As filed with the Securities and Exchange
Commission on September 26, 2016
1933 Act Registration No. 333-210186
1940 Act Registration No. 811-23147
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form N-1A
Registration Statement Under the Securities Act of
1933
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[X]
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Pre-Effective Amendment No. 2
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[ ]
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Post-Effective Amendment No. __
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[
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and/or
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Registration Statement Under the Investment Company Act of
1940
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[X]
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Amendment No. 2
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[
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First Trust Exchange-Traded Fund VIII
(Exact
name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s Telephone
Number, including Area Code: (800) 621-1675
W. Scott Jardine, Esq., Secretary
First Trust Exchange-Traded Fund VI
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(Name and Address of Agent for Service)
Copy to:
Eric F. Fess, Esq.
Chapman and Cutler LLP
111 West Monroe Street
Chicago, Illinois 60603
Approximate
Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement.
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 that 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
date as the Commission, acting pursuant to said Section 8(a), may determine.
Contents of Registration Statement
This Registration
Statement comprises the following papers and contents:
The Facing
Sheet
Part A - Prospectus
for First Trust CEF Income Opportunity ETF and First Trust Municipal CEF Income Opportunity ETF
Part B -
Statement of Additional Information for First Trust CEF Income Opportunity ETF and First Trust Municipal CEF Income
Opportunity ETF
Part C - Other
Information
Signatures
Index to Exhibits
Exhibits
First Trust
Exchange-Traded Fund VIII
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PRELIMINARY PROSPECTUS DATED
SEPTEMBER 22, 2016
SUBJECT TO COMPLETION
Prospectus
First Trust CEF Income Opportunity
ETF
Ticker Symbol:
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FCEF
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Exchange:
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The Nasdaq Stock Market LLC
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The First Trust CEF Income
Opportunity ETF (the “Fund”) intends to list and principally trade its shares on The Nasdaq Stock Market LLC (“Nasdaq”). Market prices may differ to some degree from the net asset value of the
shares. Unlike mutual funds, the Fund issues and redeems shares at net asset value, only in large specified blocks each consisting of 50,000 shares (each such block of shares called a “Creation Unit,” and
collectively, the “Creation Units”). The Fund’s Creation Units are issued and redeemed in-kind for securities in which the Fund invests and/or cash, and only to and from broker-dealers and large
institutional investors that have entered into participation agreements.
The Fund is a series of the First
Trust Exchange-Traded Fund VIII (the “Trust”) and an actively managed exchange-traded fund organized as a separate series of a registered management company.
Except when aggregated in Creation
Units, the shares are not redeemable securities of the Fund.
The Securities and Exchange
Commission has not approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
NOT FDIC INSURED MAY LOSE VALUE NO
BANK GUARANTEE
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.
Table of Contents
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Investment Objectives
The First Trust CEF Income
Opportunity ETF seeks to provide current income with a secondary emphasis on total return.
Fees and Expenses of the Fund
The following table describes
the fees and expenses you may pay if you buy and hold shares of the Fund. Investors purchasing and selling shares may be subject to costs (including customary brokerage commissions) charged by their broker, which are
not reflected in the table below.
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)
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None
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Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management Fees
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0.85%
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Distribution and Service (12b-1) Fees
(1)
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0.00%
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Other Expenses
(2)
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0.00%
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Acquired Fund Fees and Expenses
(3)
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1.69%
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Total Annual Fund Operating Expenses
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2.54%
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(1)
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Although the Fund has adopted a 12b-1 plan that permits it to pay up to 0.25% per annum, it will not pay 12b-1 fees at any time before September 30, 2018.
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(2)
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"Other Expenses" is an estimate based on the expenses the Fund expects to incur for the current fiscal year.
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(3)
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"Acquired Fund Fees and Expenses" is an estimate based on the expenses the Fund expects to incur for the current fiscal year.
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Example
The example below is intended to
help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account customary brokerage commissions that you pay when purchasing or selling shares of
the Fund in the secondary market.
The example assumes that you
invest $10,000 in the Fund for the time periods indicated. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain at current levels until September
30, 2018, and thereafter at 2.79% to represent the imposition of the 12b-1 fee of 0.25% per annum of the Fund’s average daily net assets. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
Portfolio Turnover
The Fund pays transactions
costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when
Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance.
Principal Investment Strategies
Under normal market conditions,
the Fund will seek to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in a portfolio of closed-end investment companies that are listed and traded in the
United States on registered exchanges (“Closed-End Funds”). Closed-End Funds issue shares of common stock that are traded on a securities exchange. Because the shares of Closed-End Funds cannot be redeemed
upon demand to the issuer like the shares of an open-end investment company (such as the Fund), investors seek to buy and sell shares of Closed-End Funds in the secondary market.
In selecting the Closed-End
Funds in which the Fund will invest (“Underlying Funds”), the Fund’s investment advisor will utilize a range of investment approaches. The Fund’s investment advisor generally takes a systemic
approach to investing, including the utilization of a proprietary model that identifies, sorts and scores Closed-End Funds based upon various market metrics and economic factors, including, but not limited to, Fund
size, duration, leverage ratio, average maturity, earnings rate, undistributed net investment income, distribution rate, premium or discount, net asset value and share price returns, sponsor and distribution
policies.
The Underlying Funds may invest
in, among other types of investments, U.S. and non-U.S. equity securities, U.S. and non-U.S. government debt, corporate debt, municipal securities, commodities, preferred securities, convertible securities, high yield
securities, master limited partnerships and senior loans.
Principal Risks
You could lose money by
investing in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. There can be no assurance
that the Fund’s investment objectives will be achieved.
AUTHORIZED PARTICIPANT
CONCENTRATION RISK.
Only an authorized participant (as defined in the “Frequent Purchases and Redemptions” Section) may engage in creation or redemption transactions directly with the Fund. The
Fund has a limited number of institutions that act as authorized participants. To the extent that these institutions exit the business or are unable to proceed with creation and/or redemption orders with respect to
the Fund and no other authorized participant is able to step forward to create or redeem, in either of these cases, Fund shares may trade at a discount to the Fund’s net asset value and possibly face
delisting.
CASH TRANSACTIONS RISK.
The Fund may, under certain circumstances, effect a portion of creations and redemptions for cash, rather than in-kind securities. As a result, an investment in the Fund may be less
tax-efficient than an investment in an ETF that effects its creations and redemptions for in-kind securities. Because the Fund may effect a portion of redemptions for cash, it may be required to sell portfolio
securities in order to obtain the cash needed to distribute redemption proceeds. A sale of shares may result in capital gains or losses and may also result in higher brokerage costs.
CLOSED-END FUND RISK.
Because the shares of Closed-End Funds cannot be redeemed upon demand, shares of many Closed-End Funds will trade on exchanges at market prices rather than net asset value, which may cause
the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). There can be no assurance that the market discount on shares of any Closed-End Fund purchased by the Fund
will ever decrease or that when the Fund seeks to sell shares of a Closed-End Fund it can receive the NAV for those shares. Closed-End Funds have lower levels of daily volume when compared to open-end investment
companies. There are greater risks involved in investing in securities with limited market liquidity. To the extent the Fund invests in Closed-End Funds, it will indirectly bear its proportionate share of any fees and
expenses payable directly by the Closed-End Fund. Therefore, the Fund would incur higher expenses, which may be duplicative, than if the Fund did not invest in Closed-End Funds. The performance of the Fund is
dependent upon the performance of the Underlying Funds.
In addition, Closed-End Funds
may utilize leverage. As a result, the Fund may be exposed indirectly to leverage through an investment in such securities. An investment in the securities of Closed-End Funds that use leverage may expose the Fund to
higher volatility in the market value of such securities and the possibility that the Fund’s long-term return on such securities will be diminished. Closed-End Funds may issue senior securities (including
preferred stock and debt obligations) for the purpose of leveraging the Closed-End Fund’s common shares in an attempt to enhance the current return to such Closed-End Fund’s common shareholders.
The organizational documents of
Closed-End Funds may include provisions that could the ability of other entities or persons to acquire control of the Closed-End Fund or to change the composition of its board of directors, which could limit the
ability of shareholders to sell their shares at a premium over the prevailing market prices by discouraging a third party from seeking to obtain control of the Closed-End Fund.
CYBER SECURITY RISK.
As the use of Internet technology has become more prevalent in the course of business, the Fund has become more susceptible to potential operational risks through breaches in cyber
security. A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could
cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized access to the
Fund’s digital information systems through “hacking” or malicious software coding, but may also
result from outside attacks such as
denial-of-service attacks through efforts to make network services unavailable to intended users. In addition, cyber security breaches of the Fund’s third party service providers, such as its administrator,
transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the Fund invests, can also subject the Fund to many of the same risks associated with direct cyber security breaches. The Fund has
established risk management systems designed to reduce the risks associated with cyber security. However, there is no guarantee that such efforts will succeed, especially because the Fund does not directly control the
cyber security systems of issuers or third party service providers.
MANAGEMENT RISK.
The Fund is subject to management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the Fund’s investment advisor will apply
investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the Fund will meet its investment objectives.
MARKET RISK.
Market risk is the risk that a particular Underlying Fund, the securities in which the Underlying Fund invests, or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of the Fund could decline in value
or underperform other investments.
MARKET MAKER RISK.
If the Fund has lower average daily trading volumes, it may rely on a small number of third-party market makers to provide a market for the purchase and sale of shares. Any trading halt or
other problem relating to the trading activity of these market makers could result in a dramatic change in the spread between the Fund’s net asset value and the price at which the Fund’s shares are trading
on Nasdaq, which could result in a decrease in value of the Fund’s shares. In addition, decisions by market makers or authorized participants to reduce their role or step away from these activities in times of
market stress could inhibit the effectiveness of the arbitrage process in maintaining the relationship between the underlying values of the Fund’s portfolio securities and the Fund’s market price. This
reduced effectiveness could result in Fund shares trading at a discount to net asset value and also in greater than normal intraday bid-ask spreads for Fund shares.
NEW FUND RISK.
The Fund currently has fewer assets than larger funds, and like other new funds, large inflows and outflows may impact the Fund’s market exposure for limited periods of time. This
impact may be positive or negative, depending on the direction of market movement during the period affected. Also, during the initial invest-up period, the Fund may depart from its principal investment strategies and
invest a larger amount or all of its assets in cash equivalents or it may hold cash.
NON-DIVERSIFICATION RISK.
The Fund is classified as “non-diversified” under the 1940 Act, as amended (the “1940 Act”). As a result, the Fund is only limited as to the percentage of its
assets that may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended. The Fund may invest a relatively high percentage of its
assets in a limited number of issuers. As a result, the Fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be
highly invested in certain issuers.
VOLATILITY RISK.
The market price and net asset value of the Fund’s shares and the Fund’s yield will change daily. There may be instances when the Fund will experience large in-flows and
out-flows, which will significantly alter the Fund’s size. At times, these fluctuations may negatively impact the Fund’s yield, result in increased transaction costs for the Fund and contribute to the
overall volatility of the Fund. The risk will be more prevalent when the Fund is smaller in size, such as during the Fund’s invest-up period. An investor may lose money by investing in this Fund because this
Fund is not a money market fund and may experience significant fluctuations in its net asset value.
UNDERLYING FUNDS RISK.
The Fund may be subject to the following risks as a result of its investment in the Underlying Funds:
CALL RISK.
If an issuer calls higher-yielding debt instruments held by the Fund, performance could be adversely impacted.
COUNTERPARTY RISK.
To the extent that an Underlying Fund engages in derivatives transactions, the Underlying Fund bears the risk that the counterparty to the derivative or other contract with a third-party
may default on its obligations or otherwise fail to honor its obligations. If a counterparty defaults on its payment obligations the Underlying Fund will lose money and the value of an investment in the Underlying
Fund’s shares may decrease.
COVERED CALL RISK.
Certain of the Underlying Funds may invest in covered call options. Covered call risk is the risk that an Underlying Fund will forgo, during the option’s life, the opportunity to
profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but has retained the risk of loss should the price of the underlying
security decline. In addition, as the Underlying Fund writes covered calls over more of its portfolio, its ability to benefit from capital appreciation becomes more limited. The writer of an option has no control over
the time
when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the
underlying security at the exercise price.
CREDIT RISK.
Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a
security may decline because of concerns about the issuer’s ability to make such payments.
CURRENCY RISK.
The Underlying Funds may hold investments that are denominated in non-U.S. currencies, or in securities that provide exposure to such currencies, currency exchange rates or interest rates
denominated in such currencies. Changes in currency exchange rates and the relative value of non-U.S. currencies will affect the value of the Underlying Funds’ investments and the value of the Underlying
Funds’ shares. Currency exchange rates can be very volatile and can change quickly and unpredictably. As a result, the value of an investment in the Underlying Funds may change quickly and without warning and
you may lose money.
DERIVATIVES RISK.
The Underlying Funds may invest in derivatives. The use of derivatives can lead to losses because of adverse movements in the price or value of the underlying asset, index or rate, which
may be magnified by certain features of the derivatives. These risks are heightened when the Underlying Fund’s portfolio managers use derivatives to enhance the Underlying Fund’s return or as a substitute
for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the Underlying Fund.
DISTRESSED SECURITIES RISK.
Certain of the Underlying Funds may invest in debt securities that are currently in default and not expected to pay the current coupon (“Distressed Securities”). Distressed
Securities are speculative and involve substantial risks in addition to the risks of investing in high yield securities that are not in default. Generally, an Underlying Fund will not receive interest payments from
the Distressed Securities it holds, and there is a substantial risk that the principal will not be repaid. In any reorganization or liquidation proceeding related to a Distressed Security, the Underlying Fund may lose
its entire investment in such Distressed Security.
EQUITY SECURITIES RISK.
Because certain of the Underlying Funds invest in equity securities, the value of the Fund’s shares will fluctuate with changes in the value of these equity securities. Equity
securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market
volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs
increase.
ETF RISK.
The shares of an ETF trade like common stock and represent a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although
lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs.
FIXED INCOME SECURITIES
RISK.
An investment in the Fund involves risk associated with the Underlying Funds’ investments in fixed income securities including the risk that certain of the Underlying Funds may not
have the benefit of covenants that would prevent the issuer from engaging in capital restructurings or borrowing transactions in connection with corporate acquisitions, leveraged buyouts or restructurings. This
limitation could reduce the ability of the issuer to meet its payment obligations and might result in increased credit risk. In addition, certain of the securities may be redeemed or prepaid by the issuer, resulting
in lower interest payments received by the Underlying Funds and reduced distributions to shareholders.
HIGH YIELD SECURITIES RISK.
Certain of the Underlying Funds may invest in high yield securities. High yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than
securities with higher ratings, and therefore, may be highly speculative. These securities are issued by companies that may have limited operating history, narrowly focused operations, and/or other impediments to the
timely payment of periodic interest and principal at maturity. If the economy slows down or dips into recession, the issuers of high yield securities may not have sufficient resources to continue making timely payment
of periodic interest and principal at maturity. The market for high yield securities is generally smaller and less liquid than that for investment grade securities. High yield securities are generally not listed on a
national securities exchange but trade in the over-the-counter markets. Due to the smaller, less liquid market for high yield securities, the bid-offer spread on such securities is generally greater than it is for
investment grade securities and the purchase or sale of such securities may take longer to complete. In general, high yield securities may have a greater risk of default than other types of securities.
INCOME RISK.
The income of the Underlying Funds could decline due to falling market interest rates. This is because, in a falling interest rate environment, the Underlying Funds generally will have to
invest the proceeds from sales of their shares, as well as the proceeds from maturing portfolio securities, or portfolio securities that have been called, in lower-yielding securities.
INTEREST RATE RISK.
Certain of the Underlying Funds may be subject to interest rate risk. Interest rate risk is the risk that the value of the debt securities in an Underlying Fund’s portfolio will
decline because of rising market interest rates. Interest rate risk is generally lower for shorter term debt securities and higher for longer term debt securities. Duration is a measure of the expected price
volatility of a debt security as a result of changes in market rates of interest, based on, among other factors, the weighted average timing of the debt security’s expected principal and interest payments. In
general, duration represents the expected percentage change in the value of a security for an immediate 1% change in interest rates. Therefore, prices of debt securities with shorter durations tend to be less
sensitive to interest rate changes than debt securities with longer durations. As the value of a debt security changes over time, so will its duration.
INVESTMENT RESTRICTION RISK.
The Fund’s investment in Closed-End Funds is restricted by the 1940 Act and the Fund’s associated exemptive relief which limits the amount of any single Closed-End Fund that
can be owned by the Fund, individually and in the aggregate with all other registered investment companies and private investment pools advised by First Trust and its affiliates. This limitation may prevent the Fund
from purchasing shares of a Closed-End Fund that it may have otherwise purchased pursuant to its investment objective and principal investment strategy.
LEVERAGE RISK.
The Underlying Funds may employ the use of leverage in their portfolios. Leverage may be structural leverage, through borrowings or the issuance of preferred stock, or effective leverage,
which results from an Underlying Fund’s investment in derivative instruments that are inherently leveraged. While leverage often serves to increase the yield of an Underlying Fund, this leverage also subjects
the Underlying Fund to increased risks, including the likelihood of increased volatility and the possibility that the Underlying Fund’s common share income will fall if the dividend rate on the preferred shares
or the interest rate on any borrowings rises.
LIQUIDITY RISK.
Certain of the Underlying Funds may invest a portion of their assets in lower-quality debt issued by companies that are highly leveraged. Lower-quality debt tends to be less liquid than
higher-quality debt. Moreover, smaller debt issues tend to be less liquid than larger debt issues. As of the fourth quarter of 2015, the market for high yield debt has experienced decreased liquidity, and investor
perception of increased risk has caused yield spreads to widen. Decreased liquidity may negatively affect an Underlying Fund’s ability to mitigate risk.
MLP RISK.
Certain of the Underlying Funds may invest in publicly-traded master limited partnerships and limited liability companies taxed as partnerships (“MLPs”). An investment in MLP
units involves risks which differ from an investment in common stock of a corporation. Holders of MLP units have limited control and voting rights on matters affecting the partnership. In addition, there are certain
tax risks associated with an investment in MLP units and conflicts of interest may exist between common unit holders and the general partner, including those arising from incentive distribution payments. In addition,
there is the risk that a MLP could be, contrary to its intention, taxed as a corporation, resulting in decreased returns from such MLP.
MUNICIPAL OBLIGATIONS RISK.
Certain of the Underlying Funds may invest in municipal debt securities. Issuers, including governmental issuers, may be unable to pay their obligations as they come due. The values of
municipal obligations that depend on a specific revenue source to fund their payment obligations may fluctuate as a result of actual or anticipated changes in the cash flows generated by the revenue source or changes
in the priority of the municipal obligation to receive the cash flows generated by the revenue source. In addition, changes in federal tax laws or the activity of an issuer may adversely affect the tax exempt status
of municipal obligations. Loss of tax-exempt status may cause interest received and distributed to shareholders by the Fund to be taxable and may result in a significant decline in the values of such municipal
obligations.
NON-U.S. SECURITIES RISK.
The Underlying Funds may invest in non-U.S. securities. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to possible adverse political, social
or economic developments, restrictions on foreign investment or exchange of securities, lack of liquidity, currency exchange rates, excessive taxation, government seizure of assets, different legal or accounting
standards, and less government supervision and regulation of exchanges in foreign countries.
PREFERRED SECURITIES RISK.
Certain of the Underlying Funds may invest in preferred securities. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are
typically subordinated to bonds and
other debt instruments in a company’s
capital structure, in terms of priority to corporate income, and therefore will be subject to greater credit risk than those debt instruments. Preferred securities are also subject to credit risk, interest rate risk
and income risk.
PREPAYMENT RISK.
Certain of the Underlying Funds may be subject to pre-payment risk. The degree to which borrowers prepay loans, whether as a contractual requirement or at their election, may be affected
by general business conditions, the financial condition of the borrower and competitive conditions among loan investors, among others. As such, prepayments cannot be predicted with accuracy. Upon a prepayment, either
in part or in full, the actual outstanding debt on which the Fund derives interest income will be reduced. The Fund may not be able to reinvest the proceeds received on terms as favorable as the prepaid
loan.
SENIOR LOAN RISK.
Senior loans, in which certain of the Underlying Funds may invest, are usually rated below investment grade but may also be unrated. As a result, the risks associated with these senior
loans are similar to the risks of high yield fixed income instruments. An economic downturn would generally lead to a higher non-payment rate, and a senior loan may lose significant market value before a default
occurs. Moreover, any specific collateral used to secure a senior loan may decline in value or become illiquid, which would adversely affect the senior loan’s value. Unlike the securities markets, there is no
central clearinghouse for loan trades, and the loan market has not established enforceable settlement standards or remedies for failure to settle. Therefore, portfolio transactions in senior loans may have uncertain
settlement time periods. Senior loans are subject to a number of risks described elsewhere in this prospectus, including liquidity risk and the risk of investing in below investment grade fixed income instruments.
Furthermore, increases in interest rates may result in greater volatility of Senior Loans and average duration may fluctuate with fluctuations in interest rates.
SMALLER COMPANIES RISK.
Certain of the Underlying Funds may invest in small and/or mid capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their
securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources,
management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies.
Performance
The Fund does not have a
performance history. Once available, the Fund’s performance information, and information that gives some indication of the risks of an investment in the Fund by comparing the Fund’s performance with a
broad measure of market performance, will be available on the Fund’s website at www.ftportfolios.com. The Fund’s past performance (before and after taxes) is not necessarily an indication of how the Fund
will perform in the future.
Management
Investment
Advisor
First Trust
Advisors L.P. (
“First Trust”
or the
“Advisor”
)
Portfolio
Manager
The following
person serves as the portfolio manager of the Fund:
•
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Ken Fincher, Senior Vice President and Portfolio Manager of First Trust
|
The portfolio
manager is primarily and jointly responsible for the day-to-day management of the Fund. The portfolio manager has served as part of the portfolio management team of the Fund since 2016.
Purchase and Sale of Fund Shares
The Fund issues and redeems
shares on a continuous basis, at net asset value, only in Creation Units consisting of 50,000 shares. The Fund’s Creation Units are issued and redeemed in-kind for securities in which the Fund invests and/or
cash, and only to and from broker-dealers and large institutional investors that have entered into participation agreements. Individual shares of the Fund may only be purchased and sold on Nasdaq through a
broker-dealer. Shares of the Fund will trade on Nasdaq at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value
(discount).
Tax Information
The Fund’s distributions
are taxable and will generally be taxed as ordinary income or capital gains. Distributions on shares held in a tax-deferred account, while not immediately taxable, will be subject to tax when the shares are no longer
held in a tax-deferred account.
Payments to Broker-Dealers and Other
Financial Intermediaries
If you purchase shares of the
Fund through a broker-dealer or other financial intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the Fund’s distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or
visit your financial intermediary’s website for more information.
Additional Information on the
Fund's Investment Objectives and Strategies
The Fund’s investment
objective is a fundamental policy that may only be changed with shareholder approval. Unless an investment policy is identified as being fundamental, all investment policies included in the prospectus and the
Fund’s Statement of Additional Information (“SAI”) are non-fundamental and may be changed by the Board of Trustees (the “Board”) of the First Trust Exchange-Traded Fund VIII (the
“Trust”), of which the Fund is a series, without shareholder approval. If there is a material change to the Fund’s principal investment strategies, you should consider whether the Fund remains an
appropriate investment for you. There is no guarantee that the Fund will achieve its investment objectives.
The Fund has adopted a
non-fundamental investment policy pursuant to Rule 35d-1 (the “Name Policy”) under the Investment Company Act of 1940, as amended (the “1940 Act”), whereby the Fund, under normal market
conditions, will invest at least 80% of its net assets (including investment borrowings) in Closed-End Funds. The Name Policy may be changed by the Board of Trustees without shareholder approval upon 60 days’
prior written notice. If there is a material change to the Fund’s principal investment strategies, you should consider whether the Fund remains an appropriate investment for you. There is no guarantee that the
Fund will achieve its investment objectives.
Fund Investments
Principal Investments
Investment Companies
The Fund will principally invest
in securities of Closed-End Funds. However, the Fund may also invest in other investment companies, including exchange-traded funds (“ETFs”). Closed-End Funds and ETFs are managed registered investment
companies which invest in various types of securities. Closed-End Funds issue shares of common stock that are traded on a securities exchange. The Fund’s ability to invest in other investment companies is
limited by the 1940 Act and the related rules and interpretations. Both Closed-End Funds and ETFs trade on a securities exchange and their shares may, at times, trade at a premium or discount to their net asset
value.
As a shareholder in a pooled
investment vehicle, the Fund will bear its ratable share of that vehicle’s expenses, and would remain subject to payment of the fund’s advisory and administrative fees with respect to assets so invested.
Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other pooled investment vehicles. In addition, the Fund will incur brokerage costs when purchasing and selling shares
of ETFs and Closed-End Funds. Securities of other pooled investment vehicles may be leveraged, in which case the value and/or yield of such securities will tend to be more volatile than securities of unleveraged
vehicles.
In addition, as a non-principal
investment strategy, the Fund may invest in inverse ETFs. An inverse ETF is a special type of index ETF that is designed to provide investment results that move in the opposite direction of the daily price movement of
the index to which it is benchmarked. These ETFs may pursue this strategy by utilizing short selling, trading derivatives such as futures contracts and employing other leveraged investment techniques.
Non-Principal Investments
Cash Equivalents and Short-Term
Investments
The Fund may invest up to 20% of
its net assets in short-term debt securities, money market funds and other cash equivalents, or it may hold cash. The percentage of the Fund invested in such holdings will vary and will depend on several factors,
including market conditions. For temporary defensive purposes, during the initial invest-up period and during periods of high cash inflows or outflows, the Fund may depart from its principal investment strategies and
invest part or all of its assets in these securities or it may hold cash. During such periods, the Fund may not be able to achieve its investment objectives. The Fund may adopt a defensive strategy when the Advisor
believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances. Short-term debt securities are securities from issuers having a
long-term debt rating of at least A by S&P Ratings, Moody’s or Fitch and having a maturity of one year or less.
The use of temporary investments
will not be a part of a principal investment strategy of the Fund. Short-term debt securities are defined to include, without limitation, the following: (i) fixed rate and floating rate U.S. government securities,
including bills, notes and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities; (ii) certificates of
deposit issued against funds deposited in a bank or
savings and loan association; (iii)
bankers’ acceptances, which are short-term credit instruments used to finance commercial transactions; (iv) repurchase agreements, which involve purchases of debt securities; (v) 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; and (vi) commercial paper, which is short-term unsecured promissory notes The Fund may only
invest in commercial paper rated A-1 or higher by S&P Ratings, Prime-1 or higher by Moody’s or F1 or higher by Fitch.
Illiquid Securities
The Fund may hold up to an
aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment). The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained, and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances,
more than 15% of the Fund’s net assets are held in illiquid securities. Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments that lack readily
available markets as determined in accordance with SEC staff guidance.
Disclosure of Portfolio Holdings
A description of the policies and
procedures with respect to the disclosure of the Fund’s portfolio securities is included in the Fund’s SAI, which is available on the Fund’s website at www.ftportfolios.com.
Additional Risks of Investing in
the Fund
Risk is inherent in all
investing. Investing in the Fund involves risk, including the risk that you may lose all or part of your investment. There can be no assurance that the Fund will meet its stated objectives. Before you invest, you
should consider the following supplemental disclosure pertaining to the Principal Risks set forth above as well as additional Non-Principal Risks set forth below in this prospectus.
Principal Risks
CALL RISK.
Certain of the Underlying Funds invest in bonds. Many bonds may be redeemed at the option of the issuer, or “called,” before their stated maturity date. In general, an issuer
will call its bonds if they can be refinanced by issuing new bonds which bear a lower interest rate. The Underlying Funds are subject to the possibility that during periods of falling interest rates, a bond issuer
will call its high yielding bonds. The Underlying Funds would then be forced to invest the unanticipated proceeds at lower interest rates, resulting in a decline in the Underlying Fund’s income.
CASH TRANSACTIONS RISK.
The Fund may, under certain circumstances, effect a portion of its creations and redemptions for cash, rather than in-kind securities. As a result, an investment in the Fund may be less
tax-efficient than an investment in an exchange-traded fund that effects its creations and redemptions only for in-kind securities. Exchange-traded funds are able to make in-kind redemptions and avoid being taxed on
gains on the distributed portfolio securities at the fund level. Because the Fund may effect a portion of redemptions for cash, it may be required to sell portfolio securities in order to obtain the cash needed to
distribute redemption proceeds. Any recognized gain on these sales by the Fund will generally cause the Fund to recognize a gain it might not otherwise have recognized, or to recognize such gain sooner than would
otherwise be required if it were to distribute portfolio securities only in-kind. The Fund intends to distribute these gains to shareholders to avoid being taxed on this gain at the fund level and otherwise comply
with the special tax rules that apply to it. This strategy may cause shareholders to be subject to tax on gains they would not otherwise be subject to, or at an earlier date than if they had made an investment in a
different exchange-traded fund. Moreover, cash transactions may have to be carried out over several days if the securities market is relatively illiquid and may involve considerable brokerage fees and taxes. These
brokerage fees and taxes, which will be higher than if the Fund sold and redeemed its shares principally in‐kind, will be passed on to those purchasing and redeeming Creation Units in the form of creation and
redemption transaction fees. In addition, these factors may result in wider spreads between the bid and the offered prices of the Fund’s shares than for exchange‐traded funds that distribute portfolio
securities in-kind.
CLOSED-END FUND RISK.
The shares of many Closed-End Funds, after their initial public offering, frequently trade at a price per share that is less than the net asset value per share, the difference representing
the “market discount” of such shares. This market discount may be due in part to the investment objective of long-term appreciation, which is sought by many Closed-End Funds, as well as to the fact that
the shares of Closed-End Funds are not redeemable by the holder upon demand to the issuer at the next determined net asset value, but rather, are subject to supply and demand in the secondary market. A relative lack
of secondary market purchasers of Closed-End Fund shares also may contribute to such shares trading at a discount to their net asset value.
The Fund may invest in shares of
Closed-End Funds that are trading at a discount to net asset value or at a premium to net asset value. There can be no assurance that the market discount on shares of any Closed-End Fund purchased by the Fund will
ever decrease. In fact, it is possible that this market discount may increase and the Fund may suffer realized or unrealized capital losses due to further decline in the market price of the securities of such
Closed-End Funds, thereby adversely affecting the net asset value of the Fund’s shares. Similarly, there can be no assurance that any shares of a Closed-End Fund purchased by the Fund at a premium will continue
to trade at a premium or that the premium will not decrease subsequent to a purchase of such shares by the Fund.
The organizational documents of
Closed-End Funds may include provisions that could the ability of other entities or persons to acquire control of the Closed-End Fund or to change the composition of its board of directors, which could limit the
ability of shareholders to sell their shares at a premium over the prevailing market prices by discouraging a third party from seeking to obtain control of the Closed-End Fund.
Closed-End Funds may issue
senior securities (including preferred stock and debt obligations) for the purpose of leveraging the Closed-End Fund’s common shares in an attempt to enhance the current return to such Closed-End Fund’s
common shareholders. The Fund’s investment in the common shares of Closed-End Funds that are financially leveraged may create an opportunity for greater total return on its investment, but at the same time may
be expected to exhibit more volatility in market price and net asset value than an investment in shares of investment companies without a leveraged capital structure.
CREDIT RISK.
An issuer of a debt instrument may be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a debt instrument may decline
because of concerns about the issuer’s ability or unwillingness to make such payments. High yield and comparable unrated debt securities, while generally offering higher yields than investment grade debt with
similar maturities, involve greater risks, including the possibility of dividend or interest deferral, default or bankruptcy, and are regarded as predominantly speculative with respect to the issuer’s capacity
to pay dividends or interest and repay principal. Credit risk is heightened for loans in which the Underlying Funds invest because companies that issue such loans tend to be highly leveraged and thus are more
susceptible to the risks of interest deferral, default and/or bankruptcy.
INTEREST RATE RISK.
The value of the Underlying Funds’ debt securities will fluctuate in value with changes in interest rates. In general, debt securities will increase in value when interest rates fall
and decrease in value when interest rates rise. The Underlying Funds may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and
the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.
Interest rate risk is generally
lower for shorter-term investments and higher for longer-term investments. Duration is a common measure of interest rate risk. Duration measures a debt security’s expected life on a present value basis, taking
into account the debt security’s yield, interest payments and final maturity. Duration is a reasonably accurate measure of a debt security’s price sensitivity to changes in interest rates. The longer the
duration of a debt security, the greater the debt security’s price sensitivity is to changes in interest rates. Rising interest rates also may lengthen the duration of debt securities with call features, since
exercise of the call becomes less likely as interest rates rise, which in turn will make the securities more sensitive to changes in interest rates and result in even steeper price declines in the event of further
interest rate increases.
An increase in interest rates
could also cause principal payments on a debt security to be repaid at a slower rate than expected. This risk is particularly prevalent for a callable security where an increase in interest rates could cause the
issuer of that security to not redeem the security as anticipated on the call date, which could have the effect of lengthening that debt security’s expected maturity, in turn making that security more vulnerable
to interest rate risk and reducing its market value.
When interest rates fall, an
Underlying Fund may be required to reinvest the proceeds from the sale, redemption or early prepayment of a debt security at a lower interest rate.
MARKET RISK.
The market values of the Fund’s investments may decline, at times sharply and unpredictably. Market values of debt securities are affected by a number of different factors, including
changes in interest rates, the credit quality of bond issuers, and general economic and market conditions.
Non-Principal Risks
BORROWING AND LEVERAGE RISK.
If the Fund borrows money, it must pay interest and other fees, which may reduce the Fund’s returns. As prescribed by the 1940 Act, the Fund will be required to maintain specified
asset coverage of at least 300%
with respect to any bank borrowing immediately
following such borrowing. The Fund may be required to dispose of assets on unfavorable terms if market fluctuations or other factors reduce the Fund’s asset coverage to less than the prescribed amount.
DEPENDENCE ON KEY PERSONNEL.
The Advisor is dependent upon the experience and expertise of the Fund’s portfolio manager in providing advisory services with respect to the Fund’s investments. If the Advisor
were to lose the services of the portfolio manager, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could be found for the portfolio manager in the
event of his death, resignation, retirement or inability to act on behalf of the Advisor.
DEPOSITARY RECEIPTS RISK.
The Underlying Funds’ investment in depositary receipts involves further risks due to certain features of depositary receipts. Depositary receipts are usually in the form of American
Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) or European Depositary Receipts (“EDRs”). ADRs are U.S. dollar-denominated receipts representing shares of
foreign-based corporations. ADRs are issued by U.S. banks or trust companies, and entitle the holder to all dividends and capital gains that are paid out on the underlying foreign shares. GDRs and EDRs are similar to
ADRs, but are shares of foreign-based corporations generally issued by international banks in one or more markets around the world and by European banks, respectively. ADRs, GDRs and EDRs may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the holders of depositary receipts, whether ADRs, GDRs or EDRs, are usually subject to a fee charged by the depositary.
Holders of depositary receipts
may have limited voting rights pursuant to a deposit agreement between the underlying issuer and the depositary. In certain cases, the depositary will vote the shares deposited with it as directed by the underlying
issuer’s board of directors. Furthermore, investment restrictions in certain countries may adversely impact the value of depositary receipts because such restrictions may limit the ability to convert shares into
depositary receipts and vice versa. Such restrictions may cause shares of the underlying issuer to trade at a discount or premium to the market price of the depositary receipt. Moreover, if depositary receipts are
converted into shares, the laws in certain countries may limit the ability of a non-resident to trade the shares and to reconvert the shares to depositary receipts.
Depositary receipts may be
“sponsored” or “unsponsored.” Sponsored depositary receipts are established jointly by a depositary and the underlying issuer, whereas unsponsored depositary receipts may be established by a
depositary without participation by the underlying issuer. Holders of unsponsored depositary receipts generally bear all the costs associated with establishing the unsponsored depositary receipts. In addition, the
issuers of the securities underlying unsponsored depositary receipts are not obligated to disclose material information in the United States and, therefore, there may be less information available regarding such
issuers and there may not be a correlation between such information and the market value of the depositary receipts.
Depositary receipts may be
unregistered and unlisted. The Underlying Funds’ investments may also include depositary receipts that are not purchased in the public markets and are restricted securities that can be offered and sold only to
“qualified institutional buyers” under Rule 144A under the Securities Act of 1933, as amended (“Securities Act”). Moreover, if adverse market conditions were to develop during the period
between an Underlying Fund’s decision to sell these types of depositary receipts and the point at which the Underlying Fund is permitted or able to sell such security, the Underlying Fund might obtain a price
less favorable than the price that prevailed when it decided to sell..
INFLATION RISK.
Inflation risk is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of
the Fund's assets can decline as can the value of the Fund's distributions.
ISSUER SPECIFIC CHANGES
RISK.
Changes in the financial condition of an issuer or counterparty, changes in specific economic or political conditions that affect a particular type of security or issuer, and changes in
general economic or political conditions can affect a security’s or instrument’s value. The value of securities of smaller, less well-known issuers can be more volatile than that of larger issuers. Issuer
specific events can have a negative impact on the value of the Fund.
LEGISLATION/LITIGATION RISK.
From time to time, various legislative initiatives are proposed in the United States and abroad, which may have a negative impact on certain companies in which the Fund invests. In
addition, litigation regarding any of the issuers of the securities owned by the Fund, or industries represented by these issuers, may negatively impact the value of the securities. Such legislation or litigation may
cause a Fund to lose value or may result in higher portfolio turnover if the Advisor determines to sell such a holding.
Trading Issues
Although the Fund intends to
list its shares for trading on Nasdaq, there can be no assurance that an active trading market for such shares will develop or be maintained. Trading in shares on Nasdaq may be halted due to market conditions or for
reasons that, in the view of Nasdaq, make trading in shares inadvisable. In addition, trading in shares on Nasdaq is subject to trading halts caused by extraordinary market volatility pursuant to Nasdaq “circuit
breaker” rules. Market makers are under no obligation to make a market in the Fund’s shares, and authorized participants are not obligated to submit purchase or redemption orders for Creation Units. There
can be no assurance that the requirements of Nasdaq necessary to maintain the listing of the Fund will continue to be met or will remain unchanged. Due to the initial small asset size of the Fund, it is more likely to
have difficulty maintaining its listing on Nasdaq.
Fluctuation of Net Asset Value
The net asset value of shares of
the Fund will generally fluctuate with changes in the market value of the Fund’s holdings. The market prices of shares will generally fluctuate in accordance with changes in net asset value as well as the
relative supply of and demand for shares on Nasdaq. First Trust cannot predict whether shares will trade below, at or above their net asset value. Price differences may be due, in large part, to the fact that supply
and demand forces at work in the secondary trading market for shares will be closely related to, but not identical to, the same forces influencing the prices of the holdings of the Fund trading individually or in the
aggregate at any point in time. However, given that shares can only be purchased and redeemed for cash or in-kind, in Creation Units, and only to and from broker-dealers and large institutional investors that have
entered into participation agreements (unlike shares of closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their net asset value), First Trust believes that large
discounts or premiums to the net asset value of shares should not be sustained.
Fund Organization
The Fund is a series of the
Trust, an investment company registered under the 1940 Act. The Fund is treated as a separate fund with its own investment objectives and policies. The Trust is organized as a Massachusetts business trust. The
Trust’s Board is responsible for the overall management and direction of the Trust. The Board elects the Trust’s officers and approves all significant agreements, including those with the investment
advisor, custodian and fund administrative and accounting agent.
Management of the Fund
First Trust Advisors L.P., 120
East Liberty Drive, Wheaton, Illinois 60187, is the investment advisor to the Fund. In this capacity, First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund's portfolio and
certain other services necessary for the management of the portfolio.
First Trust is a limited
partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of DuPage L.P. is a limited partnership with one general partner, The Charger
Corporation, and a number of limited partners. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, the Chief Executive Officer of First Trust. First Trust discharges its responsibilities
subject to the policies of the Board.
First Trust serves as advisor or
sub-advisor for 7 mutual fund portfolios, 10 exchange-traded funds consisting of 114 series and 16 closed-end funds. It is also the portfolio supervisor of certain unit investment trusts sponsored by First Trust
Portfolios L.P. (
“FTP”
), an affiliate of First Trust, 120 East Liberty Drive, Wheaton, Illinois 60187. FTP specializes in the underwriting, trading and distribution of unit investment
trusts and other securities. FTP is the principal underwriter of the shares of the Fund.
Ken Fincher is the Fund’s
portfolio manager and has responsibility for the day-to-day management of the Fund’s investment portfolio.
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Ken Fincher is a Senior Vice President and Portfolio Manager at First Trust. Mr. Fincher joined First Trust with over 20 years of experience in financial markets. His current responsibilities include management of
separately managed accounts that invest primarily in closed-end funds. He has also helped develop new product structures in the closed-end fund space. Mr. Fincher has been named Outstanding Individual Contributor to
the Closed-End Fund Sector in 2007, 2006, 2005 and 2004 by financial analysts and his peers in the closed-end fund
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community and also served on the Closed-End Fund committee of the Investment Company Institute. Mr. Fincher received a B.A. in financial administration from Michigan State University and an M.B.A. from Loyola
University Graduate School of Business.
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For additional information
concerning First Trust, including a description of the services provided to the Fund, see the Fund’s SAI. Additional information about the portfolio manager’s compensation, other accounts managed by the
portfolio manager and the portfolio manager’s ownership of shares in the Fund is provided in the SAI.
Management Fee
Pursuant to the Investment
Management Agreement, First Trust manages the investment of the Fund’s assets and will be responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal,
audit, license and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected
with the execution of portfolio transactions, distribution and service fees payable pursuant to a 12b-1 plan, if any, and extraordinary expenses.
The Fund has agreed to pay First
Trust an annual management fee of 0.85% of its average daily net assets. As of the date of this prospectus, the Fund has neither commenced operations nor paid management fees.
A discussion regarding the
Board’s approval of the Investment Management Agreement for the Fund will be available in the Fund’s Semi-Annual Report to shareholders for the fiscal period ended February 28, 2017.
How to Buy and Sell Shares
Most investors will buy and sell
shares of the Fund in secondary market transactions through brokers. Shares of the Fund are expected to be listed for trading on the secondary market on Nasdaq. Shares can be bought and sold throughout the trading day
like other publicly traded shares. There is no minimum investment when buying shares on Nasdaq. Although shares are generally purchased and sold in “round lots” of 100 shares, brokerage firms typically
permit investors to purchase or sell shares in smaller “odd lots,” at no per-share price differential. When buying or selling shares through a broker, investors should expect to incur customary brokerage
commissions, investors may receive less than the net asset value of the shares because shares are bought and sold at market prices rather than at net asset value, and investors may pay some or all of the spread
between the bid and the offer price in the secondary market on each leg of a round trip (purchase and sale) transaction. Share prices are reported in dollars and cents per share.
For purposes of the 1940 Act,
the Fund is treated as a registered investment company, and the acquisition of shares by other registered investment companies is subject to the restrictions of Section 12(d)(1) of the 1940 Act. The Fund’s
investment in an Underlying Fund is limited to 3% of the total outstanding voting stock of any Underlying Fund unless the Fund enters into a participation agreement with that Underlying Fund. However, the total amount
of securities of an Underlying Fund held by the Fund, both individually and when aggregated with all other shares of the Underlying Fund held by other registered investment companies and private investment pools
advised by the Advisor or its affiliates (as well as shares held by the Advisor and its affiliates) generally cannot exceed 25% of the outstanding voting securities of the Underlying Fund, and none of these entities
(including the Fund) may individually or collectively exert a controlling influence over the Underlying Fund.
Book Entry
Shares are held in book-entry
form, which means that no share certificates are issued. The Depository Trust Company (“DTC”) or its nominee is the record owner of all outstanding shares of the Fund and is recognized as the owner of all
shares for all purposes.
Investors owning shares are
beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all shares. Participants in DTC include securities brokers and dealers, banks, trust companies,
clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of shares, you are not entitled to receive physical delivery of share
certificates or to have shares registered in your name, and you are not considered a registered owner of shares. Therefore, to exercise any right as an owner of shares, you must rely upon the procedures of DTC and its
participants. These procedures are the same as those that apply to any other stocks that you hold in book-entry or “street name” form.
Share Trading Prices
The trading price of shares of the
Fund on Nasdaq is based on market price and may differ from the Fund’s daily net asset value and can be affected by market forces of supply and demand, economic conditions and other factors.
Information regarding the
intra-day value of the shares of the Fund, also referred to as the “indicative optimized portfolio value” (“IOPV”), is disseminated every 15 seconds throughout the Fund’s trading day by
the national securities exchange on which the shares are listed or by market data vendors or other information providers. The IOPV should not be viewed as a “real-time” update of the net asset value per
share of the Fund because the IOPV may not be calculated in the same manner as the net asset value, which is computed once a day, generally at the end of the business day. The price of a non-U.S. security that is
primarily traded on a non-U.S. exchange shall be updated, using the last sale price, every 15 seconds throughout the trading day, provided that upon the closing of such non-U.S. exchange, the closing price of the
security, after being converted to U.S. dollars, will be used. This will likely cause the IOPV to deviate significantly from the true market value of the portfolio. Furthermore, in calculating the IOPV of the
Fund’s shares, exchange rates may be used throughout the day (9:00 a.m. to 4:15 p.m., Eastern Time) that may differ from those used to calculate the net asset value per share of the Fund and consequently may
result in differences between the net asset value and the IOPV. The Fund is not involved in, or responsible for, the calculation or dissemination of the IOPV of shares of the Fund and the Fund does not make any
warranty as to its accuracy.
Frequent Purchases and Redemptions
of the Fund’s Shares
The Fund imposes no restrictions
on the frequency of purchases and redemptions (“market timing”). In determining not to approve a written, established policy, the Board evaluated the risks of market timing activities by the Fund’s
shareholders. The Board considered that the Fund’s shares can only be purchased and redeemed directly from the Fund in Creation Units by broker-dealers and large institutional investors that have entered into
participation agreements (i.e., authorized participants (“APs”)) and that the vast majority of trading in the Fund’s shares occurs on the secondary market. Because the secondary market trades do not
involve the Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including dilution, disruption of portfolio management, increases in the Fund’s trading costs and
the realization of capital gains. With respect to trades directly with the Fund, to the extent effected in-kind (i.e., for securities), those trades do not cause any of the harmful effects that may result from
frequent cash trades. To the extent that the Fund may effect the purchase or redemption of Creation Units in exchange wholly or partially for cash, the Board noted that such trades could result in dilution to the Fund
and increased transaction costs, which could negatively impact the Fund’s ability to achieve its investment objective. However, the Board noted that direct trading by APs is critical to ensuring that the shares
trade at or close to net asset value. In addition, the Fund imposes fixed and variable transaction fees on purchases and redemptions of Creation Units to cover the custodial and other costs incurred by the Fund in
effecting trades. Finally, the Advisor monitors purchase and redemption orders from APs for patterns of abusive trading and the Fund reserves the right to not accept orders from APs that the Advisor has determined may
be disruptive to the management of the Fund, or otherwise not in the Fund’s best interests.
Dividends, Distributions and
Taxes
Dividends from net investment
income, if any, are declared and paid monthly by the Fund. The Fund distributes its net realized capital gains, if any, to shareholders at least annually.
Distributions in cash may be
reinvested automatically in additional whole shares only if the broker through whom you purchased shares makes such option available. Such shares will generally be reinvested by the broker based upon the market price
of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Federal Tax Matters
This section summarizes 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 these summaries do not
describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker-dealer, or other investor with special
circumstances. In addition, this section does not describe your state, local or non-U.S. tax consequences.
This federal income tax summary
is based in part on the advice of counsel to the Fund. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, counsel to the Fund was not asked to review, and has
not
reached a conclusion with respect to, the federal
income tax treatment of the assets to be included in the Fund. This may not be sufficient for you to use for the purpose of avoiding penalties under federal tax law.
As with any investment, you should
seek advice based on your individual circumstances from your own tax advisor.
Fund Status
The Fund intends to qualify as a
“regulated investment company” under the federal tax laws. If the Fund qualifies as a regulated investment company and distributes its income as required by the tax law, the Fund generally will not pay
federal income taxes.
Distributions
The Fund’s distributions
are generally taxable. After the end of each year, you will receive a tax statement that separates the distributions of the Fund into two categories, ordinary income distributions and capital gain dividends. Ordinary
income distributions are generally taxed at your ordinary tax rate, however, as further discussed below, certain ordinary income distributions received from the Fund may be taxed at the capital gains tax rates.
Generally, you will treat all capital gain dividends as long-term capital gains regardless of how long you have owned your shares. To determine your actual tax liability for your capital gain 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, the Fund may make distributions that represent a return of
capital for tax purposes and thus will generally not be taxable to you; however, such distributions may reduce your tax basis in your shares, which could result in you having to pay higher taxes in the future when
shares are sold, even if you sell the shares at a loss from your original investment. 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 income from the Fund that you must take into account for federal income tax purposes is not reduced by amounts used to pay a deferred sales fee, if any. 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.
Income from the Fund may also be
subject to a 3.8% “Medicare tax.” This tax will generally apply to your net investment income if your adjusted gross income exceeds certain threshold amounts, which are $250,000 in the case of married
couples filing joint returns and $200,000 in the case of single individuals.
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, certain ordinary income dividends on shares that are attributable to qualifying dividends received by the Fund from certain corporations may be reported by the Fund as being eligible for
the dividends received deduction.
Capital Gains and Losses and Certain
Ordinary Income Dividends
If you are an individual, the
maximum marginal stated federal tax rate for net capital gain is generally 20% for taxpayers in the 39.6% tax bracket, 15% for taxpayers in the 25%, 28%, 33% and 35% tax brackets and 0% for taxpayers in the 10% and
15% tax brackets. Some portion of your capital gain dividends may be taxed at a higher maximum stated tax rate. Capital gains may also be subject to the Medicare tax described above.
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. The Internal Revenue Code of 1986, as amended, treats certain capital gains as ordinary income in special situations.
Ordinary income dividends
received by an individual shareholder from a regulated investment company such as the Fund are generally taxed at the same rates that apply to net capital gain (as discussed above), provided certain holding period
requirements are satisfied and provided the dividends are attributable to qualifying dividends received by the Fund itself. The Fund will provide notice to its shareholders of the amount of any distribution which may
be taken into account as a dividend which is eligible for the capital gains tax rates.
Sale of Shares
If you sell or redeem 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.
Taxes on Purchase and Redemption of
Creation Units
If you exchange securities for
Creation Units, you will generally recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and your aggregate basis in the securities
surrendered and the cash component paid. If you exchange Creation Units for securities, you will generally recognize a gain or loss equal to the difference between your basis in the Creation Units and the aggregate
market value of the securities received and the cash redemption amount. The Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units or Creation Units for
securities cannot be deducted currently under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position.
Deductibility of Fund Expenses
Expenses incurred and deducted
by the Fund will generally not be treated as income taxable to you. In some cases, however, you may be required to treat your portion of these Fund expenses as income. In these cases, you may be able to take a
deduction for these expenses. However, certain miscellaneous itemized deductions, such as investment expenses, may be deducted by individuals only to the extent that all of these deductions exceed 2% of the
individual’s adjusted gross income. Some individuals may also be subject to further limitations on the amount of their itemized deductions depending on their income.
Non-U.S. Tax Credit
Because the Fund will invest in
non-U.S. securities, the tax statement that you receive may include an item showing non-U.S. 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.
Non-U.S. Investors
If you are a non-U.S. investor
(i.e., an investor other than a U.S. citizen or resident or a U.S. corporation, partnership, estate or trust), you should be aware that, generally, subject to applicable tax treaties, distributions from the Fund will
be characterized as dividends for federal income tax purposes (other than dividends which the Fund properly reports as capital gain dividends) and will be subject to U.S. federal income taxes, including withholding
taxes, subject to certain exceptions described below. However, distributions received by a non-U.S. investor from the Fund that are properly reported by the Fund as capital gain dividends may not be subject to U.S.
federal income taxes, including withholding taxes, provided that the Fund makes certain elections and certain other conditions are met. Distributions from the Fund that are properly reported by the Fund as an
interest-related dividend attributable to certain interest income received by the Fund or as a short-term capital gain dividend attributable to certain net short-term capital gain income received by the Fund may not
be subject to U.S. federal income taxes, including withholding taxes when received by certain foreign investors, provided that the Fund makes certain elections and certain other conditions are met.
Distributions may be subject to
a U.S. withholding tax of 30% in the case of distributions to (i) certain non-U.S. financial institutions that have not entered into an agreement with the U.S. Treasury to collect and disclose certain information and
are not resident in a jurisdiction that has entered into such an agreement with the U.S. Treasury and (ii) certain other non-U.S. entities that do not provide certain certifications and information about the
entity’s U.S. owners. Disposition of shares by such persons may be subject to such withholding after December 31, 2018.
Investments in Certain Non-U.S.
Corporations
If the Fund holds an equity
interest in any passive foreign investment companies (“PFICs”), which are generally certain non-U.S. 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. The Fund may be able to make an election that could ameliorate these adverse tax consequences. In this case, the Fund would recognize as ordinary
income any increase in the value of such PFIC shares, and as ordinary loss any decrease in such value to the extent it did not exceed prior increases
included in income. Under this election, the
Fund might be required to recognize in a year income in excess of its distributions from PFICs and its proceeds from dispositions of PFIC stock during that year, and such income would nevertheless be subject to the
distribution requirement and would be taken into account for purposes of the 4% excise tax. Dividends paid by PFICs are not treated as qualified dividend income.
Distribution Plan
FTP serves as the distributor of
Creation Units for the Fund on an agency basis. FTP does not maintain a secondary market in shares.
The Board has adopted a
Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to
reimburse FTP for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers
or other persons that are APs for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
The Fund does not currently pay
12b-1 fees, and pursuant to a contractual arrangement, the Fund will not pay 12b-1 fees any time before September 30, 2018. However, in the event 12b-1 fees are charged in the future, because these fees are paid out
of the Fund's assets, over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges.
Net Asset Value
The Fund’s net asset value
is determined as of the close of trading (normally 4:00 p.m., Eastern Time) on each day the New York Stock Exchange is open for trading. If the New York Stock Exchange closes early on a valuation day, the Fund’s
net asset value will be determined as of that time. Net asset value per share is calculated for the Fund by taking the market price of the Fund’s total assets, including interest or dividends accrued but not yet
collected, less all liabilities (including accrued expenses and dividends declared but unpaid), and dividing such amount by the total number of shares outstanding. The result, rounded to the nearest cent, is the net
asset value per share. All valuations are subject to review by the Board or its delegate.
The Fund’s investments are
valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value, in accordance with valuation procedures adopted by the Board and in accordance with the 1940
Act. Portfolio securities listed on any exchange other than Nasdaq and the London Stock Exchange Alternative Investment Market (“AIM”) are valued at the last sale price on the business day as of which such
value is being determined. Securities listed on Nasdaq or AIM are valued at the official closing price on the business day as of which such value is being determined. If there has been no sale on such day, or no
official closing price in the case of securities traded on Nasdaq or AIM, the securities are fair valued at the mean of their most recent bid and ask price on such day. Portfolio securities traded on more than one
securities exchange are valued at the last sale price or official closing price, as applicable, on the business day as of which such value is being determined at the close of the exchange representing the principal
market for such securities. Portfolio securities traded in the over-the-counter market, but excluding securities trading on Nasdaq or AIM, are fair valued at the mean of their most recent bid and asked price, if
available, and otherwise at the closing bid price. Short-term investments that mature in less than 60 days when purchased are fair valued at cost adjusted for amortization of premiums and accretion of discount,
provided the Advisor’s Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing at the time of the
determination. Net asset value may change on days when investors may not sell or redeem Fund shares.
Certain securities may not be
able to be priced by pre-established pricing methods. Such securities may be valued by the Board or its delegate, the Advisor’s Pricing Committee, at fair value. The use of fair value pricing by the Fund is
governed by valuation procedures adopted by the Board and in accordance with the provisions of the 1940 Act. These securities generally include, but are not limited to, certain restricted securities (securities which
may not be publicly sold without registration under the Securities Act of 1933, as amended (the “Securities Act”)) for which a pricing service is unable to provide a market price; securities whose trading
has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially
affect the value of the security after the market has closed but before the calculation of the Fund’s net asset value or make it difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security’s fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might
reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally
they will differ from the current market
quotations or official closing prices on the applicable exchange. A variety of factors may be considered in determining the fair value of such securities. See the Fund’s SAI for details.
Because foreign securities
exchanges may be open on different days than the days during which an investor may purchase or sell shares of the Fund, the value of the Fund’s securities may change on days when investors are not able to
purchase or sell shares of the Fund. The value of securities denominated in foreign currencies is converted into U.S. dollars at the exchange rates in effect at the time of valuation.
Fund Service Providers
The Bank of New York Mellon, 101
Barclay Street, New York, New York 10286, acts as the administrator, custodian and fund accounting and transfer agent for the Fund. Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, serves as
legal counsel to the Fund. First Trust serves as the fund reporting agent for the Fund.
Premium/Discount Information
The Fund has not yet commenced
operations and, therefore, does not have information about the differences between the Fund’s daily market price on Nasdaq and its net asset value. Once the Fund has commenced operations, this information will
be available on the Fund’s website at www.ftportfolios.com.
