Sarbanes-Oxley Act of 2002 or under any other regulatory
requirement; and
(xvii) Coordinate contractual relationships and communications between the Fund and its contractual service providers.
16. DURATION AND TERMINATION.
(a) This Agreement shall have an initial term of five (5) years from the date of execution. (the "Initial Term").
(b) Upon the expiration of the Initial Term, this Agreement shall automatically renew for successive terms of one (1) year ("Renewal Terms") each, unless the Fund or PFPC provides written notice to the other of its intent not to renew. Such notice must be received not less than ninety (90) days prior to the expiration of the Initial Term or the then current Renewal Term.
(c) In the event a termination notice is given by the Fund, all expenses associated with movement of records and materials and conversion thereof to a successor accounting and administration services agent(s) (and any other service provider(s)), and all trailing expenses incurred by PFPC, will be borne by the Fund.
(d) If a party hereto is guilty of a material failure to perform its duties and obligations hereunder (a "Defaulting Party") the other party (the "Non-Defaulting Party") may give written notice thereof to the Defaulting Party, and if such material breach shall not have been remedied within thirty (30) days after such written notice is given, then the Non-Defaulting Party may terminate this Agreement by giving thirty (30) days written notice of such termination to the Defaulting Party. In all cases, termination by the Non-Defaulting Party shall not constitute a waiver by the Non-Defaulting Party of any other rights it might have under this Agreement or otherwise against the Defaulting Party.
17. NOTICES. Notices shall be addressed (a) if to PFPC, at 301 Bellevue Parkway, Wilmington, Delaware 19809, Attention: President; (b) if to the Fund, at 1001 Warrenville Road, Lisle, IL 60532, Attention: W. Scott Jardine or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.
18. AMENDMENTS. This Agreement, or any term thereof, may be changed or waived only by written amendment, signed by the party against whom enforcement of such change or waiver is sought.
19. ASSIGNMENT. PFPC may assign its rights hereunder to any majority-owned direct or indirect subsidiary of PFPC or of The PNC Financial Services Group, Inc., provided that PFPC gives the Fund 30 days prior written notice of such assignment.
20. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
21. FURTHER ACTIONS. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.
22. MISCELLANEOUS.
(a) Notwithstanding anything in this Agreement to the contrary, the Fund agrees not to make any modifications to its registration statement or adopt any policies which would
affect materially the obligations or responsibilities of PFPC hereunder without the prior written approval of PFPC, which approval shall not be unreasonably withheld or delayed.
(b) Except as expressly provided in this Agreement, PFPC hereby disclaims all representations and warranties, express or implied, made to the Fund or any other person, including, without limitation, any warranties regarding quality, suitability, merchantability, fitness for a particular purpose or otherwise (irrespective of any course of dealing, custom or usage of trade), of any services or any goods provided incidental to services provided under this Agreement. PFPC disclaims any warranty of title or non-infringement except as otherwise set forth in this Agreement.
(c) This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Notwithstanding any provision hereof, the services of PFPC are not, nor shall they be, construed as constituting legal advice or the provision of legal services for or on behalf of the Fund or any other person.
(d) The Fund will provide such information and documentation as PFPC may reasonably request in connection with services provided by PFPC to the Fund.
(e) This Agreement shall be deemed to be a contract made in
Delaware and governed by Delaware law, without regard to principles of conflicts of law.
(f) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.
(g) The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.
(h) The Fund and PFPC agree that the obligations of the Fund under the Agreement shall not be binding upon any of the directors, shareholders, nominees, officers, employees or agents, whether past, present or future, of the Fund individually, but are binding only upon the assets and property of the Fund (or applicable series thereof), as provided in the Declaration of Trust. The execution and delivery of this Agreement have been authorized by the directors of the Fund, and signed by an authorized officer of the Fund, acting as such, and neither such authorization by such directors nor such execution and delivery by such officer shall be deemed to have been made by any of them or any shareholder of the Fund individually or to impose any liability on any of them or any shareholder of the Fund personally, but shall bind only the assets and property of the Fund (or applicable series thereof), as provided in the Articles of Incorporation or Declaration of Trust.
(j) To help the U.S. government fight the funding of terrorism and money laundering activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain information that identifies each person who initially opens an account with that financial institution on or after October 1, 2003. Certain of PFPC's affiliates are financial institutions,
and PFPC may, as a matter of policy, request (or may have already requested) the Fund's name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party's date of birth. PFPC may also ask (and may have already asked) for additional identifying information, and PFPC may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.
PFPC TRUST COMPANY
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY
INCOME FUND
CHAPMAN AND CUTLER LLP
111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
November 23, 2004
First Trust/Aberdeen Global Opportunity Income Fund
1001 Warrenville Road
Lisle, Illinois 60532
Ladies and Gentlemen:
We have acted as counsel for First Trust/Aberdeen Global Opportunity Income Fund (the "Fund") in connection with the registration under the Securities Act of 1933 (the "Act") of certain of its common shares of beneficial interest (the "Shares") covered by Registration Statement No. 333-119081 on Form N-2, as it is proposed to be amended by Pre-Effective Amendment No. 3 (as proposed to be amended, the "Registration Statement").
In this connection we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate and other records, certificates and other papers as we deemed it necessary to examine for the purpose of this opinion, including the declaration of trust and by-laws of the Fund, actions of the board of trustees of the Fund authorizing the issuance of shares of the Fund and the Registration Statement.
We assume that, upon sale of the Shares, the Fund will receive the authorized consideration therefor, which will at least equal the net asset value of the Shares.
Based upon the foregoing, we are of the opinion that when the Shares are issued and sold after the Registration Statement has been declared effective and the authorized consideration therefor is received by the Fund, they will be legally issued, fully paid and nonassessable by the Fund, except that, as set forth in the Registration Statement, shareholders of the Fund may under certain circumstances be held personally liable for obligations of the Fund.
In rendering the foregoing opinion, we have relied upon the opinion of Bingham McCutchen LLP expressed in their letter to us dated November 23, 2004.
We consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not admit that we are in the category of persons whose consent is required under section 7 of the Act.
Very truly yours,
/s/Chapman and Cutler LLP ------------------------- |
Bingham McCutchen LLP 150 Federal Street Boston, Massachusetts 02110
November 23, 2004
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, Illinois 60603
RE: First Trust/Aberdeen Global Opportunity Income Fund
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to First Trust/Aberdeen Global Opportunity Income Fund, a Massachusetts business trust (the "Fund"), in connection with the Fund's Registration Statement on Form N-2, as such Registration Statement is proposed to be amended by Pre-Effective Amendment No. 2 to be filed with the Securities and Exchange Commission on or about November 23, 2004 (as proposed to be amended, the "Registration Statement"), with respect to certain of its common shares of beneficial interest, par value of $.01 per share (the "Shares"). You have requested that we deliver this opinion to you, as special counsel to the Fund, for use by you in connection with your opinion to the Fund with respect to the Shares.
In connection with the furnishing of this opinion, we have examined the following documents:
(a) a certificate of the Secretary of the Commonwealth of Massachusetts as to the existence of the Fund;
(b) a copy, certified by the Secretary of the Commonwealth of Massachusetts, of the Fund's Declaration of Trust (the "Declaration");
(c) a certificate of the Secretary of the Fund, certifying as to, and attaching copies of, the Fund's Declaration and By-Laws, and the resolutions adopted at the meeting of the Trustees of the Fund on October 3, 2004 (the "Resolutions"); and
(d) a draft received on November 17, 2004 of Pre-Effective Amendment No. 2 to the Registration Statement.
Chapman and Cutler LLP
November 23, 2004
In such examination, we have assumed the genuineness of all signatures, the conformity to the originals of all of the documents reviewed by us as copies, the authenticity and completeness of all original documents reviewed by us in original or copy form and the legal competence of each individual executing any document. We have assumed that the Registration Statement, as filed with the Securities and Exchange Commission, will be in substantially the form of the draft referred to in paragraph (d) above. We have further assumed that the Fund's Declaration and the Resolutions have not been amended, modified or withdrawn with respect to matters relating to the Shares and are in full force and effect on the date of issuance of such Shares.
This opinion is based entirely on our review of the documents listed above and such investigation of law as we have deemed necessary or appropriate. We have made no other review or investigation of any kind whatsoever, and we have assumed, without independent inquiry, the accuracy of the information set forth in such documents. As to our opinion below relating to the legal existence of the Fund, our opinion relies entirely upon and is limited by the certificate referenced in paragraph (a) above.
This opinion is limited solely to the internal substantive laws of the Commonwealth of Massachusetts, as applied by courts located in Massachusetts (other than Massachusetts securities laws, as to which we express no opinion), to the extent that the same may apply to or govern the transactions referred to herein. No opinion is given herein as to the choice of law or internal substantive rules of law which any tribunal may apply to such transaction. In addition, to the extent that the Fund's Declaration or By-Laws refer to, incorporate or require compliance with the Investment Company Act of 1940, as amended, or any other law or regulation applicable to the Fund, except for the internal substantive laws of the Commonwealth of Massachusetts, as aforesaid, we have assumed compliance by the Fund with such Act and such other laws and regulations.