Other Information
Continuous Offering
The Fund will issue, on a
continuous offering basis, its shares in one or more groups of a fixed number of Fund shares (each such group of such specified number of individual Fund shares, a “Creation Unit Aggregation”). The method
by which Creation Unit Aggregations of Fund shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Unit Aggregations of shares are issued and sold by the Fund on
an ongoing basis, a “distribution,” as such term is used in the Securities Act, may occur at any point. Broker-dealers and other persons are cautioned that some activities on their part may, depending on
the circumstances, result in their being deemed participants in a distribution in a manner that could render them statutory underwriters and subject them to the prospectus delivery requirement and liability provisions
of the Securities Act.
For example, a broker-dealer
firm or its client may be deemed a statutory underwriter if it takes Creation Unit Aggregations after placing an order with FTP, breaks them down into constituent shares and sells such shares directly to customers, or
if it chooses to couple the creation of a supply of new shares with an active selling effort involving solicitation of secondary market demand for shares. A determination of whether one is an underwriter for purposes
of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be
considered a complete description of all the activities that could lead to a characterization as an underwriter.
Broker-dealer firms should also
note that dealers who are not “underwriters” but are effecting transactions in shares, whether or not participating in the distribution of shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(a)(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. The Trust, on behalf of the Fund,
however, has received from the Securities and Exchange Commission an exemption from the prospectus delivery obligation in ordinary secondary market transactions under certain circumstances, on the condition that
purchasers are provided with a product description of the shares. As a result, broker-dealer firms should note that dealers who are not underwriters but are participating in a distribution (as contrasted with ordinary
secondary market transactions) and thus dealing with the shares that are part of an overallotment within the meaning of Section 4(a)(3)(C) of the Securities Act would be unable to take advantage of the prospectus
delivery exemption provided by Section 4(a)(3) of the Securities Act. Firms that incur a prospectus delivery obligation with respect to shares are reminded that, under the Securities Act Rule 153, a prospectus
delivery obligation under Section 5(b)(2) of the Securities Act owed to a broker-dealer in connection with a sale on Nasdaq is satisfied by the fact that the prospectus is available from Nasdaq upon request. The
prospectus delivery mechanism provided in Rule 153 is available with respect to transactions on a national securities exchange, a trading facility or an alternative trading system.
[THIS PAGE INTENTIONALLY LEFT BLANK.]
First Trust
Exchange-Traded Fund VIII
|
First Trust CEF Income
Opportunity ETF
For More Information
For more detailed information
on the Fund, several additional sources of information are available to you. The SAI, incorporated by reference into this prospectus, contains detailed information on the Fund’s policies and operation.
Additional information about the Fund’s investments is available in the annual and semi-annual reports to shareholders. In the Fund’s annual reports, you will find a discussion of the market conditions and
investment strategies that significantly impacted the Fund’s performance during the last fiscal year. The Fund’s most recent SAI, annual or semi-annual reports and certain other information are available
free of charge by calling the Fund at (800) 621-1675, on the Fund’s website at www.ftportfolios.com or through your financial advisor. Shareholders may call the toll-free number above with any inquiries.
You may obtain this and other
information regarding the Fund, including the SAI and the Codes of Ethics adopted by First Trust, FTP and the Trust, directly from the Securities and Exchange Commission (“SEC”). Information on the
SEC’s website is free of charge. Visit the SEC’s on-line EDGAR database at http://www.sec.gov or in person at the SEC’s Public Reference Room in Washington, D.C., or call the SEC at (202) 551-8090
for information on the Public Reference Room. You may also request information regarding the Fund by sending a request (along with a duplication fee) to the SEC’s Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549-1520 or by sending an electronic request to publicinfo@sec.gov.
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com
SEC File #: 333-210186
811-23147
First Trust
Exchange-Traded Fund VIII
|
PRELIMINARY PROSPECTUS DATED
SEPTEMBER 23, 2016
SUBJECT TO COMPLETION
Prospectus
First Trust Municipal CEF Income
Opportunity ETF
Ticker Symbol:
|
MCEF
|
Exchange:
|
The Nasdaq Stock Market LLC
|
The First Trust Municipal CEF
Income Opportunity ETF (the “Fund”) intends to list and principally trade its shares on The Nasdaq Stock Market LLC (“Nasdaq”). Market prices may differ to some degree from the net asset value
of the shares. Unlike mutual funds, the Fund issues and redeems shares at net asset value, only in large specified blocks each consisting of 50,000 shares (each such block of shares called a “Creation
Unit,” and collectively, the “Creation Units”). The Fund’s Creation Units are issued and redeemed in-kind for securities in which the Fund invests and/or cash, and only to and from
broker-dealers and large institutional investors that have entered into participation agreements.
The Fund is a series of the First
Trust Exchange-Traded Fund VIII (the “Trust”) and an actively managed exchange-traded fund organized as a separate series of a registered management company.
Except when aggregated in Creation
Units, the shares are not redeemable securities of the Fund.
The Securities and Exchange
Commission has not approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
NOT FDIC INSURED MAY LOSE VALUE NO
BANK GUARANTEE
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.
Table of Contents
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Investment Objective
The First Trust Municipal CEF
Income Opportunity ETF seeks to provide current income.
Fees and Expenses of the Fund
The following table describes
the fees and expenses you may pay if you buy and hold shares of the Fund. Investors purchasing and selling shares may be subject to costs (including customary brokerage commissions) charged by their broker, which are
not reflected in the table below.
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)
|
None
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Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management Fees
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0.75%
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Distribution and Service (12b-1) Fees
(1)
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0.00%
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Other Expenses
(2)
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0.00%
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Acquired Fund Fees and Expenses
(3)
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1.23%
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Total Annual Fund Operating Expenses
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1.98%
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(1)
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Although the Fund has adopted a 12b-1 plan that permits it to pay up to 0.25% per annum, it will not pay 12b-1 fees at any time before September 30, 2018.
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(2)
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"Other Expenses" is an estimate based on the expenses the Fund expects to incur for the current fiscal year.
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(3)
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"Acquired Fund Fees and Expenses" is an estimate based on the expenses the Fund expects to incur for the current fiscal year.
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Example
The example below is intended to
help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account customary brokerage commissions that you pay when purchasing or selling shares of
the Fund in the secondary market.
The example assumes that you
invest $10,000 in the Fund for the time periods indicated. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain at current levels until September
30, 2018, and thereafter at 2.23% to represent the imposition of the 12b-1 fee of 0.25% per annum of the Fund’s average daily net assets. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
Portfolio Turnover
The Fund pays transactions
costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when
Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance.
Principal Investment Strategies
Under normal market conditions,
the Fund will seek to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in a portfolio of closed-end investment companies that are listed and traded in the
United States on registered exchanges (“Closed-End Funds”) which invest primarily in municipal debt securities some or all of which pay interest that is exempt from regular federal income taxes
(collectively, “Municipal Securities”). Closed-End Funds issue shares of common stock that are traded on a securities exchange. Because the shares of Closed-End Funds cannot be redeemed upon demand to the
issuer like the shares of an open-end investment company (such as the Fund), investors seek to buy and sell shares of Closed-End Funds in the secondary market.
Municipal Securities are
generally issued by or on behalf of states, territories or possessions of the U.S. and the District of Columbia and their political subdivisions, agencies, authorities and other instrumentalities. The Closed-End Funds
in which the Fund invests (“Underlying Funds”) may invest in a range of Municipal Securities, including, but not limited to, municipal lease obligations (and certificates of participation in such
obligations), municipal general obligation bonds, municipal revenue bonds, municipal notes, municipal cash equivalents, private activity bonds (including without limitation industrial development bonds), and
pre-refunded and escrowed to maturity bonds. In addition, Municipal Securities include inverse floating rate securities issued by tender option bond (“TOB”) trusts and securities issued by custodial
receipt trusts, each of which are investment vehicles the underlying assets of which are municipal bonds. The Underlying Funds may invest in Municipal Securities of any maturity and any duration. The Underlying Funds
may also invest in Municipal Securities of any credit quality, including high yield securities, also known as “junk bonds.”
In selecting the Underlying
Funds, the Fund’s investment advisor will utilize a range of investment approaches. The Fund’s investment advisor generally takes a systemic approach to investing, including the utilization of a
proprietary model that identifies, sorts and scores Closed-End Funds based upon various market metrics and economic factors, including, but not limited to, Fund size, duration, leverage ratio, average maturity,
earnings rate, undistributed net investment income, distribution rate, premium or discount, net asset value and share price returns, sponsor and distribution policies.
In addition, the Fund may also
invest in exchange-traded funds (“ETFs”).
Principal Risks
You could lose money by
investing in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. There can be no assurance
that the Fund’s investment objective will be achieved.
ALTERNATIVE MINIMUM TAX
RISK.
The Fund has no limit as to the amount that can be invested in alternative minimum tax bonds. Therefore, all or a portion of the Fund’s otherwise exempt-interest dividends may be
taxable to those shareholders subject to the federal alternative minimum tax.
AUTHORIZED PARTICIPANT
CONCENTRATION RISK.
Only an authorized participant (as defined in the “Frequent Purchases and Redemptions” Section) may engage in creation or redemption transactions directly with the Fund. The
Fund has a limited number of institutions that act as authorized participants. To the extent that these institutions exit the business or are unable to proceed with creation and/or redemption orders with respect to
the Fund and no other authorized participant is able to step forward to create or redeem, in either of these cases, Fund shares may trade at a discount to the Fund’s net asset value and possibly face
delisting.
CALL RISK.
If an issuer calls higher-yielding debt instruments held by the Underlying Funds, performance could be adversely impacted.
CASH TRANSACTIONS RISK.
The Fund may, under certain circumstances, effect a portion of creations and redemptions for cash, rather than in-kind securities. As a result, an investment in the Fund may be less
tax-efficient than an investment in an ETF that effects its creations and redemptions for in-kind securities. Because the Fund may effect a portion of redemptions for cash, it may be required to sell portfolio
securities in order to obtain the cash needed to distribute redemption proceeds. A sale of shares may result in capital gains or losses and may also result in higher brokerage costs.
CLOSED-END FUND RISK.
Because the shares of Closed-End Funds cannot be redeemed upon demand, shares of many Closed-End Funds will trade on exchanges at market prices rather than net asset value, which may cause
the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). There can be no assurance that the market discount on shares of any Closed-End Fund purchased by the Fund
will ever decrease or that when the Fund seeks to sell shares of a Closed-End Fund it can receive the NAV for those shares. Closed-End Funds have lower levels of daily volume when compared to open-end investment
companies. There are greater risks involved in investing in securities with limited market liquidity. To the extent the Fund invests in Closed-End Funds, it will indirectly bear its proportionate share of any fees and
expenses payable directly by the Closed-End Fund. Therefore, the Fund would incur higher expenses, which may be duplicative, than if the Fund did not invest in Closed-End Funds. The performance of the Fund is
dependent upon the performance of the Underlying Funds.
In addition, Closed-End Funds
may utilize leverage. As a result, the Fund may be exposed indirectly to leverage through an investment in such securities. An investment in the securities of Closed-End Funds that use leverage may expose the Fund to
higher volatility in the market value of such securities and the possibility that the Fund’s long-term return on such securities
will be diminished. Closed-End Funds may issue
senior securities (including preferred stock and debt obligations) for the purpose of leveraging the Closed-End Fund’s common shares in an attempt to enhance the current return to such Closed-End Fund’s
common shareholders.
The organizational documents of
Closed-End Funds may include provisions that could the ability of other entities or persons to acquire control of the Closed-End Fund or to change the composition of its board of directors, which could limit the
ability of shareholders to sell their shares at a premium over the prevailing market prices by discouraging a third party from seeking to obtain control of the Closed-End Fund.
CYBER SECURITY RISK.
As the use of Internet technology has become more prevalent in the course of business, the Fund has become more susceptible to potential operational risks through breaches in cyber
security. A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could
cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized access to the
Fund’s digital information systems through “hacking” or malicious software coding, but may also result from outside attacks such as denial-of-service attacks through efforts to make network services
unavailable to intended users. In addition, cyber security breaches of the Fund’s third party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in
which the Fund invests, can also subject the Fund to many of the same risks associated with direct cyber security breaches. The Fund has established risk management systems designed to reduce the risks associated with
cyber security. However, there is no guarantee that such efforts will succeed, especially because the Fund does not directly control the cyber security systems of issuers or third party service providers.
ETF RISK.
The shares of an ETF trade like common stock and represent a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although
lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs.
INVESTMENT RESTRICTION RISK.
The Fund’s investment in Closed-End Funds is restricted by the 1940 Act and the Fund’s associated exemptive relief which limits the amount of any single Closed-End Fund that
can be owned by the Fund, individually and in the aggregate with all other registered investment companies and private investment pools advised by First Trust and its affiliates. This limitation may prevent the Fund
from purchasing shares of a Closed-End Fund that it may have otherwise purchased pursuant to its investment objective and principal investment strategy.
MANAGEMENT RISK.
The Fund is subject to management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the Fund’s investment advisor will apply
investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the Fund will meet its investment objective.
MARKET RISK.
Market risk is the risk that a particular Underlying Fund, the securities in which the Underlying Fund invests, or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of the Fund could decline in value
or underperform other investments.
MARKET MAKER RISK.
If the Fund has lower average daily trading volumes, it may rely on a small number of third-party market makers to provide a market for the purchase and sale of shares. Any trading halt or
other problem relating to the trading activity of these market makers could result in a dramatic change in the spread between the Fund’s net asset value and the price at which the Fund’s shares are trading
on Nasdaq, which could result in a decrease in value of the Fund’s shares. In addition, decisions by market makers or authorized participants to reduce their role or step away from these activities in times of
market stress could inhibit the effectiveness of the arbitrage process in maintaining the relationship between the underlying values of the Fund’s portfolio securities and the Fund’s market price. This
reduced effectiveness could result in Fund shares trading at a discount to net asset value and also in greater than normal intraday bid-ask spreads for Fund shares.
NEW FUND RISK.
The Fund currently has fewer assets than larger funds, and like other new funds, large inflows and outflows may impact the Fund’s market exposure for limited periods of time. This
impact may be positive or negative, depending on the direction of market movement during the period affected. Also, during the initial invest-up period, the Fund may depart from its principal investment strategies and
invest a larger amount or all of its assets in cash equivalents or it may hold cash.
NON-DIVERSIFICATION RISK.
The Fund is classified as “non-diversified” under the Investment Company Act of 1940, as amended (the "
1940 Act
"). As a result, the Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. The Fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, the Fund may be more
susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly invested in certain issuers.
VOLATILITY RISK.
The market price and net asset value of the Fund’s shares and the Fund’s yield will change daily. There may be instances when the Fund will experience large in-flows and
out-flows, which will significantly alter the Fund’s size. At times, these fluctuations may negatively impact the Fund’s yield, result in increased transaction costs for the Fund and contribute to the
overall volatility of the Fund. The risk will be more prevalent when the Fund is smaller in size, such as during the Fund’s invest-up period. An investor may lose money by investing in this Fund because this
Fund is not a money market fund and may experience significant fluctuations in its net asset value.
UNDERLYING FUNDS RISK.
The Fund may be subject to the following risks as a result of its investment in the Underlying Funds:
COUNTERPARTY RISK.
To the extent that an Underlying Fund engages in derivatives transactions, the Underlying Fund bears the risk that the counterparty to the derivative or other contract with a third-party
may default on its obligations or otherwise fail to honor its obligations. If a counterparty defaults on its payment obligations the Underlying Fund will lose money and the value of an investment in the Underlying
Fund’s shares may decrease.
CREDIT RISK.
Credit risk is the risk that an issuer of a security held by an Underlying Fund will be unable or unwilling to make dividend, interest and/or principal payments when due and the related
risk that the value of such security may decline because of concerns about the issuer’s ability to make such payments.
CUSTODIAL RECEIPT TRUSTS
RISK.
Custodial receipts are financial instruments similar to TOBs sold through private placements that represent the right to receive future principal and interest payments on underlying
municipal obligations. Custodial receipt trusts may issue inverse floater securities and if an Underlying Funds were to hold inverse floaters issued by custodial receipt trusts, the Underlying Fund would be subject to
the risks of inverse floaters described herein. In particular, because the instruments may be leveraged, their market values may be more volatile than other types of fixed-income instruments.
DERIVATIVES RISK.
The Underlying Funds may invest in derivatives. The use of derivatives can lead to losses because of adverse movements in the price or value of the underlying asset, index or rate, which
may be magnified by certain features of the derivatives. These risks are heightened when the Underlying Fund’s portfolio managers use derivatives to enhance the Underlying Fund’s return or as a substitute
for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the Underlying Fund.
DISTRESSED MUNICIPAL SECURITIES
RISK.
The Underlying Funds may invest in Municipal Securities that are currently in default and not expected to pay the current coupon (“
Distressed Municipal Securities
”). Distressed Municipal Securities are speculative and involve substantial risks in addition to the risks of investing in high yield securities that are not in default. Generally, an
Underlying Fund will not receive interest payments from the Distressed Municipal Securities it holds, and there is a substantial risk that the principal will not be repaid. In any reorganization or liquidation
proceeding related to a Distressed Municipal Security, the Underlying Fund may lose its entire investment in such Distressed Municipal Security.
HIGH YIELD SECURITIES RISK.
The Underlying Funds may invest in high yield securities. High yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities
with higher ratings, and therefore, may be highly speculative. These securities are issued by companies that may have limited operating history, narrowly focused operations, and/or other impediments to the timely
payment of periodic interest and principal at maturity. If the economy slows down or dips into recession, the issuers of high yield securities may not have sufficient resources to continue making timely payment of
periodic interest and principal at maturity. The market for high yield securities is generally smaller and less liquid than that for investment grade securities. High yield securities are generally not listed on a
national securities exchange but trade in the over-the-counter markets. Due to the smaller, less liquid market for high yield securities, the bid-offer spread on such securities is generally greater than it is for
investment grade securities and the purchase or sale of such securities may take longer to complete. In general, high yield securities may have a greater risk of default than other types of securities.
INCOME RISK.
The income of the Underlying Funds could decline due to falling market interest rates. This is because, in a falling interest rate environment, the Underlying Funds generally will have to
invest the proceeds from sales of their shares, as well as the proceeds from maturing portfolio securities, or portfolio securities that have been called, in lower-yielding securities.
INTEREST RATE RISK.
The Underlying Funds are subject to interest rate risk. Interest rate risk is the risk that the value of the debt securities in an Underlying Fund’s portfolio will decline because of
rising market interest rates. Interest rate risk is generally lower for shorter term debt securities and higher for longer term debt securities. Duration is a measure of the expected price volatility of a debt
security as a result of changes in market rates of interest, based on, among other factors, the weighted average timing of the debt security’s expected principal and interest payments. In general, duration
represents the expected percentage change in the value of a security for an immediate 1% change in interest rates. Therefore, prices of debt securities with shorter durations tend to be less sensitive to interest rate
changes than debt securities with longer durations. As the value of a debt security changes over time, so will its duration.
INVERSE FLOATERS RISK.
The Underlying Funds may invest in inverse floating rate securities issued by TOB trusts. These securities create effective leverage. Due to the leveraged nature of these investments, the
value of an inverse floater will increase and decrease to a significantly greater extent than the values of the TOB trust’s underlying municipal bonds in response to changes in market interest rates or credit
quality. In addition, distributions paid to an Underlying Fund on its inverse floaters will be reduced or even eliminated as short-term municipal interest rates rise and will increase when short-term municipal
interest rates fall. An investment in inverse floaters typically will involve greater risk than an investment in a fixed rate municipal bond.
LEVERAGE RISK.
The Underlying Funds may employ the use of leverage in their portfolios. Leverage may be structural leverage, through borrowings or the issuance of preferred stock, or effective leverage,
which results from an Underlying Fund’s investment in derivative instruments that are inherently leveraged. While leverage often serves to increase the yield of an Underlying Fund, this leverage also subjects
the Underlying Fund to increased risks, including the likelihood of increased volatility and the possibility that the Underlying Fund’s common share income will fall if the dividend rate on the preferred shares
or the interest rate on any borrowings rise.
LIQUIDITY RISK.
The Underlying Funds may invest a portion of their assets in lower-quality debt issued by entities that are highly leveraged. Lower-quality debt tends to be less liquid than higher-quality
debt. Moreover, smaller debt issues tend to be less liquid than larger debt issues. As of the fourth quarter of 2015, the market for high yield debt has experienced decreased liquidity, and investor perception of
increased risk has caused yield spreads to widen. Decreased liquidity may negatively affect an Underlying Fund’s ability to mitigate risk.
In addition, inventories of
Municipal Securities held by brokers and dealers have decreased in recent years, lessening their ability to make a market in these securities. This reduction in market making capacity has the potential to decrease an
Underlying Fund’s ability to buy or sell Municipal Securities, and increase price volatility and trading costs, particularly during periods of economic or market stress.
MUNICIPAL LEASE OBLIGATIONS
RISK.
The Underlying Funds may invest in participation interests in municipal leases. Participation interests in municipal leases pose special risks because many leases and contracts contain
“non-appropriation” clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for this purpose by the appropriate
legislative body.
MUNICIPAL OBLIGATIONS RISK.
The Underlying Funds’ investment in Municipal Securities subjects them to municipal obligations risk. Issuers, including governmental issuers, may be unable to pay their obligations
as they come due. The values of municipal obligations that depend on a specific revenue source to fund their payment obligations may fluctuate as a result of actual or anticipated changes in the cash flows generated
by the revenue source or changes in the priority of the municipal obligation to receive the cash flows generated by the revenue source. In addition, changes in federal tax laws or the activity of an issuer may
adversely affect the tax-exempt status of municipal obligations. Loss of tax-exempt status may cause interest received and distributed to shareholders by the Fund to be taxable and may result in a significant decline
in the values of such municipal obligations.
POLITICAL AND ECONOMIC RISK.
The values of Municipal Securities held by the Underlying Funds may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry
significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers.
TAX RISK.
Interest income from Municipal Securities is normally not subject to regular federal income tax, but income from Municipal Securities held by the Underlying Funds could be declared taxable
because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities or noncompliant conduct of a bond issuer. Consequently, the
attractiveness of Municipal Securities in relation to other investment alternatives is affected by changes in federal income tax rates or changes in the tax-exempt status of interest income from Municipal
Securities.
ZERO COUPON BONDS RISK.
The Underlying Funds may invest in zero coupon bonds. Zero coupon bonds do not pay interest on a current basis and may be highly volatile as interest rates rise or fall. In addition, while
such bonds generate income for purposes of generally accepted accounting standards, they do not generate cash flow and thus could cause the Fund to be forced to liquidate securities at an inopportune time in order to
distribute cash, as required by tax laws.
Performance
The Fund does not have a
performance history. Once available, the Fund’s performance information, and information that gives some indication of the risks of an investment in the Fund by comparing the Fund’s performance with a
broad measure of market performance, will be available on the Fund’s website at www.ftportfolios.com. The Fund’s past performance (before and after taxes) is not necessarily an indication of how the Fund
will perform in the future.
Management
Investment
Advisor
First Trust
Advisors L.P. (
“First Trust”
or the
“Advisor”
)
Portfolio
Manager
The following
person serves as the portfolio manager of the Fund:
•
|
Ken Fincher, Senior Vice President and Portfolio Manager of First Trust
|
The portfolio
manager is primarily and jointly responsible for the day-to-day management of the Fund. The portfolio manager has served as part of the portfolio management team of the Fund since 2016.
Purchase and Sale of Fund Shares
The Fund issues and redeems
shares on a continuous basis, at net asset value, only in Creation Units consisting of 50,000 shares. The Fund’s Creation Units are issued and redeemed in-kind for securities in which the Fund invests and/or
cash, and only to and from broker-dealers and large institutional investors that have entered into participation agreements. Individual shares of the Fund may only be purchased and sold on Nasdaq through a
broker-dealer. Shares of the Fund will trade on Nasdaq at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value
(discount).
Tax Information
The Fund intends to make
interest income distributions, some or all of which will be exempt from regular federal income tax. All or a portion of these distributions, however, may be subject to the federal alternative minimum tax and state and
local taxes, and may have other tax consequences (
e.g.
, they may affect the amount of your social security benefits that are taxed). The Fund may make other distributions that are subject to federal income tax.
Payments to Broker-Dealers and Other
Financial Intermediaries
If you purchase shares of the
Fund through a broker-dealer or other financial intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the Fund’s distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or
visit your financial intermediary’s website for more information.
Additional Information on the
Fund's Investment Objective and Strategies
The Fund’s investment
objective is a fundamental policy that may only be changed with shareholder approval. Unless an investment policy is identified as being fundamental, all investment policies included in the prospectus and the
Fund’s Statement of Additional Information (“SAI”) are non-fundamental and may be changed by the Board of Trustees (the “Board”) of the First Trust Exchange-Traded Fund VIII (the
“Trust”), of which the Fund is a series, without shareholder approval. If there is a material change to the Fund’s principal investment strategies, you should consider whether the Fund remains an
appropriate investment for you. There is no guarantee that the Fund will achieve its investment objective.
The Fund has adopted a
fundamental investment policy pursuant to Rule 35d-1 under the 1940 Act (the “Name Policy”), whereby the Fund, under normal market conditions, invests at least 80% of its net assets (including investment
borrowings) in Closed-End Funds that invest primarily in Municipal Securities. The Fund will look to the Underlying Funds’ investment objective and principal investment strategies to determine compliance with
the Name Policy. The Name Policy may not be changed by the Board of Trustees of the Trust (the “Board”) without shareholder approval. Unless an investment policy is identified as being fundamental, all
investment policies included in this prospectus and the Fund’s Statement of Additional Information (“SAI”) are non-fundamental and may be changed by the Board without shareholder approval. If there
is a material change to the Fund’s principal investment strategies, you should consider whether the Fund remains an appropriate investment for you. There is no guarantee that the Fund will achieve its investment
objective.
Fund Investments
Principal Investments
Investment Companies
The Fund will principally invest
in securities of Closed-End Funds. However, the Fund may also invest in other investment companies, including exchange-traded funds (“ETFs”). Closed-End Funds and ETFs are managed registered investment
companies which invest in various types of securities. Closed-End Funds issue shares of common stock that are traded on a securities exchange. The Fund’s ability to invest in other investment companies is
limited by the 1940 Act and the related rules and interpretations. Both Closed-End Funds and ETFs trade on a securities exchange and their shares may, at times, trade at a premium or discount to their net asset
value.
As a shareholder in a pooled
investment vehicle, the Fund will bear its ratable share of that vehicle’s expenses, and would remain subject to payment of the fund’s advisory and administrative fees with respect to assets so invested.
Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other pooled investment vehicles. In addition, the Fund will incur brokerage costs when purchasing and selling shares
of ETFs and Closed-End Funds. Securities of other pooled investment vehicles may be leveraged, in which case the value and/or yield of such securities will tend to be more volatile than securities of unleveraged
vehicles.
Municipal Securities
Municipal Securities are debt
securities that generally pay interest that is exempt from regular federal income taxes. Municipal Securities are generally issued by or on behalf of states, territories or possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and other instrumentalities. The types of Municipal Securities in which the Underlying Funds may invest include municipal lease obligations
(and certificates of participation in such obligations), municipal general obligation bonds, municipal revenue bonds, municipal notes, municipal cash equivalents, private activity bonds (including without limitation
industrial development bonds), and pre-refunded and escrowed to maturity bonds. In addition, Municipal Securities include securities issued by tender option bond (“TOB”) trusts and custodial receipt
trusts, each of which are investment vehicles the underlying assets of which are municipal bonds.
The Underlying Funds may invest in
Municipal Securities of any maturity and any duration.
Non-Principal Investments
Cash Equivalents and Short-Term
Investments
The Fund may invest up to 20% of
its net assets in short-term debt securities, money market funds and other cash equivalents, or it may hold cash. The percentage of the Fund invested in such holdings will vary and will depend on several factors,
including market conditions. For temporary defensive purposes, during the initial invest-up period and during periods of high cash inflows
or outflows, the Fund may depart from its
principal investment strategies and invest part or all of its assets in these securities or it may hold cash. During such periods, the Fund may not be able to achieve its investment objectives. The Fund may adopt a
defensive strategy when the Advisor believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances. Short-term debt securities
are securities from issuers having a long-term debt rating of at least BBB-/Baa3 by S&P Ratings, Moody’s or Fitch and having a maturity of one year or less.
The use of temporary investments
will not be a part of a principal investment strategy of the Fund. Short-term debt securities are defined to include, without limitation, the following: (i) fixed rate and floating rate U.S. government securities,
including bills, notes and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities; (ii) certificates of
deposit issued against funds deposited in a bank or savings and loan association; (iii) bankers’ acceptances, which are short-term credit instruments used to finance commercial transactions; (iv) repurchase
agreements, which involve purchases of debt securities; (v) 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; and
(vi) commercial paper, which is short-term unsecured promissory notes The Fund may only invest in commercial paper rated A-1 or higher by S&P Ratings, Prime-1 or higher by Moody’s or F1 or higher by
Fitch.
Illiquid Securities
The Fund may hold up to an
aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment). The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained, and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances,
more than 15% of the Fund’s net assets are held in illiquid securities. Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments that lack readily
available markets as determined in accordance with SEC staff guidance.
Inverse ETFs
In addition, as a non-principal
investment strategy, the Fund may invest in inverse ETFs. An inverse ETF is a special type of index ETF that is designed to provide investment results that move in the opposite direction of the daily price movement of
the index to which it is benchmarked. These ETFs may pursue this strategy by utilizing short selling, trading derivatives such as futures contracts and employing other leveraged investment techniques.
Disclosure of Portfolio Holdings
A description of the policies and
procedures with respect to the disclosure of the Fund’s portfolio securities is included in the Fund’s SAI, which is available on the Fund’s website at www.ftportfolios.com.
Additional Risks of Investing in
the Fund
Risk is inherent in all
investing. Investing in the Fund involves risk, including the risk that you may lose all or part of your investment. There can be no assurance that the Fund will meet its stated objective. Before you invest, you
should consider the following supplemental disclosure pertaining to the Principal Risks set forth above as well as additional Non-Principal Risks set forth below in this prospectus.
Principal Risks
CALL RISK.
Many bonds may be redeemed at the option of the issuer, or “called,” before their stated maturity date. In general, an issuer will call its bonds if they can be refinanced by
issuing new bonds which bear a lower interest rate. The Underlying Funds are subject to the possibility that during periods of falling interest rates, a bond issuer will call its high yielding bonds. The Underlying
Funds would then be forced to invest the unanticipated proceeds at lower interest rates, resulting in a decline in the Underlying Fund’s income.
CASH TRANSACTIONS RISK.
The Fund may, under certain circumstances, effect a portion of its creations and redemptions for cash, rather than in-kind securities. As a result, an investment in the Fund may be less
tax-efficient than an investment in an exchange-traded fund that effects its creations and redemptions only for in-kind securities. Exchange-traded funds are able to make in-kind redemptions and avoid being taxed on
gains on the distributed portfolio securities at the fund level. Because the Fund may effect a portion of redemptions for cash, it may be required to sell portfolio securities in order to obtain the cash needed to
distribute redemption proceeds. Any recognized gain on these sales by the Fund will generally cause the Fund to recognize a gain it might not otherwise have recognized, or to recognize such gain sooner than would
otherwise be required if it were to distribute portfolio securities only in-kind. The Fund intends to distribute these gains to shareholders to avoid
being taxed on this gain at the fund level and
otherwise comply with the special tax rules that apply to it. This strategy may cause shareholders to be subject to tax on gains they would not otherwise be subject to, or at an earlier date than if they had made an
investment in a different exchange-traded fund. Moreover, cash transactions may have to be carried out over several days if the securities market is relatively illiquid and may involve considerable brokerage fees and
taxes. These brokerage fees and taxes, which will be higher than if the Fund sold and redeemed its shares principally in‐kind, will be passed on to those purchasing and redeeming Creation Units in the form of
creation and redemption transaction fees. In addition, these factors may result in wider spreads between the bid and the offered prices of the Fund’s shares than for exchange‐traded funds that distribute
portfolio securities in-kind.
CLOSED-END FUND RISK.
The shares of many Closed-End Funds, after their initial public offering, frequently trade at a price per share that is less than the net asset value per share, the difference representing
the “market discount” of such shares. This market discount may be due in part to the investment objective of long-term appreciation, which is sought by many Closed-End Funds, as well as to the fact that
the shares of Closed-End Funds are not redeemable by the holder upon demand to the issuer at the next determined net asset value, but rather, are subject to supply and demand in the secondary market. A relative lack
of secondary market purchasers of Closed-End Fund shares also may contribute to such shares trading at a discount to their net asset value.
The Fund may invest in shares of
Closed-End Funds that are trading at a discount to net asset value or at a premium to net asset value. There can be no assurance that the market discount on shares of any Closed-End Fund purchased by the Fund will
ever decrease. In fact, it is possible that this market discount may increase and the Fund may suffer realized or unrealized capital losses due to further decline in the market price of the securities of such
Closed-End Funds, thereby adversely affecting the net asset value of the Fund’s shares. Similarly, there can be no assurance that any shares of a Closed-End Fund purchased by the Fund at a premium will continue
to trade at a premium or that the premium will not decrease subsequent to a purchase of such shares by the Fund.
The organizational documents of
Closed-End Funds may include provisions that could the ability of other entities or persons to acquire control of the Closed-End Fund or to change the composition of its board of directors, which could limit the
ability of shareholders to sell their shares at a premium over the prevailing market prices by discouraging a third party from seeking to obtain control of the Closed-End Fund.
Closed-End Funds may issue
senior securities (including preferred stock and debt obligations) for the purpose of leveraging the Closed-End Fund’s common shares in an attempt to enhance the current return to such Closed-End Fund’s
common shareholders. The Fund’s investment in the common shares of Closed-End Funds that are financially leveraged may create an opportunity for greater total return on its investment, but at the same time may
be expected to exhibit more volatility in market price and net asset value than an investment in shares of investment companies without a leveraged capital structure
CREDIT RISK.
An issuer of a debt instrument may be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a debt instrument may decline
because of concerns about the issuer’s ability or unwillingness to make such payments. High yield and comparable unrated debt securities, while generally offering higher yields than investment grade debt with
similar maturities, involve greater risks, including the possibility of dividend or interest deferral, default or bankruptcy, and are regarded as predominantly speculative with respect to the issuer’s capacity
to pay dividends or interest and repay principal. Credit risk is heightened for loans in which the Fund invests because companies that issue such loans tend to be highly leveraged and thus are more susceptible to the
risks of interest deferral, default and/or bankruptcy.
INTEREST RATE RISK.
The value of the Underlying Funds’ debt securities will fluctuate in value with changes in interest rates. In general, debt securities will increase in value when interest rates fall
and decrease in value when interest rates rise. The Underlying Funds may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and
the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.
Interest rate risk is generally
lower for shorter-term investments and higher for longer-term investments. Duration is a common measure of interest rate risk. Duration measures a debt security’s expected life on a present value basis, taking
into account the debt security’s yield, interest payments and final maturity. Duration is a reasonably accurate measure of a debt security’s price sensitivity to changes in interest rates. The longer the
duration of a debt security, the greater the debt security’s price sensitivity is to changes in interest rates. Rising interest rates also may lengthen the duration of debt securities with call features, since
exercise of the call becomes less likely as interest rates rise, which in turn will make the securities more sensitive to changes in interest rates and result in even steeper price declines in the event of further
interest rate increases.
An increase in interest rates
could also cause principal payments on a debt security to be repaid at a slower rate than expected. This risk is particularly prevalent for a callable security where an increase in interest rates could cause the
issuer of that security to not redeem the security as anticipated on the call date, which could have the effect of lengthening that debt security’s expected maturity, in turn making that security more vulnerable
to interest rate risk and reducing its market value.
When interest rates fall, an
Underlying Fund may be required to reinvest the proceeds from the sale, redemption or early prepayment of a debt security at a lower interest rate.
INVERSE FLOATERS RISK.
The Underlying Funds may use inverse floaters, which creates effective leverage. Due to the leveraged nature of these investments, the value of an inverse floater will increase and
decrease to a significantly greater extent than the values of the TOB trust’s underlying municipal bonds in response to changes in market interest rates or credit quality. An investment in inverse floaters
typically will involve greater risk than an investment in a fixed rate municipal bond.
Distributions on inverse
floaters bear an inverse relationship to short-term municipal bond interest rates. Thus, distributions paid to the Underlying Funds on their inverse floaters will be reduced or even eliminated as short-term municipal
interest rates rise and will increase when short-term municipal interest rates fall. The greater the amount of floaters sold by a TOB trust relative to the inverse floaters (i.e., the greater the effective leverage of
the inverse floaters), the more volatile the distributions on the inverse floaters will be. Inverse floaters generally will underperform the market for fixed rate municipal bonds in a rising interest rate
environment.
A TOB trust may be terminated
without the Underlying Fund’s consent upon the occurrence of certain events, such as the bankruptcy or default of the issuer of the securities in the trust. If that happens, the floaters will be redeemed at par
(plus accrued interest) out of the proceeds from the sale of securities in the TOB trust, and the Underlying Fund will be entitled to the remaining proceeds, if any. Thus, if there is a decrease in the value of the
securities held in the TOB trust, the Underlying Fund may lose some or all of the principal amount of its investment in the inverse floaters.
MUNICIPAL LEASE OBLIGATIONS
RISK.
The Underlying Funds may purchase participation interests in municipal leases. These are undivided interests in a lease, installment purchase contract, or conditional sale contract entered
into by a state or local government unit to acquire equipment or facilities. Participation interests in municipal leases pose special risks because many leases and contracts contain “non-appropriation”
clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for this purpose by the appropriate legislative body. Although these
kinds of obligations are secured by the leased equipment or facilities, it might be difficult and time consuming to dispose of the equipment or facilities in the event of non-appropriation, and the Underlying Fund
might not recover the full principal amount of the obligation.
MUNICIPAL SECURITIES MARKET
LIQUIDITY RISK.
Inventories of Municipal Securities held by brokers and dealers have decreased in recent years, lessening their ability to make a market in these securities. This reduction in market making
capacity has the potential to decrease an Underlying Fund’s ability to buy or sell Municipal Securities, and increase price volatility and trading costs, particularly during periods of economic or markets
stress. In addition, recent federal banking regulations may cause certain dealers to reduce their inventories of Municipal Securities, which may further decrease the Underlying Funds’ ability to buy or sell
Municipal Securities. As a result, the Underlying Funds may be forced to accept a lower price to sell a Municipal Security, to sell other securities to raise cash, or to give up an investment opportunity, any of which
could have a negative effect on performance. The Underlying Funds may invest a significant portion of its assets in unrated Municipal Securities. The market for these securities may be less liquid than the market for
rated Municipal Securities of comparable quality. In addition, as of the fourth quarter of 2015, the market for high yield debt has experienced decreased liquidity, and investor perception of increased risk has caused
yield spreads to widen. Decreased liquidity may negatively affect the Underlying Funds’ ability to mitigate risk and meet redemptions.
POLITICAL AND ECONOMIC RISK.
The values of Municipal Securities may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy
could have a correspondingly adverse effect on the financial condition of local issuers. Other factors that could affect Municipal Securities include a change in the local, state, or national economy, demographic
factors, ecological or environmental concerns, statutory limitations on the issuer’s ability to increase taxes, and other developments generally affecting the revenue of issuers (for example, legislation or
court decisions reducing state aid to local governments or mandating additional services). This risk would be heightened to the extent that the Underlying Funds invest a substantial portion of the below investment
grade quality portion of their portfolio in the bonds of similar projects (such as those relating to the education, health care, housing, transportation, or utilities
industries), in industrial development bonds,
or in particular types of Municipal Securities (such as general obligation bonds, private activity bonds or moral obligation bonds) that are particularly exposed to specific types of adverse economic, business or
political events.
To the extent that the
Underlying Funds invest a significant portion of their assets in the securities of issuers located in a given state or U.S. territory, it will be disproportionally affected by political and economic conditions and
developments in that state or territory. In addition, economic, political or regulatory changes in that state or territory could adversely affect municipal bond issuers in that state or territory and therefore the
value of the Underlying Fund’s investment portfolio.
TAX RISK.
Proposals have been introduced in Congress to restrict or eliminate the federal income tax exemption for interest on Municipal Securities, and similar proposals may be introduced in the
future. Proposed “flat tax” and “value added tax” proposals would also have the effect of eliminating the tax preference for Municipal Securities. Some of the past proposals would have applied
to interest on Municipal Securities issued before the date of enactment, which would have adversely affected their value to a material degree. If such a proposal were enacted, the availability of Municipal Securities
for investment by the Underlying Funds and the value of the Fund’s portfolio would be adversely affected.
ZERO COUPON BONDS RISK.
As interest on zero coupon bonds is not paid on a current basis, the values of the bonds are subject to greater fluctuations than are the value of bonds that distribute income regularly
and may be more speculative than such bonds. Accordingly, the values of zero coupon bonds may be highly volatile as interest rates rise or fall. In addition, while zero coupon bonds generate income for purposes of
generally accepted accounting standards, they do not generate cash flow and thus could cause the Underlying Funds to be forced to liquidate securities at an inopportune time in order to distribute cash, as required by
tax laws.
Non-Principal Risks
BORROWING AND LEVERAGE RISK.
If the Fund borrows money, it must pay interest and other fees, which may reduce the Fund’s returns. As prescribed by the 1940, the Fund will be required to maintain specified asset
coverage of at least 300% with respect to any bank borrowing immediately following such borrowing. The Fund may be required to dispose of assets on unfavorable terms if market fluctuations or other factors reduce the
Fund’s asset coverage to less than the prescribed amount.
CREDIT RATING AGENCY RISK.
Credit ratings are determined by credit rating agencies such as S&P, Moody’s and Fitch, and are only the opinions of such entities. Ratings assigned by a rating agency are not
absolute standards of credit quality and do not evaluate market risk or the liquidity of securities. Any shortcomings or inefficiencies in credit rating agencies’ processes for determining credit ratings may
adversely affect the credit ratings of securities held by the Closed-End Funds in which the Fund invests and, as a result, may adversely affect those securities’ perceived or actual credit risk.
DEPENDENCE ON KEY PERSONNEL.
The Advisor is dependent upon the experience and expertise of the Fund’s portfolio managers in providing advisory services with respect to the Fund’s investments. If the
Advisor were to lose the services of any of these portfolio managers, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could be found for any of the
portfolio managers in the event of their death, resignation, retirement or inability to act on behalf of the Advisor.
DEPENDENCE ON KEY PERSONNEL.
The Advisor is dependent upon the experience and expertise of the Fund’s portfolio manager in providing advisory services with respect to the Fund’s investments. If the Advisor
were to lose the services of the portfolio manager, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could be found for the portfolio manager in the
event of his death, resignation, retirement or inability to act on behalf of the Advisor.
INFLATION RISK.
Inflation risk is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of
the Fund's assets can decline as can the value of the Fund's distributions.
ISSUER SPECIFIC CHANGES
RISK.
Changes in the financial condition of an issuer or counterparty, changes in specific economic or political conditions that affect a particular type of security or issuer, and changes in
general economic or political conditions can affect a security’s or instrument’s value. The value of securities of smaller, less well-known issuers can be more volatile than that of larger issuers. Issuer
specific events can have a negative impact on the value of the Fund.
LEGISLATION/LITIGATION RISK.
From time to time, various legislative initiatives are proposed in the United States and abroad, which may have a negative impact on certain companies in which the Fund invests. In
addition, litigation regarding any of the issuers of the securities owned by the Underlying Funds, or industries represented by these issuers, may negatively impact the value of the Fund’s shares. Such
legislation or litigation may cause the Fund to lose value or may result in higher portfolio turnover if the Advisor determines to sell such a holding.
VALUATION RISK.
Unlike publicly traded securities that trade on national exchanges, there is no central place or exchange for fixed income securities trading. Fixed income securities generally trade on an
“over-the-counter” market which may be anywhere in the world where the buyer and seller can settle on a price. Due to the lack of centralized information and trading, the valuation of fixed income
securities may carry more uncertainty and risk than that of publicly traded securities. Accordingly, determinations of the fair value of fixed income securities may be based on infrequent and dated information. Also,
because the available information is less reliable and more subjective, elements of judgment may play a greater role in valuation of debt securities than for other types of securities. Typically, fixed income
securities are valued using information provided by a third-party pricing service, which primarily uses broker quotes to value the securities.
Trading Issues
Although the Fund intends to
list its shares for trading on Nasdaq, there can be no assurance that an active trading market for such shares will develop or be maintained. Trading in shares on Nasdaq may be halted due to market conditions or for
reasons that, in the view of Nasdaq, make trading in shares inadvisable. In addition, trading in shares on Nasdaq is subject to trading halts caused by extraordinary market volatility pursuant to Nasdaq “circuit
breaker” rules. Market makers are under no obligation to make a market in the Fund’s shares, and authorized participants are not obligated to submit purchase or redemption orders for Creation Units. There
can be no assurance that the requirements of Nasdaq necessary to maintain the listing of the Fund will continue to be met or will remain unchanged. Due to the initial small asset size of the Fund, it is more likely to
have difficulty maintaining its listing on Nasdaq.
Fluctuation of Net Asset Value
The net asset value of shares of
the Fund will generally fluctuate with changes in the market value of the Fund’s holdings. The market prices of shares will generally fluctuate in accordance with changes in net asset value as well as the
relative supply of and demand for shares on Nasdaq. First Trust cannot predict whether shares will trade below, at or above their net asset value. Price differences may be due, in large part, to the fact that supply
and demand forces at work in the secondary trading market for shares will be closely related to, but not identical to, the same forces influencing the prices of the holdings of the Fund trading individually or in the
aggregate at any point in time. However, given that shares can only be purchased and redeemed for cash or, in-kind, in Creation Units, and only to and from broker-dealers and large institutional investors that have
entered into participation agreements (unlike shares of closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their net asset value), First Trust believes that large
discounts or premiums to the net asset value of shares should not be sustained.
Fund Organization
The Fund is a series of the
Trust, an investment company registered under the 1940 Act. The Fund is treated as a separate fund with its own investment objective and policies. The Trust is organized as a Massachusetts business trust. The
Trust’s Board is responsible for the overall management and direction of the Trust. The Board elects the Trust’s officers and approves all significant agreements, including those with the investment
advisor, custodian and fund administrative and accounting agent.
Management of the Fund
First Trust Advisors L.P., 120
East Liberty Drive, Wheaton, Illinois 60187, is the investment advisor to the Fund. In this capacity, First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund's portfolio and
certain other services necessary for the management of the portfolio.
First Trust is a limited
partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of DuPage L.P. is a limited partnership with one general partner, The Charger
Corporation, and a number of limited partners. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, the Chief Executive Officer of First Trust. First Trust discharges its responsibilities
subject to the policies of the Board.
First Trust serves as advisor or
sub-advisor for 7 mutual fund portfolios, 10 exchange-traded funds consisting of 114 series and 16 closed-end funds. It is also the portfolio supervisor of certain unit investment trusts sponsored by First Trust
Portfolios L.P. (
“FTP”
), an affiliate of First Trust, 120 East Liberty Drive, Wheaton, Illinois 60187. FTP specializes in the underwriting, trading and distribution of unit investment
trusts and other securities. FTP is the principal underwriter of the shares of the Fund.
Ken Fincher is the Fund’s
portfolio manager and has responsibility for the day-to-day management of the Fund’s investment portfolio.
•
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Ken Fincher is a Senior Vice President and Portfolio Manager at First Trust. Mr. Fincher joined First Trust with over 20 years of experience in financial markets. His current responsibilities include management of
separately managed accounts that invest primarily in closed-end funds. He has also helped develop new product structures in the closed-end fund space. Mr. Fincher has been named Outstanding Individual Contributor to
the Closed-End Fund Sector in 2007, 2006, 2005 and 2004 by financial analysts and his peers in the closed-end fund community and also served on the Closed-End Fund committee of the Investment Company Institute. Mr.
Fincher received a B.A. in financial administration from Michigan State University and an M.B.A. from Loyola University Graduate School of Business.
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For additional information
concerning First Trust, including a description of the services provided to the Fund, see the Fund’s SAI. Additional information about the portfolio manager’s compensation, other accounts managed by the
portfolio manager and the portfolio manager’s ownership of shares in the Fund is provided in the SAI.
Management Fee
Pursuant to the Investment
Management Agreement, First Trust manages the investment of the Fund’s assets and will be responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal,
audit, license and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected
with the execution of portfolio transactions, distribution and service fees payable pursuant to a 12b-1 plan, if any, and extraordinary expenses.
The Fund has agreed to pay First
Trust an annual management fee of 0.75% of its average daily net assets. As of the date of this prospectus, the Fund has neither commenced operations nor paid management fees.
A discussion regarding the
Board’s approval of the Investment Management Agreement for the Fund will be available in the Fund’s Semi-Annual Report to shareholders for the fiscal period ended February 28, 2017.
How to Buy and Sell Shares
Most investors will buy and sell
shares of the Fund in secondary market transactions through brokers. Shares of the Fund are expected to be listed for trading on the secondary market on Nasdaq. Shares can be bought and sold throughout the trading day
like other publicly traded shares. There is no minimum investment when buying shares on Nasdaq. Although shares are generally purchased and sold in “round lots” of 100 shares, brokerage firms typically
permit investors to purchase or sell shares in smaller “odd lots,” at no per-share price differential. When buying or selling shares through a broker, investors should expect to incur customary brokerage
commissions, investors may receive less than the net asset value of the shares because shares are bought and sold at market prices rather than at net asset value, and investors may pay some or all of the spread
between the bid and the offer price in the secondary market on each leg of a round trip (purchase and sale) transaction. Share prices are reported in dollars and cents per share.
For purposes of the 1940 Act,
the Fund is treated as a registered investment company, and the acquisition of shares by other registered investment companies is subject to the restrictions of Section 12(d)(1) of the 1940 Act. The Fund’s
investment in an Underlying Fund is limited to 3% of the total outstanding voting stock of any Underlying Fund unless the Fund enters into a participation agreement with that Underlying Fund. However, the total amount
of securities of an Underlying Fund held by the Fund, both individually and when aggregated with all other shares of the Underlying Fund held by other registered investment companies and private investment pools
advised by the Advisor or its affiliates (as well as shares held by the Advisor and its affiliates) generally cannot exceed 25% of the outstanding voting securities of the Underlying Fund, and none of these entities
(including the Fund) may individually or collectively exert a controlling influence over the Underlying Fund.
Book Entry
Shares are held in book-entry
form, which means that no share certificates are issued. The Depository Trust Company (“DTC”) or its nominee is the record owner of all outstanding shares of the Fund and is recognized as the owner of all
shares for all purposes.
Investors owning shares are
beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all shares. Participants in DTC include securities brokers and dealers, banks, trust companies,
clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of shares, you are not entitled to receive physical delivery of share
certificates or to have shares registered in your name, and you are not considered a registered owner of shares. Therefore, to exercise any right as an owner of shares, you must rely upon the procedures of DTC and its
participants. These procedures are the same as those that apply to any other stocks that you hold in book-entry or “street name” form.
Share Trading Prices
The trading price of shares of the
Fund on Nasdaq is based on market price and may differ from the Fund’s daily net asset value and can be affected by market forces of supply and demand, economic conditions and other factors.
Information regarding the
intra-day value of the shares of the Fund, also referred to as the “indicative optimized portfolio value” (“IOPV”), is disseminated every 15 seconds throughout the Fund’s trading day by
the national securities exchange on which the shares are listed or by market data vendors or other information providers. The IOPV should not be viewed as a “real-time” update of the net asset value per
share of the Fund because the IOPV may not be calculated in the same manner as the net asset value, which is computed once a day, generally at the end of the business day. The price of a non-U.S. security that is
primarily traded on a non-U.S. exchange shall be updated, using the last sale price, every 15 seconds throughout the trading day, provided that upon the closing of such non-U.S. exchange, the closing price of the
security, after being converted to U.S. dollars, will be used. This will likely cause the IOPV to deviate significantly from the true market value of the portfolio. Furthermore, in calculating the IOPV of the
Fund’s shares, exchange rates may be used throughout the day (9:00 a.m. to 4:15 p.m., Eastern Time) that may differ from those used to calculate the net asset value per share of the Fund and consequently may
result in differences between the net asset value and the IOPV. The Fund is not involved in, or responsible for, the calculation or dissemination of the IOPV of shares of the Fund and the Fund does not make any
warranty as to its accuracy.
Frequent Purchases and Redemptions
of the Fund’s Shares
The Fund imposes no restrictions
on the frequency of purchases and redemptions (“market timing”). In determining not to approve a written, established policy, the Board evaluated the risks of market timing activities by the Fund’s
shareholders. The Board considered that the Fund’s shares can only be purchased and redeemed directly from the Fund in Creation Units by broker-dealers and large institutional investors that have entered into
participation agreements (i.e., authorized participants (“APs”)) and that the vast majority of trading in the Fund’s shares occurs on the secondary market. Because the secondary market trades do not
involve the Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including dilution, disruption of portfolio management, increases in the Fund’s trading costs and
the realization of capital gains. With respect to trades directly with the Fund, to the extent effected in-kind (i.e., for securities), those trades do not cause any of the harmful effects that may result from
frequent cash trades. To the extent that the Fund may effect the purchase or redemption of Creation Units in exchange wholly or partially for cash, the Board noted that such trades could result in dilution to the Fund
and increased transaction costs, which could negatively impact the Fund’s ability to achieve its investment objective. However, the Board noted that direct trading by APs is critical to ensuring that the shares
trade at or close to net asset value. In addition, the Fund imposes fixed and variable transaction fees on purchases and redemptions of Creation Units to cover the custodial and other costs incurred by the Fund in
effecting trades. Finally, the Advisor monitors purchase and redemption orders from APs for patterns of abusive trading and the Fund reserves the right to not accept orders from APs that the Advisor has determined may
be disruptive to the management of the Fund, or otherwise not in the Fund’s best interests
Dividends, Distributions and
Taxes
Dividends from net investment
income, if any, are declared and paid at least monthly by the Fund. The Fund distributes its net realized capital gains, if any, to shareholders at least annually.
Distributions in cash may be
reinvested automatically in additional whole shares only if the broker through whom you purchased shares makes such option available. Such shares will generally be reinvested by the broker based upon the market price
of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Federal Tax Matters
This section summarizes 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 these summaries do not
describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker-dealer, or other investor with special
circumstances. In addition, this section does not describe your state, local or non-U.S. tax consequences.
This federal income tax summary
is based in part on the advice of counsel to the Fund. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, counsel to the Fund was not asked to review, and has not
reached a conclusion with respect to, the federal income tax treatment of the assets to be included in the Fund. This may not be sufficient for you to use for the purpose of avoiding penalties under federal tax
law.
As with any investment, you should
seek advice based on your individual circumstances from your own tax advisor.
Fund Status
The Fund intends to continue to
qualify as a “regulated investment company” under the federal tax laws. If the Fund qualifies as a regulated investment company and distributes its income as required by the tax law, the Fund generally
will not pay federal income taxes.
Distributions
After the end of each year, you
will receive a tax statement that separates the distributions of the Fund into three categories, exempt-interest dividends, ordinary income distributions and capital gain dividends. Dividends that qualify as
“exempt-interest dividends” generally are excluded from your gross income for federal income tax purposes. Some or all of the exempt-interest dividends, however, may be taken into account in determining
your alternative minimum tax and may have other tax consequences (e.g., they may affect the amount of your social security benefits that are taxed). Ordinary income distributions are generally taxed at your ordinary
tax rate. Generally, you will treat all capital gain dividends as long-term capital gains regardless of how long you have owned your shares. To determine your actual tax liability for your capital gain 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, the Fund may make distributions that represent a return of
capital for tax purposes and thus will generally not be taxable to you; however, such distributions may reduce your tax basis in your shares, which could result in you having to pay higher taxes in the future when
shares are sold, even if you sell the shares at a loss from your original investment. 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 income from the Fund that you must take into account for federal income tax purposes is not reduced by amounts used to pay a deferred sales fee, if any. 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.
Income from the Fund may also be
subject to a 3.8% “Medicare tax.” This tax generally applies to your net investment income if your adjusted gross income exceeds certain threshold amounts, which are $250,000 in the case of married couples
filing joint returns and $200,000 in the case of single individuals. Interest that is excluded from gross income and exempt-interest dividends from the Fund are generally not included in your net investment income for
purposes of this tax.
Dividends Received Deduction
A corporation that owns shares
generally will not be entitled to the dividends received deduction with respect to many dividends received from the Fund because the dividends received deduction is generally not available for distributions from
regulated investment companies.
Capital Gains and Losses
If you are an individual, the
maximum marginal stated federal tax rate for net capital gain is generally 20% for taxpayers in the 39.6% tax bracket, 15% for taxpayers in the 25%, 28%, 33% and 35% tax brackets and 0% for taxpayers in the 10% and
15% tax brackets. Some portion of your capital gain dividends may be taxed at a higher maximum stated tax rate. Capital gains may also be subject to the Medicare tax described above.
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. If you hold a share for six months or less, any loss incurred by you related to the disposition of
such share will be disallowed to the extent of the exempt-interest dividends you received, except in the case of a regular dividend paid by the Fund if the Fund declares exempt-interest dividends on a daily basis in
an amount equal to at least 90 percent of its net tax-exempt interest and distributes such dividends on a monthly or more frequent basis. To the extent, if any, it is not disallowed, it will be recharacterized as
long-term capital loss to the extent of any 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. The Internal
Revenue Code of 1986, as amended, treats certain capital gains as ordinary income in special situations.
Sale of Shares
If you sell or redeem 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. Further, if you hold your
shares for six months or less, any loss incurred by you related to the disposition of such a share will be disallowed to the extent of the exempt-interest dividends you received, except as otherwise described in the
prior paragraph.
Taxes on Purchase and Redemption of
Creation Units
If you exchange securities for
Creation Units you will generally recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and your aggregate basis in the securities
surrendered and the cash component paid. If you exchange Creation Units for securities, you will generally recognize a gain or loss equal to the difference between your basis in the Creation Units and the aggregate
market value of the securities received and the cash redemption amount. The Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units or Creation Units for
securities cannot be deducted currently under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position.
Deductibility of Fund Expenses
Expenses incurred and deducted
by the Fund will generally not be treated as income taxable to you. In some cases, however, you may be required to treat your portion of these Fund expenses as income. In these cases you may be able to take a
deduction for these expenses. However, certain miscellaneous itemized deductions, such as investment expenses, may be deducted by individuals only to the extent that all of these deductions exceed 2% of the
individual’s adjusted gross income. Some individuals may also be subject to further limitations on the amount of their itemized deductions, depending on their income. Further, because the Fund pays
exempt-interest dividends, which are treated as exempt interest for federal income tax purposes, you will not be able to deduct some of your interest expense for debt that you incur or continue to purchase or carry
your shares.
Non-U.S. Investors
If you are a non-U.S. investor
(i.e., an investor other than a U.S. citizen or resident or a U.S. corporation, partnership, estate or trust), you should be aware that, generally, subject to applicable tax treaties, distributions from the Fund will
be characterized as dividends for federal income tax purposes (other than dividends which the Fund properly reports as capital gain dividends) and, other than exempt-interest dividends, will be subject to U.S. federal
income taxes, including withholding taxes, subject to certain exceptions described below. However, distributions received by a non-U.S. investor from the Fund that are properly reported by the Fund as capital gain
dividends may not be subject to U.S. federal income taxes, including withholding taxes, provided that the Fund makes certain elections and certain other conditions are met. Distributions from the Fund that are
properly reported by the Fund as an interest-related dividend attributable to certain interest income received by the Fund or as a short-term capital gain dividend attributable to certain net short-term capital gain
income received by the Fund may not be subject to U.S. federal income taxes, including withholding taxes when received by certain foreign investors, provided that the Fund makes certain elections and certain other
conditions are met.
Distributions may be subject to
a U.S. withholding tax of 30% in the case of distributions to (i) certain non-U.S. financial institutions that have not entered into an agreement with the U.S. Treasury to collect and disclose certain information and
are not resident in a jurisdiction that has entered into such an agreement with the U.S. Treasury and (ii) certain other non-U.S. entities that do not provide certain certifications and information about the
entity’s U.S. owners. Dispositions of shares by such persons may be subject to such withholding after December 31, 2018.
Distribution Plan
FTP serves as the distributor of
Creation Units for the Fund on an agency basis. FTP does not maintain a secondary market in shares.
The Board has adopted a
Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to
reimburse FTP for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers
or other persons that are APs for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
The Fund does not currently pay
12b-1 fees, and pursuant to a contractual arrangement, the Fund will not pay 12b-1 fees any time before September 30, 2018. However, in the event 12b-1 fees are charged in the future, because these fees are paid out
of the Fund's assets, over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges.
Net Asset Value
The Fund’s net asset value
is determined as of the close of trading (normally 4:00 p.m., Eastern Time) on each day the New York Stock Exchange is open for trading. If the New York Stock Exchange closes early on a valuation day, the Fund’s
net asset value will be determined as of that time. Net asset value per share is calculated for the Fund by taking the market price of the Fund’s total assets, including interest or dividends accrued but not yet
collected, less all liabilities (including accrued expenses and dividends declared but unpaid), and dividing such amount by the total number of shares outstanding. The result, rounded to the nearest cent, is the net
asset value per share. All valuations are subject to review by the Board or its delegate.
The Fund’s investments are
valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value, in accordance with valuation procedures adopted by the Board and in accordance with the 1940
Act. Portfolio securities listed on any exchange other than Nasdaq and the London Stock Exchange Alternative Investment Market (“AIM”) are valued at the last sale price on the business day as of which such
value is being determined. Securities listed on Nasdaq or AIM are valued at the official closing price on the business day as of which such value is being determined. If there has been no sale on such day, or no
official closing price in the case of securities traded on Nasdaq or AIM, the securities are fair valued at the mean of their most recent bid and ask price on such day. Portfolio securities traded on more than one
securities exchange are valued at the last sale price or official closing price, as applicable, on the business day as of which such value is being determined at the close of the exchange representing the principal
market for such securities. Portfolio securities traded in the over-the-counter market, but excluding securities trading on Nasdaq or AIM, are fair valued at the mean of their most recent bid and asked price, if
available, and otherwise at the closing bid price. Short-term investments that mature in less than 60 days when purchased are fair valued at cost adjusted for amortization of premiums and accretion of discount,
provided the Advisor’s Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing at the time of the
determination. Net asset value may change on days when investors may not sell or redeem Fund shares.
Certain securities may not be
able to be priced by pre-established pricing methods. Such securities may be valued by the Board or its delegate, the Advisor’s Pricing Committee, at fair value. The use of fair value pricing by the Fund is
governed by valuation procedures adopted by the Board and in accordance with the provisions of the 1940 Act. These securities generally include, but are not limited to, certain restricted securities (securities which
may not be publicly sold without registration under the Securities Act of 1933, as amended (the “Securities Act”)) for which a pricing service is unable to provide a market price; securities whose trading
has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially
affect the value of the security after the market has closed but before the calculation of the Fund’s net asset value or make it difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security’s fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might
reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from the current market quotations or official closing prices on the applicable
exchange. A variety of factors may be considered in determining the fair value of such securities. See the Fund’s SAI for details.
Because foreign securities
exchanges may be open on different days than the days during which an investor may purchase or sell shares of the Fund, the value of the Fund’s securities may change on days when investors are not able to
purchase or
sell shares of the Fund. The value of securities
denominated in foreign currencies is converted into U.S. dollars at the exchange rates in effect at the time of valuation.
Fund Service Providers
The Bank of New York Mellon, 101
Barclay Street, New York, New York 10286, acts as the administrator, custodian and fund accounting and transfer agent for the Fund. Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, serves as
legal counsel to the Fund.
Premium/Discount Information
The Fund has not yet commenced
operations and, therefore, does not have information about the differences between the Fund’s daily market price on Nasdaq and its net asset value. Once the Fund has commenced operations, this information will
be available on the Fund’s website at www.ftportfolios.com.
Other Information
Continuous Offering
The Fund will issue, on a
continuous offering basis, its shares in one or more groups of a fixed number of Fund shares (each such group of such specified number of individual Fund shares, a “Creation Unit Aggregation”). The method
by which Creation Unit Aggregations of Fund shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Unit Aggregations of shares are issued and sold by the Fund on
an ongoing basis, a “distribution,” as such term is used in the Securities Act, may occur at any point. Broker-dealers and other persons are cautioned that some activities on their part may, depending on
the circumstances, result in their being deemed participants in a distribution in a manner that could render them statutory underwriters and subject them to the prospectus delivery requirement and liability provisions
of the Securities Act.
For example, a broker-dealer
firm or its client may be deemed a statutory underwriter if it takes Creation Unit Aggregations after placing an order with FTP, breaks them down into constituent shares and sells such shares directly to customers, or
if it chooses to couple the creation of a supply of new shares with an active selling effort involving solicitation of secondary market demand for shares. A determination of whether one is an underwriter for purposes
of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be
considered a complete description of all the activities that could lead to a characterization as an underwriter.
Broker-dealer firms should also
note that dealers who are not “underwriters” but are effecting transactions in shares, whether or not participating in the distribution of shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(a)(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. The Trust, on behalf of the Fund,
however, has received from the Securities and Exchange Commission an exemption from the prospectus delivery obligation in ordinary secondary market transactions under certain circumstances, on the condition that
purchasers are provided with a product description of the shares. As a result, broker-dealer firms should note that dealers who are not underwriters but are participating in a distribution (as contrasted with ordinary
secondary market transactions) and thus dealing with the shares that are part of an overallotment within the meaning of Section 4(a)(3)(C) of the Securities Act would be unable to take advantage of the prospectus
delivery exemption provided by Section 4(a)(3) of the Securities Act. Firms that incur a prospectus delivery obligation with respect to shares are reminded that, under the Securities Act Rule 153, a prospectus
delivery obligation under Section 5(b)(2) of the Securities Act owed to a broker-dealer in connection with a sale on Nasdaq is satisfied by the fact that the prospectus is available from Nasdaq upon request. The
prospectus delivery mechanism provided in Rule 153 is available with respect to transactions on a national securities exchange, a trading facility or an alternative trading system.
[THIS PAGE INTENTIONALLY LEFT BLANK.]
First Trust
Exchange-Traded Fund VIII
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First Trust Municipal CEF
Income Opportunity ETF
For More Information
For more detailed information
on the Fund, several additional sources of information are available to you. The SAI, incorporated by reference into this prospectus, contains detailed information on the Fund’s policies and operation.
Additional information about the Fund’s investments is available in the annual and semi-annual reports to shareholders. In the Fund’s annual reports, you will find a discussion of the market conditions and
investment strategies that significantly impacted the Fund’s performance during the last fiscal year. The Fund’s most recent SAI, annual or semi-annual reports and certain other information are available
free of charge by calling the Fund at (800) 621-1675, on the Fund’s website at www.ftportfolios.com or through your financial advisor. Shareholders may call the toll-free number above with any inquiries.
You may obtain this and other
information regarding the Fund, including the SAI and the Codes of Ethics adopted by First Trust, FTP and the Trust, directly from the Securities and Exchange Commission (“SEC”). Information on the
SEC’s website is free of charge. Visit the SEC’s on-line EDGAR database at http://www.sec.gov or in person at the SEC’s Public Reference Room in Washington, D.C., or call the SEC at (202) 551-8090
for information on the Public Reference Room. You may also request information regarding the Fund by sending a request (along with a duplication fee) to the SEC’s Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549-1520 or by sending an electronic request to publicinfo@sec.gov.
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com
SEC File #: 333-210186
811-23147
PRELIMINARY STATEMENT OF
ADDITIONAL INFORMATION DATED SEPTEMBER 23, 2016
SUBJECT TO COMPLETION
STATEMENT OF ADDITIONAL
INFORMATION
Investment Company Act File
No. 811-23147
First Trust Exchange-Traded
Fund VIII
FUND NAME
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TICKER SYMBOL
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EXCHANGE
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First Trust CEF Income Opportunity ETF
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FCEF
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Nasdaq
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DATED [TO BE UPDATED]
This
Statement of Additional Information (
“SAI”
) is not a prospectus. It should be read in conjunction with the prospectus dated [TO BE UPDATED], as it may be revised from time to time (the
“Prospectus”
), for First Trust CEF Income Opportunity ETF (the
“Fund”
), a series of the First Trust Exchange-Traded Fund VIII (the
“Trust”
). Capitalized terms used herein that are not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained
without charge by writing to the Trust’s distributor, First Trust Portfolios L.P., 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, or by calling toll free at (800) 621-1675.
The information in this Statement of Additional
Information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional
Information is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer of sale is not permitted.
Table of Contents
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A-1
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General Description of the
Trust and the Fund
The Trust was
organized as a Massachusetts business trust on February 22, 2016, and is authorized to issue an unlimited number of shares in one or more series or “Funds.” The Trust is an open-end management investment
company, registered under the Investment Company Act of 1940, as amended (the
“1940 Act”
). The Trust currently offers shares in two series: including First Trust CEF Income Opportunities ETF and First Trust Municipal CEF Income Opportunities ETF,
each of which is a non-diversified series.
This SAI relates
to the Fund. The Fund, as a series of the Trust, represents a beneficial interest in a separate portfolio of securities and other assets, with its own objective and policies.
The Board of
Trustees of the Trust (the
“Board of Trustees”
or the
“Trustees”
) has the right to establish additional series in the future, to determine the preferences, voting powers, rights and privileges thereof and to modify such
preferences, voting powers, rights and privileges without shareholder approval. Shares of any series may also be divided into one or more classes at the discretion of the Trustees.
The Trust or any
series or class thereof may be terminated at any time by the Board of Trustees upon written notice to the shareholders.
Each share has
one vote with respect to matters upon which a shareholder vote is required, consistent with the requirements of the 1940 Act and the rules promulgated thereunder. Shares of all series of the Trust vote together as a
single class except as otherwise required by the 1940 Act, or if the matter being voted on affects only a particular series, and, if a matter affects a particular series differently from other series, the shares of
that series will vote separately on such matter. The Trust’s Declaration of Trust (the
“Declaration”
) requires a shareholder vote only on those matters where the 1940 Act requires a vote of shareholders and otherwise permits the Trustees to take actions
without seeking the consent of shareholders. For example, the Declaration gives the Trustees broad authority to approve reorganizations between the Fund and another entity, such as another exchange-traded fund, or the
sale of all or substantially all of the Fund’s assets, or the termination of the Trust or the Fund without shareholder approval if the 1940 Act would not require such approval.
The
Declaration provides that by becoming a shareholder of the Fund, each shareholder shall be expressly held to have agreed to be bound by the provisions of the Declaration. The Declaration may, except in limited
circumstances, be amended by the Trustees in any respect without a shareholder vote. The Declaration provides that the Trustees may establish the number of Trustees and that vacancies on the Board of Trustees may be
filled by the remaining Trustees, except when election of Trustees by the shareholders is required under the 1940 Act. Trustees are then elected by a plurality of votes cast by shareholders at a meeting at which a
quorum is present. The Declaration also provides that Trustees may be removed, with or without cause, by a vote of shareholders holding at least two-thirds of the voting power of the Trust, or by a vote of two-thirds
of the remaining Trustees. The provisions of the Declaration relating to the election and removal of Trustees may not be amended without the approval of two-thirds of the Trustees.
The holders of
Fund shares are required to disclose information on direct or indirect ownership of Fund shares as may be required to comply with various laws applicable to the Fund or as the Trustees may determine, and ownership of
Fund shares may be disclosed by the Fund if so required by law or regulation. In addition, pursuant to the Declaration, the Trustees may, in their discretion, require the Trust to redeem shares held by any shareholder
for any reason under terms set by the Trustees. The Declaration provides a detailed process for the bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the
time, expense, distraction and other harm that can be caused to the Fund or its shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand must
first be made on the Trustees. The Declaration details various information, certifications, undertakings and acknowledgements that must be included in the demand. Following receipt of the demand, the Trustees have a
period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority of the Trustees who are considered independent for the purposes of considering the demand determine that
maintaining the suit would not be in the best interests of the Fund, the Trustees are required to reject the demand and the complaining shareholder may not proceed with the derivative action unless the shareholder is
able to sustain the burden of proof to a court that the decision of the Trustees not to pursue the requested action was not a good faith exercise of their business judgment on behalf of the Fund. In making such a
determination, a Trustee is not considered to have a personal financial interest by virtue of being compensated for his or her services as a Trustee. If a demand is rejected, the complaining shareholder will be
responsible for the costs and expenses (including attorneys’ fees) incurred by the Fund in connection with the consideration of the demand under a number of circumstances. If a derivative action is brought in
violation of the Declaration, the shareholder bringing the action may be responsible for the Fund’s costs,
including attorneys’ fees. The Declaration
also provides that any shareholder bringing an action against the Fund waives the right to trial by jury to the fullest extent permitted by law.
The Trust is not
required to and does not intend to hold annual meetings of shareholders.
Under
Massachusetts law applicable to Massachusetts business trusts, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration
contains an express disclaimer of shareholder liability for acts or obligations of the Trust and requires that notice of this disclaimer be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. The Declaration further provides for indemnification out of the assets and property of the Trust for all losses and expenses of any shareholder held personally liable for the obligations of
the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust or the Fund itself was
unable to meet its obligations.
The
Declaration further provides that a Trustee acting in his or her capacity as Trustee is not personally liable to any person other than the Trust or its shareholders, for any act, omission, or obligation of the Trust.
The Declaration requires the Trust to indemnify any persons who are or who have been Trustees, officers or employees of the Trust for any liability for actions or failure to act except to the extent prohibited by
applicable federal law. In making any determination as to whether any person is entitled to the advancement of expenses in connection with a claim for which indemnification is sought, such person is entitled to a
rebuttable presumption that he or she did not engage in conduct for which indemnification is not available. The Declaration provides that any Trustee who serves as chair of the Board of Trustees or of a committee of
the Board of Trustees, as lead independent Trustee or as audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.
The Fund is
advised by First Trust Advisors L.P. (the
“Advisor”
or
“First Trust”
).
The shares of
the Fund list and principally trade on The Nasdaq Stock Market LLC (
“Nasdaq”
or the
“Exchange”
). The shares will trade on Nasdaq at market prices that may be below, at or above net asset value. The Fund offers and issues shares at net asset value only in
aggregations of a specified number of shares (each a
“Creation Unit”
or a
“Creation Unit Aggregation”
), generally in exchange for a basket of securities (the
“Deposit Securities”
), together with the deposit of a specified cash payment (the
“Cash Component”
). Shares are redeemable only in Creation Unit Aggregations and, generally, in exchange for portfolio securities and a specified cash payment. Creation
Units are aggregations of 50,000 shares of the Fund.
The Trust
reserves the right to permit creations and redemptions of Fund shares to be made in whole or in part on a cash basis under certain circumstances. Fund shares may be issued in advance of receipt of Deposit Securities
subject to various conditions including a requirement to maintain on deposit with the Fund cash at least equal to 115% of the market value of the missing Deposit Securities. See the section entitled “Creation
and Redemption of Creation Unit Aggregations.” In each instance of such cash creations or redemptions, transaction fees may be imposed that will be higher than the transaction fees associated with in-kind
creations or redemptions. In all cases, such fees will be limited in accordance with the requirements of the Securities and Exchange Commission (the
“SEC”
) applicable to management investment companies offering redeemable securities.
Exchange Listing and
Trading
There can be
no assurance that the requirements of Nasdaq necessary to maintain the listing of shares of the Fund will continue to be met. Nasdaq may, but is not required to, remove the shares of the Fund from listing if (i)
following the initial 12-month period beginning at the commencement of trading of the Fund, there are fewer than 50 beneficial owners of the shares of the Fund for 30 or more consecutive trading days; (ii) the
value of the Fund’s Index (as defined below) is no longer calculated or available; or (iii) such other event shall occur or condition exist that, in the opinion of Nasdaq makes further dealings on Nasdaq
inadvisable. Nasdaq will remove the shares of the Fund from listing and trading upon termination of the Fund.
As in the case of
other stocks traded on Nasdaq, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels.
The Fund
reserves the right to adjust the price levels of shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which
would have no effect on the net assets of the Fund.
Investment Objectives and
Policies
The Prospectus
describes the investment objective and certain policies of the Fund. The following supplements the information contained in the Prospectus concerning the investment objective and policies of the Fund.
The Fund is
subject to the following fundamental policies, which may not be changed without approval of the holders of a majority of the outstanding voting securities (as such term is defined in the 1940 Act) of the Fund:
(1)
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The Fund may not issue senior securities, except as permitted under the 1940 Act.
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(2)
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The Fund may not borrow money, except as permitted under the 1940 Act.
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(3)
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The Fund will not underwrite the securities of other issuers except to the extent the Fund may be considered an underwriter under the Securities Act of 1933, as amended (the
“1933 Act”
), in connection with the purchase and sale of portfolio securities.
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(4)
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The Fund will not purchase or sell real estate or interests therein, unless acquired as a result of ownership of securities or other instruments (but this shall not prohibit the Fund from purchasing or selling
securities or other instruments backed by real estate or of issuers engaged in real estate activities).
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(5)
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The Fund may not make loans to other persons, except through (i) the purchase of debt securities permissible under the Fund’s investment policies, (ii) repurchase agreements, or (iii) the
lending of portfolio securities, provided that no such loan of portfolio securities may be made by the Fund if, as a result, the aggregate of such loans would exceed 33-1/3% of the value of the Fund’s total
assets.
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(6)
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The Fund may not 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, forward contracts or other derivative instruments, or from investing in securities or other instruments backed by physical commodities).
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(7)
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The Fund may not invest 25% or more of the value of its total assets in securities of issuers in any one industry or group of industries. This restriction does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities, or securities of other investment companies.
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For purposes
of applying restriction (1) above, under the 1940 Act as currently in effect, the Fund is not permitted to issue senior securities, except that the Fund may borrow from any bank if immediately after such borrowing the
value of the Fund’s total assets is at least 300% of the principal amount of all of the Fund’s borrowings (i.e., the principal amount of the borrowings may not exceed 33 1/3% of the Fund’s total
assets). In the event that such asset coverage shall at any time fall below 300%, the Fund shall, within three days thereafter (not including Sundays and holidays), reduce the amount of its borrowings to an extent
that the asset coverage of such borrowing shall be at least 300%. The fundamental investment limitations set forth above limit the Fund’s ability to engage in certain investment practices and purchase securities
or other instruments to the extent permitted by, or consistent with, applicable law. As such, these limitations will change as the statute, rules, regulations or orders (or, if applicable, interpretations) change, and
no shareholder vote will be required or sought.
Except for
restriction (2) above, if a percentage restriction is adhered to at the time of investment, a later increase in percentage resulting from a change in market value of the investment or the total assets will not
constitute a violation of that restriction. With respect to restriction (2), if the limitations are exceeded as a result of a change in market value then the Fund will reduce the amount of borrowings within three days
thereafter to the extent necessary to comply with the limitations (not including Sundays and holidays).
The foregoing
fundamental policies of the Fund may not be changed without the affirmative vote of the majority of the outstanding voting securities of the Fund. The 1940 Act defines a majority vote as the vote of the lesser of
(i) 67% or more of the voting securities represented at a meeting at which more than 50% of the outstanding securities are represented; or (ii) more than 50% of the outstanding voting securities. With
respect to the submission of a change in an investment policy to the holders of outstanding voting securities of the Fund, such matter shall be deemed to have been effectively acted upon with respect to the Fund if a
majority of the outstanding voting securities of the Fund vote for the approval of such matter, notwithstanding that such matter has not been approved by the holders of a majority of the outstanding voting securities
of any other series of the Trust affected by such matter.
In addition to
the foregoing fundamental policies, the Fund is also subject to strategies and policies discussed herein which, unless otherwise noted, are non-fundamental policies and may be changed by the Board of Trustees.
The Fund has
adopted a non-fundamental investment policy pursuant to Rule 35d-1 under the 1940 Act (a
“Name Policy”
) whereby the Fund, under normal market conditions, will invest at least 80% of its assets in Closed-End Funds (as defined below). As a result, the Fund must
provide shareholders with a notice meeting the requirements of Rule 35d-1(c) at least 60 days prior to any change of the Fund’s Name Policy.
Investment Strategies
Under normal
market conditions, the Fund will seek to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in a portfolio of closed-end investment companies that are
listed and traded in the United States on registered exchanges (
“Closed-End Funds”
). In selecting the Closed-End Funds in which the Fund will invest (
“Underlying Funds”
), the Fund’s investment advisor will analyze relevant Closed-End Fund data metrics and economic factors. Fund shareholders are entitled to 60
days’ notice prior to any change in this non-fundamental investment policy.
Types of Investments
Closed-End
Funds.
Shares of Closed-End Funds are typically offered to the public in a one-time initial public offering by a group of underwriters who retain a spread or underwriting commission of between 4%
and 6% of the initial public offering price. Such securities are then listed for trading on the New York Stock Exchange, the American Stock Exchange or Nasdaq or, in some cases, may be traded in other OTC markets.
Because the shares of Closed-End Funds cannot be redeemed upon demand to the issuer like the shares of an open-end investment company (such as the Fund), investors seek to buy and sell shares of Closed-End Funds in
the secondary market. The Fund generally will purchase shares of Closed-End Funds only in the secondary market. The Fund will incur normal brokerage costs on such purchases similar to the expenses the Fund would incur
for the purchase of equity securities in the secondary market. The Fund may, however, also purchase securities of a Closed-End Fund in an initial public offering when, in the opinion of the Adviser, based on a
consideration of the nature of the Closed-End Fund’s proposed investments, the prevailing market conditions and the level of demand for such securities, they represent an attractive opportunity for growth of
capital. The initial offering price typically will include a dealer spread, which may be higher than the applicable brokerage cost if the Fund purchased such securities in the secondary market.
The shares of
many Closed-End Funds, after their initial public offering, frequently trade at a price per share which is less than the net asset value per share, the difference representing the “market discount” of such
shares. This market discount may be due in part to the investment objective of long-term appreciation, which is sought by many Closed-End Funds, as well as to the fact that the shares of closed-end funds are not
redeemable by the holder upon demand but rather are subject to the principles of supply and demand in the secondary market. A relative lack of secondary market purchasers of Closed-End Fund shares also may contribute
to such shares’ trading at a discount to their net asset value.
Fixed Income
Investments and Cash Equivalents.
Normally, the Fund invests substantially all of its assets to meet its investment objectives and consequently may invest significantly in fixed income securities and cash equivalents;
however, for temporary or defensive purposes, the Fund may also invest in other fixed income investments and cash equivalents in order to provide income, liquidity and preserve capital.
Fixed income
investments and cash equivalents held by the Fund may include, without limitation, the types of investments set forth below.
(1)
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The Fund may invest in U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government securities include securities that are issued or guaranteed by the U.S. Treasury, by various agencies of the U.S. government, or by various instrumentalities that
have been established or sponsored by the U.S. government. U.S. Treasury securities are backed by the “full faith and credit” of the United States. Securities issued or guaranteed by federal agencies and
U.S. government-sponsored instrumentalities may or may not be backed by the full faith and credit of the United States. Some of the U.S. government agencies that issue or guarantee securities include the Export-Import
Bank of the United States, the Farmers Home Administration, the Federal Housing Administration, the Maritime Administration, the Small Business Administration and the Tennessee Valley Authority. An instrumentality of
the U.S. government is a government agency organized under federal charter with government supervision. Instrumentalities issuing or guaranteeing securities include, among others, the Federal Home Loan Banks, the
Federal Land Banks, the Central Bank for Cooperatives, Federal
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Intermediate Credit Banks and Federal National Mortgage Association. In the case of those U.S. government securities not backed by the full faith and credit of the United States, the investor must look principally
to the agency or instrumentality issuing or guaranteeing the security for ultimate repayment, and may not be able to assert a claim against the United States itself in the event that the agency or instrumentality does
not meet its commitment. The U.S. government, its agencies and instrumentalities do not guarantee the market value of their securities; and, consequently, the value of such securities may fluctuate.
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(2)
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The Fund may invest in certificates of deposit issued against funds deposited in a bank or savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are
normally negotiable. If such certificates of deposit are non-negotiable, they will be considered illiquid securities and be subject to the Fund’s 15% restriction on investments in illiquid securities. Pursuant
to the certificate of deposit, the issuer 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 $250,000; therefore, certificates of deposit purchased by the Fund may not be fully insured. The Fund may only invest in certificates of deposit issued by U.S. banks with at
least $1 billion in assets.
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(3)
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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.
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(4)
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The Fund may invest in repurchase agreements, which involve purchases of debt securities with counterparties that are deemed by the Advisor to present acceptable credit risks. In such an action, at the time the Fund
purchases the security, it simultaneously agrees to resell and redeliver the security to the seller, who also simultaneously agrees to buy back the security 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. The Fund may enter into repurchase agreements only with respect to obligations of the U.S. government or 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 affected Fund is entitled to sell the underlying collateral. If the value of the collateral declines
after the agreement is entered into, however, and 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 portfolio managers monitor 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 portfolio managers do 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.
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(5)
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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.
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(6)
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The Fund may invest in commercial paper, which are 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 the notes. However, they are redeemable by the Fund at any time. The Fund’s
portfolio managers will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporation’s ability to meet all of its
financial obligations, because the Fund’s liquidity might be impaired if the corporation were unable to pay principal and interest on demand. The Fund may invest in commercial paper only if its has received the
highest rating from at least one nationally recognized statistical rating organization or, if unrated, judged by First Trust to be of comparable quality.
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(7)
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The Fund may invest in shares of money market funds, as consistent with its investment objective and policies. Shares of money market funds are subject to management fees and other expenses of those funds.
Therefore, investments in money market funds will cause the Fund to bear proportionately the costs incurred by the money market funds’ operations. At the same time, the Fund will continue to pay its own
management fees and expenses with respect to all of its assets, including any portion invested in the shares of other investment companies. Although money market funds that operate in accordance with Rule 2a-7 under
the 1940 Act seek to preserve a $1.00 share price (until October 2016, when amended Rule 2a-7 will require share prices of non-government money market funds to be valuated at their floating net asset value), it is
possible for the Fund to lose money by investing in money market funds.
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Illiquid
Securities.
The Fund may invest in illiquid securities (i.e., securities that are not readily marketable). For purposes of this restriction, illiquid securities include, but are not limited to,
certain restricted securities (securities the disposition of which is restricted under the federal securities laws), securities that may only be resold pursuant to Rule 144A under the 1933 Act that are deemed to
be illiquid; and repurchase agreements with maturities in excess of seven days. However, the Fund will not acquire illiquid securities if, as a result, such securities would comprise more than 15% of the value of the
Fund’s net assets. The Board of Trustees or its delegate has the ultimate authority to determine, to the extent permissible under the federal securities laws, which securities are liquid or illiquid for purposes
of this 15% limitation. The Board of Trustees has delegated to First Trust the day-to-day determination of the illiquidity of any equity or fixed-income security, although it has retained oversight for such
determinations. With respect to Rule 144A securities, First Trust considers factors such as (i) the nature of the market for a security (including the institutional private resale market, the frequency of
trades and quotes for the security, the number of dealers willing to purchase or sell the security, the amount of time normally needed to dispose of the security, the method of soliciting offers and the mechanics of
transfer); (ii) the terms of certain securities or other instruments allowing for the disposition to a third party or the issuer thereof (e.g., certain repurchase obligations and demand instruments); and
(iii) other permissible relevant factors.
Restricted
securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the 1933 Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than that which prevailed when it decided to sell. Illiquid securities will be
priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid securities, the Fund should be in a
position where more than 15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, the Fund will take such steps as is deemed advisable,
if any, to protect liquidity.
Investment
Companies.
In addition to its investments in Closed-End Funds, the Fund may also invest in securities of other investment companies, including exchange-traded funds (
“ETFs”
). An ETF is a fund that holds a portfolio of securities and trades on a securities exchange and its shares may, at times, trade a premium or discount to its net asset value. As a
shareholder in a pooled investment vehicle, the Fund will bear its ratable share of that vehicle’s expenses, and would remain subject to payment of the Fund’s management fees with respect to assets so
invested. Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other pooled asset vehicles. In addition, the Fund will also incur brokerage costs when purchasing and
selling shares of ETFs. Other pooled investment vehicles may be leveraged, and the net asset value and market value of their securities will therefore be more volatile and the yield to shareholders will tend to
fluctuate more than the yield of unleveraged pooled investment vehicles.
Portfolio Turnover
The Fund buys
and sells portfolio securities in the normal course of its investment activities. The proportion of the Fund’s investment portfolio that is bought and sold during a year is known as the Fund’s portfolio
turnover rate. A turnover rate of 100% would occur, for example, if the Fund bought and sold securities valued at 100% of its net assets within one year. A high portfolio turnover rate could result in the payment by
the Fund of increased brokerage costs, expenses and taxes.
Lending of Portfolio Securities
In order to
generate additional income, as a non-principal investment strategy, First Trust is authorized to select certain Funds, with notice to the Board of Trustees, to lend portfolio securities representing up to 33-1/3% of
the value of their total assets to broker-dealers, banks or other institutional borrowers of securities. As with other extensions of credit, there may
be risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities fail financially. However, the Fund will only enter into domestic loan arrangements with broker-dealers, banks or other institutions which
First Trust has determined are creditworthy under guidelines approved by the Board of Trustees. The Fund will pay a portion of the income earned on the lending transaction to the placing broker and may pay
administrative and custodial fees in connection with these loans. First Trust may select any Fund to participate in the securities lending program, at its discretion with notice to the Board of Trustees.
In these loan
arrangements, the applicable Funds will receive collateral in the form of cash, U.S. government securities or other high-grade debt obligations equal to at least 102% (for domestic securities) or 105% (for
international securities) of the market value of the securities loaned as determined at the time of loan origination. This collateral must be valued daily by First Trust or the applicable Fund’s lending agent
and, if the market value of the loaned securities increases, the borrower must furnish additional collateral to the lending Fund. During the time portfolio securities are on loan, the borrower pays the lending Fund
any dividends or interest paid on the securities. Loans are subject to termination at any time by the Fund or the borrower. While a Fund does not have the right to vote securities on loan, it would terminate the loan
and regain the right to vote if that were considered important with respect to the investment. When a Fund lends portfolio securities to a borrower, payments in lieu of dividends made by the borrower to the Fund will
not constitute “qualified dividends” taxable at the same rate as long-term capital gains, even if the actual dividends would have constituted qualified dividends had the Fund held the securities.
Investment Risks
Overview
An investment
in the Fund should be made with an understanding of the risks that an investment in the Fund’s shares entails, including the risk that the financial condition of the issuers of the equity securities held by the
Fund or the general condition of the securities market may worsen and the value of the equity securities and therefore the value of the Fund may decline. The Fund may not be an appropriate investment for those who are
unable or unwilling to assume the risks involved generally with such an investment. The past market and earnings performance of any of the equity securities included in the Fund are not predictive of their future
performance.
Closed-End Fund Risk
The shares of
many Closed-End Funds, after their initial public offering, frequently trade at a price per share that is less than the net asset value per share, the difference representing the “market discount” of such
shares. This market discount may be due in part to the investment objective of long-term appreciation, which is sought by many Closed-End Funds, as well as to the fact that the shares of closed-end funds are not
redeemable by the holder upon demand to the issuer at the next determined net asset value, but rather, are subject to supply and demand in the secondary market. A relative lack of secondary market purchasers of
Closed-End Fund shares also may contribute to such shares trading at a discount to their net asset value. The Fund may invest in shares of Closed-End Funds that are trading at a discount to net asset value or at a
premium to net asset value. There can be no assurance that the market discount on shares of any Closed-End Fund purchased by the Fund will ever decrease. In fact, it is possible that this market discount may increase
and the Fund may suffer realized or unrealized capital losses due to further decline in the market price of the securities of such Closed-End Funds, thereby adversely affecting the net asset value of the Fund’s
shares. Similarly, there can be no assurance that any shares of a Closed-End Fund purchased by the Fund at a premium will continue to trade at a premium or that the premium will not decrease subsequent to a purchase
of such shares by the Fund.
Closed-End
Funds may issue senior securities (including preferred stock and debt obligations) for the purpose of leveraging the Closed-End Fund’s common shares in an attempt to enhance the current return to such closed-end
fund's common shareholders. The Fund’s investment in the common shares of Closed-End Funds that are financially leveraged may create an opportunity for greater total return on its investment, but at the same
time may be expected to exhibit more volatility in market price and net asset value than an investment in shares of investment companies without a leveraged capital structure.
Equity Securities Risk
Equity
securities are especially susceptible to general market movements and to volatile increases and decreases of value as market confidence in and perceptions of the issuers change. These perceptions are based on
unpredictable factors including expectations regarding government, economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or regional political, economic or
banking crises. First Trust cannot predict the direction
or scope of any of these factors. Shareholders
of common stocks have rights to receive payments from the issuers of those common stocks that are generally subordinate to those of creditors of, or holders of debt obligations or preferred stocks of, such issuers.
Whether or not
the equity securities in the Fund or in the underlying Closed-End Funds held by the Fund are listed on a securities exchange, the principal trading market for certain of the equity securities in the Fund or in the
underlying Closed-End Funds may be in the over-the-counter (
“OTC”
) market. As a result, the existence of a liquid trading market for the equity securities may depend on whether dealers will make a market in the equity securities.
There can be no assurance that a market will be made for any of the equity securities, that any market for the equity securities will be maintained or that there will be sufficient liquidity of the equity securities
in any markets made. The price at which the equity securities are held in the Fund or in the underlying Closed-End Funds held by the Fund will be adversely affected if trading markets for the equity securities are
limited or absent.
Shareholders
of common stocks of the type held by the Fund and in the underlying Closed-End Funds held by the Fund have a right to receive dividends only when and if, and in the amounts, declared by the issuer’s board of
directors and have a right to participate in amounts available for distribution by the issuer only after all other claims on the issuer have been paid. Common stocks do not represent an obligation of the issuer and,
therefore, do not offer any assurance of income or provide the same degree of protection of capital as do debt securities. The issuance of additional debt securities or preferred stock will create prior claims for
payment of principal, interest and dividends which could adversely affect the ability and inclination of the issuer to declare or pay dividends on its common stock or the rights of holders of common stock with respect
to assets of the issuer upon liquidation or bankruptcy. The value of common stocks is subject to market fluctuations for as long as the common stocks remain outstanding, and thus the value of the equity securities in
the Fund or in the underlying Closed-End Funds held by the Fund will fluctuate over the life of the Fund and the underlying Closed-End Funds held by the Fund and may be more or less than the price at which they were
purchased by the Fund or the underlying Closed-End Funds held by the Fund. The equity securities held in the Fund and in the underlying Closed-End Funds held by the Fund may appreciate or depreciate in value (or pay
dividends) depending on the full range of economic and market influences affecting these securities, including the impact of the Fund’s or the underlying Closed-End Funds’ purchase and sale of the equity
securities and other factors.
Holders of
common stocks incur more risk than holders of preferred stocks and debt obligations because common stockholders, as owners of the entity, have generally inferior rights to receive payments from the issuer in
comparison with the rights of creditors of, or holders of debt obligations or preferred stocks issued by, the issuer. Cumulative preferred stock dividends must be paid before common stock dividends and any cumulative
preferred stock dividend omitted is added to future dividends payable to the holders of cumulative preferred stock. Preferred stockholders are also generally entitled to rights on liquidation, which are senior to
those of common stockholders.
Liquidity Risk
Whether or not
the equity securities in the underlying Closed-End Funds held by the Fund are listed on a securities exchange, the principal trading market for certain of the equity securities in the underlying Closed-End Funds may
be in the OTC market. As a result, the existence of a liquid trading market for the equity securities may depend on whether dealers will make a market in the equity securities. There can be no assurance that a market
will be made for any of the equity securities, that any market for the equity securities will be maintained or that there will be sufficient liquidity of the equity securities in any markets made. The price at which
the equity securities are held in the underlying Closed-End Funds held by the Fund will be adversely affected if trading markets for the equity securities are limited or absent.
Litigation Risk
At any time
litigation may be instituted on a variety of grounds with respect to the common stocks held by the underlying Closed-End Funds in which the Fund invests. The Fund is unable to predict whether litigation that has been
or will be instituted might have a material adverse effect on the Fund.
Management of the Fund
Trustees and Officers
The general
supervision of the duties performed for the Fund under the investment management agreement is the responsibility of the Board of Trustees. There are five Trustees of the Trust, one of whom is an “interested
person” (as the
term is defined in the 1940 Act) and four of
whom are Trustees who are not officers or employees of First Trust or any of its affiliates (
“Independent Trustees”
). The Trustees set broad policies for the Fund, choose the Trust’s officers and hire the Trust’s investment advisor. The officers of the
Trust manage its day-to-day operations and are responsible to the Trust’s Board of Trustees. The following is a list of the Trustees and executive officers of the Trust and a statement of their present positions
and principal occupations during the past five years, the number of portfolios each Trustee oversees and the other directorships they have held during the past five years, if applicable. Each Trustee has been elected
for an indefinite term. The officers of the Trust serve indefinite terms. Each Trustee, except for James A. Bowen, is an Independent Trustee. Mr. Bowen is deemed an “interested person” (as that term is
defined in the 1940 Act) (
“Interested Trustee”
) of the Trust due to his position as Chief Executive Officer of First Trust, investment advisor to the Fund.
Name, Address
and Date of Birth
|
Position
and Offices
with Trust
|
Term of
Office and
Year First
Elected or
Appointed
|
Principal Occupations
During Past 5 Years
|
Number of
Portfolios
in the First
Trust Fund
Complex
Overseen
by Trustee
|
Other
Trusteeships or
Directorships
Held by
Trustee
During the
Past 5 Years
|
TRUSTEE WHO IS AN INTERESTED PERSON OF THE TRUST
|
James A. Bowen
(1)
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 09/55
|
Chairman of the Board and Trustee
|
• Indefinite term
• Since inception
|
Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.;
Chairman of the Board of Directors, BondWave LLC (Software Development Company/
Investment Advisor) and Stonebridge Advisors LLC (Investment Advisor)
|
137 Portfolios
|
None
|
INDEPENDENT TRUSTEES
|
Richard E. Erickson
c/o First Trust Advisors L.P.
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 04/51
|
Trustee
|
• Indefinite term
• Since inception
|
Physician; President, Wheaton Orthopedics; Limited Partner, Gundersen Real Estate Limited
Partnership; Member (April 2007 to November 2015), Sportsmed LLC
|
137 Portfolios
|
None
|
Thomas R. Kadlec
c/o First Trust Advisors L.P.
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 11/57
|
Trustee
|
• Indefinite term
• Since inception
|
President, ADM Investor Services, Inc. (Futures Commission Merchant)
|
137 Portfolios
|
Director of ADM Investor Services, Inc., ADM Investor Services International, and Futures Industry Association
|
Robert F. Keith
c/o First Trust Advisors L.P.
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
|
Trustee
|
• Indefinite term
• Since inception
|
President, Hibs Enterprises (Financial and Management Consulting)
|
137 Portfolios
|
Director of Trust Company of Illinois
|
Niel B. Nielson
c/o First Trust Advisors L.P.
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
|
Trustee
|
• Indefinite term
• Since inception
|
Managing Director and Chief Operating Officer (January 2015 to present), Pelita Harapan
Educational Foundation (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Servant Interactive LLC (Educational Products and Services); President and Chief
Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services); President (June 2002 to June 2012), Covenant College
|
137 Portfolios
|
Director of Covenant Transport Inc.
(May 2003 to May 2014)
|
OFFICERS OF THE TRUST
|
James M. Dykas
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 01/66
|
President and Chief Executive Officer
|
• Indefinite term
• Since January 2016
|
Managing Director and Chief Financial Officer (January 2016 to present), Controller (January 2011 to January 2016), Senior
Vice President (April 2007 to January 2016), First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
Name, Address
and Date of Birth
|
Position
and Offices
with Trust
|
Term of
Office and
Year First
Elected or
Appointed
|
Principal Occupations
During Past 5 Years
|
Number of
Portfolios
in the First
Trust Fund
Complex
Overseen
by Trustee
|
Other
Trusteeships or
Directorships
Held by
Trustee
During the
Past 5 Years
|
OFFICERS OF THE TRUST
|
Donald P. Swade
120 E. Liberty Drive
Suite 400
Wheaton, IL 60187
D.O.B.: 08/72
|
Treasurer, Chief Financial Officer and Chief Accounting Officer
|
• Indefinite term
• Since January 2016
|
Vice President (April 2012 to Present), First Trust Advisors L.P. and First Trust
Portfolios L.P., Vice President (September 2006 to April 2012), Guggenheim Funds Investment Advisors, LLC/Claymore Securities, Inc.
|
N/A
|
N/A
|
W. Scott Jardine
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 05/60
|
Secretary and Chief Legal Officer
|
• Indefinite term
• Since inception
|
General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and
General Counsel, BondWave LLC (Software Development Company/
Investment Advisor) and Secretary, Stonebridge Advisors LLC (Investment Advisor)
|
N/A
|
N/A
|
Daniel J. Lindquist
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 02/70
|
Vice President
|
• Indefinite term
• Since inception
|
Managing Director (July 2012 to present), Senior Vice President (September 2005 to July
2012), First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
Kristi A. Maher
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 12/66
|
Chief Compliance Officer and Assistant Secretary
|
• Indefinite term
• Chief Compliance Officer Since inceptin
• Assistant Secretary Since inception
|
Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
Roger F. Testin
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 06/66
|
Vice President
|
• Indefinite term
• Since inception
|
Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
Stan Ueland
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 11/70
|
Vice President
|
• Indefinite term
• Since inception
|
Senior Vice President (September 2012 to present), Vice President (August 2005 to
September 2012) First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
(1)
|
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust, investment advisor of the Funds.
|
Unitary Board Leadership
Structure
Each Trustee
serves as a trustee of all open-end and closed-end funds in the First Trust Fund Complex (as defined below), which is known as a “unitary” board leadership structure. Each Trustee currently serves as a
trustee of First Trust Series Fund and First Trust Variable Insurance Trust, open-end funds with seven portfolios advised by First Trust; First Trust Senior Floating Rate Income Fund II, Macquarie/First Trust
Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy Income and Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust
Mortgage Income Fund, First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging Opportunity Fund, First Trust Specialty Finance and Financial Opportunities Fund, First Trust Dividend and Income Fund,
First Trust High Income Long/Short Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income Fund, First Trust New Opportunities MLP & Energy Fund, First Trust Dynamic Europe Equity Income
Fund and First Trust Intermediate Duration Preferred & Income Fund, closed-end funds advised by First Trust; First Trust Exchange-Traded Fund, First Trust Exchange-Traded Fund II, First Trust Exchange-Traded Fund
III, First Trust Exchange-Traded Fund IV, First Trust Exchange-Traded Fund V, First Trust Exchange-Traded Fund VI, First Trust Exchange-Traded Fund VII, First Trust Exchange-Traded Fund VIII, First Trust
Exchange-Traded AlphaDEX
®
Fund and First Trust Exchange-Traded AlphaDEX
®
Fund II, exchange-traded funds with 114 portfolios advised by First Trust (each a
“First Trust Fund”
and collectively, the
“First Trust Fund Complex”
). None of the Trustees who are not “interested persons” of the Trust, nor any of their immediate family members, has ever been a
director, officer or employee of, or consultant to, First Trust, First Trust Portfolios L.P. or their affiliates.
The management
of the Fund, including general supervision of the duties performed for the Fund under the investment management agreement between the Trust, on behalf of the Fund, and the Advisor, is the responsibility of the Board
of Trustees. The Trustees of the Trust set broad policies for the Fund, choose the Trust’s officers and hire the Fund’s investment advisor and other service providers. The officers of the Trust manage the
day to-day operations and are responsible to the Trust’s Board. The Trust’s Board is composed of four Independent Trustees and one Interested Trustee. The Interested Trustee, James A. Bowen, serves as the
Chairman of the Board for each fund in the First Trust Fund Complex.
The same five
persons serve as Trustees on the Trust’s Board and on the Boards of all other First Trust Funds. The unitary board structure was adopted for the First Trust Funds because of the efficiencies it achieves with
respect to the governance and oversight of the First Trust Funds. Each First Trust Fund is subject to the rules and regulations of the 1940 Act (and other applicable securities laws), which means that many of the
First Trust Funds face similar issues with respect to certain of their fundamental activities, including risk management, portfolio liquidity, portfolio valuation and financial reporting. Because of the similar and
often overlapping issues facing the First Trust Funds, including among the First Trust exchange-traded funds, the Board of the First Trust Funds believes that maintaining a unitary board structure promotes efficiency
and consistency in the governance and oversight of all First Trust Funds and reduces the costs, administrative burdens and possible conflicts that may result from having multiple boards. In adopting a unitary board
structure, the Trustees seek to provide effective governance through establishing a board the overall composition of which will, as a body, possess the appropriate skills, diversity, independence and experience to
oversee the Fund’s business.
Annually, the
Board reviews its governance structure and the committee structures, their performance and functions, and it reviews any processes that would enhance Board governance over the Fund’s business. The Board has
determined that its leadership structure, including the unitary board and committee structure, is appropriate based on the characteristics of the funds it serves and the characteristics of the First Trust Fund Complex
as a whole.
In order to
streamline communication between the Advisor and the Independent Trustees and create certain efficiencies, the Board has a Lead Independent Trustee who is responsible for: (i) coordinating activities of the
Independent Trustees; (ii) working with the Advisor, Fund counsel and the independent legal counsel to the Independent Trustees to determine the agenda for Board meetings; (iii) serving as the principal
contact for and facilitating communication between the Independent Trustees and the Fund’s service providers, particularly the Advisor; and (iv) any other duties that the Independent Trustees may delegate
to the Lead Independent Trustee. The Lead Independent Trustee is selected by the Independent Trustees and serves a three year term or until his or her successor is selected.
The Board has
established four standing committees (as described below) and has delegated certain of its responsibilities to those committees. The Board and its committees meet frequently throughout the year to oversee the
Fund’s activities, review contractual arrangements with and performance of service providers, oversee compliance with regulatory requirements, and review Fund performance. The Independent Trustees are
represented by independent legal counsel at all Board and committee meetings (other than meetings of the Executive Committee). Generally, the Board acts by majority vote of all the Trustees, including a majority vote
of the Independent Trustees if required by applicable law.
The three
Committee Chairmen and the Lead Independent Trustee rotate every three years in serving as Chairman of the Audit Committee, the Nominating and Governance Committee or the Valuation Committee or as Lead Independent
Trustee. The Lead Independent Trustee and immediate past Lead Independent Trustee also serve on the Executive Committee with the Interested Trustee.
The four
standing committees of the First Trust Fund Complex are: the Executive Committee (and Pricing and Dividend Committee), the Nominating and Governance Committee, the Valuation Committee and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to exercise all powers of and to act in the place of the Board of Trustees to the extent permitted by the Trust’s Declaration of Trust and
By Laws. Such Committee is also responsible for the declaration and setting of dividends. Mr. Kadlec, Mr. Bowen and Mr. Keith are members of the Executive Committee.
The Nominating
and Governance Committee is responsible for appointing and nominating non-interested persons to the Trust’s Board of Trustees. Messrs. Erickson, Kadlec, Keith and Nielson are members of the Nominating and
Governance Committee. If there is no vacancy on the Board of Trustees, the Board will not actively seek recommendations from other parties, including shareholders. The Board of Trustees adopted a mandatory retirement
age of 75 for Trustees, beyond which age Trustees are ineligible to serve. The Committee will not consider new trustee candidates who are 72 years of age or older. When a vacancy on the Board of Trustees occurs and
nominations are sought to fill such vacancy, the Nominating and Governance Committee may 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 of Trustees, shareholders of the
Fund should mail such recommendation to W.
Scott Jardine, Secretary, at the Trust’s address, 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187. Such recommendation shall include the following information: (i) evidence of Fund
ownership of the person or entity recommending the candidate (if a Fund shareholder); (ii) a full description of the proposed candidate’s background, including education, experience, current employment and
date of birth; (iii) names and addresses of at least three professional references for the candidate; (iv) information as to whether the candidate is an “interested person” in relation to the
Fund, as such term is defined in the 1940 Act, and such other information that may be considered to impair the candidate’s independence; and (v) any other information that may be helpful to the Committee in
evaluating the candidate. If a recommendation is received with satisfactorily completed information regarding a candidate during a time when a vacancy exists on the Board or during such other time as the Nominating
and Governance Committee is accepting recommendations, the recommendation will be forwarded to the Chairman of the Nominating and Governance Committee and to counsel to the Independent Trustees. Recommendations
received at any other time will be kept on file until such time as the Nominating and Governance Committee is accepting recommendations, at which point they may be considered for nomination.
The Valuation
Committee is responsible for the oversight of the valuation procedures of the Fund (the
“Valuation Procedures”
), for determining the fair value of the Fund’s securities or other assets under certain circumstances as described in the Valuation Procedures
and for evaluating the performance of any pricing service for the Fund. Messrs. Erickson, Kadlec, Keith and Nielson are members of the Valuation Committee.
The Audit
Committee is responsible for overseeing the Fund’s accounting and financial reporting process, system of internal controls and audit process and for evaluating and appointing independent auditors (subject also
to Board approval). Messrs. Erickson, Kadlec, Keith and Nielson serve on the Audit Committee.
Executive Officers
The executive
officers of the Trust hold the same positions with each fund in the First Trust Fund Complex (representing 137 portfolios) as they hold with the Trust.
Risk Oversight
As part of the
general oversight of the Fund, the Board is involved in the risk oversight of the Fund. The Board has adopted and periodically reviews policies and procedures designed to address the Fund’s risks. Oversight of
investment and compliance risk is performed primarily at the Board level in conjunction with the Advisor’s investment oversight group and the Trust’s Chief Compliance Officer (
“CCO”
). Oversight of other risks also occurs at the committee level. The Advisor’s investment oversight group reports to the Board at quarterly meetings regarding,
among other things, Fund performance and the various drivers of such performance. The Board reviews reports on the Fund’s and the service providers’ compliance policies and procedures at each quarterly
Board meeting and receives an annual report from the CCO regarding the operations of the Fund’s and the service providers’ compliance program. In addition, the Independent Trustees meet privately each
quarter with the CCO. The Audit Committee reviews with the Advisor the Fund’s major financial risk exposures and the steps the Advisor has taken to monitor and control these exposures, including the Fund’s
risk assessment and risk management policies and guidelines. The Audit Committee also, as appropriate, reviews in a general manner the processes other Board committees have in place with respect to risk assessment and
risk management. The Nominating and Governance Committee monitors all matters related to the corporate governance of the Trust. The Valuation Committee monitors valuation risk and compliance with the Fund’s
Valuation Procedures and oversees the pricing services and actions by the Advisor’s Pricing Committee with respect to the valuation of portfolio securities.
Not all risks
that may affect the Fund can be identified nor can controls be developed to eliminate or mitigate their occurrence or effects. It may not be practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their effectiveness, and some risks are simply beyond the reasonable control of the Fund or the Advisor or other service providers. For
instance, as the use of Internet technology has become more prevalent, the Fund and its service providers have become more susceptible to potential operational risks through breaches in cyber security (generally,
intentional and unintentional events that may cause the Fund or a service provider to lose proprietary information, suffer data corruption or lose operational capacity). There can be no guarantee that any risk
management systems established by the Fund, its service providers, or issuers of the securities in which the Fund invests to reduce cyber security risks will succeed, and the Fund cannot control such systems put in
place by service providers, issuers or other third parties whose operations may affect the Fund and/or its shareholders. Moreover, it is necessary to bear certain risks (such as investment related risks) to achieve
the Fund’s goals. As a result of the foregoing and other factors, the Fund’s ability to manage risk is subject to substantial limitations.
Board Diversification and Trustee
Qualifications
As described
above, the Nominating and Governance Committee of the Board oversees matters related to the nomination of Trustees. The Nominating and Governance Committee seeks to establish an effective Board with an appropriate
range of skills and diversity, including, as appropriate, differences in background, professional experience, education, vocation, and other individual characteristics and traits in the aggregate. Each Trustee must
meet certain basic requirements, including relevant skills and experience, time availability and, if qualifying as an Independent Trustee, independence from the Advisor and any sub-advisors, underwriters or other
service providers, including any affiliates of these entities.
Listed below for
each current Trustee are the experiences, qualifications and attributes that led to the conclusion, as of the date of this SAI, that each current Trustee should serve as a Trustee in light of the Trust’s
business and structure.
Richard E.
Erickson, M.D., is an orthopedic surgeon and President of Wheaton Orthopedics. He also has been a co-owner and director of a fitness center and a limited partner of two real estate companies. Dr. Erickson has served
as a Trustee of each First Trust Fund since its inception. Dr. Erickson has also served as the Lead Independent Trustee and on the Executive Committee (2008
–
2009), Chairman of the Nominating and Governance Committee (2003
–
2007), Chairman of the Audit Committee (2012
–
2013) and Chairman of the Valuation Committee (June 2006
–
2007 and 2010
–
2011) of the First Trust Funds. He currently serves as Chairman of the Nominating and Governance Committee (since January 1, 2014) of the First Trust Funds.
Thomas R.
Kadlec is President of ADM Investor Services Inc. (
“ADMIS”
), a futures commission merchant and wholly-owned subsidiary of the Archer Daniels Midland Company (
“ADM”
). Mr. Kadlec has been employed by ADMIS and its affiliates since 1990 in various accounting, financial, operations and risk management capacities. Mr. Kadlec serves
on the boards of several international affiliates of ADMIS and is a member of ADM’s Integrated Risk Committee, which is tasked with the duty of implementing and communicating enterprise-wide risk management. In
2014, Mr. Kadlec was elected to the board of the Futures Industry Association. Mr. Kadlec has served as a Trustee of each First Trust Fund since its inception. Mr. Kadlec also served on the Executive Committee from
the organization of the first First Trust closed-end fund in 2003 until he was elected as the first Lead Independent Trustee in December 2005, serving as such through 2007. He also served as Chairman of the Valuation
Committee (2008
–
2009), Chairman of the Audit Committee (2010
–
2011) and Chairman of the Nominating and Governance Committee (2012
–
2013). He currently serves as Lead Independent Trustee and on the Executive Committee (since January 1, 2014) of the First Trust Funds.
Robert F.