We understand that all of the foregoing assumptions and limitations are acceptable to you.
Based upon and subject to the foregoing, please be advised that it is our opinion that:
1. The Fund is legally existing under the Fund's Declaration and the laws of the Commonwealth of Massachusetts as a voluntary association with transferable shares of beneficial interest commonly referred to as a "Massachusetts business trust."
Chapman and Cutler LLP
November 23, 2004
2. The Shares, when issued, sold and paid for in accordance with the Fund's Declaration and the Resolutions, will be legally issued, fully paid and non-assessable (except that, as indicated in the Registration Statement, shareholders of the Fund may under certain circumstances be held personally liable for its obligations).
This opinion is given as of the date hereof and we assume no obligation to update this opinion to reflect any changes in law or any other facts or circumstances which may hereafter come to our attention. We hereby consent to your reliance on this opinion in connection with your opinion to the Fund with respect to the Shares, to the reference to our name in the Registration Statement under the heading "Legal Opinions" and to the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
BINGHAM McCUTCHEN LLP
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholder of First Trust/Aberdeen Global Opportunity Income Fund:
We consent to the use in this Pre-Effective Amendment No. 2 to Registration Statement No. 333-119081 of First Trust/Aberdeen Global Oppportunity Income Fund on Form N-2 of our report dated November 19, 2004, appearing in the Statement of Additional Information, which is part of such Registration Statement. We also consent to the reference to us under the caption "Independent Registered Public Accounting Firm" in the Statement of Additional Information.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 19, 2004
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
SUBSCRIPTION AGREEMENT
This Agreement made this November 16, 2004 by and between First Trust/Aberdeen Global Opportunity Income Fund, a Massachusetts business trust (the "Fund"), and First Trust Portfolios, L.P., an Illinois limited partnership (the "Subscriber");
WITNESSETH:
WHEREAS, the Fund has been formed for the purposes of carrying on business as a closed-end diversified management investment company; and
WHEREAS, the Subscriber wishes to subscribe for and purchase, and the Fund wishes to sell to the Subscriber, 5,236 common shares for a purchase price of $19.10 per share;
NOW THEREFORE, IT IS AGREED:
l. The Subscriber subscribes for and agrees to purchase from the Fund 5,236 common shares for a purchase price of $19.10 per share. Subscriber agrees to make payment for these shares at such time as demand for payment may be made by an officer of the Fund.
2. The Fund agrees to issue and sell said shares to Subscriber promptly upon its receipt of the purchase price.
3. To induce the Fund to accept its subscription and issue the shares subscribed for, the Subscriber represents that it is informed as follows:
(a) That the shares being subscribed for have not been and will not be registered under the Securities Act of l933 ("Securities Act");
(b) That the shares will be sold by the Fund in reliance on an exemption from the registration requirements of the Securities Act;
(c) That the Fund's reliance upon an exemption from the registration requirements of the Securities Act is predicated in part on the representations and agreements contained in this Subscription Agreement;
(d) That when issued, the shares will be "restricted securities" as defined in paragraph (a)(3) of Rule l44 of the General Rules and Regulations under the Securities Act ("Rule l44") and cannot be sold or transferred by Subscriber unless they are subsequently registered under the Securities Act or unless an exemption from such registration is available; and
(e) That there do not appear to be any exemptions from the registration provisions of the Securities Act available to the Subscriber for resale of the shares. In the future, certain exemptions may possibly become available, including an exemption for limited sales including an exemption for limited sales in accordance with the conditions of Rule l44.
The Subscriber understands that a primary purpose of the information acknowledged in subparagraphs (a) through (e) above is to put it on notice as to restrictions on the transferability of the shares.
4. To further induce the Fund to accept its subscription and issue the shares subscribed for, the Subscriber:
(a) Represents and warrants that the shares subscribed for are being and will be acquired for investment for its own account and not on behalf of any other person or persons and not with a view to, or for sale in connection with, any public distribution thereof; and
(b) Agrees that any certificates representing the shares subscribed for may bear a legend substantially in the following form:
The shares represented by this certificate have been acquired for investment and have not been registered under the Securities Act of l933 or any other federal or state securities law. These shares may not be offered for sale, sold or otherwise transferred unless registered under said securities laws or unless some exemption from registration is available.
5. This Subscription Agreement and all of its provisions shall be binding upon the legal representatives, heirs, successors and assigns of the parties hereto.
6. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund by the Fund's officers as officers and not individually and the obligations imposed upon the Fund by this Agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund.
IN WITNESS WHEREOF, this Subscription Agreement has been executed by the parties hereto as of the day and date first above written.
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY
INCOME FUND
By /s/ James A. Bowen -------------------------------- Name: James A. Bowen Title: President |
FIRST TRUST PORTFOLIOS, L.P.
By /s/ James A. Bowen -------------------------------- Name: James A. Bowen Title: President |
CODE OF ETHICS
I. STATEMENT OF GENERAL PRINCIPLES.
This Code of Ethics is being adopted by the funds listed on Exhibit A (each a "Fund"), in recognition of the fact that the Fund owes a duty at all times to place the interests of its investors first. In recognition of such duty it is the Fund's policy that the personal securities transactions and other activities of Fund personnel be conducted consistent with this Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility that could occur through such activities as "insider trading" or "frontrunning" investment company securities trades. It is also the Fund's policy that Fund personnel should not take inappropriate advantage of their position with respect to the Fund and that such personnel should avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of investors in the Fund.
II. DEFINITIONS.
For Purposes of this Code of Ethics:
A. "Fund" shall mean each investment company listed in Exhibit A, as amended from time to time.
B. "Investor" shall mean any investor in a Fund (including, if applicable, investors holding interests in a Fund directly or indirectly through a separate account of an insurance company).
C. "Access Person" shall mean any trustee, officer or employee of the Fund who makes, participates in or obtains information regarding the purchase or sale of securities for the Fund's portfolio or whose functions or duties as part of the ordinary course of his business relate to the making of any recommendation regarding the purchase or sale of securities for the Fund.
D. "Investment Person" shall mean any officer or employee of the Fund who makes, participates in or executes decisions regarding the purchase or sale of securities for the Fund's portfolios.
III. PROHIBITED PRACTICES.
In furtherance of the policies set forth in paragraph I above, the following practices shall be prohibited:
A. No Investment Person shall purchase any security during the initial public offering of such security.
B. No Investment Person shall purchase any security in a private placement transaction unless the purchase has been approved in writing and in advance by the Compliance Coordinator. In considering whether to approve any such transaction, the Compliance Coordinator shall take into account, among other factors, whether the investment opportunity should be reserved for the Fund and its Investors and whether the opportunity is being offered to an individual by virtue of his position. Any Investment Person who has been authorized to acquire securities in a private placement shall disclose that investment to the Compliance Coordinator before he takes part in a subsequent consideration of the Fund's investment in that issuer, and the decision to include securities of such issuer in the Fund shall be subject to independent review by Counsel to the Fund.
C. No Access Person shall purchase or sell a security within seven days before or after that security is bought or sold by the Fund if such Access Person knows or should know that such security is being bought or sold by the Fund.
D. No Investment Person shall profit from the purchase and sale, or sale and purchase, of the same (or equivalent) securities within 30 days.
E. No Investment Person shall serve on the Board of Directors of a publicly traded company absent prior authorization of the Compliance Coordinator upon a determination that board service would be consistent with the interests of the Fund and its investors and the establishment of appropriate "Chinese wall" procedures by the Compliance Coordinator.
F. Any provision of this Code of Ethics prohibiting any transaction by an Access Person or Investment Person shall prohibit any transaction in which such person has, obtains or disposes of any beneficial ownership interest.
G. No Access Person or Investment Person who has had two violations of this Code of Ethics during the prior 12 month period shall purchase or sell any security unless such purchase or sale has been approved in advance by the Compliance Coordinator.
IV. COMPLIANCE PROCEDURES.
In order to effectuate and monitor the foregoing policies and prohibitions, all Access Persons and Investment Persons shall be required to comply with the following procedures:
A. The securities trading personnel of the Fund shall provide the Compliance Coordinator with a daily summary of buy and sell orders entered by, on behalf of, or with respect to the Fund.
B. Each Access Person shall direct any firms at which he maintains brokerage accounts to provide on a timely basis duplicate copies of confirmations of all personal securities transactions and periodic statements for all securities accounts to the Compliance
Coordinator. The Compliance Coordinator shall date stamp all duplicate copies of personal securities transactions and account statements upon receipt.
C. Each Access Person shall disclose all personal securities holdings to the Compliance Coordinator both upon commencement of employment with the Fund and within 15 days of the end of each calendar year by submitting the form attached to this Code of Ethics as Exhibit B.
D. Within 15 days following the end of each calendar year, each Access Person shall certify to the Fund that he has read and understands this Code of Ethics and recognizes that he is subject to it and that he has complied with the requirements of this Code of Ethics by submitting the form attached hereto as Exhibit C.
E. Within 10 days following the end of each calendar quarter, each Access Person shall report to the Compliance Coordinator all personal securities transactions effected during such quarter by submitting the form attached hereto as Exhibit D.