Keith is President of Hibs Enterprises, a financial and management consulting firm. Mr. Keith has been with Hibs Enterprises since 2003. Prior thereto, Mr. Keith spent 18 years with ServiceMaster and Aramark,
including three years as President and COO of ServiceMaster Consumer Services, where he led the initial expansion of certain products overseas; five years as President and COO of ServiceMaster Management Services; and
two years as President of Aramark ServiceMaster Management Services. Mr. Keith is a certified public accountant and also has held the positions of Treasurer and Chief Financial Officer of ServiceMaster, at which time
he oversaw the financial aspects of ServiceMaster’s expansion of its Management Services division into Europe, the Middle East and Asia. Mr. Keith has served as a Trustee of the First Trust Funds since June
2006. Mr. Keith has also served as the Chairman of the Audit Committee (2008
–
2009) and Chairman of the Nominating and Governance Committee (2010
–
2011) of the First Trust Funds. He served as Lead Independent Trustee and on the Executive Committee (2012
–
2013) and currently serves as Chairman of the Valuation Committee (since January 1, 2014) and on the Executive Committee (since January 31, 2014) of the First Trust Funds.
Niel B.
Nielson, Ph.D., has been the Managing Director and Chief Operating Officer of Pelita Harapan Educational Foundation, a global provider of educational products and services since January 2015. Mr. Nielson formerly
served as the President and Chief Executive Officer of Dew Learning LLC from June 2012 through September 2014. Mr. Nielson formerly served as President of Covenant College (2002
–
2012), and as a partner and trader (of options and futures contracts for hedging options) for Ritchie Capital Markets Group (1996
–
1997), where he held an administrative management position at this proprietary derivatives trading company. He also held prior positions in new business development for ServiceMaster
Management Services Company and in personnel and human resources for NationsBank of North Carolina, N.A. and Chicago Research and Trading Group, Ltd. (
“CRT”
). His international experience includes serving as a director of CRT Europe, Inc. for two years, directing out of London all aspects of business conducted by the
U.K. and European subsidiary of CRT. Prior to that, Mr. Nielson was a trader and manager at CRT in Chicago. Mr. Nielson has served as a Trustee of each First Trust Fund since its inception and of the First Trust Funds
since 1999. Mr. Nielson has also served as the Chairman of the Audit Committee (2003
–
2006), Chairman of the Valuation Committee (2007
–
2008), Chairman of the Nominating and Governance Committee (2008
–
2009) and Lead Independent Trustee and a member of the Executive Committee (2010
–
2011). He currently serves as Chairman of the Audit Committee (since January 1, 2014) of the First Trust Funds.
James A. Bowen
is Chief Executive Officer of First Trust Advisors L.P. and First Trust Portfolios L.P. Mr. Bowen is involved in the day-to-day management of the First Trust Funds and serves on the Executive Committee. He has over 26
years of experience in the investment company business in sales, sales management and executive management. Mr. Bowen has served as a Trustee of each First Trust Fund since its inception and of the First Trust Funds
since 1999.
Effective
January 1, 2016, the fixed annual retainer paid to the Independent Trustees is $230,000 per year and an annual per fund fee is $2,500 for each closed-end fund and actively managed fund and $250 for each index fund.
The fixed annual retainer is allocated equally among each fund in the First Trust Fund Complex rather than being allocated pro rata based on each fund’s net assets. Additionally, the Lead Independent Trustee is
paid $30,000 annually, the Chairman of the Audit Committee or Valuation Committee are each paid $20,000 annually and the Chairman of the Nominating and Governance Committee is paid $10,000 annually to serve in such
capacities with compensation allocated pro rata among each fund in the First Trust Fund Complex based on its net assets.
The following
table sets forth the estimated compensation (including reimbursement for travel and out‑of‑pocket expenses) to be paid by the Funds for one fiscal year and the actual compensation paid by the First Trust
Fund Complex to each of the Independent Trustees for the calendar year ended December 31, 2015, respectively. The Trust has no retirement or pension plans. The officers and Trustee who are “interested
persons” as designated above serve without any compensation from the Trust. The Trust has no employees. Its officers are compensated by First Trust.
Name of Trustee
|
Estimated Compensation from
the Fund
(1)
|
Total Compensation from
the First Trust Fund Complex
(2)
|
Richard E. Erickson
|
$4,318
|
$352,350
|
Thomas R. Kadlec
|
$4,361
|
$361,500
|
Robert F. Keith
|
$4,340
|
$351,535
|
Niel B. Nielson
|
$4,340
|
$356,500
|
(1)
|
The estimated compensation to be paid by the Funds to the Independent Trustees for one fiscal year for services to the Fund.
|
(2)
|
The total compensation paid to the Independent Trustees for the calendar year ended December 31, 2015 for services to the 120 portfolios, which consists of 7 open-end mutual funds, 16 closed-end funds and 97
exchange-traded funds.
|
The following
table sets forth the dollar range of equity securities beneficially owned by the Trustees in the Fund and in other funds overseen by the Trustees in the First Trust Fund Complex as of December 31, 2015:
Trustee
|
Dollar Range of
Equity Securities
in the Fund
(Number of Shares Held)
|
Aggregate Dollar Range of
Equity Securities in All Registered
Investment Companies
Overseen by Trustee in the
First Trust Fund Complex
|
Interested Trustee
|
James A. Bowen
|
None
|
Over $100,000
|
Independent Trustees
|
Richard E. Erickson
|
None
|
Over $100,000
|
Thomas R. Kadlec
|
None
|
Over $100,000
|
Robert F. Keith
|
None
|
Over $100,000
|
Niel B. Nielson
|
None
|
Over $100,000
|
As of December
31, 2015, the Independent Trustees of the Trust and their immediate family members did not own beneficially or of record any class of securities of an investment advisor or principal underwriter of the Fund or any
person directly or indirectly controlling, controlled by or under common control with an investment advisor or principal underwriter of the Fund.
As of September
26, 2016, the officers and Trustees, in the aggregate, owned less than 1% of the shares of the Fund.
As of September
26, 2016, First Trust Portfolios was the sole shareholder of the Fund. As a sole shareholder, First Trust Portfolios has the ability to control the outcome of any item presented to shareholders for approval.
As of September
26, 2016, the Advisor did not own any shares of the Fund.
Investment
Advisor.
First Trust, 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, is the investment advisor to the Fund. First Trust is a limited partnership with one limited partner, Grace
Partners of DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of DuPage L.P. is a limited partnership with one general partner, The Charger Corporation, and a number of limited partners.
The Charger Corporation is an Illinois corporation controlled by James A. Bowen, the Chief Executive Officer of First Trust. First Trust discharges its responsibilities to the Fund subject to the policies of the Board
of Trustees.
First Trust
provides investment tools and portfolios for advisors and investors. First Trust is committed to theoretically sound portfolio construction and empirically verifiable investment management approaches. Its asset
management philosophy and investment discipline are deeply rooted in the application of intuitive factor analysis and model implementation to enhance investment decisions.
First Trust
acts as investment advisor for and manages the investment and reinvestment of the assets of the Fund. First Trust also administers the Trust’s business affairs, provides office facilities and equipment and
certain clerical, bookkeeping and administrative services, and permits any of its officers or employees to serve without compensation as Trustees or officers of the Trust if elected to such positions.
Pursuant to an
investment agreement between First Trust and the Trust (the
“Investment Management Agreement”
), First Trust will manage the investment of the Fund’s assets and will be responsible for paying all expenses of the Fund,
excluding the fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees
payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay First Trust an annual management fee equal to 0.85% of its average daily net assets.
Under the
Investment Management Agreement, First Trust 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 First Trust in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties. The Investment Management
Agreement terminates automatically upon assignment and is terminable at any time without penalty as to the Fund by the Board of Trustees, including a majority of the Independent Trustees, or by vote of the holders of
a majority of the Fund’s outstanding voting securities on 60 days’ written notice to First Trust, or by First Trust on 60 days’ written notice to the Fund.
Portfolio
Manager.
The portfolio manager of the Fund is primarily and jointly responsible for the day‑to‑day management of the Fund. There is currently one portfolio manager, as
follows:
Name
|
Position with
First Trust
|
Length of Service
with First Trust
|
Principal Occupation During Past Five Years
|
Ken Fincher
|
Senior Vice President
and Portfolios Manager
|
Since 2008
|
Vice President and Portfolio
Manager, First Trust Portfolios L.P.
|
•
|
Ken Fincher is a Senior Vice President and Portfolio Manager at First Trust. Mr. Fincher joined First Trust with over 20 years of experience in financial markets. His current responsibilities include management of
separately managed accounts that invest primarily in closed-end funds. He has also helped develop new product structures in the closed-end fund space. Mr. Fincher has been named Outstanding Individual Contributor to
the Closed-End Fund Sector in 2007, 2006, 2005 and 2004 by financial analysts and his peers in the closed-end fund community and also served on the Closed-End Fund committee of the Investment Company Institute. Mr.
Fincher received a B.A. in financial administration from Michigan State University and an M.B.A. from Loyola University Graduate School of Business.
|
As of the
date of this SAI, the portfolio manager does not beneficially own any shares of the Fund.
Compensation.
The compensation structure for each portfolio manager is based upon a fixed salary as well as a discretionary bonus determined by the management of First Trust. Salaries are
determined by management and are based upon an individual’s position and overall value to the firm. Bonuses are also determined by management and are based upon an individual’s overall contribution
to the success of the firm and the profitability of the firm. Salaries and bonuses for portfolio managers are not based upon criteria such as performance of the Fund or the value of assets included in the
Fund’s portfolios.
Accounts Managed by the Portfolio Manager.
The portfolio manager manages the investment vehicles (other than the Funds of the Trust) with the number of accounts and assets, as
of August 31, 2016, set forth in the table below:
Accounts Managed By Portfolio
Manager
Portfolio Manager
|
Registered
Investment Companies
Number of Accounts
($ Assets)
|
Other Pooled
Investment Vehicles
Number of Accounts
($ Assets)
|
Other Accounts
Number of Accounts
($ Assets)
|
Ken Fincher
|
0 ($0)
|
0 ($0)
|
221 ($75,056,379)
|
Conflicts.
None of the accounts managed by the portfolio manager pays an advisory fee that is based upon the performance of the account. In addition, First Trust believes that there are no material
conflicts of interest that may arise in connection with the portfolio manager’s management of the Fund’s investments and the investments of the other accounts managed by the portfolio manager. However,
because the investment strategy of the Fund and the investment strategies of many of the other accounts managed by the portfolio manager are based on fairly mechanical investment processes, the portfolio manager may
recommend that certain clients sell and other clients buy a given security at the same time. In addition, because the investment strategies of the Fund and other accounts managed by the portfolio manager generally
result in the clients investing in readily available securities, First Trust believes that there should not be material conflicts in the allocation of investment opportunities between the Fund and other accounts
managed by the portfolio manager.
Brokerage Allocations
First Trust is
responsible for decisions to buy and sell securities for the Fund and for the placement of the Fund’s securities business, the negotiation of the commissions to be paid on brokered transactions, the prices for
principal trades in securities, and the allocation of portfolio brokerage and principal business. It is the policy of First Trust to seek the best execution at the best security price available with respect to each
transaction, and with respect to brokered transactions in light of the overall quality of brokerage and research services provided to First Trust and its clients. The best price to the Fund means the best net price
without regard to the mix between purchase or sale price and commission, if any. Purchases may be made from underwriters, dealers, and, on occasion, the issuers. Commissions will be paid on the Fund’s futures
and options transactions, if any. The purchase price of portfolio securities purchased from an underwriter or dealer may include underwriting commissions and dealer spreads. The Fund may pay markups on principal
transactions. In selecting broker/dealers and in negotiating commissions, First Trust considers, among other things, the firm’s reliability, the quality of its execution services on a continuing basis and its
financial condition. Fund portfolio transactions may be effected with broker/dealers who have assisted investors in the purchase of shares.
Section
28(e) of the Securities Exchange Act of 1934, as amended (the
“1934 Act”
), permits an investment advisor, under certain circumstances, to cause an account to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction. Brokerage and research services include (a) furnishing
advice as to the value of securities, the advisability of investing, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (b) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (c) effecting securities transactions and performing functions incidental
thereto (such as clearance, settlement, and custody). Such brokerage and research services are often referred to as “soft dollars.” First Trust has advised the Board of Trustees that it does not currently
intend to use soft dollars.
Notwithstanding the foregoing, in selecting brokers, First Trust may in the future consider investment and market information and other research, such as economic, securities and performance measurement research,
provided by such brokers, and the quality and reliability of brokerage services, including execution capability, performance, and financial responsibility. Accordingly, the commissions charged by any such broker may
be greater than the amount another firm might charge if First Trust determines in good faith that the amount of such commissions is reasonable in relation to the value of the research information and brokerage
services provided by such broker to First Trust or the Trust. In addition, First Trust must determine
that the research information received in this
manner provides the Fund with benefits by supplementing the research otherwise available to the Fund. The Investment Management Agreement provides that such higher commissions will not be paid by the Fund unless the
Advisor determines in good faith that the amount is reasonable in relation to the services provided. The investment advisory fees paid by the Fund to First Trust under the Investment Management Agreement would not be
reduced as a result of receipt by First Trust of research services.
First Trust
places portfolio transactions for other advisory accounts advised by it, and research services furnished by firms through which the Fund effects securities transactions may be used by First Trust in servicing all of
its accounts; not all of such services may be used by First Trust in connection with the Fund. First Trust believes it is not possible to measure separately the benefits from research services to each of the accounts
(including the Fund) advised by it. Because the volume and nature of the trading activities of the accounts are not uniform, the amount of commissions in excess of those charged by another broker paid by each account
for brokerage and research services will vary. However, First Trust believes such costs to the Fund will not be disproportionate to the benefits received by the Fund on a continuing basis. First Trust seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made to purchase or sell securities by the Fund and another advisory account. In some cases, this procedure could have an adverse effect on
the price or the amount of securities available to the Fund. In making such allocations between the Fund and other advisory accounts, the main factors considered by First Trust are the respective investment
objectives, the relative size of portfolio holding of the same or comparable securities, the availability of cash for investment and the size of investment commitments generally held.
Administrator, Custodian,
Transfer Agent, Fund Accountant, Distributor, Additional Service Provider and Exchange
Administrator.
The Bank of New York Mellon Corporation (
“BNYM”
) serves as Administrator for the Fund. Its principal address is 101 Barclay Street, New York, New York 10286.
BNYM serves as
Administrator for the Trust pursuant to a Fund Administration and Accounting Agreement. Under such agreement, BNYM is obligated on a continuous basis, to provide such administrative services as the Board of Trustees
reasonably deems necessary for the proper administration of the Trust and the Fund. BNYM will generally assist in all aspects of the Trust’s and the Fund’s operations; supply and maintain office facilities
(which may be in BNYM’s own offices), statistical and research data, data processing services, clerical, accounting, bookkeeping and record keeping services (including, without limitation, the maintenance of
such books and records as are required under the 1940 Act and the rules thereunder, except as maintained by other agency agents), internal auditing, executive and administrative services, and stationery and office
supplies; prepare reports to shareholders or investors; prepare and file tax returns; supply financial information and supporting data for reports to and filings with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Board of Trustees; and provide monitoring reports and assistance regarding compliance with federal and state securities laws.
Pursuant to
the Fund Administration and Accounting Agreement, the Trust on behalf of the Fund has agreed to indemnify the Administrator for certain liabilities, including certain liabilities arising under the federal securities
laws, unless such loss or liability results from negligence or willful misconduct in the performance of its duties.
Pursuant to
the Fund Administration and Accounting Agreement between BNYM and the Trust, the Fund has agreed to pay such compensation as is mutually agreed from time to time and such out-of-pocket expenses as incurred by BNYM in
the performance of its duties. This fee is subject to reduction for assets over $1 billion. The Fund has not paid any fees to BNYM under the Fund Administration and Accounting Agreement, as the Advisor has assumed
responsibility for payment of these fees as part of the unitary management fee.
Custodian,
Transfer Agent and Fund Accountant.
BNYM, as custodian for the Fund pursuant to a Custody Agreement, holds the Fund’s assets. BNYM also serves as transfer agent of the Fund pursuant to a Transfer Agency and Service
Agreement. As the Fund’s accounting agent, BNYM calculates the net asset value of shares and calculates net income and realized capital gains or losses. BNYM may be reimbursed by the Fund for its out-of-pocket
expenses. BNYM also serves as the Fund’s transfer agent pursuant to a Transfer Agency Agreement.
Distributor.
First Trust Portfolios L.P., an affiliate of First Trust, is the distributor (
“FTP”
or the
“Distributor”
) and principal underwriter of the shares of the Fund. Its principal address is 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187. The Distributor has entered into a Distribution
Agreement with the Trust pursuant to which it distributes Fund shares. Shares are continuously offered for sale by the Fund through the Distributor only in Creation Unit Aggregations, as described in the Prospectus
and below under the heading “Creation and Redemption of Creation Unit Aggregations.”
12b-1
Plan.
The Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act (the
“Plan”
) pursuant to which the Fund may reimburse the Distributor up to a maximum annual rate of 0.25% of its average daily net assets.
Under the Plan
and as required by Rule 12b-1, the Trustees will receive and review after the end of each calendar quarter a written report provided by the Distributor of the amounts expended under the Plan and the purpose for which
such expenditures were made. With the exception of the Distributor and its affiliates, no “interested person” of the Trust (as that term is defined in the 1940 Act) and no Trustee of the Trust has a direct
or indirect financial interest in the operation of the Plan or any related agreement.
No fee is
currently paid by the Fund under the Plan, and pursuant to a contractual agreement, the Fund will not pay 12b-1 fees any time before September 30, 2018.
Aggregations.
Fund shares in less than Creation Unit Aggregations are not distributed by the Distributor. The Distributor will deliver the Prospectus and, upon request, this SAI to persons purchasing
Creation Unit Aggregations and will maintain records of both orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the 1934 Act and a member of the
Financial Industry Regulatory Authority (
“FINRA”
).
The
Distribution Agreement provides that it may be terminated at any time, without the payment of any penalty, on at least 60 days’ written notice by the Trust to the Distributor (i) by vote of a majority of the
Independent Trustees or (ii) by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund. The Distribution Agreement will terminate automatically in the event of its assignment
(as defined in the 1940 Act).
The
Distributor may also enter into agreements with participants that utilize the facilities of the Depository Trust Company (the
“DTC Participants”
), which have international, operational, capabilities and place orders for Creation Unit Aggregations of Fund shares. Participating Parties (which are
participants in the Continuous Net Settlement System of the National Securities Clearing Corporation) shall be DTC Participants.
Additional Service
Provider.
First Trust, on behalf of the Fund has engaged NYSE index group or its designee (the
“IPV Calculator”
), to calculate the intra-day values for the shares of the Fund.
Exchange.
The only relationship that Nasdaq has with First Trust or the Distributor of the Fund in connection with the Fund is that Nasdaq lists the shares of the Fund and disseminates the intra-day
portfolio values that are calculated by the IPV Calculator pursuant to its listing agreement with the Trust. Nasdaq is not responsible for and has not participated in the determination of pricing or the timing of the
issuance or sale of the shares of the Fund or in the determination or calculation of the asset value of the Fund. Nasdaq has no obligation or liability in connection with the administration, marketing or trading of
the Fund.
Additional Payments to
Financial Intermediaries
First Trust or
its affiliates may from time to time make payments, out of their own resources, to certain financial intermediaries that sell shares of First Trust mutual funds and ETFs (
“First Trust Funds”
) to promote the sales and retention of Fund shares by those firms and their customers. The amounts of these payments vary by intermediary.
The level of payments that First Trust is willing to provide to a particular intermediary may be affected by, among other factors, (i) the firm’s total assets or Fund shares held in and recent net
investments into First Trust Funds, (ii) the value of the assets invested in the First Trust Funds by the intermediary’s customers, (iii) redemption rates, (iv) its ability to attract and retain assets, (v) the
intermediary’s reputation in the industry, (vi) the level and/or type of marketing assistance and educational activities provided by the intermediary, (vii) the firm’s level of participation in First Trust
Funds’ sales and marketing programs, (viii) the firm’s compensation program for its registered representatives who sell Fund shares and provide services to Fund shareholders, and (ix) the asset class of
the First Trust Funds for which these payments are provided. Such payments are generally asset-based but also may include the payment of a lump sum.
First Trust
may also make payments to certain intermediaries for certain administrative services and shareholder processing services, including record keeping and sub-accounting of shareholder accounts pursuant to a sub-transfer
agency, omnibus account service or sub-accounting agreement. All fees payable by First Trust under this category of services may be charged back to the Fund, subject to approval by the Board.
First Trust
and/or its affiliates may make payments, out of its own assets, to those firms as compensation and/or reimbursement for marketing support and/or program servicing to selected intermediaries that are registered as
holders or
dealers of record for accounts invested in one
or more of the First Trust Funds or that make First Trust Fund shares available through certain selected Fund no-transaction fee institutional platforms and fee-based wrap programs at certain financial intermediaries.
Program servicing payments typically apply to employee benefit plans, such as retirement plans, or fee-based advisory programs but may apply to retail sales and assets in certain situations. The payments are based on
such factors as the type and nature of services or support furnished by the intermediary and are generally asset-based. Services for which an intermediary receives marketing support payments may include, but are not
limited to, business planning assistance, advertising, educating the intermediary’s personnel about First Trust Funds in connection with shareholder financial planning needs, placement on the
intermediary’s preferred or recommended fund list, and access to sales meetings, sales representatives and management representatives of the intermediary. In addition, intermediaries may be compensated for
enabling representatives of First Trust and/or its affiliates to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client
and investor events and other events sponsored by the intermediary. Services for which an intermediary receives program servicing payments typically include, but are not limited to, record keeping, reporting or
transaction processing and shareholder communications and other account administration services, but may also include services rendered in connection with Fund/investment selection and monitoring, employee enrollment
and education, plan balance rollover or separation, or other similar services. An intermediary may perform program services itself or may arrange with a third party to perform program services. These payments are in
addition to the service fee and any applicable omnibus sub-accounting fees paid to these firms with respect to these services by the First Trust Funds out of Fund assets.
From time to
time, First Trust and/or its affiliates, at its expense, may provide other compensation to intermediaries that sell or arrange for the sale of shares of the First Trust Funds, which may be in addition to marketing
support and program servicing payments described above. For example, First Trust and/or its affiliates may: (i) compensate intermediaries for National Securities Clearing Corporation networking system services (
e.g.
, shareholder communication, account statements, trade confirmations and tax reporting) on an asset-based or per-account basis; (ii) compensate intermediaries for providing Fund
shareholder trading information; (iii) make onetime or periodic payments to reimburse selected intermediaries for items such as ticket charges (
i.e.
, fees that an intermediary charges its representatives for effecting transactions in Fund shares) or exchange order, operational charges (
e.g.
, fees that an intermediary charges for establishing the Fund on its trading system) and literature printing and/or distribution costs; (iv) at the direction of a retirement
plan’s sponsor, reimburse or pay direct expenses of an employee benefit plan that would otherwise be payable by the plan; and (v) provide payments to broker-dealers to help defray their technology or
infrastructure costs.
When not
provided for in a marketing support or program servicing agreement, First Trust and/ or its affiliates may also pay intermediaries for enabling First Trust and/or its affiliates to participate in and/or present at
conferences or seminars, sales or training programs for invited registered representatives and other intermediary employees, client and investor events and other intermediary-sponsored events, and for travel expenses,
including lodging incurred by registered representatives and other employees in connection with prospecting, asset retention and due diligence trips. These payments, if any, may vary depending upon the nature of the
event. First Trust and/or its affiliates make payments for such events as it deems appropriate, subject to its internal guidelines and applicable law.
First Trust
and/or its affiliates occasionally sponsor due diligence meetings for registered representatives during which they receive updates on various First Trust Funds and are afforded the opportunity to speak with portfolio
managers. Although invitations to these meetings are not conditioned on selling a specific number of shares, those who have shown an interest in First Trust Funds are more likely to be considered. To the extent
permitted by their firm’s policies and procedures, all or a portion of registered representatives’ expenses in attending these meetings may be covered by First Trust and/or its affiliates.
The amounts of
payments referenced above made by First Trust and/or its affiliates could be significant and may create an incentive for an intermediary or its representatives to recommend or offer shares of the First Trust Funds to
its customers. The intermediary may elevate the prominence or profile of the First Trust Funds within the intermediary’s organization by, for example, placing the First Trust Funds on a list of preferred or
recommended funds and/or granting First Trust and/or its affiliates preferential or enhanced opportunities to promote the First Trust Funds in various ways within the intermediary’s organization. These payments
are made pursuant to negotiated agreements with intermediaries. The payments do not change the price paid by investors for the purchase of a share or the amount the Fund will receive as proceeds from such sales.
Furthermore, many of these payments are not reflected in the fees and expenses listed in the fee table section of the Fund’s Prospectus because they are not paid by the Fund. The types of payments described
herein are not mutually exclusive, and a single intermediary may receive some or all types of payments as described.
Other
compensation may be offered to the extent not prohibited by state laws or any self-regulatory agency, such as FINRA. Investors can ask their intermediaries for information about any payments they receive from First
Trust and/or its
affiliates and the services it provides for those
payments. Investors may wish to take intermediary payment arrangements into account when considering and evaluating any recommendations relating to Fund shares.
Additional Information
Book Entry Only
System.
The following information supplements and should be read in conjunction with the Prospectus.
DTC Acts as
Securities Depository for Fund Shares.
Shares of the Fund are represented by securities registered in the name of The Depository Trust Company (
“DTC”
) or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
DTC, a
limited-purpose trust company, was created to hold securities of its participants (the
“DTC Participants”
) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry
changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock Exchange (the
“NYSE”
) and FINRA. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
“Indirect Participants”
).
Beneficial
ownership of shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in shares (owners of such
beneficial interests are referred to herein as
“Beneficial Owners”
) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records
of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to
their purchase and sale of shares.
Conveyance of
all notices, statements and other communications to Beneficial Owners is effected as follows. Pursuant to a letter agreement between DTC and the Trust, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the shares of the Fund held by each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding shares,
directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay
to each such DTC Participants a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Fund
distributions shall be made to DTC or its nominee, as the registered holder of all Fund shares. DTC or its nominee, upon receipt of any such distributions, shall immediately credit DTC Participants’ accounts
with payments in amounts proportionate to their respective beneficial interests in shares of the Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial
Owners of shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered
in a
“
street name,
”
and will be the responsibility of such DTC Participants.
The Trust has
no responsibility or liability for any aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the
Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may decide
to discontinue providing its service with respect to shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to perform its functions at a comparable cost.
Proxy Voting Policies and
Procedures
The Trust has
adopted a proxy voting policy that seeks to ensure that proxies for securities held by the Fund are voted consistently with the best interests of the Fund.
The Board has
delegated to First Trust the proxy voting responsibilities for the Fund and has directed First Trust to vote proxies consistent with the Fund’s best interests. First Trust has engaged the services of
Institutional Shareholder Services, Inc. (
“ISS”
), to make recommendations to First Trust on the voting of proxies relating to securities held by the Fund. If First Trust manages the assets of a company or its
pension plan and any of First Trust’s clients hold any securities of that company, First Trust will vote proxies relating to such company’s securities in accordance with the ISS recommendations to avoid
any conflict of interest.
To the extent
that the Fund invests in other registered investment companies (
“acquired funds”
), it may do so pursuant to an exemptive order granted by the SEC. The relief granted by that order is conditioned upon complying with a number of
undertakings, some of which require the Fund to vote its shares in an acquired fund in the same proportion as other holders of the acquired fund’s shares. As a result, to the extent that the Fund, or another
registered investment company advised by First Trust, relies on the relief granted by the exemptive order to invest in a particular acquired fund, First Trust will vote shares of that acquired fund in the same
proportion as the other holders of that acquired fund’s shares.
First Trust
has adopted the ISS Proxy Voting Guidelines. While these guidelines are not intended to be all-inclusive, they do provide guidance on First Trust’s general voting policies. The ISS Proxy Voting Guidelines are
attached hereto as
Exhibit A
.
Quarterly
Portfolio Schedule.
The Trust is required to disclose, after its first and third fiscal quarters, the complete schedule of the Fund’s portfolio holdings with the SEC on Form N-Q. Form N-Q for the Trust
is available on the SEC’s website at http://www.sec.gov. The Fund’s Form N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Trust’s Forms N-Q are available without charge, upon request, by calling (800) 621-1675 or by writing to First Trust Portfolios L.P.,
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
Policy Regarding
Disclosure of Portfolio Holdings.
The Trust has adopted a policy regarding the disclosure of information about the Fund’s portfolio holdings. The Board of Trustees must approve all material amendments to this policy.
The Fund’s portfolio holdings are publicly disseminated each day the Fund is open for business through financial reporting and news services, including publicly accessible Internet websites. In addition, a
basket composition file, which includes the security names and share quantities to deliver in exchange for Fund shares, together with estimates and actual cash components, is publicly disseminated each day the NYSE is
open for trading via the National Securities Clearing Corporation (
“NSCC”
). The basket represents one Creation Unit of the Fund. The Fund’s portfolio holdings are also available on the Fund’s website at http://www.ftportfolios.com. The Trust, First
Trust, FTP and BNYM will not disseminate non-public information concerning the Trust.
Codes of
Ethics.
In order to mitigate the possibility that the Fund will be adversely affected by personal trading, the Trust, First Trust and the Distributor have adopted Codes of Ethics under
Rule 17j-1 of the 1940 Act. These Codes of Ethics contain policies restricting securities trading in personal accounts of the officers, Trustees and others who normally come into possession of information on
portfolio transactions. Personnel subject to the Codes of Ethics may invest in securities that may be purchased or held by the Fund; however, the Codes of Ethics require that each transaction in such securities be
reviewed by the CCO or his or her designee. These Codes of Ethics are on public file with, and are available from, the SEC.
Creation and Redemption of
Creation Unit Aggregations
Creation.
The Trust issues and sells shares of the Fund only in Creation Unit Aggregations on a continuous basis through the Distributor, without a sales load, at its net asset value next determined
after receipt, on any Business Day (as defined below), of an order in proper form.
A
“Business Day” is any day on which the NYSE is open for business. As of the date of this SAI, the NYSE observes the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of
Securities and Deposit or Delivery of Cash.
The consideration for purchase of Creation Unit Aggregations of the Fund may consist of (i) cash in lieu of all or a portion of the Deposit Securities, as defined below, and/or (ii) a
designated portfolio of equity securities determined by First Trust
—
the “Deposit Securities”
—
per each Creation Unit Aggregation and generally an amount of cash
—
the “Cash Component”
—
computed as described below. Together, the Deposit Securities and the Cash Component (including the cash in lieu amount) constitute the “Fund Deposit,” which represents the
minimum initial and subsequent investment amount for a Creation Unit Aggregation of the Fund.
The Cash
Component is sometimes also referred to as the Balancing Amount. The Cash Component serves the function of compensating for any differences between the net asset value per Creation Unit Aggregation and the Deposit
Amount (as defined below). The Cash Component is an amount equal to the difference between (i) the net asset value of Fund shares (per Creation Unit Aggregation) and (ii) the “Deposit Amount”
—
an amount equal to the market value of the Deposit Securities and/or cash in lieu of all or a portion of the Deposit Securities. If the Cash Component is a positive number (
i.e.
, the net asset value per Creation Unit Aggregation exceeds the Deposit Amount), the creator will deliver the Cash Component. If the Cash Component is a negative number (
i.e.
, the net asset value per Creation Unit Aggregation is less than the Deposit Amount), the creator will receive the Cash Component.
The Custodian,
through the NSCC (discussed below), makes available on each Business Day, prior to the opening of business of the Exchange (currently 9:30 a.m., Eastern Time), the list of the names and the required number of shares
of each Deposit Security to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for the Fund.
Such Fund Deposit
is applicable, subject to any adjustments as described below, in order to effect creations of Creation Unit Aggregations of the Fund until such time as the next-announced composition of the Deposit Securities is made
available.
The identity
and number of shares of the Deposit Securities required for a Fund Deposit for the Fund change as corporate action events are reflected within the Fund from time to time by First Trust with a view to the investment
objective of the Fund. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash
—
i.e.
, a “cash in lieu” amount
—
to be added to the Cash Component to replace any Deposit Security that may not be available, that may not be available in sufficient quantity for delivery or which might not be eligible
for trading by an Authorized Participant (as defined below) or the investor for which it is acting or other relevant reason. The Trust also reserves the right to permit or require, under certain circumstances, the
substitution of a different security in lieu of depositing some or all of the Deposit Securities. The adjustments described above will reflect changes known to First Trust on the date of announcement to be in effect
by the time of delivery of the Fund Deposit or resulting from certain corporate actions.
In addition to
the list of names and numbers of securities constituting the current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC, also makes available on each Business Day, the estimated Cash Component, for
the current day as well as the Cash Component for the previous Business Day, per outstanding Creation Unit Aggregation of the Fund.
Procedures for
Creation of Creation Unit Aggregations.
In order to be eligible to place orders with the Distributor and to create a Creation Unit Aggregation of the Fund, an entity must be a DTC Participant (see the section entitled
“Book Entry Only System”), must have executed an agreement with the Distributor and transfer agent, with respect to creations and redemptions of Creation Unit Aggregations (
“Participant Agreement”
) (discussed below) and must have international operational capabilities. A DTC Participant is also referred to as an
“Authorized Participant.”
Investors should contact the Distributor for the names of Authorized Participants that have signed a Participant Agreement. All Fund shares, however created, will be entered on the records
of DTC in the name of Cede & Co. for the account of a DTC Participant.
All standard
orders to create Creation Unit Aggregations must be received by the transfer agent no later than the closing time of the regular trading session on the NYSE (
“Closing Time”
) (ordinarily 4:00 p.m., Eastern Time) in each case on the date such order is placed in order for the creation of Creation Unit Aggregations to be effected
based on the net asset value of shares of the Fund as next determined on such date after receipt of the order in proper form. Subject to the provisions of the applicable Participant Agreement, in the case of custom
orders, the order must be received by the transfer agent no later than 3:00 p.m. Eastern Time on the trade date. A custom order may be placed by an Authorized Participant in the event that the Trust permits or
requires the substitution of an amount of cash to be added to the Cash Component to replace any Deposit Security which may not be available, which may not be available in sufficient quantity for delivery or which may
not be eligible for trading by such Authorized Participant or the investor for which it is acting or other relevant reason. The date on which an order to create Creation Unit Aggregations (or an order to redeem
Creation Unit Aggregations, as discussed below) is placed is referred to as the
“Transmittal Date.”
Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the transfer agent pursuant to
procedures set forth in the Participant Agreement, as described below. Severe economic or market disruptions or changes, or telephone or other communications failure may impede the ability to reach the transfer agent
or an Authorized Participant.
All orders
from investors who are not Authorized Participants to create Creation Unit Aggregations shall be placed with an Authorized Participant, as applicable, in the form required by such Authorized Participant. In addition,
the Authorized Participant may request the investor to make certain representations or enter into agreements with respect to the order, e.g., to provide for payments of cash, when required. Investors should be aware
that their particular broker may not have executed
a Participant Agreement and that, therefore,
orders to create Creation Unit Aggregations of the Fund have to be placed by the investor’s broker through an Authorized Participant that has executed a Participant Agreement. In such cases there may be
additional charges to such investor. At any given time, there may be only a limited number of broker-dealers that have executed a Participant Agreement. Those persons placing orders should ascertain the deadlines
applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component.
Placement of
Creation Orders.
Deposit Securities must be delivered to the Trust through DTC or NSCC, subject to and in accordance with the applicable provisions set forth in the Participant Agreement and Deposit
Securities which are non-U.S. securities must be delivered to an account maintained at the applicable local subcustodian of the Trust on or before the International Contractual Settlement Date, as defined below all in
accordance with the terms of the Participant Agreement. If a Deposit Security is an ADR or similar domestic instrument, it may be delivered to the Custodian. The Authorized Participant must also pay on or before the
International Contractual Settlement Date immediately available or same-day funds estimated by Trust to be sufficient to pay the Cash Component next determined after acceptance of the creation order, together with the
applicable Creation Transaction Fee (as defined below) and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. The “International Contractual Settlement Date” is
the earlier of (i) the date upon which all of the required Deposit Securities, the Cash Component and any other cash amounts which may be due are delivered to the Fund or (ii) the latest day for settlement on the
customary settlement cycle in the jurisdiction(s) where any of the securities of the Fund are customarily traded. Any excess funds will be returned following settlement of the issue of the Creation Unit
Aggregation.
Issuance of
Creation Unit Aggregations.
A Creation Unit Aggregation will generally not be issued until the transfer of good title to the Trust of the portfolio of Deposit Securities and the payment of the Cash Component, the
payment of the Creation Transaction Fee (as defined below) and any other required cash amounts have been completed. When the required Deposit Securities which are U.S. securities have been delivered to the Trust
through DTC or NSCC, and each relevant subcustodian confirms to Custodian that the required Deposit Securities which are non-U.S. securities (or, when permitted in the sole discretion of Trust, the cash in lieu
thereof) have been delivered to the account of the relevant subcustodian, the Custodian shall notify the Distributor and the transfer agent which, acting on behalf of the Trust, will issue and cause the delivery of
the Creation Unit Aggregations. The Trust may in its sole discretion permit or require the substitution of an amount of cash (i.e., a “cash in lieu” amount) to be added to the Cash Component to replace any
Deposit Security which may not be available in sufficient quantity for delivery or for other relevant reasons. If the Distributor, acting on behalf of the Trust, determines that a “cash in lieu” amount
will be accepted, the Distributor will notify the Authorized Participant and the transfer agent, and the Authorized Participant shall deliver, on behalf of itself or the party on whose behalf it is acting, the
“cash in lieu” amount, with any appropriate adjustments as advised by the Trust as discussed below.
In the event
that an order for a Creation Unit is incomplete because certain or all of the Deposit Securities are missing, the Trust may issue a Creation Unit notwithstanding such deficiency in reliance on the undertaking of the
Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by an additional cash deposit (described below) with respect to the undelivered Deposit
Securities. To the extent contemplated by the applicable Participant Agreement, Creation Unit Aggregations of the Fund will be issued to such Authorized Participant notwithstanding the fact that the corresponding Fund
Deposits have not been received in part or in whole, in reliance on the undertaking of the Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by
such Authorized Participant’s delivery and maintenance of collateral consisting of cash in the form of U.S. dollars in immediately available funds having a value (marked to market daily) at least equal to 115%
which First Trust may change from time to time of the value of the missing Deposit Securities. Such cash collateral must be delivered no later than 2:00 p.m., Eastern time, on the contractual settlement date. The
Participant Agreement will permit the Fund to buy the missing Deposit Securities at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such
securities and the value of the collateral.
Acceptance of
Orders for Creation Unit Aggregations.
The Trust reserves the absolute right to reject a creation order transmitted to it by the Distributor with respect to the Fund if: (i) the order is not in proper form; (ii) the
investor(s), upon obtaining the Fund shares ordered, would own 80% or more of the currently outstanding shares of the Fund; (iii) the required Fund Deposit is not delivered; (iv) acceptance of the Deposit
Securities would have certain adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would, in the opinion of the Trust, be unlawful; (vi) acceptance of the Fund Deposit would otherwise
have an adverse effect on the Trust, the Fund or the rights of Beneficial Owners; or (vii) circumstances outside the control of the Trust or the Fund make it impossible to process creation orders for all
practical purposes. Examples of such circumstances include: acts of God or public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and
computer failures; market conditions or activities causing trading
halts; systems failures involving computer or
other information systems affecting the Fund, the Trust, First Trust, the Distributor, the transfer agent, DTC, NSCC, the Custodian or sub-custodian or any other participant in the creation process; the imposition by
a foreign government or a regulatory body of controls, or other monetary, currency or trading restrictions that directly affect the portfolio securities held; and similar extraordinary events. The Distributor shall
notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on behalf of such prospective creator of its rejection of the order of such person. The Trust, the Custodian, any sub-custodian
and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits, nor shall any of them incur any liability for the failure to give any such
notification.
All questions
as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility, and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the
Trust’s determination shall be final and binding.
Creation
Transaction Fee.
Purchasers of Creation Units must pay a creation transaction fee (the
“Creation Transaction Fee”
) that is currently $500. The Creation Transaction Fee is applicable to each purchase transaction regardless of the number of Creation Units purchased in the transaction. The Creation
Transaction Fee may vary and is based on the composition of the securities included in the Fund’s portfolio and the countries in which the transactions are settled. The price for each Creation Unit will equal
the daily net asset value per share times the number of shares in a Creation Unit plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. When
the Fund permits an Authorized Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Authorized Participant may also be assessed an amount to
cover the cost of purchasing the Deposit Securities and/or disposing of the substituted securities, including operational processing and brokerage costs, transfer fees, stamp taxes, and part or all of the spread
between the expected bid and offer side of the market related to such Deposit Securities and/or substitute securities.
As discussed
above, shares of the Fund may be issued in advance of receipt of all Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Fund cash at least equal to 115% of the
market value of the missing Deposit Securities.
Redemption of
Fund Shares in Creation Unit Aggregations.
Fund shares may be redeemed only in Creation Unit Aggregations at their net asset value next determined after receipt of a redemption request in proper form by a Fund through the transfer
agent and only on a Business Day. The Fund will not redeem shares in amounts less than Creation Unit Aggregations. Beneficial Owners must accumulate enough shares in the secondary market to constitute a Creation Unit
Aggregation in order to have such shares redeemed by the Trust. Shares generally will be redeemed in Creation Unit Aggregations in exchange for a particular portfolio of securities (
“Fund Securities”
), although the Fund has the right to make redemption payments in cash, in-kind or a combination of each. There can be no assurance, however, that there will be sufficient liquidity in the
public trading market at any time to permit assembly of a Creation Unit Aggregation. Investors should expect to incur customary brokerage and other costs in connection with assembling a sufficient number of Fund
shares to constitute a redeemable Creation Unit Aggregation.
With respect
to the Fund, the Custodian, through the NSCC, makes available prior to the opening of business on the Exchange (currently 9:30 a.m. Eastern Time) on each Business Day, the identity of the Fund Securities that will be
applicable (subject to possible amendment or correction) to redemption requests received in proper form on that day. Fund Securities received on redemption may not be identical to Deposit Securities that are
applicable to creations of Creation Unit Aggregations.
Unless cash
redemptions are available or specified for the Fund (as discussed below), the redemption proceeds for a Creation Unit Aggregation generally consist of Fund Securities
—
as announced on the Business Day of the request for redemption received in proper form
—
plus or minus cash in an amount equal to the difference between the net asset value of the Creation Unit Aggregation being redeemed, as next determined after a receipt of a request in
proper form, and the value of the Fund Securities (the
“Cash Redemption Amount”
), less the applicable Redemption Transaction Fee as listed below and, if applicable, any operational processing and brokerage costs, transfer fees
or stamp taxes. In the event that the Fund Securities have a value greater than the net asset value of the Fund shares, a compensating cash payment equal to the difference plus, the applicable Redemption Transaction
Fee and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes is required to be made by or through an Authorized Participant by the redeeming shareholder.
The right of
redemption may be suspended or the date of payment postponed (i) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (ii) for any period during which trading on the NYSE
is suspended or restricted; (iii) for any period during which an emergency exists as a result of which disposal of the shares of
the Fund or determination of the Fund’s net
asset value is not reasonably practicable; or (iv) in such other circumstances as are permitted by the SEC.
Redemption
Transaction Fee.
Parties redeeming Creation Units must pay a redemption transaction fee (the
“Redemption Transaction Fee”
) that is currently $500. The Redemption Transaction Fee is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the transaction. The Redemption
Transaction Fee may vary and is based on the composition of the securities included in the Fund’s portfolio and the countries in which the transactions are settled. Investors will also bear the costs of
transferring the Fund Securities from the Trust to their account or on their order and may also be assessed an amount to cover other costs including operational processing and brokerage costs, transfer fees, stamp
taxes and part or all of the spread between the expected bid and offer side of the market related to such securities. Investors who use the services of a broker or other such intermediary in addition to an Authorized
Participant to effect a redemption of a Creation Unit Aggregation may also be assessed an amount to cover the cost of such services.
Placement of
Redemption Orders.
Orders to redeem Creation Unit Aggregations must be delivered through an Authorized Participant that has executed a Participant Agreement. Investors other than APs are responsible for
making arrangements for a redemption request to be made through an Authorized Participant. An order to redeem Creation Unit Aggregations of a Fund is deemed received by the Trust on the Transmittal Date if:
(i) such order is received by BNYM (in its capacity as transfer agent) not later than the Closing Time on the Transmittal Date; (ii) such order is accompanied or followed by the requisite number of shares of
a Fund specified in such order, which delivery must be made through DTC to BNYM; and (iii) all other procedures set forth in the Participant Agreement are properly followed.
Deliveries of
Fund Securities to investors are generally expected to be made within three Business Days.
To the extent
contemplated by an Authorized Participant’s agreement, in the event the Authorized Participant has submitted a redemption request in proper form but is unable to transfer all or part of the Creation Unit
Aggregation to be redeemed to the Fund’s transfer agent, the transfer agent may nonetheless accept the redemption request in reliance on the undertaking by the Authorized Participant to deliver the missing
shares as soon as possible. Such undertaking shall be secured by the Authorized Participant’s delivery and maintenance of collateral consisting of cash having a value (marked to market daily) at least equal to
115%, which First Trust may change from time to time, of the value of the missing shares.
The current
procedures for collateralization of missing shares require, among other things, that any cash collateral shall be in the form of U.S. dollars in immediately available funds and shall be held by BNYM and marked to
market daily, and that the fees of BNYM and any sub-custodians in respect of the delivery, maintenance and redelivery of the cash collateral shall be payable by the Authorized Participant. If the Authorized
Participant’s agreement provides for collateralization, it will permit the Trust, on behalf of the Fund, to purchase the missing shares at any time and will subject the Authorized Participant to liability for
any shortfall between the cost to the Trust of purchasing such shares and the value of the collateral.
The
calculation of the value of the Fund Securities and the Cash Redemption Amount to be delivered/received upon redemption will be made by BNYM according to the procedures set forth in this SAI under “Determination
of Net Asset Value” computed on the Business Day on which a redemption order is deemed received by the Trust. Therefore, if a redemption order in proper form is submitted to BNYM by a DTC Participant not later
than Closing Time on the Transmittal Date, and the requisite number of shares of the Fund are delivered to BNYM prior to the specified time, then the value of the Fund Securities and the Cash Redemption Amount to be
delivered will be determined by BNYM on such Transmittal Date. If, however, a redemption order is submitted to BNYM by a DTC Participant not later than the Closing Time on the Transmittal Date but either (i) the
requisite number of shares of the relevant Fund are not delivered by the specified time, as described above, on such Transmittal Date, or (ii) the redemption order is not submitted in proper form, then the
redemption order will not be deemed received as of the Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount to be delivered/received will be computed on the Business Day that
such order is deemed received by the Trust,
i.e.
, the Business Day on which the shares of the Fund are delivered through DTC to BNYM by the specified time on such Business Day pursuant to a properly submitted redemption
order.
If it is not
possible to effect deliveries of the Fund Securities, the Trust may in its discretion exercise its option to redeem such Fund shares in cash, and the redeeming Beneficial Owner will be required to receive its
redemption proceeds in cash. In addition, an investor may request a redemption in cash that the Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the net asset
value of its Fund shares based on the net asset value of shares of the Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charges for
requested cash redemptions specified above, to offset the Trust’s brokerage and other transaction costs associated with the disposition of Fund Securities). The Fund may also, in its sole discretion, upon
request of a shareholder,
provide such redeemer cash in lieu of some
securities added to the Cash Redemption Amount, but in no event will the total value of the securities delivered and the cash transmitted differ from the net asset value.
Redemptions of
Fund shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and the Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation
Unit Aggregations for cash to the extent that the Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An
Authorized Participant or an investor for which it is acting subject to a legal restriction with respect to a particular stock included in the Fund Securities applicable to the redemption of a Creation Unit
Aggregation may be paid an equivalent amount of cash. The Authorized Participant may request the redeeming Beneficial Owner of the Fund shares to complete an order form or to enter into agreements with respect to such
matters as compensating cash payment, beneficial ownership of shares or delivery instructions.
Because the
portfolio securities of the Fund may trade on the relevant exchange(s) on days that the listing exchange for the Fund is closed or are otherwise not Business Days for the Fund, shareholders may not be able to redeem
their shares of the Fund, or purchase and sell shares of the Fund on the listing exchange for the Fund, on days when the net asset value of the Fund could be significantly affected by events in the relevant foreign
markets.
Federal Tax Matters
This section
summarizes 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 the SAI. Tax laws and interpretations change frequently, and these summaries do
not describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker-dealer, or other investor with
special circumstances. In addition, this section does not describe your state, local or foreign tax consequences.
This federal
income tax summary is based in part on the advice of counsel to the Fund. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, our counsel was not asked to review,
and has not reached a conclusion with respect to the federal income tax treatment of the assets to be deposited in the Fund. This may not be sufficient for prospective investors to use for the purpose of avoiding
penalties under federal tax law.
As with any
investment, prospective investors should seek advice based on their individual circumstances from their own tax advisor.
The Fund intends
to qualify annually and to elect to be treated as a regulated investment company under the Internal Revenue Code (the
“Code”
).
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, or net income derived from interests in certain publicly traded partnerships; (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 which are engaged in the same, similar or related trades or businesses, or the securities of one or more of
certain publicly traded partnerships; 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. There are certain exceptions for failure to qualify if the failure is for reasonable cause or is de minimis, and
certain corrective action is taken and certain tax payments are made by the Fund.
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 98.2% 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. In order 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. Such 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.
Subject to
certain reasonable cause and de minimis exceptions, if the Fund fails to qualify as a regulated investment company or fails 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 are generally 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, certain ordinary income distributions received from the Fund may be taxed at capital gains tax rates. In particular, ordinary income dividends received by an individual shareholder from a
regulated investment company such as the Fund are generally taxed at the same rates that apply to net capital gain,
provided
that certain holding period requirements are satisfied and provided the dividends are attributable to qualifying dividends received by the Fund itself. Dividends received by
the Fund from REITs and foreign corporations are qualifying dividends eligible for this lower tax rate only in certain circumstances. The Fund will provide notice to its shareholders of the amount of any distributions
that may be taken into account as a dividend which is eligible for the capital gains tax rates. The Fund can not make any guarantees as to the amount of any distribution which will be regarded as a qualifying
dividend.
Income from
the Fund may also be subject to a 3.8% “Medicare tax.” This tax generally applies to net investment income if the taxpayer’s adjusted gross income exceeds certain threshold amounts, which are
$250,000 in the case of married couples filing joint returns and $200,000 in the case of single individuals.
A corporation
that owns shares generally will not be entitled to the dividends received deduction with respect to many dividends received from the Fund because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary income dividends on shares that are attributable to qualifying dividends received by the Fund from certain domestic corporations may be
reported by the Fund as being eligible for the dividends received deduction.
Distributions
of net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, properly reported 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 tax 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 basis in his or her shares. To the extent that the amount of any such 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.
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, such 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 such a 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 long-term capital gain received by the shareholder with respect to such shares.
Taxes on Purchase and Redemption of
Creation Units
If a
shareholder exchanges securities for Creation Units the shareholder will generally recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the
time and the shareholder’s aggregate basis in the securities surrendered and the Cash Component paid. If a shareholder exchanges Creation Units for securities, then the shareholder will generally recognize a
gain or loss equal to the difference between the shareholder’s basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The Internal Revenue Service,
however, may assert that a loss realized upon an exchange of securities for Creation Units or Creation Units for securities cannot be deducted currently under the rules governing “wash sales,” or on the
basis that there has been no significant change in economic position.
Nature of Fund’s
Investments
Certain of the
Fund’s investment practices are subject to special and complex federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility
of which is more limited), (iv) cause the Fund to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is
deemed to occur and (vi) adversely alter the characterization of certain complex financial transactions.
Futures Contracts and Options
The
Fund’s transactions in futures contracts and options will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Fund (
i.e.
, may affect whether gains or losses are ordinary or capital, or short-term or long-term), may accelerate recognition of income to the Fund and may defer Fund losses. These rules
could, therefore, affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Fund to mark-to-market certain types of the positions in its portfolio
(
i.e.
, treat them as if they were closed out), and (b) may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to
satisfy the 90% distribution requirement for qualifying to be taxed as a regulated investment company and the distribution requirements for avoiding excise taxes.
Investments in Certain Foreign
Corporations
If the Fund
holds an equity interest in any “passive foreign investment companies” (
“PFICs”
), 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. The Fund may be able to make an election that could ameliorate these adverse tax consequences. In this case, the Fund would recognize as ordinary income any
increase in the value of such PFIC shares, and as ordinary loss any decrease in such value to the extent it did not exceed prior increases included in income. Under this election, the Fund might be required to
recognize in a year income in excess of its distributions from PFICs and its proceeds from dispositions of PFIC stock during that year, and such income would nevertheless be subject to the distribution requirement and
would be taken into account for purposes of the 4% excise tax (described above). Dividends paid by PFICs are not treated as qualified dividend income.
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 fail to make
required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code generally are
exempt from such 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.
Non-U.S. Shareholders
U.S. taxation
of a shareholder who, as to the United States, is a nonresident alien individual, a foreign trust or estate, a foreign corporation or foreign partnership (
“non-U.S. shareholder”
) depends on whether the income of the Fund is “effectively connected” with a U.S. trade or business carried on by the shareholder.
In addition to
the rules described in this section concerning the potential imposition of withholding on distributions to non-U.S. persons, distributions to non-U.S. persons that are “financial institutions” may be
subject to a withholding tax of 30% unless an agreement is in place between the financial institution and the U.S. Treasury to collect and disclose information about accounts, equity investments, or debt interests in
the financial institution held by one or more U.S. persons or the institution is resident in a jurisdiction that has entered into such an agreement with the U.S. Treasury. For these purposes, a “financial
institution” means any entity that (i) accepts deposits in the ordinary course of a banking or similar business, (ii) holds financial assets for the account of others as a substantial portion of its business, or
(iii) is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or any interest (including a futures contract or
option) in such securities, partnership interests or commodities. Dispositions of shares by such persons may be subject to such withholding after December 31, 2018.
Distributions
to non-financial non-U.S. entities (other than publicly traded foreign entities, entities owned by residents of U.S. possessions, foreign governments, international organizations, or foreign central banks) will also
be subject to a withholding tax of 30% if the entity does not certify that the entity does not have any substantial U.S. owners or provide the name, address and TIN of each substantial U.S. owner. Dispositions of
shares by such persons may be subject to such withholding after December 31, 2018.
Income Not
Effectively Connected.
If the income from the Fund is not “effectively connected” with a U.S. trade or business carried on by the non-U.S. shareholder, distributions of investment company taxable
income will generally be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld from such distributions.
Distributions
of capital gain dividends and any amounts retained by the Fund which are properly reported by the Fund as undistributed capital gains will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless
the non-U.S. shareholder is a nonresident alien individual and is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. However, this 30% tax on
capital gains of nonresident alien individuals who are physically present in the United States for more than the 182 day period only applies in exceptional cases because any individual present in the United States for
more than 182 days during the taxable year is generally treated as a resident for U.S. income tax purposes; in that case, he or she would be subject to U.S. income tax on his or her worldwide income at the graduated
rates applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a non-U.S. shareholder who is a nonresident alien individual, the Fund may be required to withhold U.S. income tax from distributions of
net capital gain unless the non-U.S. shareholder certifies his or her non-U.S. status under penalties of perjury or otherwise establishes an exemption. If a non-U.S. shareholder is a nonresident alien individual, any
gain such shareholder realizes upon the sale or exchange of such shareholder’s shares of the Fund in the United States will ordinarily be exempt from U.S. tax unless the gain is U.S. source income and such
shareholder is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. Distributions from the Fund that are properly reported by the Fund as an
interest-related dividend attributable to certain interest income received by the Fund or as a short-term capital gain dividend attributable to certain net short-term capital gain income received by the Fund may not
be subject to U.S. federal income taxes, including withholding taxes when received by certain foreign investors, provided that the Fund makes certain elections and certain other conditions are met.
In addition,
capital gain distributions attributable to gains from U.S. real property interests (including certain U.S. real property holding corporations) will generally be subject to United States withholding tax and will give
rise to an obligation on the part of the foreign shareholder to file a United States tax return.
Income
Effectively Connected.
If the income from the Fund is “effectively connected” with a U.S. trade or business carried on by a non-U.S. shareholder, then distributions of investment company taxable
income and capital gain dividends, any amounts retained by the Fund which are properly reported by the Fund as undistributed capital gains and any gains realized upon the sale or exchange of shares of the Fund will be
subject to U.S. income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. Non-U.S. corporate shareholders may also be subject to the branch profits tax imposed by the Code.
The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may differ from those described herein. Non-U.S. shareholders are advised to consult their own tax advisors
with respect to the particular tax consequences to them of an investment in the Fund.
Other Taxation
Fund shareholders
may be subject to state, local and foreign taxes on their Fund distributions. Shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the
Fund.
Determination of Net Asset
Value
The following
information supplements and should be read in conjunction with the section in the Prospectus entitled “Net Asset Value.”
The per share
net asset value of the Fund is determined by dividing the total value of the securities and other assets, less liabilities, by the total number of shares outstanding. Under normal circumstances, daily calculation of
the net asset value will utilize the last closing sale price of each security held by the Fund at the close of the market on which such security is principally listed. In determining net asset value, portfolio
securities for the Fund for which accurate market quotations are readily available will be valued by the Fund accounting agent as follows:
(1)
|
Common stocks and other equity securities listed on any national or foreign exchange other than Nasdaq and the London Stock Exchange Alternative Investment Market (
“AIM”
) will be valued at the last sale price on the exchange on which they are principally traded, or the official closing price for Nasdaq and AIM securities. Portfolio
securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, on the Business Day as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
|
(2)
|
Shares of open-end funds are valued at fair value which is based on NAV per share.
|
(3)
|
Securities traded in the OTC market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price.
|
(4)
|
Exchange traded options and futures contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, they will be fair valued at the mean of
their most recent bid and asked price, if available, and otherwise at their closing bid price. OTC options and futures contracts are fair valued at the mean of their most recent bid and asked price, if available, and
otherwise at their closing bid price.
|
(5)
|
Forward foreign currency contracts are fair valued at the current day’s interpolated foreign exchange rate, as calculated using the current day’s spot rate, and the 30,
60, 90 and 180-day forward rates provided by a pricing service or by certain independent dealers in such contracts.
|
In addition, the
following types of securities will be fair valued by the Fund accounting agent as follows:
(1)
|
Fixed-income securities, interest rate swaps, credit default swaps, total return swaps, currency swaps, currency-linked notes, credit-linked notes and other similar instruments will be fair valued using a pricing
service.
|
(2)
|
Fixed income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of
discounts (amortized cost), provided the Advisor’s Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing
at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following:
|
(i)
|
the credit conditions in the relevant market and changes thereto;
|
(ii)
|
the liquidity conditions in the relevant market and changes thereto;
|
(iii)
|
the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates);
|
(iv)
|
issuer-specific conditions (such as significant credit deterioration); and
|
(v)
|
any other market-based data the Advisor’s Pricing Committee considers relevant. In this regard, the Advisor’s Pricing Committee may use last-obtained market-based data to
assist it when valuing portfolio securities using amortized cost.
|
(3)
|
Repurchase agreements will be fair valued as follows. Overnight repurchase agreements will be fair valued at amortized cost when it represents the best estimate of fair value. Term repurchase agreements (i.e., those
whose maturity exceeds seven days) will be fair valued by the Advisor’s Pricing Committee at the average of the bid quotations obtained daily from at least two recognized dealers.
|
If the
Advisor’s Pricing Committee has reason to question the accuracy or reliability of a price supplied or the use of the amortized cost methodology, the Advisor’s Pricing Committee shall determine if “it
needs to fair value” such portfolio security pursuant to established valuation procedures. From time to time, the Advisor’s Pricing Committee will request that the Fund accounting agent submit price
challenges to a pricing service, usually in response to any updated broker prices received.
Certain
securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Board of Trustees or its delegate, the Advisor’s Pricing Committee, at fair value. These
securities generally include but are not limited to, restricted securities (securities that may not be publicly sold without registration under the 1933 Act) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred
that is likely to materially affect the value of the security after the market has closed but before the calculation of Fund net asset value (as may be the case in foreign markets on which the security is primarily
traded) or is likely to make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security’s fair value. Fair
value prices represent any prices not considered market value prices and are either obtained from a pricing service or are determined by the Advisor’s Pricing Committee. Market value prices represent last sale
or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from pricing services. If no market price or official close price is available from either a pricing
service or no quotations are available from one or more brokers or if the Advisor’s Pricing Committee has reason to question the reliability or accuracy of a price supplied or the use of amortized cost, the
value of any portfolio security held by a Fund for which reliable market prices/quotations are not readily available will be determined by the Advisor’s Pricing Committee in a manner that most appropriately
reflects fair market value of the security on the valuation date, based on a consideration of all available information. When fair value prices are used, generally they will differ from market quotations or official
closing prices on the applicable exchange.
Because
foreign markets may be open on different days than the days during which a shareholder may purchase the shares of a Fund, the value of a Fund’s investments may change on the days when shareholders are not able
to purchase the shares of the Fund. For foreign securities, if an extraordinary market event occurs between the time the last “current” market quotation is available for a security in the Fund’s
portfolio and the time the Fund’s net asset value is determined and calls into doubt whether that earlier market quotation represents fair value at the time the Fund’s net asset value is determined, the
Fund accounting agent will immediately notify the Advisor’s Pricing Committee and the Advisor’s Pricing Committee shall determine the fair valuation. For foreign securities, the Advisor’s Pricing
Committee may seek to determine the “fair value” of such securities by retaining a pricing service to determine the value of the securities.
Foreign
securities, currencies and other assets denominated in foreign currencies are translated into U.S. dollars at the exchange rate of such currencies against the U.S. dollar as provided by a pricing service. All assets
denominated in foreign currencies will be converted into U.S. dollars at the exchange rates in effect at the time of valuation.
Dividends and
Distributions
The following
information supplements and should be read in conjunction with the section in the Prospectus entitled “Dividends, Distributions and Taxes.”
General
Policies.
Dividends from net investment income of the Fund, if any, are declared and paid quarterly. Distributions of net realized securities gains, if any, generally are declared and paid once a
year, but the Trust may make distributions on a
more frequent basis. The Trust reserves the
right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve the status of the Fund as a regulated investment company or to avoid imposition of income or
excise taxes on undistributed income.
Dividends and
other distributions of Fund shares are distributed, as described below, on a pro rata basis to Beneficial Owners of such shares. Dividend payments are made through DTC Participants and Indirect Participants to
Beneficial Owners then of record with proceeds received from the Fund.
Dividend
Reinvestment Service.
No reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of the Fund for
reinvestment of their dividend distributions. Beneficial Owners should contact their brokers in order to determine the availability and costs of the service and the details of participation therein. Brokers may
require Beneficial Owners to adhere to specific procedures and timetables. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional
whole shares of the Fund purchased in the secondary market.
Miscellaneous Information
Counsel.
Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, is counsel to the Trust.
Independent
Registered Public Accounting Firm.
Deloitte & Touche LLP, 111 South Wacker Drive, Chicago, Illinois 60606, serves as the Fund's independent registered public accounting firm. The firm audits The Fund's financial
statements and performs other related audit services.
Report of Independent
Registered Public Accounting Firm
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Trustees and Shareholder of
First Trust CEF
Income Opportunities ETF:
We have
audited the accompanying statement of assets and liabilities of First Trust CEF Income Opportunities ETF (the “Fund”), a series of the First Trust Exchange-Traded Fund VIII, as of September 16, 2016. This
statement of assets and liabilities is the responsibility of the Fund’s management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted
our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 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 CEF Income Opportunities ETF as of September 16, 2016, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte &
Touche LLP
Chicago,
Illinois
September 23,
2016
First Trust CEF Income
Opportunity ETF
Statement of Assets and Liabilities
September 16, 2016
ASSETS:
|
|
Cash
|
$100,000
|
Total Assets
|
$100,000
|
Paid in Capital
|
$100,000
|
NET ASSETS
|
$100,000
|
Shares outstanding (unlimited amount authorized, $0.01 par value)
|
5,000
|
Net asset value, offering price, and redemption price per share
|
$
20.00
|
The accompanying
notes are an integral part of the Statement of Assets and Liabilities.
Note 1: Organization
First Trust
CEF Income Opportunity ETF (the “Fund”), which is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), is a series of the First Trust Exchange-Traded Fund VIII, a
registered open-end investment company that was organized as a Massachusetts business trust on February 22, 2016. The Fund has had no operations through September 16, 2016, other than matters relating to organization
and registration and the sale of its shares to First Trust Portfolios L.P., the sole shareholder of the Fund.
The Fund seeks
to provide current income with a secondary emphasis on total return. Under normal market conditions, the Fund will seek to achieve its investment objectives by investing at least 80% of its net assets (including
investment borrowings) in a portfolio of closed-end investment companies that are listed and traded in the United States on registered exchanges.
Note 2: Significant Accounting
Policies
The Fund,
which is an investment company within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Update 2013-08, follows accounting and reporting guidance under FASB Accounting
Standards Codification Topic 946, “Financial Services-Investment Companies.” The preparation of the Statement of Assets and Liabilities in accordance with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the Statement of Assets and Liabilities. Actual results could differ from these
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.
Note 3: Fees and Expenses
First Trust
Advisors L.P. (“First Trust” or the “Advisor”) has agreed to bear the organization and offering costs of the Fund. First Trust is responsible for the selection and ongoing monitoring of the
securities in the Fund’s portfolio and certain other services necessary for the management of the portfolio. First Trust will manage the investment of the Fund’s assets and will be responsible for the
Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit, license and other services, but excluding fee payments under the Investment Management Agreement, interest,
taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a 12b-1 plan, if any, and
extraordinary expenses. The Fund has agreed to pay First Trust an annual management fee equal to 0.85% of its average daily net assets.
Note 4: Capital
Subsequent to
the Fund’s organization, shares will be created and redeemed by the Fund only in large blocks consisting of 50,000 Shares. Each block of 50,000 Shares is called a “Creation Unit.” As a practical
matter, only broker-dealers or large institutional investors with creation and redemption agreements, called “Authorized Participants” (“APs”), can purchase or redeem these Creation Units.
Transaction fees, based on the composition of the securities included in the Fund’s portfolio
and the countries in which the transactions are
settled, are charged to those APs creating or redeeming Creation Units. The Fund’s Creation Units will generally be issued and redeemed for cash and, in certain circumstances, in-kind for the securities in which
the Fund invests. Unlike most ETFs, the Fund currently intends to effect most creations and redemptions, in whole or in part, for cash, rather than in-kind, because of the nature of the Fund’s underlying
investments. As a result, an investment in the Fund may be less tax efficient than an investment in a more conventional ETF.
Exhibit A
—
Proxy Voting Guidelines
United States
Concise Proxy Voting Guidelines
2016 Benchmark Policy
Recommendations
Effective for Meetings on or after
February 1, 2016
Published January 22, 2016
www.issgovernance.com
© 2016 ISS | Institutional Shareholder
Services
2016 U.S. Concise Proxy Voting Guidelines
The policies contained herein are
a sampling of selected key U.S. proxy voting guidelines and are not
intended to be exhaustive. A full summary of ISS’ 2016 proxy voting guidelines can be found at:
http://www.issgovernance.com/policy-gateway/2016-policy-information/
BOARD OF DIRECTORS:
Voting on Director Nominees in
Uncontested Elections
➤
|
General Recommendation:
Generally vote for director nominees, except under the following circumstances:
|
1. Accountability
Vote against
(1)
or withhold from the entire board of directors (except new nominees
(2)
, who should be considered case-by-case) for the following:
Problematic
Takeover Defenses
Classified Board
Structure:
1.1.
|
The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All
appropriate nominees (except new) may be held accountable.
|
Director
Performance Evaluation:
1.2.
|
The board lacks accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of
a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s five-year total shareholder return and operational metrics. Problematic provisions include
but are not limited to:
|
➤
|
A
classified board structure;
|
➤
|
A
supermajority vote requirement;
|
➤
|
Either a plurality vote standard in uncontested director elections or a majority vote standard with no plurality carve-out for contested elections;
|
➤
|
The inability of shareholders to call special meetings;
|
➤
|
The inability of shareholders to act by written consent;
|
➤
|
A
dual-class capital structure; and/or
|
➤
|
A
non-shareholder-approved poison pill.
|
(1)
|
In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will
vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
|
(2)
|
A “new nominee” is any current nominee who has not already been elected by shareholders and who joined the board after the problematic action in question transpired. If ISS cannot determine whether the
nominee joined the board before or after the problematic action transpired, the nominee will be considered a “new nominee” if he or she joined the board within the 12 months prior to the upcoming
shareholder meeting.
|
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Poison Pills:
1.3.
|
The company’s poison pill has a “dead-hand” or “modified dead-hand” feature. Vote against or withhold from nominees every year until this feature is removed;
|
1.4.
|
The board adopts a poison pill with a term of more than 12 months (“long-term pill”), or renews any existing pill, including any “short-term” pill (12 months or less), without shareholder
approval. A commitment or policy that puts a newly adopted pill to a binding shareholder vote may potentially offset an adverse vote recommendation. Review such companies with classified boards every year, and such
companies with annually elected boards at least once every three years, and vote against or withhold votes from all nominees if the company still maintains a non-shareholder-approved poison pill; or
|
1.5.
|
The board makes a material adverse change to an existing poison pill without shareholder approval.
|
Vote case-by-case
on all nominees if:
1.6.
|
The board adopts a poison pill with a term of 12 months or less (“short-term pill”) without shareholder approval, taking into account the following factors:
|
➤
|
The date of the pill‘s adoption relative to the date of the next meeting of shareholders
—
i.e.
whether the company had time to put the pill on the ballot for shareholder ratification given the circumstances;
|
➤
|
The issuer’s rationale;
|
➤
|
The issuer’s governance structure and practices; and
|
➤
|
The issuer’s track record of accountability to shareholders.
|
Problematic
Audit-Related Practices
Generally
vote against or withhold from the members of the Audit Committee if:
1.7.
|
The non-audit fees paid to the auditor are excessive (see discussion under “Auditor Ratification”);
|
1.8.
|
The company receives an adverse opinion on the company’s financial statements from its auditor; or
|
1.9.
|
There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its
shareholders, to pursue legitimate legal recourse against the audit firm.
|
Vote
case-by-case on members of the Audit Committee and potentially the full board if:
1.10.
|
Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth,
chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted.
|
Problematic
Compensation Practices/Pay for Performance Misalignment
In the absence of
an Advisory Vote on Executive Compensation ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:
1.11.
|
There is a significant misalignment between CEO pay and company performance (pay for performance);
|
1.12.
|
The company maintains significant problematic pay practices;
|
1.13.
|
The board exhibits a significant level of poor communication and responsiveness to shareholders;
|
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1.14.
|
The company fails to submit one-time transfers of stock options to a shareholder vote; or
|
1.15.
|
The company fails to fulfill the terms of a burn rate commitment made to shareholders.
|
Vote case-by-case
on Compensation Committee members (or, in exceptional cases, the full board) and the Management Say-on-Pay proposal if:
1.16.
|
The company’s previous say-on-pay received the support of less than 70 percent of votes cast, taking into account:
|
➤
|
The company's response, including:
|
➤
|
Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support;
|
➤
|
Specific actions taken to address the issues that contributed to the low level of support;
|
➤
|
Other recent compensation actions taken by the company;
|
➤
|
Whether the issues raised are recurring or isolated;
|
➤
|
The company's ownership structure; and
|
➤
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Unilateral
Bylaw/Charter Amendments
1.17.
|
Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if the board amends the company's bylaws or charter
without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders, considering the following factors:
|
➤
|
The board's rationale for adopting the bylaw/charter amendment without shareholder ratification;
|
➤
|
Disclosure by the company of any significant engagement with shareholders regarding the amendment;
|
➤
|
The level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter;
|
➤
|
The board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
|
➤
|
The company's ownership structure;
|
➤
|
The company's existing governance provisions;
|
➤
|
The timing of the board's amendment to the bylaws/charter in connection with a significant business development; and,
|
➤
|
Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
|
Unless the
adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees, who should be considered case-by-case)
if the directors:
➤
|
Classified the board;
|
➤
|
Adopted supermajority vote requirements to amend the bylaws or charter; or
|
➤
|
Eliminated shareholders' ability to amend bylaws.
|
1.18.
|
For newly public companies, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in
connection with the company's public offering, the company or its board adopted bylaw or charter provisions materially adverse to shareholder rights, considering the following factors:
|
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➤
|
The level of impairment of shareholders' rights caused by the provision;
|
➤
|
The disclosed rationale for adopting the provision;
|
➤
|
The ability to change the governance structure in the future (
e.g.
, limitations on shareholders’ right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter);
|
➤
|
The ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; and,
|
➤
|
A
public commitment to put the provision to a shareholder vote within three years of the date of the initial public offering.
|
Unless the
adverse provision is reversed or submitted to a vote of public shareholders, vote case-by-case on director nominees in subsequent years.
Governance
Failures
Under
extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
1.19.
|
Material failures of governance, stewardship, risk oversight
(3)
, or fiduciary responsibilities at the company;
|
1.20.
|
Failure to replace management as appropriate; or
|
1.21.
|
Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best
interests of shareholders at any company.
|
2. Responsiveness
Vote
case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
2.1.
|
The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year. Factors that will be considered are:
|
➤
|
Disclosed outreach efforts by the board to shareholders in the wake of the vote;
|
➤
|
Rationale provided in the proxy statement for the level of implementation;
|
➤
|
The subject matter of the proposal;
|
➤
|
The level of support for and opposition to the resolution in past meetings;
|
➤
|
Actions taken by the board in response to the majority vote and its engagement with shareholders;
|
➤
|
The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and
|
➤
|
Other factors as appropriate.
|
2.2.
|
The board failed to act on takeover offers where the majority of shares are tendered;
|
2.3.
|
At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote;
|
2.4.
|
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the majority of votes cast at the most recent shareholder
meeting at which shareholders voted on the say-on-pay frequency; or
|
(3)
|
Examples of failure of risk oversight include, but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlements; hedging of company stock;
or significant pledging of company stock.
|
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2.5.
|
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received a plurality, but not a majority, of the votes cast at the most recent shareholder meeting at
which shareholders voted on the say-on-pay frequency, taking into account:
|
➤
|
The board's rationale for selecting a frequency that is different from the frequency that received a plurality;
|
➤
|
The company's ownership structure and vote results;
|
➤
|
ISS' analysis of whether there are compensation concerns or a history of problematic compensation practices; and
|
➤
|
The previous year's support level on the company's say-on-pay proposal.
|
3. Composition
Attendance at
Board and Committee Meetings:
3.1.
|
Generally vote against or withhold from directors (except new nominees, who should be considered case-by-case
(4)
who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they
served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
|
➤
|
Medical issues/illness;
|
➤
|
Family emergencies; and
|
➤
|
Missing only one meeting (when the total of all meetings is three or fewer).
|
3.2.
|
If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote
against or withhold from the director(s) in question.
|
Overboarded
Directors:
Vote against or
withhold from individual directors who:
3.3.
|
Sit on more than six public company boards; with respect to annual meetings on or after Feb. 1, 2017
(5)
, sit on more than five public company boards; or
|
3.4.
|
Are CEOs of public companies who sit on the boards of more than two public companies besides their own
— withhold only at their outside boards
(6)
.
|
4. Independence
Vote against or
withhold from Inside Directors and Affiliated Outside Directors (per the Categorization of Directors) when:
4.1.
|
The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;
|
(4)
|
For new nominees only, schedule conflicts due to commitments made prior to their appointment to the board are considered if disclosed in the proxy or another SEC filing.
|
(5)
|
This policy change includes a 1-year transition period to allow time for affected directors to address necessary changes if they wish.
|
(6)
|
Although all of a CEO’s subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote from the CEO of a parent company board or any of the controlled (>50 percent ownership)
subsidiaries of that parent, but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.
|
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4.2.
|
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;
|
4.3.
|
The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee; or
|
4.4.
|
Independent directors make up less than a majority of the directors.
|
Independent Chair (Separate
Chair/CEO)
➤
|
General Recommendation:
Generally vote for shareholder proposals requiring that the chairman’s position be filled by an independent director, taking into consideration the following:
|
➤
|
The scope of the proposal;
|
➤
|
The company's current board leadership structure;
|
➤
|
The company's governance structure and practices;
|
➤
|
Company performance; and
|
➤
|
Any other relevant factors that may be applicable.
|
Regarding the
scope of the proposal, consider whether the proposal is precatory or binding and whether the proposal is seeking an immediate change in the chairman role or the policy can be implemented at the next CEO transition.
Under the
review of the company's board leadership structure, ISS may support the proposal under the following scenarios absent a compelling rationale: the presence of an executive or non-independent chair in addition to the CEO;
a recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair. ISS will also consider any recent transitions in board leadership and the effect such transitions may
have on independent board leadership as well as the designation of a lead director role.
When
considering the governance structure, ISS will consider the overall independence of the board, the independence of key committees, the establishment of governance guidelines, board tenure and its relationship to CEO
tenure, and any other factors that may be relevant. Any concerns about a company's governance structure will weigh in favor of support for the proposal.
The review of
the company's governance practices may include, but is not limited to poor compensation practices, material failures of governance and risk oversight, related-party transactions or other issues putting director
independence at risk, corporate or management scandals, and actions by management or the board with potential or realized negative impact on shareholders. Any such practices may suggest a need for more independent
oversight at the company thus warranting support of the proposal.
ISS'
performance assessment will generally consider one-, three, and five-year TSR compared to the company's peers and the market as a whole. While poor performance will weigh in favor of the adoption of an independent
chair policy, strong performance over the long-term will be considered a mitigating factor when determining whether the proposed leadership change warrants support.
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Proxy Access
➤
|
General Recommendation:
Generally vote for management and shareholder proposals for proxy access with the following provisions:
|
➤
|
Ownership threshold:
maximum requirement not more than three percent (3%) of the voting power;
|
➤
|
Ownership duration:
maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;
|
➤
|
Aggregation:
minimal or no limits on the number of shareholders permitted to form a nominating group;
|
➤
|
Cap:
cap on nominees of generally twenty-five percent (25%) of the board.
|
Review for
reasonableness any other restrictions on the right of proxy access.
Generally vote
against proposals that are more restrictive than these guidelines.
Proxy Contests/Proxy Access
—
Voting for Director Nominees in Contested Elections
➤
|
General Recommendation:
Vote case-by-case on the election of directors in contested elections, considering the following factors:
|
➤
|
Long-term financial performance of the company relative to its industry;
|
➤
|
Management’s track record;
|
➤
|
Background to the contested election;
|
➤
|
Nominee qualifications and any compensatory arrangements;
|
➤
|
Strategic plan of dissident slate and quality of the critique against management;
|
➤
|
Likelihood that the proposed goals and objectives can be achieved (both slates); and
|
➤
|
Stock ownership positions.
|
In the case of
candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the
nominee(s) and/or to the nature of the election (such as whether or not there are more candidates than board seats).
CAPITAL/RESTRUCTURING
Common Stock Authorization
➤
|
General Recommendation:
Vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the
same ballot that warrants support.
|
Vote against
proposals at companies with more than one class of common stock to increase the number of authorized shares of the class of common stock that has superior voting rights.
Vote against
proposals to increase the number of authorized common shares if a vote for a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced proportionally.
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Vote case-by-case
on all other proposals to increase the number of shares of common stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
➤
|
Past Board Performance:
|
➤
|
The company's use of authorized shares during the last three years
|
➤
|
Disclosure in the proxy statement of the specific purposes of the proposed increase;
|
➤
|
Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request; and
|
➤
|
The dilutive impact of the request as determined relative to an allowable increase calculated by ISS (typically 100 percent of existing authorized shares) that reflects the company's need for shares and total
shareholder returns.
|
ISS will apply
the relevant allowable increase below to requests to increase common stock that are for general corporate purposes (or to the general corporate purposes portion of a request that also includes a specific need):
A.
|
Most companies:
100 percent
of existing authorized shares.
|
B.
|
Companies with less than 50 percent of existing authorized shares either outstanding or reserved for issuance:
50 percent
of existing authorized shares.
|
C.
|
Companies with one- and three-year total shareholder returns (TSRs) in the bottom 10 percent of the U.S. market as of the end of the calendar quarter that is closest to their most recent fiscal year end:
50 percent
of existing authorized shares.
|
D.
|
Companies at which both conditions (B and C) above are both present:
25 percent
of existing authorized shares.
|
If there is an
acquisition, private placement, or similar transaction on the ballot (not including equity incentive plans) that ISS is recommending FOR, the allowable increase will be the greater of (i) twice the amount needed to
support the transactions on the ballot, and (ii) the allowable increase as calculated above.
Mergers and Acquisitions
➤
|
General Recommendation:
Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing
factors including:
|
➤
|
Valuation
- Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale.
|
➤
|
Market reaction
- How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.
|
➤
|
Strategic rationale
- Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management
should also have a favorable track record of successful integration of historical acquisitions.
|
➤
|
Negotiations and process
- Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation
"wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (
e.g.
, full auction, partial auction, no auction) can also affect shareholder value.
|
➤
|
Conflicts of interest
- Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests
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|
may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases
be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
|
➤
|
Governance
- Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
|
COMPENSATION
Executive Pay Evaluation
Underlying all
evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
1.
|
Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and
appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and
variable pay; performance goals; and equity-based plan costs;
|
2.
|
Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;
|
3.
|
Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for
compensation decision-making (
e.g.
, including access to independent expertise and advice when needed);
|
4.
|
Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices
fully and fairly;
|
5.
|
Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise
their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.
|
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Advisory Votes on Executive
Compensation
—
Management Proposals (Management Say-on-Pay)
➤
|
General Recommendation:
Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.
|
|
Vote against Advisory Votes on Executive Compensation (Management Say-on-Pay
—
MSOP) if:
|
➤
|
There is a significant misalignment between CEO pay and company performance (pay for performance);
|
➤
|
The company maintains significant problematic pay practices;
|
➤
|
The board exhibits a significant level of poor communication and responsiveness to shareholders.
|
Vote against or
withhold from the members of the Compensation Committee and potentially the full board if:
➤
|
There is no MSOP on the ballot, and an against vote on an MSOP is warranted due to pay for performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised
previously, or a combination thereof;
|
➤
|
The board fails to respond adequately to a previous MSOP proposal that received less than 70 percent support of votes cast;
|
➤
|
The company has recently practiced or approved problematic pay practices, including option repricing or option backdating; or
|
➤
|
The situation is egregious.
|
Primary Evaluation Factors for
Executive Pay
Pay-for-Performance Evaluation
ISS annually
conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the Russell 3000 or Russell 3000E Indices
(7)
, this analysis considers the following:
1.
|
Peer Group
(8)
Alignment:
|
➤
|
The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period.
|
➤
|
The multiple of the CEO's total pay relative to the peer group median.
|
2.
|
Absolute Alignment
(9)
–
the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years
–
i.e.
, the difference between the trend in annual pay changes and the trend in annualized TSR during the period.
|
If the above
analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, misaligned pay and performance are otherwise suggested, our analysis
may include any of the following qualitative factors, as relevant to evaluating how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
(7)
|
The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.
|
(8)
|
The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company's selected peers' GICS industry
group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market cap bucket that is reflective of the
company's. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
|
(9)
|
Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
|
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➤
|
The ratio of performance- to time-based equity awards;
|
➤
|
The overall ratio of performance-based compensation;
|
➤
|
The completeness of disclosure and rigor of performance goals;
|
➤
|
The company's peer group benchmarking practices;
|
➤
|
Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers;
|
➤
|
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (
e.g.
, bi-annual awards);
|
➤
|
Realizable pay
(10)
compared to grant pay; and
|
➤
|
Any other factors deemed relevant.
|
Problematic Pay Practices
The focus is on
executive compensation practices that contravene the global pay principles, including:
➤
|
Problematic practices related to non-performance-based compensation elements;
|
➤
|
Incentives that may motivate excessive risk-taking; and
|
➤
|
Options Backdating.
|
Problematic Pay
Practices related to Non-Performance-Based Compensation Elements
Pay elements
that are not directly based on performance are generally evaluated case-by-case considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS'
Compensation FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified
relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
➤
|
Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
|
➤
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Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;
|
➤
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New or extended agreements that provide for:
|
➤
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CIC payments exceeding 3 times base salary and average/target/most recent bonus;
|
➤
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CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers);
|
➤
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CIC payments with excise tax gross-ups (including "modified" gross-ups);
|
➤
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Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible.
|
Incentives that
may Motivate Excessive Risk-Taking
➤
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Multi-year guaranteed bonuses;
|
➤
|
A
single or common performance metric used for short- and long-term plans;
|
➤
|
Lucrative severance packages;
|
➤
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High pay opportunities relative to industry peers;
|
➤
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Disproportionate supplemental pensions; or
|
➤
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Mega annual equity grants that provide unlimited upside with no downside risk.
|
Factors that
potentially mitigate the impact of risky incentives include rigorous claw-back provisions and robust stock ownership/holding guidelines.
(10)
|
ISS research reports include realizable pay for S&P1500 companies.
|
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Options
Backdating
The following
factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
➤
|
Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;
|
➤
|
Duration of options backdating;
|
➤
|
Size of restatement due to options backdating;
|
➤
|
Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and
|
➤
|
Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future.
|
Compensation Committee
Communications and Responsiveness
Consider the
following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
➤
|
Failure to respond to majority-supported shareholder proposals on executive pay topics; or
|
➤
|
Failure to adequately respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account:
|
➤
|
The company's response, including:
|
➤
|
Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support;
|
➤
|
Specific actions taken to address the issues that contributed to the low level of support;
|
➤
|
Other recent compensation actions taken by the company;
|
➤
|
Whether the issues raised are recurring or isolated;
|
➤
|
The company's ownership structure; and
|
➤
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Equity-Based and Other Incentive
Plans
➤
|
General Recommendation:
Vote case-by-case on certain equity-based compensation plans
(11)
depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance
negative factors, and vice versa, as evaluated using an "equity plan scorecard" (EPSC) approach with three pillars:
|
➤
|
Plan Cost:
The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (SVT) in relation to
peers and considering both:
|
➤
|
SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and
|
➤
|
SVT based only on new shares requested plus shares remaining for future grants.
|
➤
|
Automatic single-triggered award vesting upon a change in control (CIC);
|
➤
|
Discretionary vesting authority;
|
➤
|
Liberal share recycling on various award types;
|
(11)
|
Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees
and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors.
|
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➤
|
Lack of minimum vesting period for grants made under the plan.
|
➤
|
The company’s three year burn rate relative to its industry/market cap peers;
|
➤
|
Vesting requirements in most recent CEO equity grants (3-year look-back);
|
➤
|
The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years);
|
➤
|
The proportion of the CEO's most recent equity grants/awards subject to performance conditions;
|
➤
|
Whether the company maintains a claw-back policy;
|
➤
|
Whether the company has established post exercise/vesting share-holding requirements.
|
Generally vote
against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders' interests, or if any of the following egregious factors apply:
➤
|
Awards may vest in connection with a liberal change-of-control definition;
|
➤
|
The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it
—
for NYSE and Nasdaq listed companies
—
or by not prohibiting it when the company has a history of repricing
—
for non-listed companies);
|
➤
|
The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; or
|
➤
|
Any other plan features are determined to have a significant negative impact on shareholder interests.
|
SOCIAL/ENVIRONMENTAL ISSUES
(SHAREHOLDER PROPOSALS)
Global Approach
Issues covered
under the policy include a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a
variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
➤
|
General Recommendation:
Generally vote case-by-case, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder value, and in addition the following
will also be considered:
|
➤
|
If the issues presented in the proposal are more appropriately or effectively dealt with through legislation or government regulation;
|
➤
|
If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
|
➤
|
Whether the proposal's request is unduly burdensome (scope or timeframe) or overly prescriptive;
|
➤
|
The company's approach compared with any industry standard practices for addressing the issue(s) raised by the proposal;
|
➤
|
If the proposal requests increased disclosure or greater transparency, whether or not reasonable and sufficient information is currently available to shareholders from the company or from other publicly available
sources; and
|
➤
|
If the proposal requests increased disclosure or greater transparency, whether or not implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage.
|
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Climate Change/Greenhouse Gas (GHG)
Emissions
➤
|
General Recommendation:
Generally vote for resolutions requesting that a company disclose information on the risks related to climate change on its operations and investments, such as financial,
physical, or regulatory risks, considering:
|
➤
|
Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks
and/or opportunities;
|
➤
|
The company’s level of disclosure is at least comparable to that of industry peers; and
|
➤
|
There are no significant controversies, fines, penalties, or litigation associated with the company’s environmental performance.
|
Generally vote
for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:
➤
|
The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or
opportunities;
|
➤
|
The company's level of disclosure is comparable to that of industry peers; and
|
➤
|
There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions.
|
Vote case-by-case
on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
➤
|
Whether the company provides disclosure of year-over-year GHG emissions performance data;
|
➤
|
Whether company disclosure lags behind industry peers;
|
➤
|
The company's actual GHG emissions performance;
|
➤
|
The company's current GHG emission policies, oversight mechanisms, and related initiatives; and
|
➤
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.
|
Board Diversity
➤
|
General Recommendation:
Generally vote for requests for reports on a company's efforts to diversify the board, unless:
|
➤
|
The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and
|
➤
|
The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.
|
Vote case-by-case
on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
➤
|
The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
|
➤
|
The level of gender and racial minority representation that exists at the company’s industry peers;
|
➤
|
The company’s established process for addressing gender and racial minority board representation;
|
➤
|
Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
|
➤
|
The independence of the company’s nominating committee;
|
➤
|
Whether the company uses an outside search firm to identify potential director nominees; and
|
➤
|
Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.
|
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2016 U.S. Concise Proxy Voting Guidelines
Sustainability Reporting
➤
|
General Recommendation:
Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental
sustainability, unless:
|
➤
|
The company already discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report;
or
|
➤
|
The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame.
|
Environmental, Social, and
Governance (ESG) Compensation-Related Proposals
➤
|
General Recommendation:
Vote case-by-case on proposals to link, or report on linking, executive compensation to sustainability (environmental and social) criteria, considering:
|
➤
|
Whether the company has significant and/or persistent controversies or regulatory violations regarding social and/or environmental issues;
|
➤
|
Whether the company has management systems and oversight mechanisms in place regarding its social and environmental performance;
|
➤
|
The degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and
|
➤
|
The company's current level of disclosure regarding its environmental and social performance.
|
This document
and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the "Information") is the property of Institutional Shareholder Services Inc. (ISS), its
subsidiaries, or, in some cases third party suppliers.
The
Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a
solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any
opinion regarding any issuer, securities, financial products or instruments or trading strategies.
The user of
the Information assumes the entire risk of any use it may make or permit to be made of the Information.
ISS MAKES NO
EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
A-16
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Without
limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including
lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.
The Global Leader In Corporate
Governance
www.issgovernance.com
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PRELIMINARY STATEMENT OF
ADDITIONAL INFORMATION DATED SEPTEMBER 23, 2016
SUBJECT TO COMPLETION
STATEMENT OF ADDITIONAL
INFORMATION
Investment Company Act File
No. 811-23147
First Trust Exchange-Traded
Fund VIII
FUND NAME
|
|
TICKER SYMBOL
|
|
EXCHANGE
|
First Trust Municipal CEF Income Opportunity ETF
|
|
MCEF
|
|
Nasdaq
|
DATED [TO BE UPDATED]
This
Statement of Additional Information (
“SAI”
) is not a prospectus. It should be read in conjunction with the prospectus dated [TO BE UPDATED], as it may be revised from time to time (the
“Prospectus”
), for First Trust Municipal CEF Income Opportunity ETF (the
“Fund”
), a series of the First Trust Exchange-Traded Fund VIII (the
“Trust”
). Capitalized terms used herein that are not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained
without charge by writing to the Trust’s distributor, First Trust Portfolios L.P., 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, or by calling toll free at (800) 621-1675.
The information in this Statement of Additional
Information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional
Information is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer of sale is not permitted.
Table of Contents
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1
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2
|
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3
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|
4
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9
|
|
10
|
|
17
|
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18
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20
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21
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22
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23
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28
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31
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33
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33
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A-1
|
General Description of the
Trust and the Fund
The Trust was
organized as a Massachusetts business trust on February 22, 2016, and is authorized to issue an unlimited number of shares in one or more series or
“Funds.”
The Trust is an open-end management investment company, registered under the Investment Company Act of 1940, as amended (the
“1940 Act”
). The Trust currently offers shares in two series: including the First Trust CEF Income Opportunities ETF and First Trust Municipal CEF Income Opportunities
ETF, each of which is a non-diversified series.
This SAI relates
to the Fund. The Fund, as a series of the Trust, represents a beneficial interest in a separate portfolio of securities and other assets, with its own objective and policies.
The Board of
Trustees of the Trust (the
“Board of Trustees”
or the
“Trustees”
) has the right to establish additional series in the future, to determine the preferences, voting powers, rights and privileges thereof and to modify such
preferences, voting powers, rights and privileges without shareholder approval. Shares of any series may also be divided into one or more classes at the discretion of the Trustees.
The Trust or any
series or class thereof may be terminated at any time by the Board of Trustees upon written notice to the shareholders.
Each share has
one vote with respect to matters upon which a shareholder vote is required, consistent with the requirements of the 1940 Act and the rules promulgated thereunder. Shares of all series of the Trust vote together as a
single class except as otherwise required by the 1940 Act or if the matter being voted on affects only a particular series, and, if a matter affects a particular series differently from other series, the shares of
that series will vote separately on such matter. The Trust’s Declaration of Trust (the
“Declaration”
) requires a shareholder vote only on those matters where the 1940 Act requires a vote of shareholders and otherwise permits the Trustees to take actions
without seeking the consent of shareholders. For example, the Declaration gives the Trustees broad authority to approve reorganizations between the Fund and another entity, such as another exchange-traded fund, or the
sale of all or substantially all of the Fund’s assets, or the termination of the Trust or the Fund without shareholder approval if the 1940 Act would not require such approval.
The
Declaration provides that by becoming a shareholder of the Fund, each shareholder shall be expressly held to have agreed to be bound by the provisions of the Declaration. The Declaration may, except in limited
circumstances, be amended by the Trustees in any respect without a shareholder vote. The Declaration provides that the Trustees may establish the number of Trustees and that vacancies on the Board of Trustees may be
filled by the remaining Trustees, except when election of Trustees by the shareholders is required under the 1940 Act. Trustees are then elected by a plurality of votes cast by shareholders at a meeting at which a
quorum is present. The Declaration also provides that Trustees may be removed, with or without cause, by a vote of shareholders holding at least two-thirds of the voting power of the Trust, or by a vote of two-thirds
of the remaining Trustees. The provisions of the Declaration relating to the election and removal of Trustees may not be amended without the approval of two-thirds of the Trustees.
The holders of
Fund shares are required to disclose information on direct or indirect ownership of Fund shares as may be required to comply with various laws applicable to the Fund or as the Trustees may determine, and ownership of
Fund shares may be disclosed by the Fund if so required by law or regulation. In addition, pursuant to the Declaration, the Trustees may, in their discretion, require the Trust to redeem shares held by any shareholder
for any reason under terms set by the Trustees. The Declaration provides a detailed process for the bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the
time, expense, distraction and other harm that can be caused to the Fund or its shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand must
first be made on the Trustees. The Declaration details various information, certifications, undertakings and acknowledgements that must be included in the demand. Following receipt of the demand, the Trustees have a
period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority of the Trustees who are considered independent for the purposes of considering the demand determine that
maintaining the suit would not be in the best interests of the Fund, the Trustees are required to reject the demand and the complaining shareholder may not proceed with the derivative action unless the shareholder is
able to sustain the burden of proof to a court that the decision of the Trustees not to pursue the requested action was not a good faith exercise of their business judgment on behalf of the Fund. In making such a
determination, a Trustee is not considered to have a personal financial interest by virtue of being compensated for his or her services as a Trustee. If a demand is rejected, the complaining shareholder will be
responsible for the costs and expenses (including attorneys’ fees) incurred by the Fund in connection with the consideration of the demand under a number of circumstances. If a derivative action is brought in
violation of the Declaration, the shareholder bringing the action may be responsible for the Fund’s costs,
including attorneys’ fees. The Declaration
also provides that any shareholder bringing an action against the Fund waives the right to trial by jury to the fullest extent permitted by law.
The Trust is not
required to and does not intend to hold annual meetings of shareholders.
Under
Massachusetts law applicable to Massachusetts business trusts, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration
contains an express disclaimer of shareholder liability for acts or obligations of the Trust and requires that notice of this disclaimer be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. The Declaration further provides for indemnification out of the assets and property of the Trust for all losses and expenses of any shareholder held personally liable for the obligations of
the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust or the Fund itself was
unable to meet its obligations.
The
Declaration further provides that a Trustee acting in his or her capacity as Trustee is not personally liable to any person other than the Trust or its shareholders, for any act, omission, or obligation of the Trust.
The Declaration requires the Trust to indemnify any persons who are or who have been Trustees, officers or employees of the Trust for any liability for actions or failure to act except to the extent prohibited by
applicable federal law. In making any determination as to whether any person is entitled to the advancement of expenses in connection with a claim for which indemnification is sought, such person is entitled to a
rebuttable presumption that he or she did not engage in conduct for which indemnification is not available. The Declaration provides that any Trustee who serves as chair of the Board of Trustees or of a committee of
the Board of Trustees, as lead independent Trustee or as audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.
The Fund is
advised by First Trust Advisors L.P. (the
“Advisor”
or
“First Trust”
).
The shares of
the Fund list and principally trade on The Nasdaq Stock Market LLC (
“Nasdaq”
or the
“Exchange”
). The shares will trade on Nasdaq at market prices that may be below, at or above net asset value. The Fund offers and issues shares at net asset value only in
aggregations of a specified number of shares (each a
“Creation Unit”
or a
“Creation Unit Aggregation”
), generally in exchange for a basket of securities (the
“Deposit Securities”
), together with the deposit of a specified cash payment (the
“Cash Component”
). Shares are redeemable only in Creation Unit Aggregations and, generally, in exchange for portfolio securities and a specified cash payment. Creation
Units are aggregations of 50,000 shares of the Fund.
The Trust
reserves the right to permit creations and redemptions of Fund shares to be made in whole or in part on a cash basis under certain circumstances. Fund shares may be issued in advance of receipt of Deposit Securities
subject to various conditions including a requirement to maintain on deposit with the Fund cash at least equal to 115% of the market value of the missing Deposit Securities. See the section entitled “Creation
and Redemption of Creation Unit Aggregations.” In each instance of such cash creations or redemptions, transaction fees may be imposed that will be higher than the transaction fees associated with in-kind
creations or redemptions. In all cases, such fees will be limited in accordance with the requirements of the Securities and Exchange Commission (the
“SEC”
) applicable to management investment companies offering redeemable securities.
Exchange Listing and
Trading
There can be
no assurance that the requirements of Nasdaq
necessary to maintain the listing of shares of the Fund will continue to be met. Nasdaq
may, but is not required to, remove the shares of the Fund from listing if (i) following the initial 12-month period
beginning at the commencement of trading of the Fund, there are fewer than 50 beneficial owners of the shares of the Fund for 30 or more consecutive trading days; (ii) the value of the Fund’s Index (as
defined below) is no longer calculated or available; or (iii) such other event shall occur or condition exist that, in the opinion of Nasdaq
makes further dealings on Nasdaq inadvisable. Nasdaq will remove the shares of the Fund from listing and trading upon
termination of the Fund.
As in the case of
other stocks traded on Nasdaq, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels.
The Funds
reserve the right to adjust the price levels of shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which
would have no effect on the net assets of the Fund.
Investment Objective and
Policies
The Prospectus
describes the investment objective and certain policies of the Fund. The following supplements the information contained in the Prospectus concerning the investment objective and policies of the Fund.
The Fund is
subject to the following fundamental policies, which may not be changed without approval of the holders of a majority of the outstanding voting securities (as such term is defined in the 1940 Act) of the Fund:
(1)
|
The Fund may not issue senior securities, except as permitted under the 1940 Act.
|
(2)
|
The Fund may not borrow money, except as permitted under the 1940 Act.
|
(3)
|
The Fund will not underwrite the securities of other issuers except to the extent the Fund may be considered an underwriter under the Securities Act of 1933, as amended (the
“1933 Act”
), in connection with the purchase and sale of portfolio securities.
|
(4)
|
The Fund will not purchase or sell real estate or interests therein, unless acquired as a result of ownership of securities or other instruments (but this shall not prohibit the Fund from purchasing or selling
securities or other instruments backed by real estate or of issuers engaged in real estate activities).
|
(5)
|
The Fund may not make loans to other persons, except through (i) the purchase of debt securities permissible under the Fund's investment policies, (ii) repurchase agreements, or (iii) the lending of portfolio
securities,
provided
that no such loan of portfolio securities may be made by the Fund if, as a result, the aggregate of such loans would exceed 33⅓% of the value of the Fund's total
assets.
|
(6)
|
The Fund may not 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, forward contracts or other derivative instruments, or from investing in securities or other instruments backed by physical commodities).
|
(7)
|
The Fund may not invest more than 25% of its assets in securities of issuers in any one industry or group of industries This restriction does not apply to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities or securities of other investment companies..
|
For purposes
of applying restriction (1) above, under the 1940 Act as currently in effect, the Fund is not permitted to issue senior securities, except that the Fund may borrow from any bank if immediately after such borrowing the
value of the Fund’s total assets is at least 300% of the principal amount of all of the Fund’s borrowings (i.e., the principal amount of the borrowings may not exceed 33 1/3% of the Fund’s total
assets). In the event that such asset coverage shall at any time fall below 300%, the Fund shall, within three days thereafter (not including Sundays and holidays), reduce the amount of its borrowings to an extent
that the asset coverage of such borrowing shall be at least 300%. The fundamental investment limitations set forth above limit the Fund’s ability to engage in certain investment practices and purchase securities
or other instruments to the extent permitted by, or consistent with, applicable law. As such, these limitations will change as the statute, rules, regulations or orders (or, if applicable, interpretations) change, and
no shareholder vote will be required or sought.
Except for
restriction (2) above, if a percentage restriction is adhered to at the time of investment, a later increase in percentage resulting from a change in market value of the investment or the total assets will not
constitute a violation of that restriction. With respect to restriction (2), if the limitations are exceeded as a result of a change in market value then the Fund will reduce the amount of borrowings within three days
thereafter to the extent necessary to comply with the limitations (not including Sundays and holidays).
The foregoing
fundamental policies of the Fund may not be changed without the affirmative vote of the majority of the outstanding voting securities of the Fund. The 1940 Act defines a majority vote as the vote of the lesser of
(i) 67% or more of the voting securities represented at a meeting at which more than 50% of the outstanding securities are represented; or (ii) more than 50% of the outstanding voting securities. With
respect to the submission of a change in an investment policy to the holders of outstanding voting securities of the Fund, such matter shall be deemed to have been effectively acted upon with respect to the Fund if a
majority of the outstanding voting securities of the Fund vote for the approval of such matter, notwithstanding that such matter has not been approved by the holders of a majority of the outstanding voting securities
of any other series of the Trust affected by such matter.
The Fund has
adopted a fundamental investment policy pursuant to Rule 35d-1 under the 1940 Act (the
“Name Policy”
) whereby the Fund, under normal market conditions, invests at least 80% of its net assets (including investment borrowings) in Closed-End Funds that invest
primarily in Municipal Securities (as defined below).
The Fund will
look to the Underlying Funds’ investment objective and principal investment strategies to determine compliance with the Name Policy. The Name Policy may not be changed by the Board of Trustees of the Trust
(the
“Board”)
without shareholder approval.
In addition to
the foregoing fundamental policies, the Fund is also subject to strategies and policies discussed herein which, unless otherwise noted, are non-fundamental policies and may be changed by the Board of Trustees.
Investment Strategies
Under normal
market conditions, the Fund will seek to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in a portfolio of closed-end investment companies that are
listed and traded in the United States on registered exchanges (
“Closed-End Funds”
) which invest primarily in municipal debt securities some or all of which pay interest that is exempt from regular federal income taxes (
“Municipal Securities”
). In selecting the Closed-End Funds in which the Fund will invest (
“Underlying Funds”
), the Fund’s investment advisor will analyze relevant Closed-End Fund data metrics and economic factors.
Types of Investments
Closed-End
Funds.
Shares of Closed-End Funds are typically offered to the public in a one-time initial public offering by a group of underwriters who retain a spread or underwriting commission of between 4%
and 6% of the initial public offering price. Such securities are then listed for trading on the New York Stock Exchange, the American Stock Exchange or Nasdaq or, in some cases, may be traded in other OTC markets.
Because the shares of Closed-End Funds cannot be redeemed upon demand to the issuer like the shares of an open-end investment company (such as the Fund), investors seek to buy and sell shares of Closed-End Funds in
the secondary market. The Fund generally will purchase shares of Closed-End Funds only in the secondary market. The Fund will incur normal brokerage costs on such purchases similar to the expenses the Fund would incur
for the purchase of equity securities in the secondary market. The Fund may, however, also purchase securities of a Closed-End Fund in an initial public offering when, in the opinion of the Adviser, based on a
consideration of the nature of the Closed-End Fund’s proposed investments, the prevailing market conditions and the level of demand for such securities, they represent an attractive opportunity for growth of
capital. The initial offering price typically will include a dealer spread, which may be higher than the applicable brokerage cost if the Fund purchased such securities in the secondary market.
The shares of
many Closed-End Funds, after their initial public offering, frequently trade at a price per share which is less than the net asset value per share, the difference representing the “market discount” of such
shares. This market discount may be due in part to the investment objective of long-term appreciation, which is sought by many Closed-End Funds, as well as to the fact that the shares of closed-end funds are not
redeemable by the holder upon demand but rather are subject to the principles of supply and demand in the secondary market. A relative lack of secondary market purchasers of Closed-End Fund shares also may contribute
to such shares’ trading at a discount to their net asset value.
Fixed Income
Investments and Cash Equivalents.
Normally, the Fund invests substantially all of its assets to meet its investment objectives and consequently may invest significantly in fixed income securities and cash equivalents;
however, for temporary or defensive purposes, the Fund may also invest in other fixed income investments and cash equivalents in order to provide income, liquidity and preserve capital.
Fixed income
investments and cash equivalents held by the Fund may include, without limitation, the types of investments set forth below.
(1)
|
The Fund may invest in U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government securities include securities that are issued or guaranteed by the U.S. Treasury, by various agencies of the U.S. government, or by various instrumentalities that
have been established or sponsored by the U.S. government. U.S. Treasury securities are backed by the “full faith and credit” of the United States. Securities issued or guaranteed by federal agencies and
U.S. government-sponsored instrumentalities may or may not be backed by the full faith and credit of the United States. Some of the U.S. government agencies that issue or guarantee securities include the Export-Import
Bank of the United States, the Farmers Home
|
|
Administration, the Federal Housing Administration, the Maritime Administration, the Small Business Administration and the Tennessee Valley Authority. An instrumentality of the U.S. government is a government agency
organized under federal charter with government supervision. Instrumentalities issuing or guaranteeing securities include, among others, the Federal Home Loan Banks, the Federal Land Banks, the Central Bank for
Cooperatives, Federal Intermediate Credit Banks and Federal National Mortgage Association. In the case of those U.S. government securities not backed by the full faith and credit of the United States, the investor
must look principally to the agency or instrumentality issuing or guaranteeing the security for ultimate repayment, and may not be able to assert a claim against the United States itself in the event that the agency
or instrumentality does not meet its commitment. The U.S. government, its agencies and instrumentalities do not guarantee the market value of their securities; and, consequently, the value of such securities may
fluctuate.
|
(2)
|
The Fund may invest in certificates of deposit issued against funds deposited in a bank or savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are
normally negotiable. If such certificates of deposit are non-negotiable, they will be considered illiquid securities and be subject to the Fund’s 15% restriction on investments in illiquid securities. Pursuant
to the certificate of deposit, the issuer 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 $250,000; therefore, certificates of deposit purchased by the Fund may not be fully insured. The Fund may only invest in certificates of deposit issued by U.S. banks with at
least $1 billion in assets.
|
(3)
|
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.
|
(4)
|
The Fund may invest in repurchase agreements, which involve purchases of debt securities with counterparties that are deemed by the Advisor to present acceptable credit risks. In such an action, at the time the Fund
purchases the security, it simultaneously agrees to resell and redeliver the security to the seller, who also simultaneously agrees to buy back the security 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. The Fund may enter into repurchase agreements only with respect to obligations of the U.S. government or 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 affected Fund is entitled to sell the underlying collateral. If the value of the collateral declines
after the agreement is entered into, however, and 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 portfolio managers monitor 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 portfolio managers do 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.
|
(5)
|
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.
|
(6)
|
The Fund may invest in commercial paper, which are 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 the notes. However, they are redeemable by the Fund at any time. The Fund’s
portfolio managers will consider the financial condition of the corporation (
e.g.,
earning power, cash flow and other liquidity ratios) and will continuously monitor the corporation’s ability to meet all of its financial obligations, because the
Fund’s liquidity
|
|
might be impaired if the corporation were unable to pay principal and interest on demand. The Fund may invest in commercial paper only if it has received the highest rating from at least one nationally recognized
statistical rating organization or, if unrated, judged by First Trust to be of comparable quality.
|
(7)
|
The Fund may invest in shares of money market funds, as consistent with its investment objective and policies. Shares of money market funds are subject to management fees and other
expenses of those funds. Therefore, investments in money market funds will cause the Fund to bear proportionately the costs incurred by the money market funds’ operations. At the same time, the Fund will
continue to pay its own management fees and expenses with respect to all of its assets, including any portion invested in the shares of other investment companies. Although money market funds that operate in
accordance with Rule 2a-7 under the 1940 Act seek to preserve a $1.00 share price (until October 2016, when amended Rule 2a-7 will require share prices of non-government money market funds to be valuated at their
floating net asset value), it is possible for the Fund to lose money by investing in money market funds.
|
Illiquid
Securities.
The Fund may invest in illiquid securities (
i.e.,
securities that are not readily marketable). For purposes of this restriction, illiquid securities include, but are not limited to, certain restricted securities (securities the
disposition of which is restricted under the federal securities laws), securities that may only be resold pursuant to Rule 144A under the 1933 Act
that are deemed to be illiquid; and repurchase agreements with maturities in excess of seven days. However, the Fund will not acquire illiquid securities if, as a result, such securities
would comprise more than 15% of the value of the Fund’s net assets. The Board of Trustees or its delegate has the ultimate authority to determine, to the extent permissible under the federal securities laws,
which securities are liquid or illiquid for purposes of this 15% limitation. The Board of Trustees has delegated to First Trust the day-to-day determination of the illiquidity of any equity or fixed-income security,
although it has retained oversight for such determinations. With respect to Rule 144A securities, First Trust considers factors such as (i) the nature of the market for a security (including the
institutional private resale market, the frequency of trades and quotes for the security, the number of dealers willing to purchase or sell the security, the amount of time normally needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer); (ii) the terms of certain securities or other instruments allowing for the disposition to a third party or the issuer thereof (
e.g.,
certain repurchase obligations and demand instruments); and (iii) other permissible relevant factors.
Restricted
securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the 1933 Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than that which prevailed when it decided to sell. Illiquid securities will be
priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid securities, the Fund should be in a
position where more than 15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, the Fund will take such steps as is deemed advisable,
if any, to protect liquidity.
Investment
Companies.
In addition to its investments in Closed-End Funds, the Fund may also invest in securities of other investment companies, including exchange-traded funds (
“ETFs”
). An ETF is a fund that holds a portfolio of securities and trades on a securities exchange and its shares may, at times, trade a premium or discount to its net asset value.
As a
shareholder in pooled investment vehicle, the Fund will bear its ratable share of that vehicle’s expenses, and would remain subject to payment of the Fund’s management fees with respect to assets so
invested. Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other pooled asset vehicles. In addition, the Fund will also incur brokerage costs when purchasing and
selling shares of ETFs.
Other pooled
investment vehicles may be leveraged, and the net asset value and market value of their securities will therefore be more volatile and the yield to shareholders will tend to fluctuate more than the yield of
unleveraged pooled investment vehicles.
Municipal
Securities.
Municipal Securities are debt securities that generally pay interest that is exempt from regular federal income taxes. Municipal Securities are generally issued by or on behalf of states,
territories or possessions of the United States and the District of Columbia and their political subdivisions, agencies, authorities and other instrumentalities. The types of Municipal Securities in which the
Underlying Funds may invest include municipal lease obligations (and certificates of participation in such obligations), municipal general obligation bonds, municipal revenue bonds, municipal notes, municipal cash
equivalents, private activity bonds (including without limitation industrial development bonds), and pre-refunded and escrowed to maturity
bonds. In addition, Municipal Securities
include securities issued by tender option bond (
“TOB”
) trusts and custodial receipt trusts, each of which are investment vehicles the underlying assets of which are municipal bonds. Additional information on certain of
the types of Municipal Securities in which Underlying Funds may invest is listed below.
Municipal Lease
Obligations.
The Underlying Funds may purchase municipal lease obligations, primarily through certificates of participation. Certificates of participation in municipal leases are undivided interests in
a lease, installment purchase contract or conditional sale contract entered into by a state or local governmental unit to acquire equipment or facilities.
Private Activity
Bonds.
A private activity bond is a type of revenue bond that is issued by or on behalf of a state or local government for the purpose of financing the project of a private user. Revenue bonds are
usually payable only out of a specific revenue source rather than from general revenues. Revenue bonds ordinarily are not backed by the faith, credit or general taxing power of the issuing governmental entity. The
principal and interest on revenue bonds for private facilities are typically paid out of rents or other specified payments made to the issuing governmental entity by a private company which uses or operates the
facilities. Industrial revenue bonds are an example of these types of obligations. Industrial revenue bonds are issued by governmental entities to provide financing aid to community facilities such as hospitals,
hotels, business or residential complexes, convention halls and sport complexes.
Pre-Refunded and
Escrowed to Maturity Bonds.