F. Any provision of this Code of Ethics requiring an Access Person or Investment Person to report securities transactions or securities positions to the Fund shall require the reporting of any transaction or position in which such person has, acquires or disposes of any beneficial ownership interest.
G. The requirements of Section IV(B), IV(C) and IV(E) shall be deemed to be complied with by any Access Person who complies with substantially similar requirements contained in the First Trust Portfolios L.P. Unit Investment Trust Code of Ethics, First Trust Advisors L.P. Investment Company Code of Ethics or First Defined Portfolio Fund LLC Code of Ethics.
H. The requirements of Section IV(B), IV(C) and IV(E) shall not apply to any member of the Board of Trustees of the Fund unless such member knows or, in the ordinary course of fulfilling his official duties as a Trustee of the Fund, should have known that during the seven day period immediately preceding or after the date of any transaction in a security by the member such security was purchased or sold by the Fund or such purchase or sale was considered by the Fund or its investment adviser.
V. EXEMPTIONS.
The following transactions shall be exempted from the provisions of Article III and, in the case of paragraph A, C, and D, Article IV of this Code of Ethics:
A. The purchase or sale of U.S. government securities, money market instruments, mutual funds or unit investment trusts.
B. The purchase or sale of shares of issuers whose shares are traded on a national or foreign securities exchange and which have a market capitalization of at least $1 billion.
C. Purchases which are part of an automatic dividend reinvestment plan or which involve no investment decision by the purchaser.
D. Purchases and sales which are effected to establish or maintain a model investment portfolio on behalf of First Trust Advisors L.P., subject to prior notice to the Fund's Board of Trustees.
VI. SANCTIONS.
Upon discovery of a violation of this Code of Ethics, including either violations of the enumerated provisions or the general principles provided, the Fund may impose such sanctions as it deems appropriate, including, inter alia, a fine, letter of censure or suspension or termination of the employment of the violator.
EXHIBIT A
For purposes of this Code of Ethics, the Funds include the following:
Energy Income and Growth Fund
First Trust/Aberdeen Global Opportunity Income Fund
First Trust/Fiduciary Asset Management Covered Call Fund
First Trust Value Line(R) 100 Fund
First Trust Value Line(R) Dividend Fund
First Trust/Value Line(R) & Ibbotson Equity Allocation Fund
First Trust/Four Corners Senior Floating Rate Income Fund
First Trust/Four Corners Senior Floating Rate Income Fund II
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund
EXHIBIT B
CODE OF ETHICS
ACCESS/INVESTMENT PERSON
SECURITIES HOLDINGS REPORT
Name of Access/Investment Person: ______________________________________________
Date: _______________
[ ] I hereby certify that as of _______________, I had a beneficial ownership interest in no securities other than those set forth below.
ISSUER # OF SHARES/PRINCIPAL AMOUNT MARKET VALUE
OR
[ ] I hereby certify that as of _______________, I had a beneficial ownership interest in no securities other than those set forth on the attached brokerage account statements.
OR
[ ] I hereby certify that as of _______________, I had a beneficial interest in no securities.
EXHIBIT C
ACCESS/INVESTMENT PERSON
CODE OF ETHICS CERTIFICATION
I, ____________________, hereby certify that I have read, and understand the Code of Ethics for the Funds, as defined in the Code. Furthermore, I certify that I have complied with its provisions during the preceding year.
Date: _______________
EXHIBIT D
ACCESS/INVESTMENT PERSON
QUARTERLY TRANSACTION REPORT
Name of Access/Investment Person: ______________________________________________
Date: _______________
[ ] I hereby certify that during the calendar quarter ended _____________, I had a beneficial ownership interest in the following securities transactions:
TYPE OF TYPE OF # OF SHARES/ TRANSACTION SECURITY ISSUER PRINCIPAL AMOUNT $ AMOUNT ----------- -------- ------ ---------------- -------- |
OR
[ ] I hereby certify that during the calendar quarter ended _____________, I had a beneficial ownership interest in no securities transactions other than those set forth on the attached brokerage account confirmations.
OR
[ ] I hereby certify that during the calendar quarter ended _____________, I had a beneficial ownership interest in no securities transactions.
CODE OF ETHICS DISTRIBUTION LIST
ACCESS PERSONS
CODE OF ETHICS DISTRIBUTION LIST
INVESTMENT PERSONS
First Trust Portfolios L.P.
Code of Ethics
I. STATEMENT OF GENERAL PRINCIPLES
This Code of Ethics is being adopted by First Trust Portfolios L.P. (the "Company"), The First Trust Special Situations Trust, The First Trust Combined Series, The First Trust of Insured Municipal Bonds, The First Trust GNMA, and The First Trust of Insured Municipal Bonds - Multi-State (the "Trusts") in recognition of the fact that the Company owes a duty at all times to place the interests of holders of Units of the Trusts and Shareholders of the Funds first. In recognition of such duty it is the Company's policy that the personal securities transactions and other activities of Company personnel be conducted consistent with this Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility that could occur through such activities as "insider trading" or "frontrunning" Trust or Fund securities trades. It is also the Company's policy that Company personnel should not take inappropriate advantage of their position with respect to Trusts or Funds sponsored by the Company and that such personnel should avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of Unit holders or Shareholders.
II. DEFINITIONS
For Purposes of this Code of Ethics:
A. "Company" shall mean First Trust Portfolios L.P.
B. "Trust" shall mean any unit investment trust sponsored by the Company.
C. "Unit holder" shall mean the holder of any unit of any Trust.
D. "Fund" shall mean any open-end management investment company for which the Company acts as distributor or principal underwriter.
E. "Shareholder" shall mean the holder of any share of any Fund.
F. "Access Person" shall mean any partner, officer or employee of the Company who makes, participates in or obtains information regarding the purchase or sale of securities for a Trust's or Fund's portfolio or whose functions or duties as part of the ordinary course of his business relate to the making of any recommendation regarding the purchase or sale of securities for a Trust or Fund and includes, but is not limited to, all personnel in the Company's research, new products, securities trading, unit investment trust trading, wholesaling, evaluation, marketing, trust administration, compliance, legal, corporate publishing and investment advisory departments and any and all supervisors thereof.
G. "Investment Person" shall mean any officer or employee of the Company who makes, participates in or executes decisions regarding the purchase or sale of securities for a Trust's or Fund's portfolio and includes, but is not limited to, all personnel in the Company's research, new products, securities trading, trust administration and investment advisory departments and any and all supervisors thereof ; provided, however, that any person shall be deemed to be an Investment Person for purposes of this Code of Ethics only with respect to the type of security for which such person makes, participates in or executes purchase or sale decisions and provided further that any person who is an Investment Person with respect to any type of security under the Code shall be an Access person for purposes of all provisions of the Code.
III. PROHIBITED PRACTICES
In furtherance of the policies set forth in paragraph I above, the following practices shall be prohibited:
A. No Investment Person shall purchase any security during the initial public offering of such security.
B. No Investment Person shall purchase any security in a private placement transaction unless the purchase has been approved in writing and in advance by the Compliance Department. In considering whether to approve any such transaction, the Compliance Department shall take into account, among other factors, whether the investment opportunity should be reserved for any existing or proposed Trust and its Unit holders or any Fund and its Shareholders and whether the opportunity is being offered to an individual by virtue of his position. Any Investment Person who has been authorized to acquire securities in a private placement shall disclose that investment to the Compliance Department before he takes part in a subsequent consideration of any Trust's or Funds investment in that issuer, and the decision to include securities of such issuer in a Trust or Fund shall be subject to independent review by General Counsel of the Company.
C. No Access Person shall purchase or sell any security prior to the initial public offering period of a Trust which it is proposed may contain that security in its portfolio. No Access Person shall purchase or sell any security on a day during which there is "buy" or a "sell" order from a Trust or Fund for that security until such order is executed or withdrawn. No Investment Person shall purchase or sell a security within seven days before or after that security is bought or sold by a Trust or Fund. Any profits realized on transactions prohibited by this Section shall be disgorged.
D. No Investment Person shall profit from the purchase and sale, or sale and purchase, of the same (or equivalent) securities within 30 days. Any profits realized on transactions prohibited by this Section shall be disgorged.
E. No Investment Person shall serve on the Board of Directors of a publicly traded company absent prior authorization of the Compliance Department upon a determination that board service would be consistent with the interests of Trusts and their Unit holders and the Funds and their Shareholders and the establishment of appropriate "Chinese wall" procedures by the Compliance Department.
F. Any provision of this Code of Ethics prohibiting any transaction by an Access Person or Investment Person shall prohibit any transaction in which such person has, obtains or disposes of any beneficial ownership interest.
IV. COMPLIANCE PROCEDURES
In order to effectuate and monitor the foregoing policies and prohibitions, all Access Persons and Investment Persons shall be required to comply with the following procedures:
A. The securities trading personnel of the Company shall provide the Compliance Department with a daily summary of buy and sell orders entered by, on behalf of, or with respect to both Trusts, Funds and the Company's unit investment trust accumulation account or accounts. The Research Department shall notify the Compliance Department, in writing, of the composition of the proposed portfolio of any proposed Trust on the day that portfolio is determined. The Trust Administration Department shall provide the Compliance Department with a daily written summary of the Trusts, if any, for which a public offering has either commenced or been terminated.