There are two types of refunded bonds: pre-refunded bonds and escrowed-to-maturity (
“ETM”
) bonds. Refunded bonds may have originally been issued as general obligation or revenue bonds, but become refunded when they are secured by an escrow fund, usually consisting entirely of
direct U.S. government obligations and/or U.S. government agency obligations sufficient for paying the bondholders. The escrow fund for a pre-refunded municipal bond may be structured so that the refunded bonds are to
be called at the first possible date or a subsequent call date established in the original bond debenture. The call price usually includes a premium from 1% to 3% above par. This type of structure usually is used for
those refundings that either reduce the issuer’s interest payment expenses or change the debt maturity schedule. In escrow funds for ETM refunded municipal bonds, the maturity schedules of the securities in the
escrow funds match the regular debt-service requirements on the bonds as originally stated in the bond indentures.
Tender Option
Bonds.
In a TOB transaction, one or more highly-rated municipal bonds are deposited into a special purpose trust that issues two types of securities: floating rate securities (or
“floaters”
) and inverse floating rate securities. The Underlying Funds may acquire the inverse floating rate securities or “inverse floaters” from a TOB trust. The interest rates on
inverse floaters issued by a TOB trust vary inversely to the interest rates paid on the floaters. Holders of the floaters have the right to tender their securities to the TOB trust at par plus accrued interest. As a
result, holders of the inverse floaters are exposed to all of the gains or losses on the underlying municipal bonds, despite the fact that their net cash investment is significantly less than the value of the bonds.
This multiplies the positive or negative impact of the underlying bonds’ price movements on the value of the inverse floaters, thereby creating effective leverage. Because changes in short-term interest rates
inversely affect the rate of interest received on an inverse floater, and because inverse floaters essentially represent a leveraged investment, the value of an inverse floater is generally more volatile than that of
a conventional fixed-rate bond having similar credit quality, redemption provisions and maturity.
Custodial
Receipt Trusts.
Custodial receipts are financial instruments similar to TOBs that are underwritten by securities dealers or banks and evidence ownership of future interest payments, principal payments or
both on certain municipal securities. The underwriter of these certificates or receipts typically purchases municipal securities and deposits them in an irrevocable trust or custodial account with a custodian bank,
which then issues receipts or certificates that evidence ownership of the periodic unmatured coupon payments and the final principal payment on the obligation. The principal and interest payments on the municipal
securities underlying custodial receipts may be allocated in a number of ways. For example, payments may be allocated such that certain custodial receipts may have variable or floating interest rates and others may be
stripped securities which pay only the principal or interest due on the underlying municipal securities. The Underlying Funds may invest in custodial receipts which have inverse floating interest rates.
Refunded
Bonds.
The Underlying Funds may invest in refunded bonds. Refunded bonds may have originally been issued as general obligation or revenue bonds, but become refunded when they are secured by an
escrow fund, usually consisting entirely of direct U.S. government obligations and/or U.S. government agency obligations sufficient for paying the bondholders. There are two types of refunded bonds: pre-refunded bonds
and escrowed-to-maturity (“
ETM
”) bonds. The escrow fund for a pre-refunded municipal bond may be structured so that the refunded bonds are to be called at the first possible date or a subsequent call date
established in the original bond debenture. The call price usually includes a premium from 1% to 3% above par. This type of structure usually is used for those refundings that either reduce the issuer’s interest
payment expenses or change the debt maturity schedule. In escrow funds for ETM refunded municipal bonds, the maturity schedules of the securities in the escrow funds match the regular debt-service requirements on the
bonds as originally stated in the bond indentures.
Derivative
Municipal Securities.
The Underlying Funds may also acquire derivative municipal securities, which are custodial receipts of certificates underwritten by securities dealers or banks that evidence ownership of
future interest payments, principal payments or both on certain municipal securities. The underwriter of these certificates or receipts typically purchases municipal securities and deposits them in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts or certificates that evidence ownership of the periodic unmatured coupon payments and the final principal payment on the
obligation.
The principal
and interest payments on the municipal securities underlying custodial receipts may be allocated in a number of ways. For example, payments may be allocated such that certain custodial receipts may have variable or
floating interest rates and others may be stripped securities which pay only the principal or interest due on the underlying municipal securities. The Fund may invest in custodial receipts which have inverse floating
interest rates and other inverse floating rate municipal obligations, as described below.
Inverse Floating
Rate Municipal Securities.
The Underlying Funds may invest in inverse floating rate municipal securities or “inverse floaters,” whose rates vary inversely to interest rates on a specified short-term
municipal bond index or on another instrument. Such securities involve special risks as compared to conventional fixed-rate bonds. Should short-term interest rates rise, the Underlying Funds’ investment in
inverse floaters likely would adversely affect the Underlying Funds’ earnings and distributions to shareholders. Also, because changes in the interest rate on the other index or other instrument inversely affect
the rate of interest received on an inverse floater, and because inverse floaters essentially represent a leveraged investment in a long-term bond, the value of an inverse floater is generally more volatile than that
of a conventional fixed-rate bond having similar credit quality, redemption provisions and maturity. Although volatile in value, inverse floaters typically offer the potential for yields substantially exceeding the
yields available on conventional fixed-rate bonds with comparable credit quality, coupon, call provisions and maturity. The markets for inverse floating rate securities may be less developed and have less liquidity
than the markets for conventional securities.
Portfolio Turnover
The Fund buys
and sells portfolio securities in the normal course of their investment activities. The proportion of the Fund's investment portfolio that is bought and sold during a year is known as the Fund's portfolio turnover
rate. A turnover rate of 100% would occur, for example, if the Fund bought and sold securities valued at 100% of its net assets within one year. A high portfolio turnover rate could result in the payment by the Fund
of increased brokerage costs, expenses and taxes.
Lending of Portfolio Securities
In order to
generate additional income, as a non-principal investment strategy, First Trust is authorized to select certain Fund, with notice to the Board of Trustees, to lend portfolio securities representing up to 33⅓% of
the value of their total assets to broker-dealers, banks or other institutional borrowers of securities. As with other extensions of credit, there may be risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially. However, the Fund will only enter into domestic loan arrangements with broker-dealers, banks or other institutions which First Trust has
determined are creditworthy under guidelines approved by the Board of Trustees. The lending Fund will pay a portion of the income earned on the lending transaction to the placing broker and may pay administrative and
custodial fees in connection with these loans. First Trust may select any Fund to participate in the securities lending program, at its discretion with notice to the Board of Trustees.
In these loan
arrangements, the Fund will receive collateral in the form of cash, U.S. government securities or other high-grade debt obligations equal to at least 102% (for domestic securities) or 105% (for international
securities) of the market value of the securities loaned as determined at the time of loan origination. This collateral must be valued daily by First Trust or the Fund’s lending agent and, if the market value of
the loaned securities increases, the borrower must furnish additional collateral to the lending Fund. During the time portfolio securities are on loan, the borrower pays the lending Fund any dividends or interest paid
on the securities. Loans are subject to termination at any time by the lending Fund or the borrower. While the Fund does not have the right to vote securities on loan, it would terminate the loan and regain the right
to vote if that were considered important with respect to the investment. When the Fund lends portfolio securities to a borrower, payments in lieu of dividends made by the borrower to the Fund will not constitute
“qualified dividends” taxable at the same rate as long-term capital gains, even if the actual dividends would have constituted qualified dividends had the Fund held the securities.
Investment Risks
The following
risk disclosure supplements the discussion of the Fund's investment risks that appears in the Prospectus.
Overview
An investment
in the Fund should be made with an understanding of the risks that an investment in Fund's shares entails, including the risk that the financial condition of the issuers of the equity securities held by the Fund or
the general condition of the securities market may worsen and the value of the securities and therefore the value of the Fund may decline. The Fund may not be an appropriate investment for those who are unable or
unwilling to assume the risks involved generally with such an investment. The past market and earnings performance of any of the securities included in the Fund is not predictive of their future performance.
Closed-End Fund Risk
The shares of
many Closed-End Funds, after their initial public offering, frequently trade at a price per share that is less than the net asset value per share, the difference representing the “market discount” of such
shares. This market discount may be due in part to the investment objective of long-term appreciation, which is sought by many Closed-End Funds, as well as to the fact that the shares of closed-end funds are not
redeemable by the holder upon demand to the issuer at the next determined net asset value, but rather, are subject to supply and demand in the secondary market. A relative lack of secondary market purchasers of
Closed-End Fund shares also may contribute to such shares trading at a discount to their net asset value. The Fund may invest in shares of Closed-End Funds that are trading at a discount to net asset value or at a
premium to net asset value. There can be no assurance that the market discount on shares of any Closed-End Fund purchased by the Fund will ever decrease. In fact, it is possible that this market discount may increase
and the Fund may suffer realized or unrealized capital losses due to further decline in the market price of the securities of such Closed-End Funds, thereby adversely affecting the net asset value of the Fund’s
shares. Similarly, there can be no assurance that any shares of a Closed-End Fund purchased by the Fund at a premium will continue to trade at a premium or that the premium will not decrease subsequent to a purchase
of such shares by the Fund.
Closed-End
Funds may issue senior securities (including preferred stock and debt obligations) for the purpose of leveraging the Closed-End Fund’s common shares in an attempt to enhance the current return to such closed-end
fund's common shareholders. The Fund’s investment in the common shares of Closed-End Funds that are financially leveraged may create an opportunity for greater total return on its investment, but at the same
time may be expected to exhibit more volatility in market price and net asset value than an investment in shares of investment companies without a leveraged capital structure.
Escrowed-to-Maturity Municipal Bond
Risk
Investment in
ETM municipal bonds held by the Underlying Funds may subject the Underlying Funds to interest rate risk, market risk and credit risk. In addition, while a secondary market exists for ETM municipal bonds, if the
Underlying Funds sell ETM municipal bonds prior to maturity, the price received may be more or less than the original cost, depending on market conditions at the time of sale.
Liquidity Risk
Whether or not
the equity securities in the Underlying Funds held by the Fund are listed on a securities exchange, the principal trading market for certain of the equity securities in the Underlying Funds may be in the OTC market.
As a result, the existence of a liquid trading market for the equity securities may depend on whether dealers will make a market in the equity securities. There can be no assurance that a market will be made for any
of the equity securities, that any market for the equity securities will be maintained or that there will be sufficient liquidity of the equity securities in any markets made. The price at which the equity securities
are held in the Underlying Funds held by the Fund will be adversely affected if trading markets for the equity securities are limited or absent.
Litigation Risk
At any time
litigation may be instituted on a variety of grounds with respect to the common stocks held by the Underlying Funds in which the Fund invests. The Fund is unable to predict whether litigation that has been or will be
instituted might have a material adverse effect on the Fund.
Pre-refunded Municipal Bonds Risk
Investment in
pre-refunded municipal bonds held by the Underlying Funds may subject the Underlying Funds to interest rate risk, market risk and credit risk. In addition, while a secondary market exists for pre-refunded municipal
bonds, if the Underlying Funds sell pre-refunded municipal bonds prior to maturity, the price received may be more or less than the original cost, depending on market conditions at the time of sale.
Management of the Fund
Trustees and Officers
The general
supervision of the duties performed for the Fund under the investment management agreement is the responsibility of the Board of Trustees. There are five Trustees of the Trust, one of whom is an “interested
person” (as the term is defined in the 1940 Act) and four of whom are Trustees who are not officers or employees of First Trust or any of its affiliates (
“Independent Trustees”
). The Trustees set broad policies for the Fund, choose the Trust’s officers and hire the Trust’s investment advisor. The officers of the
Trust manage its day-to-day operations and are responsible to the Trust’s Board of Trustees. The following is a list of the Trustees and executive officers of the Trust and a statement of their present positions
and principal occupations during the past five years, the number of portfolios each Trustee oversees and the other directorships they have held during the past five years, if applicable. Each Trustee has been elected
for an indefinite term. The officers of the Trust serve indefinite terms. Each Trustee, except for James A. Bowen, is an Independent Trustee. Mr. Bowen is deemed an “interested person” (as that term is
defined in the 1940 Act) (
“Interested Trustee”
) of the Trust due to his position as Chief Executive Officer of First Trust, investment advisor to the Fund.
Name, Address
and Date of Birth
|
Position
and Offices
with Trust
|
Term of
Office and
Year First
Elected or
Appointed
|
Principal Occupations
During Past 5 Years
|
Number of
Portfolios
in the First
Trust Fund
Complex
Overseen
by Trustee
|
Other
Trusteeships or
Directorships
Held by
Trustee
During the
Past 5 Years
|
TRUSTEE WHO IS AN INTERESTED PERSON OF THE TRUST
|
James A. Bowen
(1)
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 09/55
|
Chairman of the Board and Trustee
|
• Indefinite term
• Since inception
|
Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.;
Chairman of the Board of Directors, BondWave LLC (Software Development Company/
Investment Advisor) and Stonebridge Advisors LLC (Investment Advisor)
|
137 Portfolios
|
None
|
INDEPENDENT TRUSTEES
|
Richard E. Erickson
c/o First Trust Advisors L.P.
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 04/51
|
Trustee
|
• Indefinite term
• Since inception
|
Physician; President, Wheaton Orthopedics; Limited Partner, Gundersen Real Estate Limited
Partnership; Member, Sportsmed LLC (April 2007 to November 2015)
|
137 Portfolios
|
None
|
Thomas R. Kadlec
c/o First Trust Advisors L.P.
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 11/57
|
Trustee
|
• Indefinite term
• Since inception
|
President, ADM Investor Services, Inc. (Futures Commission Merchant)
|
137 Portfolios
|
Director of ADM Investor Services, Inc., ADM Investor Services International, and Futures Industry Association
|
Robert F. Keith
c/o First Trust Advisors L.P.
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
|
Trustee
|
• Indefinite term
• Since inception
|
President, Hibs Enterprises (Financial and Management Consulting)
|
137 Portfolios
|
Director of Trust Company of Illinois
|
Name, Address
and Date of Birth
|
Position
and Offices
with Trust
|
Term of
Office and
Year First
Elected or
Appointed
|
Principal Occupations
During Past 5 Years
|
Number of
Portfolios
in the First
Trust Fund
Complex
Overseen
by Trustee
|
Other
Trusteeships or
Directorships
Held by
Trustee
During the
Past 5 Years
|
INDEPENDENT TRUSTEES
|
Niel B. Nielson
c/o First Trust Advisors L.P.
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
|
Trustee
|
• Indefinite term
• Since inception
|
Managing Director and Chief Operating Officer (January 2015 to present), Pelita Harapan
Educational Foundation (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Servant Interactive LLC (Educational Products and Services); President and Chief
Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services); President (June 2002 to June 2012), Covenant College
|
137 Portfolios
|
Director of Covenant Transport Inc.
(May 2003 to May 2014)
|
OFFICERS OF THE TRUST
|
James M. Dykas
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 01/66
|
President and Chief Executive Officer
|
• Indefinite term
• Since January 2016
|
Managing Director and Chief Financial Officer (January 2016 to present), Controller
(January 2011 to January 2016), Senior Vice President (April 2007 to January 2016), First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
Donald P. Swade
120 E. Liberty Drive
Suite 400
Wheaton, IL 60187
D.O.B.: 08/72
|
Treasurer, Chief Financial Officer and Chief Accounting Officer
|
• Indefinite term
• Since January 2016
|
Vice President (April 2012 to Present), First Trust Advisors L.P. and First Trust
Portfolios L.P., Vice President (September 2006 to April 2012), Guggenheim Funds Investment Advisors, LLC/Claymore Securities, Inc.
|
N/A
|
N/A
|
W. Scott Jardine
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 05/60
|
Secretary and Chief Legal Officer
|
• Indefinite term
• Since inception
|
General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and
General Counsel, BondWave LLC (Software Development Company/
Investment Advisor) and Secretary, Stonebridge Advisors LLC (Investment Advisor)
|
N/A
|
N/A
|
Daniel J. Lindquist
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 02/70
|
Vice President
|
• Indefinite term
• Since inception
|
Managing Director (July 2012 to present), Senior Vice President (September 2005 to July
2012), First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
Kristi A. Maher
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 12/66
|
Chief Compliance Officer and Assistant Secretary
|
• Indefinite term
• Chief Compliance Officer Since January 2011
• Assistant Secretary Since inception
|
Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
Roger F. Testin
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 06/66
|
Vice President
|
• Indefinite term
• Since inception
|
Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
Stan Ueland
120 East Liberty Drive,
Suite 400
Wheaton, IL 60187
D.O.B.: 11/70
|
Vice President
|
• Indefinite term
• Since inception
|
Senior Vice President (September 2012 to present), Vice President (August 2005 to
September 2012) First Trust Advisors L.P. and First Trust Portfolios L.P.
|
N/A
|
N/A
|
(1)
|
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust, investment advisor of the Fund.
|
Unitary Board Leadership
Structure
Each Trustee
serves as a trustee of all open-end and closed-end funds in the First Trust Fund Complex (as defined below), which is known as a “unitary” board leadership structure. Each Trustee currently serves as a
trustee of First Trust Series Fund and First Trust Variable Insurance Trust, open-end funds with seven portfolios advised by First Trust; First Trust Senior Floating Rate Income Fund II, Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, First Trust Energy Income and Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income
Fund, First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging Opportunity Fund, First Trust Specialty Finance and Financial Opportunities Fund, First Trust Dividend and Income Fund, First Trust High
Income Long/Short Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income Fund, First Trust Intermediate Duration Preferred & Income Fund, First Trust Dynamic Europe Equity Income Fund and
First Trust New Opportunities MLP & Energy Fund, closed-end funds advised by First Trust; and First Trust Exchange-Traded Fund, First Trust Exchange-Traded Fund II, First Trust Exchange-Traded Fund III, First
Trust Exchange-Traded Fund IV, First Trust Exchange-Traded Fund V, First Trust Exchange-Traded Fund VI, First Trust Exchange-Traded Fund VII, First Trust Exchange-Traded Fund VIII, First Trust Exchange-Traded
AlphaDEX
®
Fund and First Trust Exchange-Traded AlphaDEX
®
Fund II, exchange-traded funds with 114 portfolios advised by First Trust (each a
“First Trust Fund”
and collectively, the
“First Trust Fund Complex”
). None of the Trustees who are not “interested persons” of the Trust, nor any of their immediate family members, has ever been a
director, officer or employee of, or consultant to, First Trust, First Trust Portfolios L.P. or their affiliates.
The management
of the Fund, including general supervision of the duties performed for the Fund under the investment management agreement between the Trust, on behalf of the Fund, and the Advisor, is the responsibility of the Board
of Trustees. The Trustees of the Trust set broad policies for the Fund, choose the Trust’s officers and hire the Fund’s investment advisor and other service providers. The officers of the Trust manage the
day to-day operations and are responsible to the Trust’s Board. The Trust’s Board is composed of four Independent Trustees and one Interested Trustee. The Interested Trustee, James A. Bowen, serves as the
Chairman of the Board for each fund in the First Trust Fund Complex.
The same five
persons serve as Trustees on the Trust’s Board and on the Boards of all other First Trust Funds. The unitary board structure was adopted for the First Trust Funds because of the efficiencies it achieves with
respect to the governance and oversight of the First Trust Funds. Each First Trust Fund is subject to the rules and regulations of the 1940 Act (and other applicable securities laws), which means that many of the
First Trust Funds face similar issues with respect to certain of their fundamental activities, including risk management, portfolio liquidity, portfolio valuation and financial reporting. Because of the similar and
often overlapping issues facing the First Trust Funds, including among the First Trust exchange-traded funds, the Board of the First Trust Funds believes that maintaining a unitary board structure promotes efficiency
and consistency in the governance and oversight of all First Trust Funds and reduces the costs, administrative burdens and possible conflicts that may result from having multiple boards. In adopting a unitary board
structure, the Trustees seek to provide effective governance through establishing a board the overall composition of which will, as a body, possess the appropriate skills, diversity, independence and experience to
oversee the Fund’s business.
Annually, the
Board reviews its governance structure and the committee structures, their performance and functions, and it reviews any processes that would enhance Board governance over the Fund’s business. The Board has
determined that its leadership structure, including the unitary board and committee structure, is appropriate based on the characteristics of the funds it serves and the characteristics of the First Trust Fund Complex
as a whole.
In order to
streamline communication between the Advisor and the Independent Trustees and create certain efficiencies, the Board has a Lead Independent Trustee who is responsible for: (i) coordinating activities of the
Independent Trustees; (ii) working with the Advisor, Fund counsel and the independent legal counsel to the Independent Trustees to determine the agenda for Board meetings; (iii) serving as the principal
contact for and facilitating communication between the Independent Trustees and the Fund’s service providers, particularly the Advisor; and (iv) any other duties that the Independent Trustees may delegate
to the Lead Independent Trustee. The Lead Independent Trustee is selected by the Independent Trustees and serves a three year term or until his or her successor is selected.
The Board has
established four standing committees (as described below) and has delegated certain of its responsibilities to those committees. The Board and its committees meet frequently throughout the year to oversee the
Fund’s activities, review contractual arrangements with and performance of service providers, oversee compliance with regulatory requirements, and review Fund performance. The Independent Trustees are
represented by independent legal counsel at all Board and committee meetings (other than meetings of the Executive Committee). Generally, the Board acts by majority vote of all the Trustees, including a majority vote
of the Independent Trustees if required by applicable law.
The three
Committee Chairmen and the Lead Independent Trustee rotate every three years in serving as Chairman of the Audit Committee, the Nominating and Governance Committee or the Valuation Committee or as Lead Independent
Trustee. The Lead Independent Trustee and immediate past Lead Independent Trustee also serve on the Executive Committee with the Interested Trustee.
The four
standing committees of the First Trust Fund Complex are: the Executive Committee (and Pricing and Dividend Committee), the Nominating and Governance Committee, the Valuation Committee and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to exercise all powers of and to act in the place of the Board of Trustees to the extent permitted by the Trust’s Declaration of Trust and
By Laws. Such Committee is also responsible for the declaration and setting of dividends. Mr. Kadlec, Mr. Bowen and Mr. Keith are members of the Executive Committee.
The Nominating
and Governance Committee is responsible for appointing and nominating non-interested persons to the Trust’s Board of Trustees. Messrs. Erickson, Kadlec, Keith and Nielson are members of the Nominating and
Governance Committee. If there is no vacancy on the Board of Trustees, the Board will not actively seek recommendations from other parties, including shareholders. The Board of Trustees adopted a mandatory retirement
age of 75 for Trustees, beyond which age Trustees are ineligible to serve. The Committee will not consider new trustee candidates who are 72 years of age or older. When a vacancy on the Board of Trustees occurs and
nominations are sought to fill such vacancy, the Nominating and Governance Committee may 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 of Trustees, shareholders of the Fund should mail such recommendation to W. Scott Jardine, Secretary, at the Trust’s address,
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187. Such recommendation shall include the following information: (i) evidence of Fund ownership of the person or entity recommending the candidate
(if a Fund shareholder); (ii) a full description of the proposed candidate’s background, including education, experience, current employment and date of birth; (iii) names and addresses of at least
three professional references for the candidate; (iv) information as to whether the candidate is an “interested person” in relation to the Fund, as such term is defined in the 1940 Act, and such other
information that may be considered to impair the candidate’s independence; and (v) any other information that may be helpful to the Committee in evaluating the candidate. If a recommendation is received
with satisfactorily completed information regarding a candidate during a time when a vacancy exists on the Board or during such other time as the Nominating and Governance Committee is accepting recommendations, the
recommendation will be forwarded to the Chairman of the Nominating and Governance Committee and to counsel to the Independent Trustees. Recommendations received at any other time will be kept on file until such time
as the Nominating and Governance Committee is accepting recommendations, at which point they may be considered for nomination.
The Valuation
Committee is responsible for the oversight of the valuation procedures of the Fund (the
“Valuation Procedures”
), for determining the fair value of the Fund’s securities or other assets under certain circumstances as described in the Valuation Procedures
and for evaluating the performance of any pricing service for the Fund. Messrs. Erickson, Kadlec, Keith and Nielson are members of the Valuation Committee.
The Audit
Committee is responsible for overseeing the Fund’s accounting and financial reporting process, system of internal controls and audit process and for evaluating and appointing independent auditors (subject also
to Board approval). Messrs. Erickson, Kadlec, Keith and Nielson serve on the Audit Committee.
Executive Officers
The executive
officers of the Trust hold the same positions with each fund in the First Trust Fund Complex (representing 137 portfolios) as they hold with the Trust.
Risk Oversight
As part of the
general oversight of the Fund, the Board is involved in the risk oversight of the Fund. The Board has adopted and periodically reviews policies and procedures designed to address the Fund’s risks. Oversight of
investment and compliance risk is performed primarily at the Board level in conjunction with the Advisor’s investment oversight group and the Trust’s Chief Compliance Officer (“CCO”). Oversight
of other risks also occurs at the committee level. The Advisor’s investment oversight group reports to the Board at quarterly meetings regarding, among other things, Fund performance and the various drivers of
such performance. The Board reviews reports on the Fund’s and the service providers’ compliance policies and procedures at each quarterly Board meeting and receives an annual report from the CCO regarding
the operations of the Fund’s and the service providers’ compliance program. In addition, the Independent Trustees meet privately each quarter with the CCO. The Audit Committee reviews with the Advisor the
Fund’s major financial risk exposures and the steps the Advisor has taken to monitor and control these exposures, including the Fund’s risk assessment and risk management policies and guidelines. The
Audit Committee also, as appropriate, reviews
in a general manner the processes other Board committees have in place with respect to risk assessment and risk management. The Nominating and Governance Committee monitors all matters related to the corporate
governance of the Trust. The Valuation Committee monitors valuation risk and compliance with the Fund’s Valuation Procedures and oversees the pricing services and actions by the Advisor’s Pricing Committee
with respect to the valuation of portfolio securities.
Not all risks
that may affect the Fund can be identified nor can controls be developed to eliminate or mitigate their occurrence or effects. It may not be practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their effectiveness, and some risks are simply beyond the reasonable control of the Fund or the Advisor or other service providers. For
instance, as the use of Internet technology has become more prevalent, the Fund and its service providers have become more susceptible to potential operational risks through breaches in cyber security (generally,
intentional and unintentional events that may cause the Fund or a service provider to lose proprietary information, suffer data corruption or lose operational capacity). There can be no guarantee that any risk
management systems established by the Fund, its service providers, or issuers of the securities in which the Fund invests to reduce cyber security risks will succeed, and the Fund cannot control such systems put in
place by service providers, issuers or other third parties whose operations may affect the Fund and/or its shareholders. Moreover, it is necessary to bear certain risks (such as investment related risks) to achieve
the Fund’s goals. As a result of the foregoing and other factors, the Fund’s ability to manage risk is subject to substantial limitations.
Board Diversification and Trustee
Qualifications
As described
above, the Nominating and Governance Committee of the Board oversees matters related to the nomination of Trustees. The Nominating and Governance Committee seeks to establish an effective Board with an appropriate
range of skills and diversity, including, as appropriate, differences in background, professional experience, education, vocation, and other individual characteristics and traits in the aggregate. Each Trustee must
meet certain basic requirements, including relevant skills and experience, time availability and, if qualifying as an Independent Trustee, independence from the Advisor, underwriters or other service providers,
including any affiliates of these entities.
Listed below for
each current Trustee are the experiences, qualifications and attributes that led to the conclusion, as of the date of this SAI, that each current Trustee should serve as a Trustee in light of the Trust’s
business and structure.
Richard E.
Erickson, M.D., is an orthopedic surgeon and President of Wheaton Orthopedics. He also has been a co-owner and director of a fitness center and a limited partner of two real estate companies. Dr. Erickson has served
as a Trustee of each First Trust Fund since its inception. Dr. Erickson has also served as the Lead Independent Trustee and on the Executive Committee (2008
–
2009), Chairman of the Nominating and Governance Committee (2003
–
2007), Chairman of the Audit Committee (2012
–
2013) and Chairman of the Valuation Committee (June 2006
–
2007 and 2010
–
2011) of the First Trust Funds. He currently serves as Chairman of the Nominating and Governance Committee (since January 1, 2014) of the First Trust Funds.
Thomas R.
Kadlec is President of ADM Investor Services Inc. (
“ADMIS”
), a futures commission merchant and wholly-owned subsidiary of the Archer Daniels Midland Company (
“ADM”
). Mr. Kadlec has been employed by ADMIS and its affiliates since 1990 in various accounting, financial, operations and risk management capacities. Mr. Kadlec serves
on the boards of several international affiliates of ADMIS and is a member of ADM’s Integrated Risk Committee, which is tasked with the duty of implementing and communicating enterprise-wide risk management. In
2014, Mr. Kadlec was elected to the board of the Futures Industry Association. Mr. Kadlec has served as a Trustee of each First Trust Fund since its inception. Mr. Kadlec also served on the Executive Committee from
the organization of the first First Trust closed-end fund in 2003 until he was elected as the first Lead Independent Trustee in December 2005, serving as such through 2007. He also served as Chairman of the Valuation
Committee (2008
–
2009), Chairman of the Audit Committee (2010
–
2011) and Chairman of the Nominating and Governance Committee (2012
–
2013). He currently serves as Lead Independent Trustee and on the Executive Committee (since January 1, 2014) of the First Trust Funds.
Robert F.
Keith is President of Hibs Enterprises, a financial and management consulting firm. Mr. Keith has been with Hibs Enterprises since 2003. Prior thereto, Mr. Keith spent 18 years with ServiceMaster and Aramark,
including three years as President and COO of ServiceMaster Consumer Services, where he led the initial expansion of certain products overseas; five years as President and COO of ServiceMaster Management Services; and
two years as President of Aramark ServiceMaster Management Services. Mr. Keith is a certified public accountant and also has held the positions of Treasurer and Chief Financial Officer of ServiceMaster, at which time
he oversaw the financial aspects of ServiceMaster’s expansion of its Management Services division into Europe, the Middle East and Asia. Mr. Keith has served as a Trustee of the First Trust Funds since June
2006.
Mr. Keith has also served as the Chairman of
the Audit Committee (2008
–
2009) and Chairman of the Nominating and Governance Committee (2010
–
2011) of the First Trust Funds. He served as Lead Independent Trustee and on the Executive Committee (2012
–
2013) and currently serves as Chairman of the Valuation Committee (since January 1, 2014) and on the Executive Committee (since January 31, 2014) of the First Trust Funds.
Niel B.
Nielson, Ph.D., has been the Managing Director and Chief Operating Officer of Pelita Harapan Educational Foundation, a global provider of educational products and services since January 2015. Mr. Nielson formerly
served as the President and Chief Executive Officer of Dew Learning LLC from June 2012 through September 2014. Mr. Nielson formerly served as President of Covenant College (2002
–
2012), and as a partner and trader (of options and futures contracts for hedging options) for Ritchie Capital Markets Group (1996
–
1997), where he held an administrative management position at this proprietary derivatives trading company. He also held prior positions in new business development for ServiceMaster
Management Services Company and in personnel and human resources for NationsBank of North Carolina, N.A. and Chicago Research and Trading Group, Ltd. (
“CRT”
). His international experience includes serving as a director of CRT Europe, Inc. for two years, directing out of London all aspects of business conducted by the
U.K. and European subsidiary of CRT. Prior to that, Mr. Nielson was a trader and manager at CRT in Chicago. Mr. Nielson has served as a Trustee of each First Trust Fund since its inception and of the First Trust Funds
since 1999. Mr. Nielson has also served as the Chairman of the Audit Committee (2003
–
2006), Chairman of the Valuation Committee (2007
–
2008), Chairman of the Nominating and Governance Committee (2008
–
2009) and Lead Independent Trustee and a member of the Executive Committee (2010
–
2011). He currently serves as Chairman of the Audit Committee (since January 1, 2014) of the First Trust Funds.
James A. Bowen
is Chief Executive Officer of First Trust Advisors L.P. and First Trust Portfolios L.P. Mr. Bowen is involved in the day-to-day management of the First Trust Funds and serves on the Executive Committee. He has over 26
years of experience in the investment company business in sales, sales management and executive management. Mr. Bowen has served as a Trustee of each First Trust Fund since its inception and of the First Trust Funds
since 1999.
Effective
January 1, 2016, the fixed annual retainer paid to the Independent Trustees is $230,000 per year and an annual per fund fee is $2,500 for each closed-end fund and actively managed fund and $250 for each index fund.
The fixed annual retainer is allocated equally among each fund in the First Trust Fund Complex rather than being allocated pro rata based on each fund’s net assets. Additionally, the Lead Independent Trustee is
paid $30,000 annually, the Chairman of the Audit Committee or Valuation Committee are each paid $20,000 annually and the Chairman of the Nominating and Governance Committee is paid $10,000 annually to serve in such
capacities with compensation allocated pro rata among each fund in the First Trust Fund Complex based on its net assets.
The following
table sets forth the estimated compensation (including reimbursement for travel and out-of-pocket expenses) to be paid by the Funds for one fiscal year and the actual compensation paid by the First Trust Fund Complex
to each of the Independent Trustees for the calendar year ended December 31, 2015, respectively. The Trust has no retirement or pension plans. The officers and Trustee who are “interested persons” as
designated above serve without any compensation from the Trust. The Trust has no employees. Its officers are compensated by First Trust.
Name of Trustee
|
Estimated Compensation from
the Fund
(1)
|
Total Compensation from
the First Trust Fund
Complex
(2)
|
Richard E. Erickson
|
$4,318
|
$352,350
|
Thomas R. Kadlec
|
$4,361
|
$361,500
|
Robert F. Keith
|
$4,340
|
$357,350
|
Niel B. Nielson
|
$4,340
|
$356,500
|
(1)
|
The estimated compensation to be paid by the Fund to the Independent Trustees for one fiscal year for services to the Fund.
|
(2)
|
The total compensation paid to the Independent Trustees for the calendar year ended December 31, 2015 for services to the 120 portfolios, which consists of 7 open-end mutual funds, 16 closed-end funds and 97
exchange-traded funds.
|
The following
table sets forth the dollar range of equity securities beneficially owned by the Trustees in the Fund and in other funds overseen by the Trustees in the First Trust Fund Complex as of December 31, 2015:
Trustee
|
Dollar Range of Equity
Securities in the Fund
(Number of Shares Held)
|
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Trustee
in the First Trust Fund Complex
|
Interested Trustee
|
|
|
James A. Bowen
|
None
|
Over $100,000
|
Independent Trustees
|
|
|
Richard E. Erickson
|
None
|
Over $100,000
|
Thomas R. Kadlec
|
None
|
Over $100,000
|
Robert F. Keith
|
None
|
Over $100,000
|
Niel B. Nielson
|
None
|
Over $100,000
|
As of December
31, 2015, the Independent Trustees of the Trust and their immediate family members did not own beneficially or of record any class of securities of an investment advisor or principal underwriter of the Fund or any
person directly or indirectly controlling, controlled by or under common control with an investment advisor or principal underwriter of the Fund.
As of September
26, 2016, the officers and Trustees, in the aggregate, owned less than 1% of the shares of the Fund.
As of September
26, 2016, First Trust Portfolios was the sole shareholder of the Fund. As a sole shareholder, First Trust Portfolios has the ability to control the outcome of any item presented to shareholders for approval.
As
of September 26, 2016, the Advisor did not own any shares of the Fund.
Investment
Advisor.
First Trust, 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, is the investment advisor to the Fund. First Trust is a limited partnership with one limited partner, Grace
Partners of DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of DuPage L.P. is a limited partnership with one general partner, The Charger Corporation, and a number of limited partners.
The Charger Corporation is an Illinois corporation controlled by James A. Bowen, the Chief Executive Officer of First Trust. First Trust discharges its responsibilities to the Fund subject to the policies of the Board
of Trustees.
First Trust
provides investment tools and portfolios for advisors and investors. First Trust is committed to theoretically sound portfolio construction and empirically verifiable investment management approaches. Its asset
management philosophy and investment discipline are deeply rooted in the application of intuitive factor analysis and model implementation to enhance investment decisions.
First Trust
acts as investment advisor for and manages the investment and reinvestment of the assets of the Fund. First Trust also administers the Trust’s business affairs, provides office facilities and equipment and
certain clerical, bookkeeping and administrative services, and permits any of its officers or employees to serve without compensation as Trustees or officers of the Trust if elected to such positions.
Pursuant to an
investment agreement between First Trust and the Trust (the
“Investment Management Agreement”
), First Trust will manage the investment of the Fund’s assets and will be responsible for paying all expenses of the Fund,
excluding the fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees
payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay First Trust an annual management fee equal to 0.75% of its average daily net assets.
Under the
Investment Management Agreement, First Trust 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 First Trust in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties. The Investment Management
Agreement terminates automatically upon assignment and is terminable at any time without penalty as to the Fund by the Board of Trustees, including a majority of the Independent Trustees, or by vote of the holders
of a majority of the Fund’s outstanding
voting securities on 60 days’ written notice to First Trust, or by First Trust on 60 days’ written notice to the Fund.
Portfolio
Manager.
The portfolio manager of the Fund is primarily and jointly responsible for the day-to-day management of the Fund. There is currently one portfolio manager, as
follows:
Name
|
Position with
First Trust
|
Length of Service
with First Trust
|
Principal Occupation During Past Five Years
|
Ken Fincher
|
Senior Vice President,
Portfolio Manager
|
Since 2008
|
Vice President and Portfolio Manager
First Trust Portfolios L.P.
|
•
|
Ken Fincher is a Senior Vice President and Portfolio Manager at First Trust. Mr. Fincher joined First Trust with over 20 years of experience in financial markets. His current responsibilities include management of
separately managed accounts that invest primarily in closed-end funds. He has also helped develop new product structures in the closed-end fund space. Mr. Fincher has been named Outstanding Individual Contributor to
the Closed-End Fund Sector in 2007, 2006, 2005 and 2004 by financial analysts and his peers in the closed-end fund community and also served on the Closed-End Fund committee of the Investment Company Institute. Mr.
Fincher received a B.A. in financial administration from Michigan State University and an M.B.A. from Loyola University Graduate School of Business.
|
As of the
date of this SAI, the portfolio manager does not beneficially own any shares of the Fund.
Compensation.
The compensation structure for each portfolio manager is based upon a fixed salary as well as a discretionary bonus determined by the management of First Trust. Salaries are
determined by management and are based upon an individual’s position and overall value to the firm. Bonuses are also determined by management and are based upon an individual’s overall contribution to the
success of the firm and the profitability of the firm. Salaries and bonuses for the portfolio managers are not based upon criteria such as performance of the Fund or the value of assets included in the Fund’s
portfolio.
Accounts Managed by the Portfolio Manager.
The portfolio manager manages the investment vehicles (other than the Funds of the Trust) with the number of accounts and assets, as of
August 31, 2016, set forth in the table below:
Accounts Managed by Portfolio
Manager
Portfolio Manager
|
Registered
Investment Companies
Number of Accounts
($ Assets)
|
Other Pooled
Investment Vehicles
Number of Accounts
($ Assets)
|
Other Accounts
Number of Accounts
($ Assets)
|
Ken Fincher
|
0 ($0)
|
0 ($0)
|
221 ($75,056,379)
|
Conflicts.
None of the accounts managed by the portfolio manager pays an advisory fee that is based upon the performance of the account. In addition, First Trust believes that there are no material
conflicts of interest that may arise in connection with the portfolio manager's management of the Fund's investments and the investments of the other accounts managed by the portfolio manager. However, because the
investment strategy of the Fund and the investment strategies of many of the other accounts managed by the portfolio manager are based on fairly mechanical investment processes, the portfolio manager may recommend
that certain clients sell and other clients buy a given security at the same time. In addition, because the investment strategies of the Fund and other accounts managed by the portfolio manager generally result in the
clients investing in readily available securities, First Trust believes that there should not be material conflicts in the allocation of investment opportunities between the Fund and other accounts managed by the
portfolio manager.
Brokerage Allocations
First Trust is
responsible for decisions to buy and sell securities for the Fund and for the placement of the Fund's securities business, the negotiation of the commissions to be paid on brokered transactions, the prices for
principal trades in securities, and the allocation of portfolio brokerage and principal business. It is the policy of First Trust to seek the best execution at the best security price available with respect to each
transaction, and with respect to brokered transactions in light of the overall quality of brokerage and research services provided to First Trust and its clients. The best price to the Fund means the best net price
without regard to the mix between purchase or sale price and commission, if any. Purchases may be made from underwriters, dealers and, on occasion, the issuers. Commissions will be paid on the Fund's futures
transactions, if any. The purchase price of portfolio securities purchased from an underwriter or dealer may include underwriting commissions and
dealer spreads. The Fund may pay markups on
principal transactions. In selecting broker-dealers and in negotiating commissions, First Trust considers, among other things, the firm’s reliability, the quality of its execution services on a continuing basis
and its financial condition. Fund portfolio transactions may be effected with broker-dealers who have assisted investors in the purchase of shares.
Section 28(e)
of the Securities Exchange Act of 1934, as amended (the
“1934 Act”
), permits an investment advisor, under certain circumstances, to cause an account to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction. Brokerage and research services include (a) furnishing advice as
to the value of securities, the advisability of investing, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (b) furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; and (c) effecting securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Such brokerage and research services are often referred to as “soft dollars.” First Trust has advised the Board of Trustees that it does not currently intend to use soft
dollars.
Notwithstanding the foregoing, in selecting brokers, First Trust may in the future consider investment and market information and other research, such as economic, securities and performance measurement research,
provided by such brokers, and the quality and reliability of brokerage services, including execution capability, performance and financial responsibility. Accordingly, the commissions charged by any such broker may be
greater than the amount another firm might charge if First Trust determines in good faith that the amount of such commissions is reasonable in relation to the value of the research information and brokerage services
provided by such broker to First Trust or the Trust. In addition, First Trust must determine that the research information received in this manner provides the Fund with benefits by supplementing the research
otherwise available to the Fund. The Investment Management Agreement provides that such higher commissions will not be paid by the Fund unless the Advisor determines in good faith that the amount is reasonable in
relation to the services provided. The investment advisory fees paid by the Fund to First Trust under the Investment Management Agreement would not be reduced as a result of receipt by First Trust of research
services.
First Trust
places portfolio transactions for other advisory accounts advised by it, and research services furnished by firms through which the Fund effects its securities transactions may be used by First Trust in servicing all
of its accounts; not all of such services may be used by First Trust in connection with the Fund. First Trust believes it is not possible to measure separately the benefits from research services to each of the
accounts (including the Fund) advised by it. Because the volume and nature of the trading activities of the accounts are not uniform, the amount of commissions in excess of those charged by another broker paid by each
account for brokerage and research services will vary. However, First Trust believes such costs to the Fund will not be disproportionate to the benefits received by the Fund on a continuing basis. First Trust seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made to purchase or sell securities by the Fund and another advisory account. In some cases, this procedure could have an adverse effect on
the price or the amount of securities available to the Fund. In making such allocations between the Fund and other advisory accounts, the main factors considered by First Trust are the respective investment
objectives, the relative size of portfolio holding of the same or comparable securities, the availability of cash for investment and the size of investment commitments generally held.
Administrator, Custodian,
Transfer Agent, Fund Accountant, Distributor, Additional Service Provider and Exchange
Administrator
.
The Bank of New York Mellon Corporation (
“BNYM”
) serves as Administrator for the Fund. Its principal address is 101 Barclay Street, New York, New York 10286.Pursuant to the Administrative Agency Agreement, the Trust on behalf
of the Fund has agreed to indemnify the Administrator for certain liabilities, including certain liabilities arising under the federal securities laws, unless such loss or liability results from negligence or willful
misconduct in the performance of its duties.
BNYM serves as
Administrator for the Trust pursuant to a Fund Administration and Accounting Agreement. Under such agreement, BNYM is obligated on a continuous basis, to provide such administrative services as the Board of Trustees
reasonably deems necessary for the proper administration of the Trust and the Fund. BNYM will generally assist in all aspects of the Trust’s and the Fund’s operations; supply and maintain office facilities
(which may be in BNYM’s own offices), statistical and research data, data processing services, clerical, accounting, bookkeeping and record keeping services (including, without limitation, the maintenance of
such books and records as are required under the 1940 Act and the rules thereunder, except as maintained by other agency agents), internal auditing, executive and administrative services, and stationery and office
supplies; prepare reports to shareholders or investors; prepare and file tax returns; supply financial information and supporting
data for reports to and filings with the SEC
and various state Blue Sky authorities; supply supporting documentation for meetings of the Board of Trustees; and provide monitoring reports and assistance regarding compliance with federal and state securities
laws.
Pursuant to
the Fund Administration and Accounting Agreement, the Trust on behalf of the Fund has agreed to indemnify the Administrator for certain liabilities, including certain liabilities arising under the federal securities
laws, unless such loss or liability results from negligence or willful misconduct in the performance of its duties.
Pursuant to
the Fund Administration and Accounting Agreement between BNYM and the Trust, the Fund has agreed to pay such compensation as is mutually agreed from time to time and such out-of-pocket expenses as incurred by BNYM in
the performance of its duties. This fee is subject to reduction for assets over $1 billion. The Fund has not paid any fees to BNYM under the Fund Administration and Accounting Agreement, as the Advisor has assumed
responsibility for payment of these fees as part of the unitary management fee.
Custodian,
Transfer Agent and Fund Accountant
.
BNYM, as custodian for the Fund pursuant to a Custody Agreement, holds the Fund’s assets. BNYM also serves as transfer agent of the Fund pursuant to a Transfer Agency and Service
Agreement. As the Fund’s accounting agent, BNYM calculates the net asset value of shares and calculates net income and realized capital gains or losses. BNYM may be reimbursed by the Fund for its out-of-pocket
expenses. BNYM also serves as the Fund’s transfer agent pursuant to a Transfer Agency Agreement.
Distributor
.
First Trust Portfolios L.P., an affiliate of First Trust, is the distributor (
“FTP”
or the
“Distributor”
) and principal underwriter of the shares of the Fund. Its principal address is 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187. The Distributor has entered into a Distribution
Agreement with the Trust pursuant to which it distributes Fund shares. Shares are continuously offered for sale by the Fund through the Distributor only in Creation Unit Aggregations, as described in the Prospectus
and below under the heading “Creation and Redemption of Creation Unit Aggregations.”
12b-1 Plan
.
The Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act (the
“Plan”
) pursuant to which the Fund may reimburse the Distributor up to a maximum annual rate of 0.25% of its average daily net assets.
Under the Plan
and as required by Rule 12b-1, the Trustees will receive and review after the end of each calendar quarter a written report provided by the Distributor of the amounts expended under the Plan and the purpose for which
such expenditures were made. With the exception of the Distributor and its affiliates, no “interested person” of the Trust (as that term is defined in the 1940 Act) and no Trustee of the Trust has a direct
or indirect financial interest in the operation of the Plan or any related agreement.
No fee is
currently paid by the Fund under the Plan, and pursuant to a contractual agreement, the Fund will not pay 12b-1 fees any time before September 30, 2018.
Aggregations.
Fund shares in less than Creation Unit Aggregations are not distributed by the Distributor. The Distributor will deliver the Prospectus and, upon request, this SAI to persons purchasing
Creation Unit Aggregations and will maintain records of both orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the 1934 Act and a member of the
Financial Industry Regulatory Authority (
“FINRA”
).
The
Distribution Agreement provides that it may be terminated at any time, without the payment of any penalty, on at least 60 days’ written notice by the Trust to the Distributor (i) by vote of a majority of the
Independent Trustees or (ii) by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund. The Distribution Agreement will terminate automatically in the event of its assignment
(as defined in the 1940 Act).
The
Distributor may also enter into agreements with participants that utilize the facilities of the Depository Trust Company (the
“DTC Participants”
), which have international, operational, capabilities and place orders for Creation Unit Aggregations of Fund shares. Participating Parties (which are
participants in the Continuous Net Settlement System of the National Securities Clearing Corporation) shall be DTC Participants.
Additional Service
Provider.
First Trust, on behalf of the Fund has engaged NYSE index group or its designee (the
“IPV Calculator”)
, to calculate the intra-day values for the shares of the Fund.
Exchange.
The only relationship that Nasdaq has with First Trust or the Distributor of the Fund in connection with the Fund is that Nasdaq lists the shares of the Fund and disseminates the intra-day
portfolio values that are calculated by the IPV Calculator pursuant to its listing agreement with the Trust. Nasdaq is not responsible for and has not participated in the
determination of pricing or the timing of the
issuance or sale of the shares of the Fund or in the determination or calculation of the asset value of the Fund. Nasdaq has no obligation or liability in connection with the administration, marketing or trading of
the Fund.
Additional Payments to
Financial Intermediaries
First Trust or
its affiliates may from time to time make payments, out of their own resources, to certain financial intermediaries that sell shares of First Trust mutual funds and ETFs (
“First Trust Funds”
) to promote the sales and retention of Fund shares by those firms and their customers. The amounts of these payments vary by intermediary. The level of
payments that First Trust is willing to provide to a particular intermediary may be affected by, among other factors, (i) the firm’s total assets or Fund shares held in and recent net investments into First
Trust Funds, (ii) the value of the assets invested in the First Trust Funds by the intermediary’s customers, (iii) redemption rates, (iv) its ability to attract and retain assets, (v) the intermediary’s
reputation in the industry, (vi) the level and/or type of marketing assistance and educational activities provided by the intermediary, (vii) the firm’s level of participation in First Trust Funds’ sales
and marketing programs, (viii) the firm’s compensation program for its registered representatives who sell Fund shares and provide services to Fund shareholders, and (ix) the asset class of the First Trust Funds
for which these payments are provided. Such payments are generally asset-based but also may include the payment of a lump sum.
First Trust
may also make payments to certain intermediaries for certain administrative services and shareholder processing services, including record keeping and sub-accounting of shareholder accounts pursuant to a sub-transfer
agency, omnibus account service or sub-accounting agreement. All fees payable by First Trust under this category of services may be charged back to the Fund, subject to approval by the Board.
First Trust
and/or its affiliates may make payments, out of its own assets, to those firms as compensation and/or reimbursement for marketing support and/or program servicing to selected intermediaries that are registered as
holders or dealers of record for accounts invested in one or more of the First Trust Funds or that make First Trust Fund shares available through certain selected Fund no-transaction fee institutional platforms and
fee-based wrap programs at certain financial intermediaries. Program servicing payments typically apply to employee benefit plans, such as retirement plans, or fee-based advisory programs but may apply to retail sales
and assets in certain situations. The payments are based on such factors as the type and nature of services or support furnished by the intermediary and are generally asset based. Services for which an intermediary
receives marketing support payments may include, but are not limited to, business planning assistance, advertising, educating the intermediary’s personnel about First Trust Funds in connection with shareholder
financial planning needs, placement on the intermediary’s preferred or recommended fund list, and access to sales meetings, sales representatives and management representatives of the intermediary. In addition,
intermediaries may be compensated for enabling representatives of First Trust and/or its affiliates to participate in and/or present at conferences or seminars, sales or training programs for invited registered
representatives and other employees, client and investor events and other events sponsored by the intermediary. Services for which an intermediary receives program servicing payments typically include, but are not
limited to, record keeping, reporting or transaction processing and shareholder communications and other account administration services, but may also include services rendered in connection with Fund/investment
selection and monitoring, employee enrollment and education, plan balance rollover or separation, or other similar services. An intermediary may perform program services itself or may arrange with a third party to
perform program services. These payments are in addition to the service fee and any applicable omnibus sub-accounting fees paid to these firms with respect to these services by the First Trust Funds out of Fund
assets.
From time to
time, First Trust and/or its affiliates, at its expense, may provide other compensation to intermediaries that sell or arrange for the sale of shares of the First Trust Funds, which may be in addition to marketing
support and program servicing payments described above. For example, First Trust and/or its affiliates may: (i) compensate intermediaries for National Securities Clearing Corporation networking system services (
e.g.
, shareholder communication, account statements, trade confirmations and tax reporting) on an asset-based or per-account basis; (ii) compensate intermediaries for providing Fund
shareholder trading information; (iii) make one-time or periodic payments to reimburse selected intermediaries for items such as ticket charges (
i.e.
, fees that an intermediary charges its representatives for effecting transactions in Fund shares) or exchange order, operational charges (
e.g.
, fees that an intermediary charges for establishing the Fund on its trading system), and literature printing and/or distribution costs; (iv) at the direction of a retirement
plan’s sponsor, reimburse or pay direct expenses of an employee benefit plan that would otherwise be payable by the plan; and (v) provide payments to broker-dealers to help defray their technology or
infrastructure costs.
When not
provided for in a marketing support or program servicing agreement, First Trust and/or its affiliates may also pay intermediaries for enabling First Trust and/or its affiliates to participate in and/or present at
conferences or seminars,
sales or training programs for invited
registered representatives and other intermediary employees, client and investor events and other intermediary-sponsored events, and for travel expenses, including lodging incurred by registered representatives and
other employees in connection with prospecting, asset retention and due diligence trips. These payments may vary depending upon the nature of the event. First Trust and/or its affiliates make payments for such events
as it deems appropriate, subject to its internal guidelines and applicable law.
First Trust
and/or its affiliates occasionally sponsor due diligence meetings for registered representatives during which they receive updates on various First Trust Funds and are afforded the opportunity to speak with portfolio
managers. Although invitations to these meetings are not conditioned on selling a specific number of shares, those who have shown an interest in First Trust Funds are more likely to be considered. To the extent
permitted by their firm’s policies and procedures, all or a portion of registered representatives’ expenses in attending these meetings may be covered by First Trust and/or its affiliates.
The amounts of
payments referenced above made by First Trust and/or its affiliates could be significant and may create an incentive for an intermediary or its representatives to recommend or offer shares of the First Trust Funds to
its customers. The intermediary may elevate the prominence or profile of the First Trust Funds within the intermediary’s organization by, for example, placing the First Trust Funds on a list of preferred or
recommended funds and/or granting First Trust and/or its affiliates preferential or enhanced opportunities to promote the First Trust Funds in various ways within the intermediary’s organization. These payments
are made pursuant to negotiated agreements with intermediaries. The payments do not change the price paid by investors for the purchase of a share or the amount the Fund will receive as proceeds from such sales.
Furthermore, many of these payments are not reflected in the fees and expenses listed in the fee table section of the Fund's Prospectus because they are not paid by the Fund. The types of payments described herein are
not mutually exclusive, and a single intermediary may receive some or all types of payments as described.
Other
compensation may be offered to the extent not prohibited by state laws or any self-regulatory agency, such as FINRA. Investors can ask their intermediaries for information about any payments they receive from First
Trust and/or its affiliates and the services it provides for those payments. Investors may wish to take intermediary payment arrangements into account when considering and evaluating any recommendations relating to
Fund shares.
Additional Information
Book Entry Only
System.
The following information supplements and should be read in conjunction with the Prospectus.
DTC Acts as
Securities Depository for Fund Shares.
Shares of the Fund are represented by securities registered in the name of The Depository Trust Company (
“DTC”
) or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
DTC, a
limited-purpose trust company, was created to hold securities of its participants (the
“DTC Participants”
) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry
changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock Exchange (the
“NYSE”
) and FINRA. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
“Indirect Participants”
).
Beneficial
ownership of shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in shares (owners of such
beneficial interests are referred to herein as
“Beneficial Owners”
) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records
of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to
their purchase and sale of shares.
Conveyance of
all notices, statements and other communications to Beneficial Owners is effected as follows. Pursuant to a letter agreement between DTC and the Trust, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the shares of the Fund held by each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding shares,
directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall
pay
to each such DTC Participants a fair and
reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Fund
distributions shall be made to DTC or its nominee, as the registered holder of all Fund shares. DTC or its nominee, upon receipt of any such distributions, shall immediately credit DTC Participants’ accounts
with payments in amounts proportionate to their respective beneficial interests in shares of the Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial
Owners of shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered
in a
“
street name,
”
and will be the responsibility of such DTC Participants.
The Trust has
no responsibility or liability for any aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the
Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may decide
to discontinue providing its service with respect to shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to perform its functions at a comparable cost.
Proxy Voting Policies and
Procedures
The Trust has
adopted a proxy voting policy that seeks to ensure that proxies for securities held by the Fund are voted consistently with the best interests of the Fund.
The Board has
delegated to First Trust the proxy voting responsibilities for the Fund and has directed First Trust to vote proxies consistent with the Fund’s best interests. First Trust has engaged the services of
Institutional Shareholder Services, Inc. (
“ISS”
), to make recommendations to First Trust on the voting of proxies relating to securities held by the Fund. If First Trust manages the assets of a company or its
pension plan and any of First Trust’s clients hold any securities of that company, First Trust will vote proxies relating to such company’s securities in accordance with the ISS recommendations to avoid
any conflict of interest.
To the extent
that the Fund invests in other registered investment companies (
“acquired funds”
), it may do so pursuant to an exemptive order granted by the SEC. The relief granted by that order is conditioned upon complying with a number of
undertakings, some of which require the Fund to vote its shares in an acquired fund in the same proportion as other holders of the acquired fund’s shares. As a result, to the extent that the Fund, or another
registered investment company advised by First Trust, relies on the relief granted by the exemptive order to invest in a particular acquired fund, First Trust will vote shares of that acquired fund in the same
proportion as the other holders of that acquired fund’s shares.
First Trust
has adopted the ISS Proxy Voting Guidelines. While these guidelines are not intended to be all-inclusive, they do provide guidance on First Trust’s general voting policies. The ISS Proxy Voting Guidelines are
attached hereto as
Exhibit A
.
Quarterly
Portfolio Schedule.
The Trust is required to disclose, after its first and third fiscal quarters, the complete schedule of the Fund's portfolio holdings with the SEC on Form N-Q. Form N-Q for the Trust is
available on the SEC’s website at http://www.sec.gov. The Fund's Form N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the
Public Reference Room may be obtained by calling (800) SEC-0330. The Trust’s Forms N-Q are available without charge, upon request, by calling (800) 621-1675 or by writing to First Trust Portfolios L.P., 120 East
Liberty Drive, Suite 400, Wheaton, Illinois 60187.
Policy Regarding
Disclosure of Portfolio Holdings.
The Trust has adopted a policy regarding the disclosure of information about the Fund’s portfolio holdings. The Board of Trustees must approve all material amendments to this
policy. The Fund’s portfolio holdings are publicly disseminated each day the Fund is open for business through financial reporting and news services, including publicly accessible Internet websites. In addition,
a basket composition file, which includes the security names and share quantities to deliver in exchange for Fund shares, together with estimates and actual cash components, is publicly disseminated each day the NYSE
is open for trading via the National Securities Clearing Corporation (
“NSCC”
). The basket represents one Creation Unit of the Fund. The Fund’s portfolio holdings are also available on the Fund's website at http://www.ftportfolios.com. The Trust, First Trust,
FTP and BNYM will not disseminate non-public information concerning the Trust.
Codes of
Ethics.
In order to mitigate the possibility that the Fund will be adversely affected by personal trading, the Trust, First Trust and the Distributor have adopted Codes of Ethics under Rule 17j-1
of the 1940 Act. These Codes of Ethics contain policies restricting securities trading in personal accounts of the officers, Trustees and others who normally come into possession of information on portfolio
transactions. Personnel subject to the Codes of Ethics may invest in securities that may be purchased or held by the Fund; however, the Codes of Ethics require that each transaction in such securities be reviewed by
the Chief Compliance Officer or his or her designee. These Codes of Ethics are on public file with, and are available from, the SEC.
Creation and Redemption of
Creation Unit Aggregations
Creation.
The Trust issues and sells shares of the Funds only in Creation Unit Aggregations on a continuous basis through the Distributor, without a sales load, at their net asset values next
determined after receipt, on any Business Day (as defined below), of an order in proper form.
A
“Business Day” is any day on which the NYSE is open for business. As of the date of this SAI, the NYSE observes the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of
Securities and Deposit or Delivery of Cash.
The consideration for purchase of Creation Unit Aggregations of the Fund may consist of (i) cash in lieu of all or a portion of the Deposit Securities, as defined below, and/or (ii) a
designated portfolio of equity securities determined by First Trust
—
the “Deposit Securities”
—
per each Creation Unit Aggregation and generally an amount of cash
—
the “Cash Component”
—
computed as described below. Together, the Deposit Securities and the Cash Component (including the cash in lieu amount) constitute the “Fund Deposit,” which represents the
minimum initial and subsequent investment amount for a Creation Unit Aggregation of the Fund.
The Cash
Component is sometimes also referred to as the Balancing Amount. The Cash Component serves the function of compensating for any differences between the net asset value per Creation Unit Aggregation and the Deposit
Amount (as defined below). The Cash Component is an amount equal to the difference between (i) the net asset value of Fund shares (per Creation Unit Aggregation) and (ii) the “Deposit Amount”
—
an amount equal to the market value of the Deposit Securities and/or cash in lieu of all or a portion of the Deposit Securities. If the Cash Component is a positive number (
i.e.
, the net asset value per Creation Unit Aggregation exceeds the Deposit Amount), the creator will deliver the Cash Component. If the Cash Component is a negative number (
i.e.
, the net asset value per Creation Unit Aggregation is less than the Deposit Amount), the creator will receive the Cash Component.
The Custodian,
through the NSCC (discussed below), makes available on each Business Day, prior to the opening of business of the NYSE (currently 9:30 a.m., Eastern Time), the list of the names and the required number of shares of
each Deposit Security to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for the Fund.
Such Fund Deposit
is applicable, subject to any adjustments as described below, in order to effect creations of Creation Unit Aggregations of the Fund until such time as the next-announced composition of the Deposit Securities is made
available.
The identity
and number of shares of the Deposit Securities required for a Fund Deposit for the Fund change as corporate action events are reflected within the Fund from time to time by First Trust with a view to the investment
objective of the Fund. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash
—
i.e.
, a “cash in lieu” amount
—
to be added to the Cash Component to replace any Deposit Security that may not be available, that may not be available in sufficient quantity for delivery or which might not be eligible
for trading by an Authorized Participant (as defined below) or the investor for which it is acting or other relevant reason. The Trust also reserves the right to permit or require, under certain circumstances, the
substitution of a different security in lieu of depositing some or all of the Deposit Securities The adjustments described above will reflect changes known to First Trust on the date of announcement to be in effect by
the time of delivery of the Fund Deposit or resulting from certain corporate actions.
In addition to
the list of names and numbers of securities constituting the current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC, also makes available on each Business Day, the estimated Cash Component, for
the current day as well as the Cash Component for the previous Business Day, per outstanding Creation Unit Aggregation of the Fund.
Procedures for
Creation of Creation Unit Aggregations.
In order to be eligible to place orders with the Distributor and to create a Creation Unit Aggregation of the Fund, an entity must be a DTC Participant (see the section entitled
“Book
Entry Only System”), must have executed
an agreement with the Distributor and transfer agent, with respect to creations and redemptions of Creation Unit Aggregations (“Participant Agreement”) (discussed below) and must have international
operational capabilities. A DTC Participant is also referred to as an “Authorized Participant.” Investors should contact the Distributor for the names of Authorized Participants that have signed a
Participant Agreement. All Fund shares, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant.
All standard
orders to create Creation Unit Aggregations must be received by the transfer agent no later than the closing time of the regular trading session on the Exchange (“Closing Time”) (ordinarily 4:00 p.m.,
Eastern Time) in each case on the date such order is placed in order for the creation of Creation Unit Aggregations to be effected based on the net asset value of shares of the Fund as next determined on such date
after receipt of the order in proper form. Subject to the provisions of the applicable Participant Agreement, in the case of custom orders, the order must be received by the transfer agent no later than 3:00 p.m.
Eastern Time on the trade date. A custom order may be placed by an Authorized Participant in the event that the Trust permits or requires the substitution of an amount of cash to be added to the Cash Component to
replace any Deposit Security which may not be available, which may not be available in sufficient quantity for delivery or which may not be eligible for trading by such Authorized Participant or the investor for which
it is acting or other relevant reason. The date on which an order to create Creation Unit Aggregations (or an order to redeem Creation Unit Aggregations, as discussed below) is placed is referred to as the
“Transmittal Date.” Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the transfer agent pursuant to procedures set forth in the Participant
Agreement, as described below. Severe economic or market disruptions or changes, or telephone or other communications failure may impede the ability to reach the transfer agent or an Authorized Participant.
All orders
from investors who are not Authorized Participants to create Creation Unit Aggregations shall be placed with an Authorized Participant, as applicable, in the form required by such Authorized Participant. In addition,
the Authorized Participant may request the investor to make certain representations or enter into agreements with respect to the order, e.g., to provide for payments of cash, when required. Investors should be aware
that their particular broker may not have executed a Participant Agreement and that, therefore, orders to create Creation Unit Aggregations of the Fund have to be placed by the investor’s broker through an
Authorized Participant that has executed a Participant Agreement. In such cases there may be additional charges to such investor. At any given time, there may be only a limited number of broker-dealers that have
executed a Participant Agreement. Those persons placing orders should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or
depository institution effectuating such transfer of Deposit Securities and Cash Component.
Placement of
Creation Orders.
Deposit Securities must be delivered to the Trust through DTC or NSCC, subject to and in accordance with the applicable provisions set forth in the Participant Agreement and Deposit
Securities which are non-U.S. securities must be delivered to an account maintained at the applicable local subcustodian of the Trust on or before the International Contractual Settlement Date, as defined below all in
accordance with the terms of the Participant Agreement. If a Deposit Security is an ADR or similar domestic instrument, it may be delivered to the Custodian. The Authorized Participant must also pay on or before the
International Contractual Settlement Date immediately available or same-day funds estimated by Trust to be sufficient to pay the Cash Component next determined after acceptance of the creation order, together with the
applicable Creation Transaction Fee (as defined below) and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. The “International Contractual Settlement Date” is
the earlier of (i) the date upon which all of the required Deposit Securities, the Cash Component and any other cash amounts which may be due are delivered to the Fund or (ii) the latest day for settlement on the
customary settlement cycle in the jurisdiction(s) where any of the securities of the Fund are customarily traded. Any excess funds will be returned following settlement of the issue of the Creation Unit
Aggregation.
Issuance of
Creation Unit Aggregations
.
A Creation Unit Aggregation will generally not be issued until the transfer of good title to the Trust of the portfolio of Deposit Securities and the payment of the Cash Component, the
payment of the Creation Transaction Fee (as defined below) and any other required cash amounts have been completed. When the required Deposit Securities which are U.S. securities have been delivered to the Trust
through DTC or NSCC, and each relevant subcustodian confirms to Custodian that the required Deposit Securities which are non-U.S. securities (or, when permitted in the sole discretion of Trust, the cash in lieu
thereof) have been delivered to the account of the relevant subcustodian, the Custodian shall notify the Distributor and the transfer agent which, acting on behalf of the Trust, will issue and cause the delivery of
the Creation Unit Aggregations. The Trust may in its sole discretion permit or require the substitution of an amount of cash (
i.e.
, a “cash in lieu” amount) to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or for other relevant
reasons. If the Distributor, acting on behalf of the Trust, determines that a “cash in lieu” amount will be accepted, the Distributor will notify the Authorized Participant and the transfer agent, and the
Authorized
Participant shall deliver, on behalf of itself or
the party on whose behalf it is acting, the “cash in lieu” amount, with any appropriate adjustments as advised by the Trust as discussed below.
In the event
that an order for a Creation Unit is incomplete because certain or all of the Deposit Securities are missing, the Trust may issue a Creation Unit notwithstanding such deficiency in reliance on the undertaking of the
Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by an additional cash deposit (described below) with respect to the undelivered Deposit
Securities. To the extent contemplated by the applicable Participant Agreement, Creation Unit Aggregations of the Fund will be issued to such Authorized Participant notwithstanding the fact that the corresponding Fund
Deposits have not been received in part or in whole, in reliance on the undertaking of the Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by
such Authorized Participant’s delivery and maintenance of collateral consisting of cash in the form of U.S. dollars in immediately available funds having a value (marked to market daily) at least equal to 115%
which First Trust may change from time to time of the value of the missing Deposit Securities. Such cash collateral must be delivered no later than 2:00 p.m., Eastern time, on the contractual settlement date. The
Participant Agreement will permit the Fund to buy the missing Deposit Securities at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such
securities and the value of the collateral.
Acceptance of
Orders for Creation Unit Aggregations.
The Trust reserves the absolute right to reject a creation order transmitted to it by the Distributor with respect to the Fund if: (i) the order is not in proper form; (ii) the
investor(s), upon obtaining the Fund shares ordered, would own 80% or more of the currently outstanding shares of the Fund; (iii) the required Fund Deposit is not delivered; (iv) acceptance of the Deposit
Securities would have certain adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would, in the opinion of the Trust, be unlawful; (vi) acceptance of the Fund Deposit would otherwise
have an adverse effect on the Trust, the Fund or the rights of Beneficial Owners; or (vii) circumstances outside the control of the Trust or the Fund make it impossible to process creation orders for all
practical purposes. Examples of such circumstances include: acts of God or public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and
computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Fund, the Trust, First Trust, the Distributor, the transfer
agent, DTC, NSCC, the Custodian or sub-custodian or any other participant in the creation process; the imposition by a foreign government or a regulatory body of controls, or other monetary, currency or trading
restrictions that directly affect the portfolio securities held; and similar extraordinary events. The Distributor shall notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on
behalf of such prospective creator of its rejection of the order of such person. The Trust, the Custodian, any sub-custodian and the Distributor are under no duty, however, to give notification of any defects or
irregularities in the delivery of Fund Deposits, nor shall any of them incur any liability for the failure to give any such notification.
All questions
as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility, and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the
Trust’s determination shall be final and binding.
Creation
Transaction Fee.
Purchasers of Creation Units must pay a creation transaction fee (the
“Creation Transaction Fee”
) that is currently $500. The Creation Transaction Fee is applicable to each purchase transaction regardless of the number of Creation Units purchased in the transaction. The Creation
Transaction Fee may vary and is based on the composition of the securities included in the Fund’s portfolio and the countries in which the transactions are settled. The price for each Creation Unit will equal
the daily net asset value per share times the number of shares in a Creation Unit plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. When
the Fund permits an Authorized Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Authorized Participant may also be assessed an amount to
cover the cost of purchasing the Deposit Securities and/or disposing of the substituted securities, including operational processing and brokerage costs, transfer fees, stamp taxes, and part or all of the spread
between the expected bid and offer side of the market related to such Deposit Securities and/or substitute securities.
As discussed
above, shares of the Fund may be issued in advance of receipt of all Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Fund cash at least equal to 115% of the
market value of the missing Deposit Securities.
Redemption of
Fund Shares in Creation Unit Aggregations.
Fund shares may be redeemed only in Creation Unit Aggregations at their net asset value next determined after receipt of a redemption request in proper form by a Fund through the transfer
agent and only on a Business Day. The Fund will not redeem shares in amounts less than Creation Unit Aggregations.
Beneficial Owners must accumulate enough shares
in the secondary market to constitute a Creation Unit Aggregation in order to have such shares redeemed by the Trust. Shares generally will be redeemed in Creation Unit Aggregations in exchange for a particular
portfolio of securities (
“Fund Securities”
), although the Fund has the right to make redemption payments in cash, in-kind or a combination of each. There can be no assurance, however, that there
will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit Aggregation. Investors should expect to incur customary brokerage and other costs in connection with
assembling a sufficient number of Fund shares to constitute a redeemable Creation Unit Aggregation.
With respect
to the Fund, the Custodian, through the NSCC, makes available prior to the opening of business on the NYSE (currently 9:30 a.m. Eastern Time) on each Business Day, the identity of the Fund Securities that will be
applicable (subject to possible amendment or correction) to redemption requests received in proper form on that day. Fund Securities received on redemption may not be identical to Deposit Securities that are
applicable to creations of Creation Unit Aggregations.
Unless cash
redemptions are available or specified for the Fund (as discussed below), the redemption proceeds for a Creation Unit Aggregation generally consist of Fund Securities
—
as announced on the Business Day of the request for redemption received in proper form
—
plus or minus cash in an amount equal to the difference between the net asset value of the Creation Unit Aggregation being redeemed, as next determined after a receipt of a request in
proper form, and the value of the Fund Securities (the
“Cash Redemption Amount”
), less the applicable Redemption Transaction Fee as listed below and, if applicable, any operational processing and brokerage costs, transfer fees
or stamp taxes. In the event that the Fund Securities have a value greater than the net asset value of the Fund shares, a compensating cash payment equal to the difference plus, the applicable Redemption Transaction
Fee and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes is required to be made by or through an Authorized Participant by the redeeming shareholder.
The right of
redemption may be suspended or the date of payment postponed (i) for any period during which the Exchange is closed (other than customary weekend and holiday closings); (ii) for any period during which trading on the
Exchange is suspended or restricted; (iii) for any period during which an emergency exists as a result of which disposal of the shares of the Fund or determination of the Fund’s net asset value is not reasonably
practicable; or (iv) in such other circumstances as are permitted by the SEC.
Redemption
Transaction Fee.
Parties redeeming Creation Units must pay a redemption transaction fee (the
“Redemption Transaction Fee”
) that is currently $500. The Redemption Transaction Fee is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the transaction. The Redemption
Transaction Fee may vary and is based on the composition of the securities included in the Fund’s portfolio and the countries in which the transactions are settled. Investors will also bear the costs of
transferring the Fund Securities from the Trust to their account or on their order and may also be assessed an amount to cover other costs including operational processing and brokerage costs, transfer fees, stamp
taxes and part or all of the spread between the expected bid and offer side of the market related to such securities. Investors who use the services of a broker or other such intermediary in addition to an Authorized
Participant to effect a redemption of a Creation Unit Aggregation may also be assessed an amount to cover the cost of such services.
Placement of
Redemption Orders.
Orders to redeem Creation Unit Aggregations must be delivered through an Authorized Participant that has executed a Participant Agreement. Investors other than APs are responsible for
making arrangements for a redemption request to be made through an Authorized Participant. An order to redeem Creation Unit Aggregations of a Fund is deemed received by the Trust on the Transmittal Date if:
(i) such order is received by BNYM (in its capacity as transfer agent) not later than the Closing Time on the Transmittal Date; (ii) such order is accompanied or followed by the requisite number of shares of
a Fund specified in such order, which delivery must be made through DTC to BNYM; and (iii) all other procedures set forth in the Participant Agreement are properly followed.
Deliveries of
Fund Securities to investors are generally expected to be made within three Business Days.
To the extent
contemplated by an Authorized Participant’s agreement, in the event the Authorized Participant has submitted a redemption request in proper form but is unable to transfer all or part of the Creation Unit
Aggregation to be redeemed to the Fund’s transfer agent, the transfer agent may nonetheless accept the redemption request in reliance on the undertaking by the Authorized Participant to deliver the missing
shares as soon as possible. Such undertaking shall be secured by the Authorized Participant’s delivery and maintenance of collateral consisting of cash having a value (marked to market daily) at least equal to
115%, which First Trust may change from time to time, of the value of the missing shares.
The current
procedures for collateralization of missing shares require, among other things, that any cash collateral shall be in the form of U.S. dollars in immediately available funds and shall be held by BNYM and marked to
market daily, and
that the fees of BNYM and any sub-custodians in
respect of the delivery, maintenance and redelivery of the cash collateral shall be payable by the Authorized Participant. If the Authorized Participant’s agreement provides for collateralization, it will permit
the Trust, on behalf of the Fund, to purchase the missing shares at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such shares and the
value of the collateral.
The
calculation of the value of the Fund Securities and the Cash Redemption Amount to be delivered/received upon redemption will be made by BNYM according to the procedures set forth in this SAI under “Determination
of Net Asset Value” computed on the Business Day on which a redemption order is deemed received by the Trust. Therefore, if a redemption order in proper form is submitted to BNYM by a DTC Participant not later
than Closing Time on the Transmittal Date, and the requisite number of shares of the Fund are delivered to BNYM prior to the specified time, then the value of the Fund Securities and the Cash Redemption Amount to be
delivered will be determined by BNYM on such Transmittal Date. If, however, a redemption order is submitted to BNYM by a DTC Participant not later than the Closing Time on the Transmittal Date but either (i) the
requisite number of shares of the relevant Fund are not delivered by the specified time, as described above, on such Transmittal Date, or (ii) the redemption order is not submitted in proper form, then the
redemption order will not be deemed received as of the Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount to be delivered/received will be computed on the Business Day that
such order is deemed received by the Trust,
i.e.,
the Business Day on which the shares of the Fund are delivered through DTC to BNYM by the specified time on such Business Day pursuant to a properly submitted redemption
order.
If it is not
possible to effect deliveries of the Fund Securities, the Trust may in its discretion exercise its option to redeem such Fund shares in cash, and the redeeming Beneficial Owner will be required to receive its
redemption proceeds in cash. In addition, an investor may request a redemption in cash that the Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the net asset
value of its Fund shares based on the net asset value of shares of the Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charges for
requested cash redemptions specified above, to offset the Trust’s brokerage and other transaction costs associated with the disposition of Fund Securities). The Fund may also, in its sole discretion, upon
request of a shareholder, provide such redeemer cash in lieu of some securities added to the Cash Redemption Amount, but in no event will the total value of the securities delivered and the cash transmitted differ
from the net asset value.
Redemptions of
Fund shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and the Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation
Unit Aggregations for cash to the extent that the Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An
Authorized Participant or an investor for which it is acting subject to a legal restriction with respect to a particular stock included in the Fund Securities applicable to the redemption of a Creation Unit
Aggregation may be paid an equivalent amount of cash. The Authorized Participant may request the redeeming Beneficial Owner of the Fund shares to complete an order form or to enter into agreements with respect to such
matters as compensating cash payment, beneficial ownership of shares or delivery instructions.
Because the
portfolio securities of the Fund may trade on the relevant exchange(s) on days that the listing exchange for the Fund is closed or are otherwise not Business Days for the Fund, shareholders may not be able to redeem
their shares of the Fund, or purchase and sell shares of the Fund on the listing exchange for the Fund, on days when the net asset value of the Fund could be significantly affected by events in the relevant foreign
markets.
Federal Tax Matters
This section
summarizes 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 the SAI. Tax laws and interpretations change frequently, and these summaries do
not describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker-dealer, or other investor with
special circumstances. In addition, this section does not describe your state, local or foreign tax consequences.
This federal
income tax summary is based in part on the advice of counsel to the Fund. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, our counsel was not asked to review,
and has not reached a conclusion with respect to the federal income tax treatment of the assets to be deposited in the Fund. This may not be sufficient for prospective investors to use for the purpose of avoiding
penalties under federal tax law.
As with any
investment, prospective investors should seek advice based on their individual circumstances from their own tax advisor.
The Fund intends
to qualify annually and to elect to be treated as a regulated investment company under the Internal Revenue Code (the
“Code”
).
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, or net income derived from interests in certain publicly traded partnerships; (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 which are engaged in the same, similar or related trades or businesses, or the securities of one or more of
certain publicly traded partnerships; 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. There are certain exceptions for failure to qualify if the failure is for reasonable cause or is de minimis, and
certain corrective action is taken and certain tax payments are made by the Fund.
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 98.2% 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. In order 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. Such 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.
Subject to
certain reasonable cause and de minimis exceptions, if the Fund fails to qualify as a regulated investment company or fails 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 are generally 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. In addition, some dividends may qualify as “exempt-interest dividends,” which generally are excluded from gross income for federal income tax purposes. Some or all of the exempt-interest
dividends, however, may be taken into account in determining alternative minimum tax and may have other tax consequences (e.g., they may affect the amount of social security benefits that are taxed).
Income from
the Fund may also be subject to a 3.8% “Medicare tax.” This tax generally applies to net investment income if the taxpayer’s adjusted gross income exceeds certain threshold amounts, which are
$250,000 in the case of married couples filing joint returns and $200,000 in the case of single individuals. Interest that is excluded from gross income and exempt-interest dividends from the Fund are generally not
included in your net investment income for purposes of this tax.
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.
Distributions
of net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, properly reported 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 tax 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 basis in his or her shares. To the extent that the amount of any such 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.
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, such 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 such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. If a shareholder holds a share for six months or less, any loss incurred by the shareholder related to the disposition of such share will be
disallowed to the extent of the exempt-interest dividends you received, except in the case of a regular dividend paid by the Fund if the Fund declares exempt-interest dividends on a daily basis in an amount equal to
at least 90 percent of its net tax-exempt interest and distributes such dividends on a monthly or more frequent basis. To the extent, if any, it is not disallowed, it will be recharacterized as long-term capital loss
to the extent of any capital gain dividend received.
Taxes on Purchase and Redemption of
Creation Units
If a
shareholder exchanges equity securities for Creation Units the shareholder will generally recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at
the time and the shareholder’s aggregate basis in the securities surrendered and the Cash Component paid. If a shareholder exchanges Creation Units for equity securities, then the shareholder will generally
recognize a gain or loss equal to the difference between the shareholder’s basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The Internal
Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units or Creation Units for securities cannot be deducted currently under the rules governing “wash
sales,” or on the basis that there has been no significant change in economic position.
Nature of Fund Investments
Certain of the
Funds’ investment practices are subject to special and complex federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility
of which is more limited), (iv) cause the Funds to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is
deemed to occur and (vi) adversely alter the characterization of certain complex financial transactions.
Futures Contracts and Options
The
Fund’s transactions in futures contracts and options will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Fund (
i.e.,
may affect whether gains or losses are ordinary or capital, or short-term or long-term), may accelerate recognition of income to the Fund and may defer Fund losses. These rules
could, therefore, affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Fund to mark-to-market certain types of the positions in its portfolio
(
i.e.,
treat them as if they were closed out), and (b) may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to
satisfy the 90% distribution requirement for qualifying to be taxed as a regulated investment company and the distribution requirements for avoiding excise taxes.
Backup Withholding
The Funds 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 Funds with their correct taxpayer identification number or fail to make
required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code generally are
exempt from such 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.
Non-U.S. Shareholders
U.S. taxation
of a shareholder who, as to the United States, is a nonresident alien individual, a foreign trust or estate, a foreign corporation or foreign partnership (
“non-U.S. shareholder”
) depends on whether the income of the Fund is “effectively connected” with a U.S. trade or business carried on by the shareholder.
In addition to
the rules described in this section concerning the potential imposition of withholding on distributions to non-U.S. persons, distributions to non-U.S. persons that are “financial institutions” may be
subject to a withholding tax of 30% unless an agreement is in place between the financial institution and the U.S. Treasury to collect and disclose information about accounts, equity investments, or debt interests in
the financial institution held by one or more U.S. persons or the institution is resident in a jurisdiction that has entered into such an agreement with the U.S. Treasury. For these purposes, a “financial
institution” means any entity that (i) accepts deposits in the ordinary course of a banking or similar business, (ii) holds financial assets for the account of others as a substantial portion of its business, or
(iii) is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or any interest (including a futures contract or
option) in such securities, partnership interests or commodities. Dispositions of shares by such persons may be subject to such withholding after December 31, 2018.
Distributions
to non-financial non-U.S. entities (other than publicly traded foreign entities, entities owned by residents of U.S. possessions, foreign governments, international organizations, or foreign central banks) will also
be subject to a withholding tax of 30% if the entity does not certify that the entity does not have any substantial U.S. owners or provide the name, address and TIN of each substantial U.S. owner. Dispositions
of shares by such persons may be subject to such withholding after December 31, 2018.
Income Not
Effectively Connected.
If the income from the Fund is not “effectively connected” with a U.S. trade or business carried on by the non-U.S. shareholder, distributions of investment company taxable
income will generally be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld from such distributions.
Distributions
of capital gain dividends and any amounts retained by the Fund which are properly reported by the Fund as undistributed capital gains will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless
the non-U.S. shareholder is a nonresident alien individual and is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. However, this 30% tax on
capital gains of nonresident alien individuals
who are physically present in the United States
for more than the 182 day period only applies in exceptional cases because any individual present in the United States for more than 182 days during the taxable year is generally treated as a resident for U.S. income
tax purposes; in that case, he or she would be subject to U.S. income tax on his or her worldwide income at the graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a non-U.S.
shareholder who is a nonresident alien individual, the Fund may be required to withhold U.S. income tax from distributions of net capital gain unless the non-U.S. shareholder certifies his or her non-U.S. status under
penalties of perjury or otherwise establishes an exemption. If a non-U.S. shareholder is a nonresident alien individual, any gain such shareholder realizes upon the sale or exchange of such shareholder’s shares
of the Fund in the United States will ordinarily be exempt from U.S. tax unless the gain is U.S. source income and such shareholder is physically present in the United States for more than 182 days during the taxable
year and meets certain other requirements. Distributions from the Fund that are properly reported by the Fund as an interest-related dividend attributable to certain interest income received by the Fund or as a
short-term capital gain dividend attributable to certain net short-term capital gain income received by the Fund may not be subject to U.S. federal income taxes, including withholding taxes when received by certain
foreign investors, provided that the Fund makes certain elections and certain other conditions are met.
In addition,
capital gain distributions attributable to gains from U.S. real property interests (including certain U.S. real property holding corporations) will generally be subject to United States withholding tax and will give
rise to an obligation on the part of the foreign shareholder to file a United States tax return.
Income
Effectively Connected.
If the income from the Fund is “effectively connected” with a U.S. trade or business carried on by a non-U.S. shareholder, then distributions of investment company taxable
income and capital gain dividends, any amounts retained by the Fund which are properly reported by the Fund as undistributed capital gains and any gains realized upon the sale or exchange of shares of the Fund will be
subject to U.S. income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. Non-U.S. corporate shareholders may also be subject to the branch profits tax imposed by the Code.
The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may differ from those described herein. Non-U.S. shareholders are advised to consult their own tax advisors
with respect to the particular tax consequences to them of an investment in the Fund.
Other Taxation
Fund shareholders
may be subject to state, local and foreign taxes on their Fund distributions. Shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the
Fund.
Determination of Net Asset
Value
The following
information supplements and should be read in conjunction with the section in the Prospectus entitled “Net Asset Value.”
The per-share
net asset value of the Fund is determined by dividing the total value of the securities and other assets, less liabilities, by the total number of shares outstanding. Under normal circumstances, daily calculation of
the net asset value will utilize the last closing sale price of each security held by the Fund at the close of the market on which such security is principally listed. In determining net asset value, portfolio
securities for the Fund for which accurate market quotations are readily available will be valued by the Fund accounting agent as follows:
(1)
|
Common stocks and other equity securities listed on any national or foreign exchange other than The Nasdaq Stock Market LLC (
“Nasdaq”
) and the London Stock Exchange Alternative Investment Market (
“AIM”
) will be valued at the last sale price on the exchange on which they are principally traded, or the official closing price for Nasdaq and AIM securities. Portfolio
securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, on the Business Day as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
|
(2)
|
Shares of open-end funds are valued at fair value which is based on NAV per share.
|
(3)
|
Securities traded in the OTC market are fair valued at the mean of the bid and asked price, if available, and otherwise at their closing bid price.
|
(4)
|
Exchange traded options and futures contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, they will be fair valued at the mean of the
bid and asked price. If no mean price is available, they will be fair valued at their closing bid price. OTC options and futures contracts are fair valued at the mean of the most recent bid and asked price, if
available, and otherwise at their closing bid price.
|
(5)
|
Forward foreign currency contracts are fair valued at the current day’s interpolated foreign exchange rate, as calculated using the current day’s spot rate, and the 30,
60, 90 and 180-day forward rates provided by a pricing service or by certain independent dealers in such contracts.
|
In addition, the
following types of securities will be fair valued by the Fund accounting agent as follows:
(1)
|
Fixed-income securities, interest rate swaps, credit default swaps, total return swaps, currency swaps, currency-linked notes, credit-linked notes and other similar instruments will be fair valued using a pricing
service.
|
(2)
|
Fixed income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of
discounts (amortized cost), provided the Advisor’s Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing
at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following:
|
(i)
|
the credit conditions in the relevant market and changes thereto;
|
(ii)
|
the liquidity conditions in the relevant market and changes thereto;
|
(iii)
|
the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates);
|
(iv)
|
issuer-specific conditions (such as significant credit deterioration); and
|
(v)
|
any other market-based data the Advisor’s Pricing Committee considers relevant. In this regard, the Advisor’s Pricing Committee may use last-obtained market-based data to
assist it when valuing portfolio securities using amortized cost.
|
(3)
|
Repurchase agreements will be valued as follows. Overnight repurchase agreements will be fair valued at amortized cost when it represents the best estimate of fair value. Term repurchase agreements (
i.e.
, those whose maturity exceeds seven days) will be fair valued by the Advisor’s Pricing Committee at the average of the bid quotations obtained daily from at least two
recognized dealers.
|
If the
Advisor’s Pricing Committee has reason to question the accuracy or reliability of a price supplied or the use of the amortized cost methodology, the Advisor’s Pricing Committee shall determine if “it
needs to fair value” such portfolio security pursuant to established valuation procedures. From time to time, the Advisor’s Pricing Committee will request that the Fund accounting agent submit price
challenges to a pricing service, usually in response to any updated broker prices received.
Certain
securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Board of Trustees or its delegate, the Advisor’s Pricing Committee, at fair value. These
securities generally include but are not limited to, restricted securities (securities that may not be publicly sold without registration under the 1933 Act) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred
that is likely to materially affect the value of the security after the market has closed but before the calculation of Fund net asset value (as may be the case in foreign markets on which the security is primarily
traded) or is likely to make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security’s fair value. Fair
value prices represent any prices not considered market value prices and are either obtained from a pricing service or are determined by the Advisor’s Pricing Committee. Market value prices represent last sale
or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from pricing services. If no market price or official close price is available from either a pricing
service or no quotations are available from one or more brokers or if the Advisor’s Pricing Committee has reason to question the reliability or accuracy of a price supplied or the use of amortized cost, the
value of any portfolio security held by the Fund for which reliable market prices/quotations are not readily available will be determined by the Advisor’s Pricing Committee in a manner that most appropriately
reflects
fair market value of the security on the valuation
date, based on a consideration of all available information. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchange.
Because
foreign markets may be open on different days than the days during which a shareholder may purchase the shares of the Fund, the value of the Fund’s investments may change on the days when shareholders are not
able to purchase the shares of the Fund. For foreign securities, if an extraordinary market event occurs between the time the last “current” market quotation is available for a security in the Fund’s
portfolio and the time the Fund’s net asset value is determined and calls into doubt whether that earlier market quotation represents fair value at the time the Fund’s net asset value is determined, the
Fund accounting agent will immediately notify the Advisor’s Pricing Committee and the Advisor’s Pricing Committee shall determine the fair valuation. For foreign securities, the Advisor’s Pricing
Committee may seek to determine the “fair value” of such securities by retaining a pricing service to determine the value of the securities.
Foreign
securities, currencies and other assets denominated in foreign currencies are translated into U.S. dollars at the exchange rate of such currencies against the U.S. dollar as provided by a pricing service. All assets
denominated in foreign currencies will be converted into U.S. dollars at the exchange rates in effect at the time of valuation.
Dividends and
Distributions
The following
information supplements and should be read in conjunction with the section in the Prospectus entitled “Dividends, Distributions and Taxes.”
General
Policies.
Dividends from net investment income of the Fund, if any, are declared and paid monthly. Distributions of net realized securities gains, if any, generally are declared and paid once a year,
but the Trust may make distributions on a more frequent basis. The Trust reserves the right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve the
status of the Fund as a regulated investment company or to avoid imposition of income or excise taxes on undistributed income.
Dividends and
other distributions of Fund shares are distributed, as described below, on a
pro rata
basis to Beneficial Owners of such shares. Dividend payments are made through DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds
received from the Fund.
Dividend
Reinvestment Service.
No reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of the Fund for
reinvestment of their dividend distributions. Beneficial Owners should contact their brokers in order to determine the availability and costs of the service and the details of participation therein. Brokers may
require Beneficial Owners to adhere to specific procedures and timetables. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional
whole shares of the Fund purchased in the secondary market.
Miscellaneous Information
Counsel.
Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, is counsel to the Trust.
Independent
Registered Public Accounting Firm.
Deloitte & Touche LLP, 111 South Wacker Drive, Chicago, Illinois 60606, serves as the Fund's independent registered public accounting firm. The firm audits the financial statements and
performs other related audit services.
Exhibit A
—
Proxy Voting Guidelines
United States
Concise Proxy Voting Guidelines
2016 Benchmark Policy
Recommendations
Effective for Meetings on or after
February 1, 2016
Published January 22, 2016
www.issgovernance.com
© 2016 ISS | Institutional Shareholder
Services
2016 U.S. Concise Proxy Voting Guidelines
The policies contained herein are
a sampling of selected key U.S. proxy voting guidelines and are not
intended to be exhaustive. A full summary of ISS’ 2016 proxy voting guidelines can be found at:
http://www.issgovernance.com/policy-gateway/2016-policy-information/
BOARD OF DIRECTORS:
Voting on Director Nominees in
Uncontested Elections
➤
|
General Recommendation:
Generally vote for director nominees, except under the following circumstances:
|
1. Accountability
Vote against
(1)
or withhold from the entire board of directors (except new nominees
(2)
, who should be considered case-by-case) for the following:
Problematic
Takeover Defenses
Classified Board
Structure:
1.1.
|
The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All
appropriate nominees (except new) may be held accountable.
|
Director
Performance Evaluation:
1.2.
|
The board lacks accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of
a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s five-year total shareholder return and operational metrics. Problematic provisions include
but are not limited to:
|
➤
|
A
classified board structure;
|
➤
|
A
supermajority vote requirement;
|
➤
|
Either a plurality vote standard in uncontested director elections or a majority vote standard with no plurality carve-out for contested elections;
|
➤
|
The inability of shareholders to call special meetings;
|
➤
|
The inability of shareholders to act by written consent;
|
➤
|
A
dual-class capital structure; and/or
|
➤
|
A
non-shareholder-approved poison pill.
|
(1)
|
In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will
vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
|
(2)
|
A “new nominee” is any current nominee who has not already been elected by shareholders and who joined the board after the problematic action in question transpired. If ISS cannot determine whether the
nominee joined the board before or after the problematic action transpired, the nominee will be considered a “new nominee” if he or she joined the board within the 12 months prior to the upcoming
shareholder meeting.
|
A-2
Enabling the financial community to manage
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© 2016 ISS | Institutional Shareholder
Services
2016 U.S. Concise Proxy Voting Guidelines
Poison Pills:
1.3.
|
The company’s poison pill has a “dead-hand” or “modified dead-hand” feature. Vote against or withhold from nominees every year until this feature is removed;
|
1.4.
|
The board adopts a poison pill with a term of more than 12 months (“long-term pill”), or renews any existing pill, including any “short-term” pill (12 months or less), without shareholder
approval. A commitment or policy that puts a newly adopted pill to a binding shareholder vote may potentially offset an adverse vote recommendation. Review such companies with classified boards every year, and such
companies with annually elected boards at least once every three years, and vote against or withhold votes from all nominees if the company still maintains a non-shareholder-approved poison pill; or
|
1.5.
|
The board makes a material adverse change to an existing poison pill without shareholder approval.
|
Vote case-by-case
on all nominees if:
1.6.
|
The board adopts a poison pill with a term of 12 months or less (“short-term pill”) without shareholder approval, taking into account the following factors:
|
➤
|
The date of the pill‘s adoption relative to the date of the next meeting of shareholders
—
i.e.
whether the company had time to put the pill on the ballot for shareholder ratification given the circumstances;
|
➤
|
The issuer’s rationale;
|
➤
|
The issuer’s governance structure and practices; and
|
➤
|
The issuer’s track record of accountability to shareholders.
|
Problematic
Audit-Related Practices
Generally
vote against or withhold from the members of the Audit Committee if:
1.7.
|
The non-audit fees paid to the auditor are excessive (see discussion under “Auditor Ratification”);
|
1.8.
|
The company receives an adverse opinion on the company’s financial statements from its auditor; or
|
1.9.
|
There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its
shareholders, to pursue legitimate legal recourse against the audit firm.
|
Vote
case-by-case on members of the Audit Committee and potentially the full board if:
1.10.
|
Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth,
chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted.
|
Problematic
Compensation Practices/Pay for Performance Misalignment
In the absence of
an Advisory Vote on Executive Compensation ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:
1.11.
|
There is a significant misalignment between CEO pay and company performance (pay for performance);
|
1.12.
|
The company maintains significant problematic pay practices;
|
1.13.
|
The board exhibits a significant level of poor communication and responsiveness to shareholders;
|
A-3
Enabling the financial community to manage
governance risk for the benefit of shareholders.
© 2016 ISS | Institutional Shareholder
Services
2016 U.S. Concise Proxy Voting Guidelines
1.14.
|
The company fails to submit one-time transfers of stock options to a shareholder vote; or
|
1.15.
|
The company fails to fulfill the terms of a burn rate commitment made to shareholders.
|
Vote case-by-case
on Compensation Committee members (or, in exceptional cases, the full board) and the Management Say-on-Pay proposal if:
1.16.
|
The company’s previous say-on-pay received the support of less than 70 percent of votes cast, taking into account:
|
➤
|
The company's response, including:
|
➤
|
Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support;
|
➤
|
Specific actions taken to address the issues that contributed to the low level of support;
|
➤
|
Other recent compensation actions taken by the company;
|
➤
|
Whether the issues raised are recurring or isolated;
|
➤
|
The company's ownership structure; and
|
➤
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Unilateral
Bylaw/Charter Amendments
1.17.
|
Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if the board amends the company's bylaws or charter
without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders, considering the following factors:
|
➤
|
The board's rationale for adopting the bylaw/charter amendment without shareholder ratification;
|
➤
|
Disclosure by the company of any significant engagement with shareholders regarding the amendment;
|
➤
|
The level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter;
|
➤
|
The board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
|
➤
|
The company's ownership structure;
|
➤
|
The company's existing governance provisions;
|
➤
|
The timing of the board's amendment to the bylaws/charter in connection with a significant business development; and,
|
➤
|
Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
|
Unless the
adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees, who should be considered case-by-case)
if the directors:
➤
|
Classified the board;
|
➤
|
Adopted supermajority vote requirements to amend the bylaws or charter; or
|
➤
|
Eliminated shareholders' ability to amend bylaws.
|
1.18.
|
For newly public companies, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in
connection with the company's public offering, the company or its board adopted bylaw or charter provisions materially adverse to shareholder rights, considering the following factors:
|
A-4
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© 2016 ISS | Institutional Shareholder
Services
2016 U.S. Concise Proxy Voting Guidelines
➤
|
The level of impairment of shareholders' rights caused by the provision;
|
➤
|
The disclosed rationale for adopting the provision;
|
➤
|
The ability to change the governance structure in the future (
e.g.
, limitations on shareholders’ right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter);
|
➤
|
The ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; and,
|
➤
|
A
public commitment to put the provision to a shareholder vote within three years of the date of the initial public offering.
|
Unless the
adverse provision is reversed or submitted to a vote of public shareholders, vote case-by-case on director nominees in subsequent years.
Governance
Failures
Under
extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
1.19.
|
Material failures of governance, stewardship, risk oversight
(3)
, or fiduciary responsibilities at the company;
|
1.20.
|
Failure to replace management as appropriate; or
|
1.21.
|
Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best
interests of shareholders at any company.
|
2. Responsiveness
Vote
case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
2.1.
|
The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year. Factors that will be considered are:
|
➤
|
Disclosed outreach efforts by the board to shareholders in the wake of the vote;
|
➤
|
Rationale provided in the proxy statement for the level of implementation;
|
➤
|
The subject matter of the proposal;
|
➤
|
The level of support for and opposition to the resolution in past meetings;
|
➤
|
Actions taken by the board in response to the majority vote and its engagement with shareholders;
|
➤
|
The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and
|
➤
|
Other factors as appropriate.
|
2.2.
|
The board failed to act on takeover offers where the majority of shares are tendered;
|
2.3.
|
At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote;
|
2.4.
|
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the majority of votes cast at the most recent shareholder
meeting at which shareholders voted on the say-on-pay frequency; or
|
(3)
|
Examples of failure of risk oversight include, but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlements; hedging of company stock;
or significant pledging of company stock.
|
A-5
Enabling the financial community to manage
governance risk for the benefit of shareholders.
© 2016 ISS | Institutional Shareholder
Services
2016 U.S. Concise Proxy Voting Guidelines
2.5.
|
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received a plurality, but not a majority, of the votes cast at the most recent shareholder meeting at
which shareholders voted on the say-on-pay frequency, taking into account:
|
➤
|
The board's rationale for selecting a frequency that is different from the frequency that received a plurality;
|
➤
|
The company's ownership structure and vote results;
|
➤
|
ISS' analysis of whether there are compensation concerns or a history of problematic compensation practices; and
|
➤
|
The previous year's support level on the company's say-on-pay proposal.
|
3. Composition
Attendance at
Board and Committee Meetings:
3.1.
|
Generally vote against or withhold from directors (except new nominees, who should be considered case-by-case
(4)
who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they
served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
|
➤
|
Medical issues/illness;
|
➤
|
Family emergencies; and
|
➤
|
Missing only one meeting (when the total of all meetings is three or fewer).
|
3.2.
|
If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote
against or withhold from the director(s) in question.
|
Overboarded
Directors:
Vote against or
withhold from individual directors who:
3.3.
|
Sit on more than six public company boards; with respect to annual meetings on or after Feb. 1, 2017
(5)
, sit on more than five public company boards; or
|
3.4.
|
Are CEOs of public companies who sit on the boards of more than two public companies besides their own
— withhold only at their outside boards
(6)
.
|
4. Independence
Vote against or
withhold from Inside Directors and Affiliated Outside Directors (per the Categorization of Directors) when:
4.1.
|
The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;
|
(4)
|
For new nominees only, schedule conflicts due to commitments made prior to their appointment to the board are considered if disclosed in the proxy or another SEC filing.
|
(5)
|
This policy change includes a 1-year transition period to allow time for affected directors to address necessary changes if they wish.
|
(6)
|
Although all of a CEO’s subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote from the CEO of a parent company board or any of the controlled (>50 percent ownership)
subsidiaries of that parent, but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.
|
A-6
Enabling the financial community to manage
governance risk for the benefit of shareholders.
© 2016 ISS | Institutional Shareholder
Services
2016 U.S. Concise Proxy Voting Guidelines
4.2.
|
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;
|
4.3.
|
The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee; or
|
4.4.
|
Independent directors make up less than a majority of the directors.
|
Independent Chair (Separate
Chair/CEO)
➤
|
General Recommendation:
Generally vote for shareholder proposals requiring that the chairman’s position be filled by an independent director, taking into consideration the following:
|
➤
|
The scope of the proposal;
|
➤
|
The company's current board leadership structure;
|
➤
|
The company's governance structure and practices;
|
➤
|
Company performance; and
|
➤
|
Any other relevant factors that may be applicable.
|
Regarding the
scope of the proposal, consider whether the proposal is precatory or binding and whether the proposal is seeking an immediate change in the chairman role or the policy can be implemented at the next CEO transition.
Under the
review of the company's board leadership structure, ISS may support the proposal under the following scenarios absent a compelling rationale: the presence of an executive or non-independent chair in addition to the CEO;
a recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair. ISS will also consider any recent transitions in board leadership and the effect such transitions may
have on independent board leadership as well as the designation of a lead director role.
When
considering the governance structure, ISS will consider the overall independence of the board, the independence of key committees, the establishment of governance guidelines, board tenure and its relationship to CEO
tenure, and any other factors that may be relevant. Any concerns about a company's governance structure will weigh in favor of support for the proposal.
The review of
the company's governance practices may include, but is not limited to poor compensation practices, material failures of governance and risk oversight, related-party transactions or other issues putting director
independence at risk, corporate or management scandals, and actions by management or the board with potential or realized negative impact on shareholders. Any such practices may suggest a need for more independent
oversight at the company thus warranting support of the proposal.
ISS'
performance assessment will generally consider one-, three, and five-year TSR compared to the company's peers and the market as a whole. While poor performance will weigh in favor of the adoption of an independent
chair policy, strong performance over the long-term will be considered a mitigating factor when determining whether the proposed leadership change warrants support.
A-7
Enabling the financial community to manage
governance risk for the benefit of shareholders.
© 2016 ISS | Institutional Shareholder
Services
2016 U.S. Concise Proxy Voting Guidelines
Proxy Access
➤
|
General Recommendation:
Generally vote for management and shareholder proposals for proxy access with the following provisions:
|
➤
|
Ownership threshold:
maximum requirement not more than three percent (3%) of the voting power;
|
➤
|
Ownership duration:
maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;
|
➤
|
Aggregation:
minimal or no limits on the number of shareholders permitted to form a nominating group;
|
➤
|
Cap:
cap on nominees of generally twenty-five percent (25%) of the board.
|
Review for
reasonableness any other restrictions on the right of proxy access.
Generally vote
against proposals that are more restrictive than these guidelines.
Proxy Contests/Proxy Access
—
Voting for Director Nominees in Contested Elections
➤
|
General Recommendation:
Vote case-by-case on the election of directors in contested elections, considering the following factors:
|
➤
|
Long-term financial performance of the company relative to its industry;
|
➤
|
Management’s track record;
|
➤
|
Background to the contested election;
|
➤
|
Nominee qualifications and any compensatory arrangements;
|
➤
|
Strategic plan of dissident slate and quality of the critique against management;
|
➤
|
Likelihood that the proposed goals and objectives can be achieved (both slates); and
|
➤
|
Stock ownership positions.
|
In the case of
candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the
nominee(s) and/or to the nature of the election (such as whether or not there are more candidates than board seats).
CAPITAL/RESTRUCTURING
Common Stock Authorization
➤
|
General Recommendation:
Vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the
same ballot that warrants support.
|
Vote against
proposals at companies with more than one class of common stock to increase the number of authorized shares of the class of common stock that has superior voting rights.
Vote against
proposals to increase the number of authorized common shares if a vote for a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced proportionally.
A-8
Enabling the financial community to manage
governance risk for the benefit of shareholders.
© 2016 ISS | Institutional Shareholder
Services
2016 U.S. Concise Proxy Voting Guidelines
Vote case-by-case
on all other proposals to increase the number of shares of common stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
➤
|
Past Board Performance:
|
➤
|
The company's use of authorized shares during the last three years
|
➤
|
Disclosure in the proxy statement of the specific purposes of the proposed increase;
|
➤
|
Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request; and
|
➤
|
The dilutive impact of the request as determined relative to an allowable increase calculated by ISS (typically 100 percent of existing authorized shares) that reflects the company's need for shares and total
shareholder returns.
|
ISS will apply
the relevant allowable increase below to requests to increase common stock that are for general corporate purposes (or to the general corporate purposes portion of a request that also includes a specific need):
A.
|
Most companies:
100 percent
of existing authorized shares.
|
B.
|
Companies with less than 50 percent of existing authorized shares either outstanding or reserved for issuance:
50 percent
of existing authorized shares.
|
C.
|
Companies with one- and three-year total shareholder returns (TSRs) in the bottom 10 percent of the U.S. market as of the end of the calendar quarter that is closest to their most recent fiscal year end:
50 percent
of existing authorized shares.
|
D.
|
Companies at which both conditions (B and C) above are both present:
25 percent
of existing authorized shares.
|
If there is an
acquisition, private placement, or similar transaction on the ballot (not including equity incentive plans) that ISS is recommending FOR, the allowable increase will be the greater of (i) twice the amount needed to
support the transactions on the ballot, and (ii) the allowable increase as calculated above.
Mergers and Acquisitions
➤
|
General Recommendation:
Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing
factors including:
|
➤
|
Valuation
- Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale.
|
➤
|
Market reaction
- How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.
|
➤
|
Strategic rationale
- Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management
should also have a favorable track record of successful integration of historical acquisitions.
|
➤
|
Negotiations and process
- Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation
"wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (
e.g.
, full auction, partial auction, no auction) can also affect shareholder value.
|
➤
|
Conflicts of interest
- Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests
|
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|
may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases
be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
|
➤
|
Governance
- Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
|
COMPENSATION
Executive Pay Evaluation
Underlying all
evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
1.
|
Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and
appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and
variable pay; performance goals; and equity-based plan costs;
|
2.
|
Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;
|
3.
|
Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for
compensation decision-making (
e.g.
, including access to independent expertise and advice when needed);
|
4.
|
Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices
fully and fairly;
|
5.
|
Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise
their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.
|
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Advisory Votes on Executive
Compensation
—
Management Proposals (Management Say-on-Pay)
➤
|
General Recommendation:
Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.
|
|
Vote against Advisory Votes on Executive Compensation (Management Say-on-Pay
—
MSOP) if:
|
➤
|
There is a significant misalignment between CEO pay and company performance (pay for performance);
|
➤
|
The company maintains significant problematic pay practices;
|
➤
|
The board exhibits a significant level of poor communication and responsiveness to shareholders.
|
Vote against or
withhold from the members of the Compensation Committee and potentially the full board if:
➤
|
There is no MSOP on the ballot, and an against vote on an MSOP is warranted due to pay for performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised
previously, or a combination thereof;
|
➤
|
The board fails to respond adequately to a previous MSOP proposal that received less than 70 percent support of votes cast;
|
➤
|
The company has recently practiced or approved problematic pay practices, including option repricing or option backdating; or
|
➤
|
The situation is egregious.
|
Primary Evaluation Factors for
Executive Pay
Pay-for-Performance Evaluation
ISS annually
conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the Russell 3000 or Russell 3000E Indices
(7)
, this analysis considers the following:
1.
|
Peer Group
(8)
Alignment:
|
➤
|
The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period.
|
➤
|
The multiple of the CEO's total pay relative to the peer group median.
|
2.
|
Absolute Alignment
(9)
–
the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years
–
i.e.
, the difference between the trend in annual pay changes and the trend in annualized TSR during the period.
|
If the above
analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, misaligned pay and performance are otherwise suggested, our analysis
may include any of the following qualitative factors, as relevant to evaluating how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
(7)
|
The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.
|
(8)
|
The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company's selected peers' GICS industry
group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market cap bucket that is reflective of the
company's. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
|
(9)
|
Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
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➤
|
The ratio of performance- to time-based equity awards;
|
➤
|
The overall ratio of performance-based compensation;
|
➤
|
The completeness of disclosure and rigor of performance goals;
|
➤
|
The company's peer group benchmarking practices;
|
➤
|
Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers;
|
➤
|
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (
e.g.
, bi-annual awards);
|
➤
|
Realizable pay
(10)
compared to grant pay; and
|
➤
|
Any other factors deemed relevant.
|
Problematic Pay Practices
The focus is on
executive compensation practices that contravene the global pay principles, including:
➤
|
Problematic practices related to non-performance-based compensation elements;
|
➤
|
Incentives that may motivate excessive risk-taking; and
|
➤
|
Options Backdating.
|
Problematic Pay
Practices related to Non-Performance-Based Compensation Elements
Pay elements
that are not directly based on performance are generally evaluated case-by-case considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS'
Compensation FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified
relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
➤
|
Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
|
➤
|
Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;
|
➤
|
New or extended agreements that provide for:
|
➤
|
CIC payments exceeding 3 times base salary and average/target/most recent bonus;
|
➤
|
CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers);
|
➤
|
CIC payments with excise tax gross-ups (including "modified" gross-ups);
|
➤
|
Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible.
|
Incentives that
may Motivate Excessive Risk-Taking
➤
|
Multi-year guaranteed bonuses;
|
➤
|
A
single or common performance metric used for short- and long-term plans;
|
➤
|
Lucrative severance packages;
|
➤
|
High pay opportunities relative to industry peers;
|
➤
|
Disproportionate supplemental pensions; or
|
➤
|
Mega annual equity grants that provide unlimited upside with no downside risk.
|
Factors that
potentially mitigate the impact of risky incentives include rigorous claw-back provisions and robust stock ownership/holding guidelines.
(10)
|
ISS research reports include realizable pay for S&P1500 companies.
|
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Options
Backdating
The following
factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
➤
|
Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;
|
➤
|
Duration of options backdating;
|
➤
|
Size of restatement due to options backdating;
|
➤
|
Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and
|
➤
|
Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future.
|
Compensation Committee
Communications and Responsiveness
Consider the
following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
➤
|
Failure to respond to majority-supported shareholder proposals on executive pay topics; or
|
➤
|
Failure to adequately respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account:
|
➤
|
The company's response, including:
|
➤
|
Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support;
|
➤
|
Specific actions taken to address the issues that contributed to the low level of support;
|
➤
|
Other recent compensation actions taken by the company;
|
➤
|
Whether the issues raised are recurring or isolated;
|
➤
|
The company's ownership structure; and
|
➤
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Equity-Based and Other Incentive
Plans
➤
|
General Recommendation:
Vote case-by-case on certain equity-based compensation plans
(11)
depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance
negative factors, and vice versa, as evaluated using an "equity plan scorecard" (EPSC) approach with three pillars:
|
➤
|
Plan Cost:
The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (SVT) in relation to
peers and considering both:
|
➤
|
SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and
|
➤
|
SVT based only on new shares requested plus shares remaining for future grants.
|
➤
|
Automatic single-triggered award vesting upon a change in control (CIC);
|
➤
|
Discretionary vesting authority;
|
➤
|
Liberal share recycling on various award types;
|
(11)
|
Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees
and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors.
|
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➤
|
Lack of minimum vesting period for grants made under the plan.
|
➤
|
The company’s three year burn rate relative to its industry/market cap peers;
|
➤
|
Vesting requirements in most recent CEO equity grants (3-year look-back);
|
➤
|
The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years);
|
➤
|
The proportion of the CEO's most recent equity grants/awards subject to performance conditions;
|
➤
|
Whether the company maintains a claw-back policy;
|
➤
|
Whether the company has established post exercise/vesting share-holding requirements.
|
Generally vote
against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders' interests, or if any of the following egregious factors apply:
➤
|
Awards may vest in connection with a liberal change-of-control definition;
|
➤
|
The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it
—
for NYSE and Nasdaq listed companies
—
or by not prohibiting it when the company has a history of repricing
—
for non-listed companies);
|
➤
|
The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; or
|
➤
|
Any other plan features are determined to have a significant negative impact on shareholder interests.
|
SOCIAL/ENVIRONMENTAL ISSUES
(SHAREHOLDER PROPOSALS)
Global Approach
Issues covered
under the policy include a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a
variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
➤
|
General Recommendation:
Generally vote case-by-case, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder value, and in addition the following
will also be considered:
|
➤
|
If the issues presented in the proposal are more appropriately or effectively dealt with through legislation or government regulation;
|
➤
|
If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
|
➤
|
Whether the proposal's request is unduly burdensome (scope or timeframe) or overly prescriptive;
|
➤
|
The company's approach compared with any industry standard practices for addressing the issue(s) raised by the proposal;
|
➤
|
If the proposal requests increased disclosure or greater transparency, whether or not reasonable and sufficient information is currently available to shareholders from the company or from other publicly available
sources; and
|
➤
|
If the proposal requests increased disclosure or greater transparency, whether or not implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage.
|
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Climate Change/Greenhouse Gas (GHG)
Emissions
➤
|
General Recommendation:
Generally vote for resolutions requesting that a company disclose information on the risks related to climate change on its operations and investments, such as financial,
physical, or regulatory risks, considering:
|
➤
|
Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks
and/or opportunities;
|
➤
|
The company’s level of disclosure is at least comparable to that of industry peers; and
|
➤
|
There are no significant controversies, fines, penalties, or litigation associated with the company’s environmental performance.
|
Generally vote
for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:
➤
|
The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or
opportunities;
|
➤
|
The company's level of disclosure is comparable to that of industry peers; and
|
➤
|
There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions.
|
Vote case-by-case
on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
➤
|
Whether the company provides disclosure of year-over-year GHG emissions performance data;
|
➤
|
Whether company disclosure lags behind industry peers;
|
➤
|
The company's actual GHG emissions performance;
|
➤
|
The company's current GHG emission policies, oversight mechanisms, and related initiatives; and
|
➤
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.
|
Board Diversity
➤
|
General Recommendation:
Generally vote for requests for reports on a company's efforts to diversify the board, unless:
|
➤
|
The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and
|
➤
|
The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.
|
Vote case-by-case
on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
➤
|
The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
|
➤
|
The level of gender and racial minority representation that exists at the company’s industry peers;
|
➤
|
The company’s established process for addressing gender and racial minority board representation;
|
➤
|
Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
|
➤
|
The independence of the company’s nominating committee;
|
➤
|
Whether the company uses an outside search firm to identify potential director nominees; and
|
➤
|
Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.
|
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Sustainability Reporting
➤
|
General Recommendation:
Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental
sustainability, unless:
|
➤
|
The company already discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report;
or
|
➤
|
The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame.
|
Environmental, Social, and
Governance (ESG) Compensation-Related Proposals
➤
|
General Recommendation:
Vote case-by-case on proposals to link, or report on linking, executive compensation to sustainability (environmental and social) criteria, considering:
|
➤
|
Whether the company has significant and/or persistent controversies or regulatory violations regarding social and/or environmental issues;
|
➤
|
Whether the company has management systems and oversight mechanisms in place regarding its social and environmental performance;
|
➤
|
The degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and
|
➤
|
The company's current level of disclosure regarding its environmental and social performance.
|
This document
and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the "Information") is the property of Institutional Shareholder Services Inc. (ISS), its
subsidiaries, or, in some cases third party suppliers.