B. Each Access Person shall direct any firms at which he maintains brokerage accounts to provide on a timely basis duplicate copies of confirmations of all personal securities transactions and periodic statements for all securities accounts to the Compliance Department. The Compliance Department shall date stamp all duplicate copies of personal securities transactions and account statements upon receipt.
C. Each Access Person shall disclose all personal securities holdings to the Compliance Department both upon commencement of employment with the Company and within 15 days of the end of each calendar year by submitting the form attached to this Code of Ethics as Exhibit A.
D. Within 15 days following the end of each calendar year, each Access Person shall certify to the Company that he has read and understands this Code of Ethics and recognizes that he is subject to it and that he has complied with the requirements of this Code of Ethics by submitting the form attached hereto as Exhibit B.
E. Within 10 days following the end of each calendar quarter, each Access Person shall report to the Compliance Department all personal securities transactions effected during such quarter by submitting the form attached hereto as Exhibit C.
F. Any provision of this Code of Ethics requiring an Access Person or Investment Person to report securities transactions or securities positions to the Company shall require the reporting of any transaction or position in which such person has, acquires or disposes of any beneficial ownership interest.
V. EXEMPTIONS
The following transactions shall be exempted from the provisions of Article III and, in the case of paragraph A, C, and D, Article IV of this Code of Ethics:
A. The purchase or sale of U.S. government securities, money market instruments, mutual funds or unit investment trusts.
B. The purchase or sale of shares of issuers whose shares are traded on a national or foreign securities exchange and which have a market capitalization of at least $1 billion.
C. Purchases which are part of an automatic dividend reinvestment plan or which involve no investment decision by the purchaser.
D. Purchases and sales which are effected to establish or maintain a model investment portfolio on behalf of First Trust Advisors L.P.
VI. SANCTIONS Upon discovery of a violation of this Code of Ethics, including either violations of the enumerated provisions or the general principles provided, the Company may impose such sanctions as it deems appropriate, including, inter alia, a fine, letter of censure or suspension or termination of the employment of the violator.
Amended as of November 27, 2002
EXHIBIT A
FIRST TRUST PORTFOLIOS L.P.
ACCESS/INVESTMENT PERSON
SECURITIES HOLDINGS REPORT
Name of Access/Investment Person: ___________________________________________
Date: ______________________________________
[ ] I hereby certify that as of _________________, I had a beneficial ownership interest in no securities other than those set forth below.
OR
[ ] I hereby certify that as of __________________, I had a beneficial ownership interest in no securities other than those set forth on the attached brokerage account statements.
OR
[ ] I hereby certify that as of __________________, I had a beneficial interest in no securities.
EXHIBIT B
FIRST TRUST PORTFOLIOS L.P.
ACCESS/INVESTMENT PERSON
CODE OF ETHICS CERTIFICATION
I, ___________________________, hereby certify that I have read, and understand the FIRST TRUST PORTFOLIOS L.P. Code of Ethics. Furthermore, I certify that I have complied with its provisions during the preceding year.
EXHIBIT C
FIRST TRUST PORTFOLIOS L.P.
ACCESS/INVESTMENT PERSON
QUARTERLY TRANSACTION REPORT
Name of Access/Investment Person: _____________________________________
Date: _____________________
[ ] I hereby certify that during the calendar quarter ended _____________, I had a beneficial ownership interest in the following securities transactions:
# of shares/
Type of Transaction Type of Security Issuer principal amount $ amount
-------------------- ---------------- ------ ---------------- --------
|
OR
[ ] I hereby certify that during the calendar quarter ended __________, I
had a beneficial ownership interest in no securities transactions
other than those set forth on the attached brokerage account
confirmations.
OR
[ ] I hereby certify that during the calendar quarter ended ___________, I had a beneficial ownership interest in no securities transactions.
First Trust Advisors L.P.
Investment Company Code of Ethics
I. STATEMENT OF GENERAL PRINCIPLES
This Code of Ethics is being adopted by First Trust Advisors L.P. (the "Company"), in recognition of the fact that the Company owes a duty at all times to place the interests of investors in investment companies for which the Company provides investment advisory services first. In recognition of such duty it is the Company's policy that the personal securities transactions and other activities of Company personnel be conducted consistent with this Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility that could occur through such activities as "insider trading" or "frontrunning" investment company securities trades. It is also the Company's policy that Company personnel should not take inappropriate advantage of their position with respect to investment companies for which the Company provides investment advisory services and that such personnel should avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of investors in investment companies for which the Company provides investment advisory services.
II. DEFINITIONS
For Purposes of this Code of Ethics:
A. "Company" shall mean First Trust Advisors L.P.
B. "Investment Company" shall mean any investment company for which the Company provides investment advisory services.
C. "Investor" shall mean any investor of any Investment Company.
D. "Access Person" shall mean any partner, officer or employee of the Company who makes, participates in or obtains information regarding the purchase or sale of securities for an Investment Company's portfolio or whose functions or duties as part of the ordinary course of his business relate to the making of any recommendation regarding the purchase or sale of securities for an Investment Company and includes all personnel listed in the Company's form ADV.
E. "Investment Person" shall mean any officer or employee of the Company who makes, participates in or executes decisions regarding the purchase or sale of securities for an Investment Company's portfolio.
III. PROHIBITED PRACTICES
In furtherance of the policies set forth in paragraph I above, the following practices shall be prohibited:
A. No Investment Person shall purchase any security during the initial public offering of such security.
B. No Investment Person shall purchase any security in a private placement transaction unless the purchase has been approved in writing and in advance by the Compliance Department. In considering whether to approve any such transaction, the Compliance Department shall take into account, among other factors, whether the investment opportunity should be reserved for any existing or proposed Investment Company and its Investors and whether the opportunity is being offered to an individual by virtue of his position. Any Investment Person who has been authorized to acquire securities in a private placement shall disclose that investment to the Compliance Department before he takes part in a subsequent consideration of any Investment Company's investment in that issuer, and the decision to include securities of such issuer in an Investment Company shall be subject to independent review by General Counsel of the Company.
C. No Access Person shall purchase or sell any security on a day during which there is "buy" or a "sell" order from an Investment Company for that security until such order is executed or withdrawn. No Investment Person shall purchase or sell a security within seven days before or after that security is bought or sold by an Investment Company.
D. No Investment Person shall profit from the purchase and sale, or sale and purchase, of the same (or equivalent) securities within 30 days.
E. No Investment Person shall serve on the Board of Directors of a publicly traded company absent prior authorization of the Compliance Department upon a determination that board service would be consistent with the interests of Investment Companies and their investors and the establishment of appropriate "Chinese wall" procedures by the Compliance Department.
F. Any provision of this Code of Ethics prohibiting any transaction by an Access Person or Investment Person shall prohibit any transaction in which such person has, obtains or disposes of any beneficial ownership interest.
IV. COMPLIANCE PROCEDURES
In order to effectuate and monitor the foregoing policies and prohibitions, all Access Persons and Investment Persons shall be required to comply with the following procedures:
A. The securities trading personnel of the Company shall provide the Compliance Department with a daily summary of buy and sell orders entered by, on behalf of, or with respect to Investment Companies.
B. Each Access Person shall direct any firms at which he maintains brokerage accounts to provide on a timely basis duplicate copies of confirmations of all personal securities transactions and periodic statements for all securities accounts to the Compliance Department. The Compliance Department shall date stamp all duplicate copies of personal securities transactions and account statements upon receipt.
C. Each Access Person shall disclose all personal securities holdings to the Compliance Department both upon commencement of employment with the Company and within 15 days of the end of each calendar year by submitting the form attached to this Code of Ethics as Exhibit A.
D. Within 15 days following the end of each calendar year, each Access Person shall certify to the Company that he has read and understands this Code of Ethics and recognizes that he is subject to it and that he has complied with the requirements of this Code of Ethics by submitting the form attached hereto as Exhibit B.
E. Within 10 days following the end of each calendar quarter, each Access Person shall report to the Compliance Department all personal securities transactions effected during such quarter by submitting the form attached hereto as Exhibit C.
F. Any provision of this Code of Ethics requiring an Access Person or Investment Person to report securities transactions or securities positions to the Company shall require the reporting of any transaction or position in which such person has, acquires or disposes of any beneficial ownership interest.
G. The requirements of Section IV(B), IV(C), IV(D) and IV(E) shall be deemed to be complied with by any Access Person who complies with substantially similar requirements contained in the First Trust Portfolios L.P. Unit Investment Trust Code of Ethics.
V. EXEMPTIONS
The following transactions shall be exempted from the provisions of Article III and, in the case of paragraph A, C, and D, Article IV of this Code of Ethics:
A. The purchase or sale of U.S. government securities, money market instruments, mutual funds or unit investment trusts.
B. The purchase or sale of shares of issuers whose shares are traded on a national or foreign securities exchange and which have a market capitalization of at least $1 billion.
C. Purchases which are part of an automatic dividend reinvestment plan or which involve no investment decision by the purchaser.
D. Purchases and sales which are effected to establish or maintain a model investment portfolio on behalf of First Trust Advisor L.P.
VI. SANCTIONS
Upon discovery of a violation of this Code of Ethics, including either violations of the enumerated provisions or the general principles provided, the Company may impose such sanctions as it deems appropriate, including, inter alia, a fine, letter of censure or suspension or termination of the employment of the violator.
Amended as of November 27, 2002
EXHIBIT A
FIRST TRUST ADVISORS L.P.
ACCESS/INVESTMENT PERSON
SECURITIES HOLDINGS REPORT
Name of Access/Investment Person: ____________________________________________
Date: ______________________________
[ ] I hereby certify that as of _________________, I had a beneficial ownership interest in no securities other than those set forth below.
OR
[ ] I hereby certify that as of __________________, I had a beneficial ownership interest in no securities other than those set forth on the attached brokerage account statements.
OR
[ ] I hereby certify that as of __________________, I had a beneficial interest in no securities.
EXHIBIT B
FIRST TRUST ADVISORS L.P.
ACCESS/INVESTMENT PERSON
CODE OF ETHICS CERTIFICATION
I, ___________________________, hereby certify that I have read, and understand the FIRST TRUST ADVISORS L.P. Code of Ethics. Furthermore, I certify that I have complied with its provisions during the preceding year.
EXHIBIT C
FIRST TRUST ADVISORS L.P.
ACCESS/INVESTMENT PERSON
QUARTERLY TRANSACTION REPORT
Name of Access/Investment Person:________________________________________
Date: _____________________
[ ] I hereby certify that during the calendar quarter ended _____________, I had a beneficial ownership interest in the following securities transactions:
Type of Type of # of shares/ Transaction Security Issuer principal amount $ amount ----------- -------- ------ ---------------- -------- |
OR
[ ] I hereby certify that during the calendar quarter ended __________, I had a beneficial ownership interest in no securities transactions other that those set forth on the attached brokerage account confirmations.
OR
[ ] I hereby certify that during the calendar quarter ended ___________, I had a beneficial ownership interest in no securities transactions.
CODE OF ETHICS
1. INTRODUCTION
This Code of Ethics ("the Code") is adopted by:
(i) Aberdeen Asset Management Inc;
(ii) Aberdeen Asset Managers (C.I.) Limited; and
(iii) Aberdeen Asset Management Limited
(iv) Aberdeen Asset Management Asia Limited
(each hereinafter referred to individually as a "firm" and together as "Aberdeen US Fund Management Subsidiaries") in compliance with the requirements of Rule 17j-1 ("the Rule") adopted by the United States Securities and Exchange Commission under the Investment Company Act of 1940 ("the Act"), and Sections 204A and 206 of the Investment Advisers Act of 1940 ("the Advisers Act"), specifically Rule 204-2 thereunder, to effectuate the purposes and objectives of those provisions.
Under the Rule the following activities are unlawful for certain persons, including any employee of Aberdeen US Fund Management Subsidiaries, in connection with the purchase or sale by such person of a security held or to be acquired by any Portfolio of Aberdeen US Fund Management Subsidiaries:
1. To employ a device, scheme or artifice to defraud a Portfolio, a Fund, any client or prospective client;
2. To make to a Portfolio, a Fund, any client or prospective client, any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances in which they are made, not misleading;
3. To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon a Portfolio, a Fund, any client or prospective client;
4. Acting as principal for his/her own account, knowingly to sell any security to or purchase any security from a client, or acting as a broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he/she is acting and obtaining the consent of the client to such transaction; or
5. To engage in any act, practice, or course of business which is fraudulent, deceptive or manipulative.
Under the Advisers Act Aberdeen US Fund Management Subsidiaries are required to:
o establish and enforce policies and procedures reasonably designed to
prevent the misuse of material,
non-public information by investment advisers ( Section 204A); and
o maintain records with respect to the personal securities transactions of
advisory representatives (as defined below) (Section 204-2).
This Code contains provisions reasonably necessary to prevent persons from engaging in acts in violation of the above standard and procedures reasonably necessary to prevent violations of the Code.
The Board of Directors of each firm adopts this Code.
The Code is based upon the principle that the Directors and Officers of Aberdeen US Fund Management Subsidiaries and certain persons employed within the Aberdeen Asset Management Group of companies owe a fiduciary duty to clients to conduct their affairs, including their personal securities transactions, in such a manner as to avoid:
(i) serving their own personal interests ahead of clients;
(ii) taking inappropriate advantage of their position within Aberdeen US Fund Management Subsidiaries; and
(iii) any actual or potential conflicts of interest or any abuse of their position of trust and responsibility.
This fiduciary duty includes the duty of a firm's Compliance Officer to report violations of this Code to the firm's Board of Directors and to the Board of Directors of any Fund advised or sub-advised by the firm.
2. POLICY STATEMENT ON INSIDER TRADING
Definition
The Aberdeen Group prohibits any Affected Person, namely (i) any officer or director of an Aberdeen US Fund Management Subsidiary, and (ii) employees of the Group from trading, either personally or on behalf of others, including accounts managed by the Aberdeen Group, on material non-public information or communicating material non-public information to others in violation of the law. This conduct is frequently referred to as "insider trading." The policy applies to every such Affected Person and extends to activities within and outside their duties within the Group. Any questions regarding the firm's policy and procedures should be referred to the Compliance Officer.
The term "insider trading" is not defined in the Federal Securities laws, but generally is used to refer to the use of material non-public information to trade in securities (whether or not one is an "insider") or to communications of material non-public information to others.
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
1) trading by an insider, while in possession of material non-public information;
2) trading by a non-insider, while in possession of material non-public information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated; or
3) communicating material non-public information to others.
The Concept of "Insider"
The concept of "insider" is broad. It includes officers, directors and employees of a company. In addition, a person can be a "temporary insider" if he or she enters into a special confidential relationship in the conduct of a firm's affairs and as a result is given access to information solely for the company's purposes.
A temporary insider can include, among others, a company's legal advisers, accountants, consultants, bank lending officers, and the employees of such third parties. In addition, a company may become a temporary insider of a company it advises or for which it performs other services. For that to occur that company must expect the subsidiary to keep the disclosed non-public information confidential and the relationship must at least imply such a duty before the subsidiary will be considered an insider.
Material Information
Trading on inside information is not a basis for liability unless the information is material. "Material information" generally is defined as:
o information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions: or
o information that is reasonably certain to have a substantial effect on the price of a company's securities.
Information that officers, directors and employees should consider material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments.
Non-Public Information
Information is non-public until it has been effectively communicated to the market place. One must be able to point to some fact to show the information is generally public. For example, information found in a report filed with the SEC, or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of general circulation would be considered public.
Before trading for yourself or others in the securities of a company about which you may have potential inside information, ask yourself the following questions:
i. Is the information material? Is this information that an investor would consider important in making his or her investment decisions? Is this information that would substantially effect the market price of the securities if generally disclosed?
ii. Is the information non-public? To whom has this information been provided? Has the information been effectively communicated to the marketplace?
If, after consideration of the above, you believe that the information is material and non-public, or if you have questions as to whether the information is material and non-public, you should take the following steps.
i. Report the matter immediately to the Compliance Officer.
ii. Do not purchase or sell the securities on behalf of yourself or others.
iii. Do not communicate the information either inside or outside the firm, other than to the Compliance Officer or another appropriate member of the Compliance Department.
iv. After the Compliance Officer has reviewed the issue, you will either (i) be instructed to continue the prohibitions against trading and communication, or (ii) l be allowed to trade and communicate the information.
Information in your possession that you identify as material and non-public may not be communicated to anyone, including persons within the Aberdeen Group, except as provided above. In addition, care should be taken so that such information is secure. For example, files containing material non-public information should be sealed and access to computer files containing material non-public information should be restricted.
Monitoring Procedures
The role of Compliance is critical to the implementation and maintenance of the Aberdeen Group's policy and procedures against insider trading.
The Supervisory Procedures can be divided into:
(A) The Prevention of insider trading and detection of insider trading
To prevent insider trading Compliance will:
i. provide, on a regular basis, an educational program to familiarise Affected Persons with the policy and procedures; and
ii. when it has been determined that an Affected Person has material non-public information:
o implement measures to prevent dissemination of such information; and
o where necessary, restrict Affected Persons from trading the securities.
(B) The Detection of Insider Trading.
To detect insider trading, Compliance will:
i. review the trading activity reports filed by each Affected Person; and
iii. review the trading activity of accounts managed by the firm.
3. THE REQUIREMENTS
A. DEFINITIONS
"Access Person" means (i) any Director or Officer of Aberdeen US Fund Management Subsidiaries and (ii) any Investment Personnel of the Aberdeen Group.
"Advisory Representative " means any employee, who in connection with his or her regular functions or duties, normally makes, participates in, or otherwise obtains current information regarding the purchase or sale of a security by the Aberdeen Group or whose functions relate to the making of any recommendations with respect to such purchases or sales; and any natural person in a control relationship to the Aberdeen Group who obtains information concerning recommendations made concerning a purchase or sale of a Security. This definition includes but is not limited to the following: Officer, Director, "Investment
Person", "Portfolio Manager" and any other employee of the Adviser designated as an "Advisory Representative" from time to time by the Compliance Officer.
"Non-Advisory Representative " means any individual who has no contact with information regarding the purchases or sales of Securities made by the Aberdeen Group in his or her regular functions or duties. However, such individuals are subject to the Introduction and Policy Statement on Insider Trading contained in this Code.
"Affiliated Company" means a company which is an affiliated person, as defined in the 1940 Act.
"Affiliated Person" of another person means (a) any person directly or indirectly owning, controlling, or holding with power to vote, five (5%) percent or more of the outstanding voting securities of such other person; (b) any person five (5%) percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other person; (c) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (d) any officer, director, partner, copartner, or employee of such other person; (e) if such other person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (f) if such other person is an unincorporated investment company not having a board of directors, the depositor thereof.
"Beneficial ownership" shall be interpreted in the same manner as it would be under Rule 16a-1(a)(2) of the Securities Exchange Act of 1934, as amended (the "1934 Act") in determining whether a person is the beneficial owner of a security for purposes of Section 16 of the 1934 Act and the rules and regulations thereunder, that, generally speaking, encompasses those situations where the beneficial owner has the right to enjoy a direct or indirect economic benefit from the ownership of the security. A person is normally regarded as the beneficial owner of securities held in (i) the name of his or her spouse, domestic partner, minor children, or other relatives living in his or her household; (ii) a trust, estate or other account in which he/she has a present or future interest in the income, principal or right to obtain title to the securities; or (iii) the name of another person or entity by reason of any contract, understanding, relationship, agreement or other arrangement whereby he or she obtains benefits substantially equivalent to those of ownership.
"Control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Any person who owns beneficially, either directly or through one or more controlled companies, more than twenty-five (25%) percent of the voting securities of a company shall be presumed to control such company. Any person who does not so own more than twenty-five (25%) percent of the voting securities of any company shall be presumed not to control such company. A natural person shall be presumed not to be a controlled person.
"Disclosable transaction" means any transaction in a security pursuant to which an access person would have a beneficial ownership.
"Fund" means any investment vehicle registered under the Investment Company Act of 1940 for which Aberdeen US Fund Management Subsidiaries act as Manager, Adviser or Sub-adviser.
"Non-interested Director" means a director or trustee who is not an interested person.
"Interested Person" of another person, when used with respect to a
Fund, means (i) any affiliated person of the Fund; (ii) any member of
the immediate family of any natural person who is an affiliated person
of the Fund; (iii) any interested person of any investment adviser of
or principal underwriter for the Fund; (iv) any person or partner or
employee of any person who at any time since the beginning of the last
two completed fiscal years of the Fund has acted as legal counsel for
the Fund; (v) any broker or dealer registered under the Securities
Exchange Act of 1934 or any affiliated person of such a broker or
dealer; or (vi) any natural person whom the Commission by order shall
have determined to be an interested person by reason of having had, at
any time since the beginning of the last two completed fiscal years of
the Fund, a material business or professional relationship with the
Fund or with the principal executive officer of such company or with
any other investment company having the same investment adviser or
principal underwriter or with the principal executive officer of such
other investment company, provided, that no person shall be deemed to
be an interested person of an investment company solely by reason of
(aa) his being a member of its Board of Directors or advisory board or
an owner of its securities, or (bb) his membership in the immediate
family of any person specified in clause (aa) of this proviso.
"Initial Public Offering" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the 1934 Act, or a similar offering of securities in another market.
"Investment Personnel" means (a) any Portfolio Manager of the Aberdeen Group; (b) any employee of the Aberdeen Group (or of any company in a control relationship to a Fund or the Aberdeen Group) who, in
connection with his regular functions or duties, makes or participates
in making recommendations regarding the purchase or sale of securities
by the Aberdeen Group, including securities analysts and traders; or
(c) any person who controls a Fund of the Aberdeen Group and who
obtains information concerning recommendations made to a Fund or any
Portfolio regarding the purchase or sale of securities by any Fund or
Portfolio.
"Limited Offering" means an offering that is exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") pursuant to Section 4(2) or Section 4(6) or Rules 504, 505 or 506 under the Securities Act. Limited offerings are commonly referred to as private placements.
"Person" means a natural person or a company.
"Portfolio" means any account, trust or other investment vehicle (except "Fund") over which the Aberdeen Group has investment management discretion.
"Portfolio Manager" means an employee of the Aberdeen Group entrusted with the direct responsibility and authority to make investment decisions affecting the Portfolios or Funds managed by the Aberdeen Group.
"Purchase or sale of a security" includes, among other things, the writing of an option to purchase or sell a Security.
"Security Held or to be Acquired" means (i) any security which, within
the most recent 15 days, is or has been held by a Fund or Portfolio, or
is being or has been considered for purchase by a Fund or Portfolio, or
(ii) any option to purchase or sell and any security convertible into
or exchangeable for a Security.
"Security" shall have the meaning set forth in Section 202(a)(18) of the Advisers Act and Section 2(a)(36) of the 1940 Investment Company Act. Further, for purposes of this Code, "Security" shall include any commodities contracts as defined in Section 2(a)(1)(A) of the Commodity Exchange Act. This definition includes but is not limited to futures contracts on equity indices.
"Security" shall not include direct obligations of a national government, bankers' acceptances, bank certificates of deposit, high quality short-term debt instruments (maturity of less than 366 days at issuance and rated in one of the two highest rating categories by a Nationally Recognized Statistical Rating Organization), including repurchase agreements, commercial paper and shares of money market funds that limit their investments to the exempted securities enumerated above. Also excluded from the definition are any registered open-end investment companies (e.g. open-end mutual funds), or the equivalent of such as SICAVs. Any question as to whether a particular investment constitutes a "Security" should be referred to the Compliance Officer.
B. PROHIBITED TRANSACTIONS
No Access Person shall engage in any act, practice or course of conduct, which would violate the provisions of Rule 17j-1 of the Investment Company Act or Section 206 of the Investment Advisers Act as set forth above.
1. Access Persons
Except as provided in Section C below, no Access Person shall:
(a) purchase or sell, directly or indirectly, any security in which he/she has or by reason of such transaction acquires, any direct or indirect beneficial ownership and which to his/her actual knowledge at the time of such purchase or sale is:
(1) being considered for purchase or sale by any Portfolio or Fund managed by the Aberdeen Group;
(2) being purchased or sold by any Portfolio or Fund managed by the Aberdeen Group; or
(b) disclose to other persons the securities activities engaged in or contemplated for the various Portfolios or Funds managed by the Aberdeen Group;
(c) accept any gift or other thing of more than de minimis value from any person or entity that does business with or on behalf of the Aberdeen Group. For the purposes of the Code "de minimis" shall be considered to be the annual receipt of gifts and / or entertainment from the same source valued at (pound)350;
(d) acquire a beneficial interest in any securities in an Initial Public Offering ("IPO") or other limited offerings commonly referred to as private placements, without having sought prior written approval from the appropriate Investment Director and an Executive Director of the Aberdeen Group. Compliance will maintain a record of any decision, and the reasons supporting the decision, to approve the Access Person's
acquisition of an IPO or private placement for at least five years after the end of the fiscal year in which the approval was granted.
Before granting such approval the Investment Director will carefully evaluate such investment to determine that the investment could create no material conflict between the Access Person and a Fund or Portfolio. The Investment Director may make such determination by looking at, among other things, the nature of the offering and the particular facts surrounding the purchase. For example, the Investment Director may consider approving the transaction if it can be determined that: (i) the investment did not result from directing Fund or Aberdeen Group business to the underwriter or issuer of the security; (ii) the Investment Personnel is not misappropriating an opportunity that should have been offered to a Fund or Portfolio; and (iii) an Investment Person's investment decisions for a Fund or Portfolio will not be unduly influenced by his or her personal holdings and investment decisions are based solely on the best interests of a Fund or Portfolio.
Any person authorised to purchase securities in an IPO or private placement shall disclose that investment when they play a part in a Fund or Portfolio's subsequent consideration of an investment in that issuer. In such circumstances, a Fund or Portfolio's decision to purchase securities of the issuer shall be subject to independent review by investment personnel with no personal interest in the issuer.
(e) serve on the Board of Directors of any publicly traded company without prior authorisation of the Aberdeen Group Chief Executive. Any such authorisation shall be based upon a determination that the board service would be consistent with the interests of the Aberdeen Group and Portfolios and Funds under their management. Authorisation of board service shall be subject to the implementation by the Aberdeen Group of "Chinese Wall" or other procedures to isolate such Access Persons from making decisions about trading in that company's securities.
2. Portfolio Managers
In addition to the prohibitions listed in Sections B(1) and (2) above, no Portfolio Manager shall buy or sell a security within seven (7) calendar days before or after any Portfolio or Fund managed or advised by the Aberdeen Group trades in that security. Any trades made within the proscribed period shall be unwound, if possible. Otherwise, any profits realised on trades within the proscribed period shall be disgorged to a charity of Aberdeen's choosing.
3. All Employees
No employees may profit in the purchase and sale, or sale and purchase, of the same (or equivalent) securities within ninety (90) calendar days. Trades made in violation of this prohibition should be unwound, if possible. Otherwise, any profits realised on such short-term trades shall be subject to disgorgement to the appropriate charity of Aberdeen's choosing. This prohibition shall also apply to the purchase and sale of shares/units in mutual funds.
C. EXEMPTED TRANSACTIONS
Transactions described in Sections B(1), B(2) and B(3) above, which appear
upon reasonable inquiry and investigation to present no reasonable
likelihood of harm to a Fund or Portfolio and which are otherwise
transacted in accordance with Investment Company Act Rule 17j-1 and
Section 206 of the Investment Company Act may be permitted within the
discretion afforded under the Aberdeen Group's Personal Account Dealing
authorisation process on a case-by-case basis.
The Aberdeen Group's current exempted transactions include securities over which the Access Person has no influence or control, including:
(a) purchases or sales which are non-volitional on the part of either the Access Person or the Fund and/or Portfolio;
(b) purchases which are part of an automatic dividend reinvestment plan or regular investment scheme for investment in a selected security or securities, subject to pre-clearance of the first purchase under that scheme); and
(c) securities acquired by the exercise of rights issued pro rata by an issuer to all holders of a class of its securities (to the extent such rights were acquired from such issuer), and sales of such rights so acquired.
D. COMPLIANCE PROCEDURES
With respect to the pre-clearance and reporting requirements contained herein, Access Persons shall pre-clear in accordance with the Aberdeen Group's Personal Account Dealing procedures.
1. Pre-clearance Procedures
All Access Persons must receive prior written approval from the appropriate Investment Director, before purchasing or selling securities in an account that such Access Person has beneficial ownership. The Access Person should request pre-clearance by completing, signing and submitting the Personal Account Deal Request Form for the written authorisation of an Investment Director, an Executive Director and Compliance prior to dealing. The persons currently accepted as authorised signatures for the Aberdeen Group are given in Exhibit A.
In addition where the Access Person intends to deal in securities issued by a closed-end investment company advised by Aberdeen, or in the shares of Aberdeen Asset Management PLC the written approval of the Company Secretary of the investment company or, as the case may be Aberdeen Asset Management PLC, must first be obtained.
Pre-clearance approval will expire 12 hours after the authorisation is granted with the exception of Far Eastern and Australian offices where the approval time extends to 24 hours. If the trade instruction is not placed before such pre-clearance expires, the Access Person is required to again obtain pre-clearance for the trade. In addition, if before placing the trade instruction, the Access Person becomes aware of any additional information with respect to a transaction that was pre-cleared, such Access Person shall not proceed further with the trade, without submitting a fresh application for approval. Access Persons are excluded from the requirement to pre-clear securities purchased, sold or acquired only in the following transactions:
(a) purchases or sales which are non-volitional on the part of either
the Access Person or the Fund and/or Portfolio;
(b) purchases which are part of an automatic dividend reinvestment
plan or regular investment scheme for investment in a selected
security or securities, subject to pre-clearance of the first
purchase under that scheme; and
(c) securities acquired by the exercise of rights issued pro rata by
an issuer to all holders of a class of its securities, to the
extent such rights were acquired from such issuer, and sales of
such rights so acquired.
2. Disclosure of Personal Holdings
All Access Persons shall disclose to the Compliance Officer:
o all personal securities holdings (including securities acquired
before the person became an Access Person) within ten (10) days
upon the later of commencement of employment or adoption of this
Code; and
o report the name of any broker, dealer or bank with whom the Access
Person maintains an account in which any securities were held for
the direct or indirect benefit of the Access Person.
Access Persons must provide duplicate copies of confirmation of each transaction to the Compliance Department in accordance with the Aberdeen Group Procedures for Personal Account Dealing.
In addition to reporting securities holdings, every Access Person shall certify in their initial report that:
(a) they have received, read and understand the Code and recognise that they are subject thereto; and
(b) they have no knowledge of the existence of any personal conflict of interest relationship which may involve a Fund or Portfolio, such as any economic relationship between their transactions and securities held or to be acquired by a Fund or Portfolio.
This initial report shall be made on the form Initial Report of Access Person and shall be delivered to Compliance.
3. Quarterly Reporting Requirements
All Access Persons are required to disclose to Compliance all personal securities transactions conducted during the period as of the calendar quarter ended within ten (10) days after quarter end. This disclosure includes the:
(a) date of the transaction, title of the security, interest rate and maturity date (if applicable), number of shares, and principal amount of each security involved;
(b) nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(d) name of the broker, dealer or bank with or through whom the transaction was effected; and
(d) date the report is submitted.
In addition, with respect to any account established by an Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person, the Access Person must provide the:
(a) name of the broker, dealer or bank with whom the Access Person established the account;
(b) date the account was established; and
(c) date the report is submitted.
The Aberdeen Group's Personal Account Dealing Procedures require copy contract confirmations to be received for all Person Account Dealing. These will be accepted as meeting the quarterly reporting requirement in so far as for each calendar quarter ended all copy contract notes are delivered within thirty days of the relevant quarter. Similarly, Access Persons may provide an account statement of any new account opened in the quarter within thirty days of the relevant quarter.
4. Annual Certification of Compliance with the Code
Access Persons shall disclose all personal securities holdings as of the calendar year ended within thirty (30) days after the year-end. In addition to reporting securities holdings, every Access Person shall certify annually that:
(a) they have read and understand the Code and recognise that they are subject thereto;
(b) they have complied with the requirements of the Code; and that they have reported all personal securities transactions required to be reported pursuant to the requirements of the Code;
(c) they have not disclosed pending "buy" or "sell" orders for a Portfolio or Fund to any employees of any other management company, except where the disclosure occurred subsequent to the execution or withdrawal of an order; and
(d) they have no knowledge of the existence of any personal conflict of interest relationship which may involve any Portfolio or Fund, such as any economic relationship between their transactions and securities held or to be acquired by a Fund or Portfolio.
This annual report shall be delivered to the Compliance Officer.
5. Reports to Compliance Officer
The firm's Compliance Officer will provide, by the twelfth (12) day after each quarter end, certification to the Compliance Officer of a relevant Fund that, as of the prior quarter end:
(a) all documentation required by the Code and Rule 17j-1 has been collected and is being retained on behalf of the Fund;
(b) there have been no violations to the Code and, if there have been violations to the Code, the violation has been documented and reported to the Fund's Compliance Officer; and
(c) the firm has appointed appropriate management or compliance personnel to review transactions and reports filed by access persons under the Code, and adopted procedures reasonably necessary to prevent access persons from violating the Firm's Code.
Each quarter the firm's Compliance Officer will also provide to the Compliance Officer of each Relevant Fund a list of Access Persons who are subject to this Code and the names of the relevant personnel responsible for pre-clearing and reviewing personal securities transactions.
A "Relevant Fund" is one where the Aberdeen US Fund Management Subsidiary acts as a delegated sub-adviser to another company's fund, which requires positive affirmation on the tasks carried out.
The Compliance Officer will provide such information, including, but not limited to, initial, quarterly and annual reports for all Access Persons, pre-clearance reports and approval for short term transactions, IPO and private placement securities, as is requested by a relevant Fund's Compliance Officer.
6. General Reporting Requirements
Compliance will notify each Access Person that he or she is subject to the Code and the reporting requirements contained herein, and shall deliver a copy of this Code to each such person when they become an Access Person, or upon request.
Reports submitted pursuant to this Code shall be confidential and shall be provided only to the officers and Directors of the Firm and each Fund, their legal advisers/or regulatory authorities upon appropriate request.
7. Excessive Trading
Aberdeen understand that it is appropriate for Access Persons to participate in the public securities markets as part of their overall personal financial planning.
As in other areas, however, this should be done in a way that creates no potential conflicts with the interests of any Fund or Portfolio. Further, it is important to recognise that otherwise appropriate trading, if excessive, may compromise the best interests of any Funds or Portfolios if such trading is conducted during work-time or using Fund/Portfolio resources. Accordingly, if personal trading rising to such dimension as to create an environment that is not consistent with the Code, approval for such personal transactions may either be refused or may be limited by the firm.
No Access Person should engage in excessive trading or market timing activities with respect to any mutual Funds whether managed by the Aberdeen Group or otherwise.
8. Conflict of Interest
Every Access Person shall notify the Compliance Officer of any personal conflict of interest relationship which may involve a Fund or Portfolio, such as the existence of any economic relationship between their transactions and securities held or to be acquired by any Portfolio or Fund. Such notification shall occur in the pre-clearance process.
E. REPORTING OF VIOLATIONS TO THE BOARD OF DIRECTORS
The Compliance Officer shall promptly report to the firm's Board of Directors and the Compliance Officer of the appropriate Fund all apparent violations of the Code and the reporting requirements thereunder. The Board of Directors of the firm shall consider reports made hereunder and shall determine whether or not this Code has been violated and what sanctions, if any, should be imposed.
F. ANNUAL REPORTING TO THE BOARD OF DIRECTORS
The Compliance Officer will prepare an annual report relating to the Code of Ethics for the Board of Directors of the firm and the Funds. Such annual report shall:
(a) summarise existing procedures concerning personal investing and any changes in the procedures made during the past year;
(b) identify any violations requiring significant remedial action during the past year;
(c) identify any recommended changes in the existing restrictions or procedures based upon the firm's experience under the Code of Ethics, evolving industry practices or developments in applicable laws or regulations; and
(d) state that the firm had adopted procedures reasonably necessary to prevent Access Persons from violating the Code.
G. SANCTIONS
Upon discovering a violation of this Code, the Board of Directors of the firm may impose such sanctions as they deem appropriate, including, among other things a letter of censure. In addition the employment of the violator will be subject to suspension or termination.
H. RETENTION OF RECORDS
The firm will maintain the following records as required under Rule 17j-1:
(a) a copy of any Code in effect within the most recent five years;
(b) a list of all persons required to make reports hereunder within the most recent five years and a list of all persons who were responsible for reviewing the reports;
(c) a copy of each report submitted by an Access Person hereunder for a period of five years from the end of the fiscal year in which it was made;
(d) each memorandum made by the Compliance Officer hereunder, for a period of five years from the end of the fiscal year in which it was made;
(e) a record of any violation hereof and any action taken as a result of such violation, for a period of five years following the end of the fiscal year in which the violation occurred; and
(f) a copy of every report provided to the firm's Board of Directors, or to the Compliance Officer of a Fund, which either (i) describes any issues arising under this Code or (ii) confirms that the firm has adopted procedures reasonably necessary to prevent Access Persons from violating the Code.
Appendix A
Executive Directors and Investment Directors authorised to sign Personal Account Dealing requests
Executive Committee: Martin Gilbert London/Aberdeen
Andrew Laing London/ Aberdeen
Bill Rattray Aberdeen/London
Gary Marshall London
Rod Davidson London
Hugh Young Singapore
Bev Hendry Fort Lauderdale
Jeremy Burchill Aberdeen
Anne Richards Edinburgh
Rod Macrae Edinburgh
Investment Directors: Colin Crosby Aberdeen
Hugh Little Aberdeen
John Shelley Aberdeen
John Plumpton London
Anne Richards Edinburgh
Rod Davidson London
Peter Hames Singapore
Yoon Chou Chong London
Bruce Harrison Jersey
Graeme Sinclair Singapore
|
NB Investment Directors who are also Executive Directors may authorise a Personal Account deal request in either capacity but no one person may authorise a Personal Account Deal request in more than one capacity.
Exhibit A
ABERDEEN
CODE OF ETHICS
INITIAL REPORT OF ACCESS PERSON
1. I hereby acknowledge that (i) I have received a copy of the Aberdeen
Code of Ethics (the "Code"); (ii) I have read and understand the Code;
(iii) and I recognise that I am subject to the Code as an "Access
Person" of the Aberdeen Group.
2. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Aberdeen Group or a Fund or Portfolio, such as any economic relationship between my transactions and securities held or to be acquired by the Aberdeen Group or a Fund or Portfolio.
3. As of the date below I had a direct or indirect beneficial ownership in the following securities. You do not need to report transactions in direct obligations of government stock, bankers' acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments and recognised open-end investment companies (unit trusts, OEICs, mutual funds). Please check this box if an addendum is attached listing additional securities [ ]
Security No. of Price per Principal Type of Purchase Broker
(include interest rate and Shares Share Amount (Direct or Indirect)
maturity date, if applicable)
----------------------------- ------ --------- --------- -------------------- -------
|
This report (i) excludes transactions with respect to which I had no direct or indirect influence or control; and (ii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities listed above.
4. As of the date below I maintain accounts with the brokers, dealers or banks listed below to hold securities for my direct or indirect benefit. Please check this box if an addendum is attached listing additional accounts [ ]
Signature: _________________________ Signature: ________________________
Access Person Compliance Officer
Name: _________________________ Name: ________________________
Date: _________________________ Date: ________________________
(First date of Access
Person status)
|
Exhibit A
ABERDEEN
CODE OF ETHICS
ADDENDUM TO THE
INITIAL REPORT OF ACCESS PERSON
Security No. of Price per Principal Type of Purchase Broker
(include interest rate and Shares Share Amount (Direct or Indirect)
maturity date, if applicable)
----------------------------- ------ --------- --------- -------------------- -------
|
This report (i) excludes transactions with respect to which I had no direct or indirect influence or control; and (ii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities listed above.
Signature: _________________________ Signature: ________________________
Access Person Compliance Officer
Name: _________________________ Name: ________________________
Date: _________________________ Date: ________________________
(First date of Access
Person status)
|
Exhibit B
ABERDEEN
CODE OF ETHICS
ANNUAL REPORT OF ACCESS PERSONS
1. I hereby acknowledge that I have read and understand the Code of Ethics for the Aberdeen Group (the "Code") and recognise that I am subject thereto in the capacity of an Access Person of the Group.
2. I hereby certify that, during the year ended December 31, 200__, I have complied with the requirements of the Code and have reported all securities transactions required to be reported pursuant to the Code.
3. I hereby certify that I have not disclosed pending "buy" or "sell" orders for a Portfolio or a Fund to any employees of any other Management Company, except where the disclosure occurred subsequent to the execution or withdrawal of an order.
4. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve a Fund or a Portfolio, such as any economic relationship between my transactions and securities held or to be acquired by a Fund or a Portfolio.
5. As of December 31, 200__, I had a direct or indirect beneficial ownership in the securities listed below. You do not need to report transactions in direct obligations of government stock, bankers' acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments and recognised open-end investment companies (unit trusts, OEICs, mutual funds). Please check this box if an addendum is attached listing additional securities [ ]
Security No. of Price per Principal Type of Purchase Broker
(include interest rate and Shares Share Amount (Direct or Indirect)
maturity date, if applicable)
----------------------------- ------ --------- --------- -------------------- -------
|
This report (i) excludes transactions with respect to which I had no direct or indirect influence or control; and (ii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities listed above.
6. As of the date below I maintain accounts with the brokers, dealers or banks listed below to hold securities for my direct or indirect benefit. Please check this box if an addendum is attached listing additional accounts [ ]
Signature: _________________________ Signature: ________________________
Access Person Compliance Officer
Name: _________________________ Name: ________________________
Date: _________________________ Date: ________________________
(No later than 30 days after
year-end)
|
Exhibit B
ABERDEEN
CODE OF ETHICS
ADDENDUM TO THE
ANNUAL REPORT OF ACCESS PERSON
Security No. of Price per Principal Type of Purchase Broker
(include interest rate and Shares Share Amount (Direct or Indirect)
maturity date, if applicable)
----------------------------- ------ --------- --------- -------------------- -------
|
This report (i) excludes transactions with respect to which I had no direct or indirect influence or control; and (ii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities listed above.
Signature: _________________________ Signature: ________________________
Access Person Compliance Officer
Name: _________________________ Name: ________________________
Date: _________________________ Date: ________________________
(No later than 30 days after
year-end)
|
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above-referenced organization, hereby constitutes and appoints W. SCOTT JARDINE and ERIC F. FESS and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in his name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set his hand this 3rd day of October, 2004.
/s/ James A Bowen ---------------------------- James A. Bowen |
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
|
On this 3rd day of October, 2004, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
My Commission Expires: 9/20/06
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above-referenced organization, hereby constitutes and appoints JAMES A. BOWEN, W. SCOTT JARDINE and ERIC F. FESS and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in his name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set his hand this 3rd day of October, 2004.
/s/ Richard E. Erickson ---------------------------- Richard E. Erickson |
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
|
On this 3rd day of October, 2004, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
My Commission Expires: 9/20/06
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above-referenced organization, hereby constitutes and appoints JAMES A. BOWEN, W. SCOTT JARDINE and ERIC F. FESS and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in his name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set his hand this 3rd day of October, 2004.
/s/ Niel B. Nielson ---------------------------- Niel B. Nielson |
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
|
On this 3rd day of October, 2004, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
________________________________ Rita A. Ochoa
-------------
Notary Public, State of Illinois Notary Public
My Commission Expires: 9/20/06
|
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above-referenced organization, hereby constitutes and appoints JAMES A. BOWEN, W. SCOTT JARDINE and ERIC F. FESS and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in his name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set his hand this 3rd day of October, 2004.
/s/ Thomas R. Kadlec ---------------------------- Thomas R. Kadlec |
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
|
On this 3rd day of October, 2004, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
________________________________ Rita A. Ochoa
-------------
Notary Public, State of Illinois Notary Public
My Commission Expires: 9/20/06
|
FIRST TRUST/ABERDEEN GLOBAL OPPORTUNITY INCOME FUND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above-referenced organization, hereby constitutes and appoints JAMES A. BOWEN, W. SCOTT JARDINE and ERIC F. FESS and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in his name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set his hand this 3rd day of October, 2004.
/s/ David M. Oster ---------------------------- David M. Oster |
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
|
On this 3rd day of October, 2004, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
My Commission Expires: 9/20/06