The
Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a
solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any
opinion regarding any issuer, securities, financial products or instruments or trading strategies.
The user of
the Information assumes the entire risk of any use it may make or permit to be made of the Information.
ISS MAKES NO
EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
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Without
limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including
lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.
The Global Leader In Corporate
Governance
www.issgovernance.com
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First
Trust Exchange-Traded Fund VIII
Part C – Other Information
Item 28. Exhibits
Exhibit No. Description
(a)
|
|
Declaration of Trust of the Registrant. (1)
|
(b)
|
|
By-Laws of the Registrant. (1)
|
(d)
|
|
Investment Management Agreement between Registrant and First Trust Advisors L.P.,
dated June 13, 2016. (2)
|
(e)
|
|
Distribution Agreement between Registrant and First Trust Portfolios, dated September
15, 2016. (2)
|
(g)
|
|
Custody Agreement between the Registrant and The Bank of New York Mellon, dated
June 23, 2016. (2)
|
(h)
|
|
(1) Fund Administration and Accounting Agreement between the Registrant and The Bank
of New York Mellon, dated June 23, 2016. (2)
|
(2)
Transfer Agency and Service Agreement between the Registrant and The Bank of New York Mellon, dated June 23, 2016. (2)
(3)
Form of Subscription Agreement. (2)
(4)
Form of Participant Agreement. (2)
(i)
|
|
(1) Opinion and Consent of Morgan, Lewis & Bockius LLP. (2)
|
(2)
Opinion and Consent of Chapman and Cutler LLP. (2)
(j)
|
|
Consent of Independent Registered Public Accounting Firm. (2)
|
(m)
|
|
12b-1 Distribution and Service Plan. (2)
|
(p)
|
|
(1) First Trust Advisors L.P., First Trust Portfolios L.P. Code of Ethics, amended
on July 1, 2013. (1)
|
(2)
First Trust Funds Code of Ethics, amended on October 30, 2013. (1)
(q)
|
|
Powers of Attorney (1)
|
__________________
|
(1)
|
Incorporated by reference to the Registrant’s Registration Statement on Form N-1A (File No.
333-210186) filed on March 14, 2016.
|
Item 29. Persons
Controlled By or Under Common Control with Registrant
Not Applicable.
Item 30. Indemnification
Section 9.5
of the Registrant’s Declaration of Trust provides as follows:
Section 9.5.
Indemnification and Advancement of Expenses. Subject to the exceptions and limitations contained in this Section 9.5, every person
who is, or has been, a Trustee, officer, or employee of the Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or
otherwise (hereinafter referred to as a "Covered Person"
),
shall be indemnified by the Trust to the fullest extent
permitted by law against liability and against all expenses reasonably incurred or paid by him or in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been such a Trustee,
director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof.
No indemnification
shall be provided hereunder to a Covered Person to the extent such indemnification is prohibited by applicable federal law.
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 such a Covered Person and shall inure to the benefit of the heirs, executors and administrators of such a person.
Subject to
applicable federal law, expenses of preparation and presentation of a defense to any claim, action, suit or proceeding subject
to a claim for indemnification under this Section 9.5 shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he is not entitled
to indemnification under this Section 9.5.
To the extent
that any determination is required to be made as to whether a Covered Person engaged in conduct for which indemnification is not
provided as described herein, or as to whether there is reason to believe that a Covered Person ultimately will be found entitled
to indemnification, the Person or Persons making the determination shall afford the Covered Person a rebuttable presumption that
the Covered Person has not engaged in such conduct and that there is reason to believe that the Covered Person ultimately will
be found entitled to indemnification.
As used in
this Section 9.5, the words "claim," "action," "suit" or "proceeding" shall apply to all
claims, demands, actions, suits, investigations, regulatory inquiries, proceedings or any other occurrence of a similar nature,
whether actual or threatened and whether civil, criminal, administrative or other, including appeals, and the words "liability"
and "expenses" shall include without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
Item 31. Business
and Other Connections of the Investment Adviser
First Trust
Advisors L.P. (“First Trust”), investment adviser to the Registrant, serves as adviser or sub-adviser to various
other open-end and closed-end management investment companies and is the portfolio supervisor of certain unit investment trusts.
The principal business of certain of First Trust’s principal executive officers involves various activities in connection
with the family of unit investment trusts sponsored by First Trust Portfolios L.P. (“FTP”). The principal address
for all these investment companies, First Trust, FTP and the persons below is 120 East Liberty Drive, Suite 400, Wheaton, Illinois
60187.
A description
of any business, profession, vocation or employment of a substantial nature in which the officers of First Trust who serve as officers
or trustees of the Registrant have engaged during the last two years for his or her account or in the capacity of director, officer,
employee, partner or trustee appears under “Management of the Fund” in the Statement of Additional Information. Such
information for the remaining senior officers of First Trust appears below:
Name and Position with First Trust
|
Employment During Past Two Years
|
Andrew S. Roggensack, President
|
Managing Director and President, First Trust
|
R. Scott Hall, Managing Director
|
Managing Director, First Trust
|
Ronald D. McAlister, Managing Director
|
Managing Director, First Trust
|
David G. McGarel, Chief Investment Officer, Chief Operating Officer and Managing Director
|
Managing Director; Senior Vice President, First Trust
|
Name and Position with First Trust
|
Employment During Past Two Years
|
Kathleen Brown, Chief Compliance Officer and Senior Vice President
|
Chief Compliance Officer and Senior Vice President, First Trust
|
Brian Wesbury, Chief Economist and Senior Vice President
|
Chief Economist and Senior Vice President, First Trust
|
Item 32. Principal
Underwriter
(a) FTP
serves as principal underwriter of the shares of the Registrant, First Trust Exchange-Traded Fund, First Trust Exchange-Traded
Fund II, First Trust Exchange-Traded Fund III, First Trust Exchange-Traded Fund IV, First Trust Exchange-Traded Fund V, First
Trust Exchange Traded Fund VI, First Trust Exchange-Traded Fund VII, First Trust Exchange-Traded AlphaDEX
®
Fund,
First Trust Exchange-Traded AlphaDEX
®
Fund II, First Trust Variable Insurance Trust and First Trust Series Fund.
FTP serves as principal underwriter and depositor of the following investment companies registered as unit investment trusts:
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.
(b)
Name and Principal
Business Address*
|
Positions and Offices
with Underwriter
|
Positions and
Offices with Fund
|
The Charger Corporation
|
General Partner
|
None
|
Grace Partners of DuPage L.P.
|
Limited Partner
|
None
|
James A. Bowen
|
Chief Executive Officer and Managing Director
|
Trustee and Chairman of the Board
|
James M. Dykas
|
Chief Financial Officer
|
President and Chief Executive Officer
|
Frank L. Fichera
|
Managing Director
|
None
|
Russell J. Graham
|
Managing Director
|
None
|
R. Scott Hall
|
Managing Director
|
None
|
W. Scott Jardine
|
General Counsel, Secretary and Managing Director
|
Secretary
|
Daniel J. Lindquist
|
Managing Director
|
Vice President
|
Ronald D. McAlister
|
Managing Director
|
None
|
Name and Principal
Business Address*
|
Positions and Offices
with Underwriter
|
Positions and
Offices with Fund
|
David G. McGarel
|
Chief Investment Officer, Chief Operating Officer and Managing Director
|
None
|
Richard A. Olson
|
Managing Director
|
None
|
Marisa Bowen
|
Managing Director
|
None
|
Andrew S. Roggensack
|
President and Managing Director
|
None
|
Kristi A. Maher
|
Deputy General Counsel
|
Chief Compliance Officer and Assistant Secretary
|
* All addresses are
120 East Liberty Drive,
Wheaton, Illinois
60187.
|
|
|
(c) Not
Applicable.
Item 33. Location
of Accounts and Records
First
Trust, 120 East Liberty Drive, Wheaton, Illinois 60187, maintains the Registrant’s organizational documents, minutes of
meetings, contracts of the Registrant and all advisory material of the investment adviser.
Item 34. Management
Services
Not Applicable.
Item 35. Undertakings
Not Applicable.
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, duly authorized in the City of Wheaton, and State of Illinois
on the 26th day of September, 2016.
|
First Trust
Exchange-Traded Fund VIII
|
|
By:
|
/s/ James M. Dykas
|
|
|
James M. Dykas, President and
Chief Executive Officer
|
Pursuant to
the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
Signature
|
Title
|
|
Date
|
/s/ James M. Dykas
|
President and Chief Executive
Officer
|
September 26, 2016
|
James M. Dykas
|
|
|
|
/s/ Donald P. Swade
|
Treasurer, Chief Financial Officer
and Chief Accounting Officer
|
September 26, 2016
|
Donald P. Swade
|
|
|
|
James A. Bowen*
|
)
Trustee )
|
|
|
|
)
|
|
|
Richard E. Erickson*
|
)
Trustee )
|
|
|
|
)
|
|
|
Thomas R. Kadlec*
|
)
Trustee )
|
|
|
|
)
|
By:
|
/s/
W. Scott Jardine
|
Robert F. Keith*
|
)
Trustee )
|
|
W. Scott Jardine
Attorney-In-Fact
|
|
)
|
|
September 26, 2016
|
Niel B. Nielson *
|
)
Trustee )
|
|
|
|
)
|
|
|
|
*
|
Original powers of attorney authorizing W. Scott Jardine, James M. Dykas, Eric F. Fess and Kristi A. Maher
to execute Registrant's Registration Statement, and Amendments thereto, for each of the trustees of the Registrant on whose behalf
this Registration Statement is filed, were previously executed, filed as an exhibit and are incorporated by reference herein
.
|
Index
to Exhibits
(b)
|
|
(4) Participant Agreement.
|
(d)
|
|
Investment Management Agreement between Registrant and First Trust Advisors L.P.,
dated June 13, 2016.
|
(e)
|
|
Distribution Agreement between Registrant and First Trust Portfolios, dated September
15, 2016.
|
(g)
|
|
Custody Agreement between the Registrant and The Bank of New York Mellon, dated
June 23, 2016.
|
(h)
|
|
(1) Fund Administration and Accounting Agreement between the Registrant and The Bank
of New York Mellon, dated June 23, 2016.
|
(2)
Transfer Agency and Service Agreement between the Registrant and The Bank of New York Mellon, dated June 23, 2016.
(3) Form of
Subscription Agreement.
(4) Form of
Participant Agreement.
(i)
|
|
(1) Opinion and Consent of Morgan, Lewis & Bockius LLP.
|
(2) Opinion
and Consent of Chapman and Cutler LLP.
(j)
|
|
Consent of Independent Registered Public Accounting Firm.
|
(m)
|
|
12b-1 Distribution and Service Plan.
|
INVESTMENT MANAGEMENT AGREEMENT
INVESTMENT MANAGEMENT AGREEMENT made this thirteenth day of June 2016, by
and between FIRST TRUST EXCHANGE-TRADED FUND VIII, a Massachusetts business
trust (the "Trust"), and FIRST TRUST ADVISORS L.P., an Illinois limited
partnership (the "Adviser").
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company;
WHEREAS, the Trust is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets;
WHEREAS, the Trust intends to offer shares in series as set forth on
Schedule A attached hereto and any other series as to which this Agreement may
hereafter be made applicable and set forth on Schedule A, which may be amended
from time to time (each such series being herein referred to as a "Fund," and
collectively as the "Funds"); and
WHEREAS, the Trust desires to retain the Adviser as investment adviser, to
furnish certain investment advisory and portfolio management services to the
Trust with respect to the Funds, and the Adviser is willing to furnish such
services.
W I T N E S S E T H:
In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:
1. The Trust hereby engages the Adviser to act as the investment adviser
for, and to set the overall investment strategy and manage the investment and
reinvestment of the assets of, each Fund in accordance with each Fund's
investment objectives and policies and limitations, and to administer each
Fund's affairs to the extent requested by and subject to the supervision of the
Board of Trustees of the Trust for the period and upon the terms herein set
forth. The investment of each Fund's assets shall be subject to the Fund's
policies, restrictions and limitations with respect to investments as set forth
in the Fund's then current registration statement under the l940 Act, and all
applicable laws and the regulations of the Securities and Exchange Commission
relating to the management of registered open-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 Funds' transfer agent, administrator or other service providers)
for the Funds, to permit any of its officers or employees to serve without
compensation as trustees or officers of the Trust if elected or appointed 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 a 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 a 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 neither have the authority to act for nor represent the Trust
in any way, nor otherwise be deemed an agent of the Trust.
3. For the services and facilities described in Section 1, each 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 each Fund's average daily net assets as set forth on Schedule A.
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 Trust 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. During the term of this Agreement, the Adviser shall pay all of the
expenses of each Fund of the Trust (including the cost of transfer agency,
sub-advisory, custody, fund administration, legal, audit and other services and
license fees, if any) but excluding the fee payment under this Agreement,
interest, taxes, brokerage commissions and other expenses connected with the
execution of portfolio transactions (such as dividend and distribution expenses
from securities sold short and/or other investment related costs), distribution
and service fees payable pursuant to a Rule 12b-1 plan, if any, and
extraordinary expenses.
5. The Adviser shall arrange for suitably qualified officers or employees
of the Adviser to serve, without compensation from the Trust, as Trustees,
officers or agents of the Trust, if duly elected or appointed to such positions,
and subject to their individual consent and to any limitations imposed by law.
6. For purposes of this Agreement, brokerage commissions paid by a Fund
upon the purchase or sale of a Fund's portfolio securities or other assets shall
be considered a cost of the securities or assets of the Fund and shall be paid
by the Fund.
7. The Adviser is authorized to select the brokers, dealers, futures
commission merchants, banks, or any other agent or counterparty that will
execute the purchases and sales of a Fund's portfolio investments 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 Trust's Board of Trustees
and to the extent permitted by and in conformance with applicable law and the
-2-
rules and regulations thereunder (including Rule 17e-1 under the 1940 Act), the
Adviser may select brokers, dealers, futures commission merchants or other
persons affiliated with the Adviser. It is understood that the Adviser will not
be deemed to have acted unlawfully, or to have breached a fiduciary duty to the
Trust, or be in breach of any obligation owing to the Trust 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
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 Adviser's
overall responsibilities with respect to its accounts, including the Fund, as to
which it exercises investment discretion.
In addition, the Adviser may, to the extent permitted by applicable law
and the rules and regulations thereunder, aggregate purchase and sale orders of
portfolio investments with similar orders being made simultaneously for other
accounts managed by the Adviser or its affiliates, if in the Adviser's
reasonable judgment such aggregation shall result in an overall economic benefit
to a 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 a Fund occurs as part of any aggregate sale or purchase orders, the objective
of the Adviser and any of its affiliates involved in such transaction shall be
to allocate the securities or other assets so purchased or sold, as well as
expenses incurred in the transaction, among the Fund and other accounts in an
equitable manner. Nevertheless, each Fund acknowledges that under some
circumstances, such allocation may adversely affect the Fund with respect to the
price or size of the portfolio investments obtainable or salable. Whenever a
Fund and one or more other investment advisory clients of the Adviser have
available funds for investment, investments suitable and appropriate for each
will be allocated in a manner believed by the 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, the Adviser and its affiliates may purchase securities or other
instruments of an issuer for one client and at approximately the same time
recommend selling or sell the same or similar types of securities, assets or
instruments for another client.
The Adviser will not arrange purchases or sales of portfolio investments
between a Fund and other accounts advised by the Adviser or its affiliates
unless (a) such purchases or sales are in accordance with applicable law and the
rules and regulations thereunder (including Rule 17a-7 under the 1940 Act) and
the Trust's policies and procedures, (b) the Adviser determines the purchase or
sale is in the best interests of each Fund, and (c) the Trust's Board of
Trustees has approved these types of transactions.
To the extent a 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.
-3-
The Adviser will communicate to the officers and Trustees of the Trust
such information relating to transactions for the Funds as they may reasonably
request. In no instance will portfolio investments be purchased by or sold to
the Adviser or any affiliated person of either the Trust or the Adviser, except
as may be permitted under the 1940 Act, the rules and regulations thereunder or
any applicable exemptive orders.
The 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 (i) conform in all material respects to all applicable
rules and regulations of the Securities and Exchange Commission and
Commodity Futures Trading Commission, (ii) comply in all material respects
with all policies and procedures adopted by the Board of Trustees for the
Trust and communicated to the Adviser, and (iii) 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, commodity pool operator and commodity trading
advisory activities;
(c) will report regularly to the Board of Trustees of the Trust
(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 each
Fund, including, without limitation, review of the general investment
strategies of each Fund, the performance of each 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 Trust; and
(d) will prepare and maintain such books and records with respect
to each Fund's securities and other transactions as required under
applicable law and will prepare and furnish the Trust's Board of Trustees
such periodic and special reports as the Board of Trustees may reasonably
request. The Adviser further agrees that all records which it maintains
for each Fund are the property of the Fund and the 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.
8. Subject to applicable statutes and regulations, it is understood that
officers, Trustees, or agents of the Trust 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 Trust otherwise than as Trustees, officers or agents.
-4-
9. The Adviser shall not be liable for any loss sustained by reason of
the purchase, sale or retention of any asset, 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 obligations and duties under this Agreement.
10. Subject to obtaining the initial and periodic approvals required under
Section 15 of the 1940 Act (after taking into effect any exemptive order,
no-action assurances or other relief, rule or regulation upon which the
respective Fund may rely), 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 a Fund. In addition,
the Adviser may adjust from time to time the duties delegated to any
sub-adviser, the portion of portfolio assets of the Fund that the sub-adviser
shall manage and the fees to be paid to the sub-adviser pursuant to any
sub-advisory agreement or other arrangement entered into in accordance with this
Agreement, subject to the approvals set forth in Section 15 of the 1940 Act if
required after taking into account any exemptive order, no-action assurances or
other relief, rule or regulation upon which the respective Fund may rely.
Retention of one or more sub-advisers shall in no way reduce the
responsibilities or obligations of the Adviser under this Agreement and the
Adviser shall be responsible to a Fund for all acts or omissions of any
sub-adviser in connection with the performance of the Adviser's duties
hereunder. In addition, to the extent the respective Fund is relying on an
exemptive order or an amendment thereto permitting the Fund to hire one or more
sub-advisers or amend a sub-advisory agreement without shareholder approval, the
Adviser agrees to comply with any terms and conditions provided in such
exemptive order or amendment applicable to it.
11. The Trust acknowledges that the 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 Trust. In addition, the Trust
acknowledges that the persons employed by the Adviser to assist in the Adviser's
duties under this Agreement will not devote their full time to such efforts. It
is also agreed that the Adviser may use any supplemental research obtained for
the benefit of the Trust 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 on Schedule A
for each respective Fund, provided it has been approved in the manner required
by the 1940 Act (after taking into effect any exemptive order, no action
assurances, or other relief, rule or regulation upon which the Trust may rely).
This Agreement shall continue in effect until the two-year anniversary of the
date of its effectiveness as to a Fund, 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 (after taking into effect
any exemptive order, no action assurances, or other relief, rule or regulation
upon which the Trust may rely).
-5-
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 a Fund or by the Adviser upon sixty (60) days' written notice to the other
party. Each 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 Trust, or by vote of
a majority of the outstanding voting securities of the Trust, 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
the 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. This Agreement may be amended or modified only by a written instrument
executed by both parties.
14. 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.
15. 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.
16. All parties hereto are expressly put on notice of the Trust's
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 Trust by the Trust's officers as officers and not individually
and the obligations imposed upon the Trust or a Fund by this Agreement are not
binding upon any of the Trust's Trustees, officers or shareholders individually
but are binding only upon the assets and property of the respective Fund, and
persons dealing with the Trust must look solely to the assets of such Fund for
the enforcement of any claims.
17. This Agreement shall be construed in accordance with applicable
federal law and (except as to Section 16 hereof which shall be construed in
accordance with the laws of Massachusetts) the laws of the State of Illinois.
18. None of the provisions of this Agreement shall be for the benefit of,
or enforceable by, any person or entity that is not a party hereto.
19. Any action brought on or with respect to this Agreement or any other
document executed in connection herewith or therewith by a party to this
Agreement against another party to this Agreement shall be brought only in a
court of competent jurisdiction in Chicago, Cook County, Illinois, or if venue
does not lie in any such court only in a court of competent jurisdiction within
-6-
the State of Illinois (the "Chosen Courts"). Each party to this Agreement (a)
consents to jurisdiction in the Chosen Courts; (b) waives any objection to venue
in any of the Chosen Courts; and (c) waives any objection that any of the Chosen
Courts is an inconvenient forum. In any action commenced by a party hereto
against another party to the Agreement, there shall be no right to a jury trial.
THE RIGHT TO A TRIAL BY JURY IS EXPRESSLY WAIVED TO THE FULLEST EXTENT PERMITTED
BY LAW.
-7-
IN WITNESS WHEREOF, the Trust and the Adviser have caused this Agreement
to be executed on the day and year above written.
FIRST TRUST EXCHANGE-TRADED FUND VIII
By: /s/ James M. Dykas
-----------------------------
Name: James M. Dykas
Title: President and CEO
ATTEST:
-----------------------------
Name: Matthew B. Farber
Title: Assistant General Counsel
|
FIRST TRUST ADVISORS L.P.
By: /s/ James M. Dykas
-----------------------------
Name: James M. Dykas
Title: Chief Financial Officer
ATTEST:
-----------------------------
Name: Matthew B. Farber
Title: Assistant General Counsel
|
-8-
SCHEDULE A
(as of June 13, 2016)
FUNDS
ANNUAL RATE OF
AVERAGE DAILY EFFECTIVE
Series NET ASSETS DATE
-------------------------------------------------- -------------- ----------
First Trust Equity Market Neutral ETF 1.45%
First Trust CEF Income Opportunity ETF
|
First Trust Municipal CEF Income Opportunity ETF
DISTRIBUTION AGREEMENT
FIRST TRUST EXCHANGE-TRADED FUND VIII
September 15, 2016
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
To Whom It May Concern:
This is to confirm that, in consideration of the agreements hereinafter
contained, the above-named investment company (the "Trust") has agreed that you
shall be, during the term of this agreement, the distributor of shares of each
Series of the Trust set forth on Exhibit A hereto, as such Exhibit may be
revised from time to time (each, an "Series"). For purposes of this agreement
the term "Shares" shall mean the authorized shares of the relevant Series.
1. SERVICES AS DISTRIBUTOR
1.1. You will act as an agent of the Trust for the distribution of Shares
in Creation Units (as defined herein) covered by, and in accordance with, the
registration statement and prospectus then in effect under the Securities Act of
1933, as amended (the "1933 Act"), and will transmit promptly any orders
received by you for purchase or redemption of Shares in Creation Units to the
transfer agent for the Trust as identified in the Trust's prospectus. You shall
deliver or cause the delivery of a prospectus to persons purchasing Shares in
Creation Units and shall maintain records of both orders placed with you and
confirmations of acceptance furnished by you. You represent and warrant that you
are a broker-dealer registered under the Securities Exchange Act of 1934 (the
"1934 Act") and a member of the National Association of Securities Dealers, Inc.
You agree to comply with all of the applicable terms and provisions of the 1934
Act.
1.2. You agree to use your best efforts to perform the services
contemplated herein on a continuous basis. It is contemplated that you may enter
into "Participant Agreements" with broker-dealers who agree to solicit orders
for Shares. In addition, you may enter into sales or servicing agreements with
securities dealers, financial institutions and other industry professionals,
such as investment advisers, accountants and estate planning firms. In entering
into sales or servicing agreements, you will act only on your own behalf as
principal.
1.3. You shall act as distributor of Shares in Creation Units in
compliance in all material respects with all applicable laws, rules and
regulations,
including, without limitations, all rules and regulations made or adopted
pursuant to the Investment Company Act of 1940, as amended (the "1940 Act"), by
the Securities and Exchange Commission or any securities association registered
under the 1934 Act.
1.4. Whenever the parties hereto, in their collective judgment, mutually
agree that such action is warranted by unusual market, economic or political
conditions, or by abnormal circumstances of any kind deemed by them to render
sales of a Trust's Shares in Creation Units not in the best interest of the
Trust, the parties hereto may agree to decline to accept any orders for, or make
any sales of, any Shares in Creation Units until such time as the parties deem
it advisable to accept such orders and to make such sales.
1.5. The Trust agrees to pay all appropriate costs and expenses, including
but not limited to, all expenses in connection with the registration of Shares
under the 1933 Act and all expenses in connection with maintaining facilities
for the issue and transfer of Shares in Creation Units and for supplying
information, prices and other data to be furnished by the Trust hereunder, and
all expenses in connection with the preparation and printing of the Trust's
prospectuses and statements of additional information for regulatory purposes
and for distribution to shareholders; provided, however, that the Trust shall
not pay any of the costs of advertising or promotion for the sale of Shares,
except as such payments may be made pursuant to Rule 12b-1 of the 1940 Act.
1.6. The Trust agrees to execute any and all documents and to furnish any
and all information and otherwise to take all actions which may be reasonably
necessary in the discretion of the Trust's officers in connection with the
qualification of Shares for sale in Creation Units in such states as you may
designate to the Trust and the Trust may approve, and the Trust agrees to pay
all expenses which may be incurred in connection with such qualification. You
shall pay all expenses connected with your own qualification as a dealer under
state or Federal laws and, except as otherwise specifically provided in this
agreement, all other expenses incurred by you in connection with the sale of
Shares in Creation Units as contemplated in this agreement.
1.7. The Trust shall furnish you from time to time, for use in connection
with the sale of Shares in Creation Units, such information with respect to the
Trust or any relevant Series and the Shares as you may reasonably request, all
of which shall be signed by one or more of the Trust's duly authorized officers;
and the Trust warrants that the statements contained in any such information,
when so signed by the Trust's officers, shall be true and correct. The Trust
also shall furnish you upon request with: (a) semi-annual reports and annual
audited reports of the Trust's books and accounts made by independent public
accountants regularly retained by the Trust, (b) quarterly earnings statements
prepared by the Trust, (c) a monthly itemized list of the securities in the
Trust's or, if applicable, each Series' portfolio, (d) monthly balance sheets as
soon as practicable after the end of each month, and (e) from time to time such
additional information regarding the Trust's financial condition as you may
reasonably request.
1.8. The Trust represents to you that all registration statements and
prospectuses filed by the Trust with the Securities and Exchange Commission
under the 1933 Act and the 1940 Act, with respect to the Shares have been
prepared in conformity with the requirements of said Acts and rules and
regulations of the Securities and Exchange Commission thereunder. As used in
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this agreement the terms "registration statement" and "prospectus" shall mean
any registration statement and prospectus, including the statement of additional
information incorporated by reference therein, filed with the Securities and
Exchange Commission and any amendments and supplements thereto which at any time
shall have been filed with said Commission. The Trust represents and warrants to
you that any registration statement and prospectus, when such registration
statement becomes effective, will contain all statements required to be stated
therein in conformity with said Acts and the rules and regulations of said
Commission; that all statements of fact contained in any such registration
statement and prospectus will be true and correct when such registration
statement becomes effective; and that neither any registration statement nor any
prospectus when such registration statement becomes effective will include 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 not misleading.
The Trust may, but shall not be obligated to, propose from time to time such
amendment or amendments to any registration statement and such supplement or
supplements to any prospectus as it may deem necessary or advisable. If the
Trust shall not propose such amendment or amendments and/or supplement or
supplements within fifteen days after receipt by the Trust of a written request
from you to do so, you may, at your option, terminate this agreement or decline
to make offers of the Trust's securities until such amendments are made. The
Trust will give you reasonable notice in advance of its filing of any amendment
to any registration statement or supplement to any prospectus; provided,
however, that nothing contained in this agreement shall in any way limit the
Trust's right to file at any time such amendments to any registration statement
and/or supplements to any prospectus, of whatever character, as the Trust may
deem advisable, such right being in all respects absolute and unconditional.
1.9. The Trust authorizes you and any dealers with whom you have entered
into Participant Agreements to use any prospectus in the form most recently
furnished by the Trust in connection with the sale of Shares in Creation Units.
The Trust agrees to indemnify, defend and hold you, your several officers and
directors, and any person who controls you within the meaning of Section 15 of
the 1933 Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which you, your officers and directors, or any such
controlling persons, may incur under the 1933 Act, the 1940 Act or common law or
otherwise, (a) arising out of or on the basis of any untrue statement, or
alleged untrue statement, of a material fact required to be stated in either any
registration statement or any prospectus or any statement of additional
information, or (b) arising out of or based upon any omission, or alleged
omission, to state a material fact required to be stated in any registration
statement, any prospectus or any statement of additional information or
necessary to make the statements in any of them not misleading, or (c) arising
out of breach of any obligation, representation or warranty pursuant to this
Agreement by the Trust, or (d) the Trust's failure to comply with applicable
securities laws, except that the Trust's agreement to indemnify you, your
officers or directors, and any such controlling person will not be deemed to
cover any such claim, demand, liability or expense to the extent that it arises
out of or is based upon any such untrue statement, alleged untrue statement,
omission or alleged omission made in any registration statement, any prospectus
or any statement of additional information in reliance upon information
furnished by you, your officers, directors or any such controlling person to the
Trust or its representatives for use in the preparation thereof, and except that
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the Trust's agreement to indemnify you and the Trust's representations and
warranties set out in paragraph 1.8 of this Agreement will not be deemed to
cover any liability to the Trusts or their shareholders to which you would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of your duties, or by reason of your reckless
disregard of your obligations and duties under this Agreement ("Disqualifying
Conduct"). The Trust's agreement to indemnify you, your officers and directors,
and any such controlling person, as aforesaid, is expressly conditioned upon the
Trust's being notified of any action brought against you, your officers or
directors, or any such controlling person, such notification to be given by
letter, by facsimile or by telegram addressed to the Trust at its address set
forth above within a reasonable period of time after the summons or other first
legal process shall have been served. The failure so to notify the Trust of any
such action shall not relieve the Trust from any liability which the Trust may
have to the person against whom such action is brought by reason of any such
untrue, or alleged untrue, statement or omission, or alleged omission, otherwise
than on account of the Trust's indemnity agreement contained in this paragraph
1.9. The Trust will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but, in such case, such defense
shall be conducted by counsel of good standing chosen by the Trust and approved
by you. In the event the Trust elects to assume the defense of any such suit and
retain counsel of good standing approved by you, the defendant or defendants in
such suit shall bear the fees and expenses of any additional counsel retained by
any of them; but in case the Trust does not elect to assume the defense of any
such suit, the Trust will reimburse you, your officers and directors, or the
controlling person or persons named as defendant or defendants in such suit, for
the reasonable fees and expenses of any counsel retained by you or them. The
Trust's indemnification agreement contained in this paragraph 1.9 and the
Trust's representations and warranties in this Agreement shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of you, your officers and directors, or any controlling person, and shall
survive the delivery of any Shares. This agreement of indemnity will inure
exclusively to your benefit, to the benefit of your several officers and
directors, and their respective estates, and to the benefit of any controlling
persons or other affiliates, and their successors. The Trust agrees promptly to
notify you of the commencement of any litigation or proceedings against the
Trust or any of its officers or Board members in connection with the issue and
sale of Shares.
1.10. You agree to indemnify, defend and hold the Trust, its several
officers and Board members, and any person who controls the Trust within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Trust, its officers or Board
members, or any such controlling person, may incur under the 1933 Act, the 1940
Act, or under common law or otherwise, but only to the extent that such
liability or expense incurred by the Trust, its officers or Board members, or
such controlling person resulting from such claims or demands, (a) shall arise
out of or be based upon any information, statements or representations made or
provided by you in any sales literature or advertisements, or any Disqualifying
Conduct by you in connection with the offering and sale of any Shares, (b) shall
arise out of or be based upon any untrue, or alleged untrue, statement of a
material fact contained in information furnished in writing by you to the Trust
specifically for use in the Trust's registration statement and used in the
answers to any of the items of the registration statement or in the
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corresponding statements made in the prospectus or statement of additional
information, or shall arise out of or be based upon any omission, or alleged
omission, to state a material fact in connection with such information furnished
in writing by you to the Trust and required to be stated in such answers or
necessary to make such information not misleading, (c) arising out of your
breach of any obligation, representation or warranty pursuant to this Agreement,
or (d) your failure to comply with applicable securities laws. Your agreement to
indemnify the Trust, its officers and Board members, and any such controlling
person, as aforesaid, is expressly conditioned upon your being notified of any
action brought against the Trust, its officers or Board members, or any such
controlling person, such notification to be given by letter, by facsimile or by
telegram addressed to you at your address set forth above within a reasonable
period of time after the summons or other first legal process shall have been
served. The failure so to notify you of any such action shall not relieve you
from any liability which you may have to the Trust, its officers or Board
members, or to such controlling person by reason of any such untrue, or alleged
untrue, statement or omission, or alleged omission, otherwise than on account of
your indemnity agreement contained in this paragraph. You will be entitled to
assume the defense of such action, but, in such case, such defense shall be
conducted by counsel of good standing chosen by you and approved by an executive
officer of the Trust, if such action is based solely upon such alleged
misstatement or omission on your part, and in any other event Trust, its
officers or Board members, or such controlling person shall each have the right
to participate in the defense or preparation of the defense of any such action.
This agreement of indemnity will inure exclusively to the Trust's benefit, to
the benefit of the Trust's officers and Board members, and their respective
estates, and to the benefit of any controlling persons and their successors. You
agree promptly to notify the Trust of the commencement of any litigation or
proceedings against you or any of your officers or directors in connection with
the issue and sale of Shares.
1.11. No Shares shall be offered by either you or the Trust under any of
the provisions of this agreement and no orders for the purchase or sale of such
Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act or if and so long as a current prospectus as required by Section 10 of said
1933 Act is not on file with the Securities and Exchange Commission; provided,
however, that nothing contained in this paragraph 1.11 shall in any way restrict
or have any application to or bearing upon the Trust's obligation to redeem or
repurchase any Shares from any shareholder in accordance with the provisions of
the Trust's prospectus or charter documents.
1.12. The Trust agrees to advise you immediately in writing of the
occurrence of any of the following events, as soon as any such event comes to
the attention of the Trust:
(a) any request by the Securities and Exchange Commission for
amendments to the registration statement or prospectus then in effect or
for additional information;
(b) the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of the
registration statement or prospectus then in effect or the initiation of
any proceeding for that purpose;
I the happening of any event which makes untrue any statement of a
material fact made in the registration statement or prospectus then in
effect or which requires the making of a change in such registration
statement or prospectus in order to make the statements therein not
misleading; and
(d) all actions of the Securities and Exchange Commission with
respect to any amendments to any registration statement or prospectus
which may from time to time be filed with the Securities and Exchange
Commission.
2. OFFERING CREATION UNITS
Shares in Creation Units of each Series will be offered for sale by you at
a price per Creation Unit in the manner set forth in the then-current
prospectus, based on a net asset value determined in accordance with the Trust's
prospectus and charter documents. Any payments to dealers shall be governed by a
separate agreement between you and such dealer and the Trust's then-current
prospectus.
You will accept as compensation for the performance of your obligations
hereunder such compensation, if any, as may be provided for in any plan of
distribution adopted by the Trust with respect to the Trust or any Series
pursuant to Rule 12b-1 under the 1940 Act.
3. TERM
This Agreement shall become effective with respect to each Series of the
Trust as of the date set forth in Exhibit A attached hereto and will continue
for an initial two-year term from the date of effectiveness and is renewable
annually thereafter so long as such continuance is specifically approved (a) by
the Trust's Board on behalf of each Series or (b) by a vote of a majority (as
defined in the 1940 Act) of the Shares of the Trust or the relevant Series, as
the case may be, provided that in either event its continuance also is approved
by a majority of the Board members who are not "interested persons" (as defined
in the 1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. This agreement may be
terminated in respect of an Series at any time, without the payment of any
penalty, (i) by vote of a majority of the Trustees who are not interested
persons of the Trust (as defined under the 1940 Act) or (ii) by vote of a
majority (as defined under the 1940 Act) of the outstanding voting securities of
the relevant Series, on at least 60 days' written notice to you. This agreement
may also be terminated at any time by you, without the payment of any penalty,
upon 60 days' notice by you and will terminate automatically in the event of its
assignment (as defined under the 1940 Act).
4. MISCELLANEOUS
4.1. The Trust recognizes that your directors, officers and employees may
from time to time serve as directors, trustees, officers and employees of
corporations and business trusts (including other investment companies), and
that you or your affiliates may enter into distribution or other agreements with
such other corporations and trusts.
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4.2. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought.
4.3. This Agreement shall be governed by the laws of the State of New
York, without regard to principles of conflicts of laws.
4.4. 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.
Please confirm that the foregoing is in accordance with your understanding
and indicate your acceptance hereof by signing below, whereupon it shall become
a binding agreement between us.
Very truly yours,
FIRST TRUST EXCHANGE-TRADED FUND VIII
By
ACCEPTED:
FIRST TRUST PORTFOLIOS L.P.
By
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EXHIBIT A
(AS OF SEPTEMBER 15, 2016)
SERIES OF THE TRUST
SERIES EFFECTIVE DATE
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First Trust CEF Income Opportunity ETF September 28, 2016
First Trust Municipal CEF Income Opportunity ETF September 28, 2016
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EXECUTION
CUSTODY AGREEMENT
AGREEMENT, dated as of June 23, 2016 between First Trust Exchange-Traded
Fund VIII, a business trust organized and existing under the laws of the
Commonwealth of Massachusetts having its principal office and place of business
at 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187 (the "Trust") and
The Bank of New York Mellon, a New York banking corporation having its principal
office and place of business at 225 Liberty Street, New York, New York 10286
{"Custodian").
WITNESSETH:
WHEREAS, the Trust is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Trust, so authorized, intends that this Agreement be
applicable to each of its series as set forth on Schedule II (each such series
together with all other series subsequently established by the Trust and made
subject to this Agreement by amendment hereof, being referred to as a "Fund" and
collectively as the "Funds"); and
WHEREAS, the Trust desires to retain the Custodian to provide for the
Funds the services described herein, and the Custodian is willing to provide
such services, all as more fully set forth below;
Now, THEREFORE, in consideration of the mutual promises and agreements
contained herein, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words shall have the
meanings set forth below:
"Authorized Person" shall be any person, whether or not an officer or
employee of the Trust, duly authorized by the Trust's board to execute any
Certificate or to give any Oral Instruction with respect to one or more
Accounts, such persons to be designated in a Certificate annexed hereto as
Schedule I hereto or such other Certificate as may be received by Custodian from
time to time.
"BNYM Affiliate" shall mean any office, branch or subsidiary of The Bank
of New York Mellon Corporation.
"Book-Entry System" shall mean the Federal Reserve/Treasury book-entry
system for receiving and delivering securities, its successors and nominees.
"Business Day" shall mean any day on which Custodian and relevant
Depositories are open for business.
"Certificate" shall mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement to be given to Custodian,
which is actually received by Custodian by letter or facsimile transmission and
signed on behalf of the Trust by an Authorized Person or a person reasonably
believed by Custodian to be an Authorized Person.
"Composite Currency Unit" shall mean the Euro or any other composite
currency unit consisting of the aggregate of specified amounts of specified
currencies, as such unit may be constituted from time to time.
"Depository" shall include (a) the Book-Entry System, (b) the Depository
Trust Company, (c) any other securities depository, book-entry system or
clearing agency authorized to act as such under applicable law identified to the
Trust from time to time, and (d) the respective successors and nominees of the
foregoing.
"Foreign Depository" shall mean (a) Euroclear, (b) Clearstream Banking,
societe anonyme, (c) each Eligible Securities Depository as defined in Rule
17f-7 under the Investment Company Act of 1940, as amended, identified to the
Trust prior to the use of such Foreign Depository on Schedule III (as the same
may be changed by Custodian from time to time and identified to the Trust) and
(d) the respective successors and nominees of the foregoing identified to the
Trust prior to the use of such successor or nominee.
"Instructions" shall mean communications transmitted by electronic or
telecommunications media, including S.W.I.F.T., computer-to-computer interface,
or dedicated transmission lines.
"Oral Instructions" shall mean verbal instructions received by Custodian
from an Authorized Person or from a person reasonably believed by Custodian to
be an Authorized Person.
"Securities" shall include, without limitation, any common stock and other
equity securities, bonds, debentures and other debt securities, notes, mortgages
or other obligations, and any instruments representing rights to receive,
purchase, or subscribe for the same, or representing any other rights or
interests therein (whether represented by a certificate or held in a Depository
or by a Subcustodian).
"Subcustodian" shall mean a bank (including any branch thereof) or other
financial institution (other than a Foreign Depository) which is utilized by
Custodian in connection with the purchase, sale or custody of Securities
hereunder and identified to the Trust from time to time, and their respective
successors and nominees.
"Transfer Agent" shall mean The Bank ofNew York Mellon.
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ARTICLE II
APPOINTMENT OF CUSTODIAN; ACCOUNTS;
REPRESENTATIONS, WARRANTIES, AND COVENANTS
Section 1. (a) The Trust hereby appoints Custodian as custodian of all
Securities and cash at any time delivered to Custodian during the term of this
Agreement, and authorizes Custodian to hold Securities in registered form in its
name or the name of its nominees. Custodian hereby accepts such appointment and
agrees to establish and maintain one or more securities accounts and cash
accounts for each Fund in which Custodian will hold Securities and cash as
provided herein. Custodian shall maintain books and records segregating the
assets of each Fund from the assets of any other Fund. Such accounts (each, an
"Account"; collectively, the "Accounts") shall be in the name of the Trust.
(b) Custodian may from time to time establish on its books and records
such subaccounts within each Account as the Trust and Custodian may agree upon
(each a "Special Account"), and Custodian shall reflect therein such assets as
the Trust may specify in a Certificate or Instructions.
(c) Custodian may from time to time establish pursuant to a written
agreement with and for the benefit of a broker, dealer, future commission
merchant or other third party identified in a Certificate or Instructions such
accounts on such terms and conditions as the Trust and Custodian shall agree,
and Custodian shall transfer to such account such Securities and money as the
Trust may specify in a Certificate or Instructions.
Section 2. The Trust hereby represents and warrants, which representations
and warranties shall be continuing and shall be deemed to be reaffirmed upon
each delivery of a Certificate or each giving of Oral Instructions or
Instructions by the Trust, that:
(a) It is duly organized and existing under the laws of the
jurisdiction of its organization, with full power to carry on its business
as now conducted, to enter into this Agreement, and to perform its
obligations hereunder;
(b) This Agreement has been duly authorized, executed and delivered
by the Trust, approved by a resolution of its board, constitutes a valid
and legally binding obligation of the Trust in respect of each Fund
thereof from time to time existing, enforceable in accordance with its
terms, and there is no statute, regulation, rule, order or judgment
binding on it, and no provision of its charter or by-laws, nor of any
mortgage, indenture, credit agreement or other contract binding on it or
affecting its property, which would prohibit its execution or performance
of this Agreement;
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(c) To the best of its knowledge and belief, it is conducting its
business in substantial compliance with all applicable laws and
requirements, both state and federal, and has obtained all regulatory
licenses, approvals and consents necessary to carry on its business as now
conducted;
(d) It will not knowingly use the services provided by Custodian
hereunder in any manner that is, or will result in, a violation of any
law, rule or regulation applicable to the Trust;
(e) If the Trust's foreign custody manager is not the Custodian or
a BNYM Affiliate, the Trust's Board or its foreign custody manager, as
defined in Rule 17f-5 under the Investment Company Act of 1940, as amended
(the "'40 Act"), has determined that use of each Subcustodian (including
any Replacement Custodian (as defined below)) which Custodian or any
Subcustodian is authorized to utilize in accordance with Section 1(a) of
Article III hereof, satisfies the applicable requirements of the '40 Act
and 17f-5 thereunder, as the case may be;
(f) Prior to any settlement instructions being given to the
Custodian requiring the services of a Foreign Depository, the Trust's
investment advisor has indicated that it shall have determined that the
custody arrangements of such Foreign Depository provide reasonable
safeguards against the custody risks associated with maintaining assets
with such Foreign Depository within the meaning of Rule 17f-7 under the
'40 Act;
(g) It is fully informed of the protections and risks associated
with various methods of transmitting Instructions and Oral Instructions
and delivering Certificates to Custodian, shall cause each Authorized
Person to safeguard and treat with extreme care any user and authorization
codes, passwords and/or authentication keys, understands that there may be
more secure methods of transmitting or delivering the same than the
methods selected by the Trust, agrees that the security procedures (if
any) to be utilized provide a commercially reasonable degree of protection
in light of its particular needs and circumstances, and acknowledges and
agrees that Instructions need not be reviewed by Custodian, may
conclusively be presumed by Custodian to have been given by person(s) duly
authorized, and may be acted upon as given;
(h) It shall manage its borrowings, including, without limitation,
any advance or overdraft (including any day-light overdraft) in the
Accounts, so that the aggregate of its total borrowings for each Fund does
not exceed the amount such Fund is permitted to borrow under the '40 Act;
(i) Its transmission or giving of, and Custodian acting upon and in
reliance on, Certificates, Instructions, or Oral Instructions pursuant to
this Agreement shall at all times comply with the '40 Act;
(j) It shall impose and maintain restrictions on the destinations
to which cash may be disbursed by Instructions to ensure that each
disbursement is for a proper purpose; and
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(k) It has the right to make the pledge and grant the security
interest and security entitlement to Custodian contained in Section 1 of
Article V hereof, free of any right of redemption or prior claim of any
other person or entity, such pledge and such grants shall have a first
priority subject to no setoffs, counterclaims, or other liens or grants
prior to or on a parity therewith, and it shall take such additional steps
as Custodian may require to assure such priority.
Section 3. The Custodian hereby represents and warrants, which
representations and warranties shall be continuing, that:
(a) It is duly organized and existing under the laws of the
jurisdiction of its organization, with full power to carry on its business as
now conducted, to enter into this Agreement, and to perform its obligations
hereunder;
(b) This Agreement has been duly authorized, executed and delivered
by the Custodian, constitutes a valid and legally binding obligation of the
Custodian, enforceable in accordance with its terms, and there is no statute,
regulation, rule, order ore judgment binding it, and no provision of its charter
or by-laws, nor of any mortgage, indenture, credit agreement or other contract
binding on it or affecting its property, which would prohibit its execution or
performance of this Agreement;
(c) It will not knowingly use the assets delivered to it, or
perform its services, pursuant to this Agreement in any manner that is, or will
result in, a violation of any law, rule or regulation applicable to Custodian;
(d) Upon the reasonable request of the Trust's Chief Compliance
officer, it will inform the Trust of any material changes to be made or
imminently to be made to its policies and procedures relating to the services
contemplated herein;
(e) It has at least the minimum qualifications required by Section
17(f)(1) of the '40 Act to act as custodian of the Securities and cash of the
Fund(s); and
(f) It has, and will maintain, such backup, contingency and
disaster recovery procedures as are required by its regulators.
Section 4. The Trust hereby covenants that it shall from time to time
complete and execute and deliver to Custodian upon Custodian's request a Form FR
U-l (or successor form) whenever the Trust borrows from Custodian any money to
be used for the purchase or carrying of margin stock as defined in Federal
Reserve Regulation U.
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Article III
Custody and Related Services
Section 1. (a) Subject to the terms hereof, the Trust hereby authorizes
Custodian to hold any Securities and cash, all payments of income, payments of
principal or capital distributions with respect to the Securities, received by
it from time to time for the account of the Trust and its applicable Fund.
Custodian shall be entitled to utilize, subject to subsection (c) of this
Section 1, Depositories, Subcustodians (provided (i) if the Custodian employs a
Subcustodian for custody of assets located in the U.S., the Custodian has
received notice of the approval of such Subcustodian by the Trust's board, and
(ii) if the Trust's foreign custody manager is not the Custodian or a BNYM
Affiliate, the Custodian has received notice of the Subcustodians approved by
the Trust's board or foreign custody manager for custody of assets located
outside the U.S.), and, subject to subsection (d) of this Section 1, Foreign
Depositories, to the extent possible in connection with its performance
hereunder. Securities and cash held in a Depository or Foreign Depository will
be held subject to the rules, terms and conditions of such entity. Securities
and cash held through Subcustodians shall be held subject to the terms and
conditions of Custodian's agreements with such Subcustodians. Subcustodians may
be authorized to hold Securities in Foreign Depositories in which such
Subcustodians participate. Unless otherwise required by local law or practice or
a particular subcustodian agreement, Securities deposited with a Subcustodian, a
Depositary or a Foreign Depository will be held in a commingled account, in the
name of Custodian, holding only Securities held by Custodian as custodian for
its customers. Custodian shall identify on its books and records the Securities
and cash belonging to the Trust and each Fund thereof, whether held directly or
indirectly through Depositories, Foreign Depositories, or Subcustodians.
Custodian shall, directly or indirectly through Subcustodians, Depositories, or
Foreign Depositories, endeavor, to the extent feasible, to hold Securities in
the country or other jurisdiction in which the principal trading market for such
Securities is located, where such Securities are to be presented for
cancellation and/or payment and/or registration, or where such Securities are
acquired. Custodian at any time may cease utilizing any Subcustodian and/or may
replace a Subcustodian with a different Subcustodian (the "Replacement
Subcustodian"). In the event Custodian selects a Replacement Subcustodian,
Custodian shall not utilize such Replacement Subcustodian until after the
Trust's board or foreign custody manager has determined that utilization of such
Replacement Subcustodian satisfies the requirements of the '40 Act and Rule
17f-5 thereunder.
(b) In the event that the Trust desires to have the Custodian serve as
foreign custody manager to a Fund, and the Custodian agrees to provide such
services, the Trust and Custodian shall enter into a Foreign Custody Manager
Agreement substantially in the form attached as Appendix II.
(c) Unless applicable law otherwise requires or Custodian has received a
Certificate or Instructions to the contrary, Custodian shall hold Securities
indirectly through a Subcustodian only if (i) the Securities are not subject to
any right, charge, security interest, lien or claim of any
-6-
kind in favor of such Subcustodian or its creditors or operators, including a
receiver or trustee in bankruptcy or similar authority, except for a claim of
payment for the safe custody or administration of Securities on behalf of the
Trust by such Subcustodian, and (ii) beneficial ownership of the Securities is
freely transferable without the payment of money or value other than for safe
custody or administration.
(d) With respect to each Depository, Custodian (i) shall exercise due care
in accordance with reasonable commercial standards in discharging its duties as
a securities intermediary to obtain and thereafter maintain Securities or
financial assets deposited or held in such Depository and (ii) will provide,
promptly upon request by the Trust, such reports as are available concerning the
internal accounting controls and financial strength of the Depository.
(e) With respect to each Foreign Depository, Custodian shall exercise
reasonable care, prudence, and diligence (i) to provide the Trust with an
analysis of the custody risks associated with maintaining assets with the
Foreign Depository in accordance with Rule 17f-7(a)(l)(i)(A) of the '40 Act, and
(ii) to monitor such custody risks on a continuing basis and promptly notify the
Trust of any material change in such risks in accordance with Rule
17f-7(a)(l)(i)(B) of the '40 Act. The Custodian shall only utilize a Foreign
Depository that it has determined satisfies the requirements of Rule 17f-7(b)(l)
as an "Eligible Securities Depository" (as defined in Rule 17f- 7(b)(1)) and has
provided the risk analysis required in (i) of this paragraph (e). In such a
manner as Custodian deems reasonable, Custodian shall give the Trust prompt
notice of any material change known to Custodian, that would adversely affect
Custodian's determination that an entity is an Eligible Securities Depository.
The Trust acknowledges and agrees that such analysis and monitoring shall be
made on the basis of, and limited by, information gathered from Subcustodians or
through publicly available information otherwise obtained by Custodian, and
shall not include any evaluation of Country Risks. As used herein the term
"Country Risks" shall mean with respect to any Foreign Depositoiy: (a) the
financial infrastructure of the country in which it is organized, (b) such
country's prevailing custody and settlement practices, (c) nationalization,
expropriation or other governmental actions, (d) such country's regulation of
the banking or securities industry, (e) currency controls, restrictions,
devaluations or fluctuations, and (f) market conditions which affect the order
execution of securities transactions or affect the value of securities.
(f) With respect to each country in which the Custodian or a Subcustodian
maintains assets for a Fund pursuant to this Agreement, the Custodian will, as
requested by the Trust from time to time, furnish the Trust the information
specified in Appendix III.
Section 2. Custodian shall furnish the Trust with an advice of daily
transactions (including a confirmation of each transfer of Securities) and a
monthly summary of all transfers to or from the Accounts.
Section 3. With respect to all Securities held hereunder, Custodian shall,
unless otherwise instructed to the contrary:
(a) Receive all income and other payments and advise the Trust as
promptly as practicable of any such amounts due but not paid;
-7-
(b) Present for payment and receive the amount paid upon all
Securities which may mature and advise the Trust as promptly as
practicable of any such amounts due but not paid;
(c) Forward to the Trust copies of all information or documents that
it may actually receive from an issuer of Securities which, in the opinion
of Custodian, are intended for the beneficial owner of Securities;
(d) Execute, as custodian, any certificates of ownership,
affidavits, declarations or other certificates under any tax laws now or
hereafter in effect in connection with the collection of bond and note
coupons;
(e) Hold directly or through a Depository, a Foreign Depository, or
a Subcustodian all rights and similar Securities issued with respect to
any Securities credited to an Account hereunder; and
(f) Endorse for collection checks, drafts or other negotiable
instruments.
Section 4. (a) Custodian shall notify the Trust of rights or discretionary
actions with respect to Securities held hereunder, and of the date or dates by
when such rights must be exercised or such action must be taken, provided that
Custodian has actually received, from the issuer or the relevant Depository
(with respect to Securities issued in the United States) or from the relevant
Subcustodian, Foreign Depository, or a nationally or internationally recognized
bond or corporate action service to which Custodian subscribes, timely notice of
such rights or discretionary corporate action or of the date or dates such
rights must be exercised or such action must be taken. Absent actual receipt of
such notice, Custodian shall have no liability for failing to so notify the
Trust.
(b) Whenever Securities (including, but not limited to, warrants, options,
tenders, options to tender or non-mandatory puts or calls) confer discretionary
rights on the Trust or provide for discretionary action or alternative courses
of action by the Trust, the Trust shall be responsible for making any decisions
relating thereto and for directing Custodian to act. In order for Custodian to
act, it must receive the Trust's Certificate or Instructions at Custodian's
offices, addressed as Custodian may from time to time request, not later than
noon (New York time) at least two (2) Business Days prior to the last scheduled
date to act with respect to such Securities (or such earlier date or time as
Custodian may specify to the Trust). Absent Custodian's timely receipt of such
Certificate or Instructions, Custodian shall not be liable for failure to take
any action relating to or to exercise any rights conferred by such Securities.
Section 5. All voting rights with respect to Securities, however
registered, shall be exercised by the Trust or its designee. For Securities
issued in the United States, Custodian's only duty shall be to mail to the Trust
any documents (including proxy statements, annual reports and signed proxies)
actually received by Custodian relating to the exercise of such voting rights.
With respect to Securities issued outside of the United States, Custodian's only
duty shall be to provide the Trust with access to a provider of global proxy
-8-
services at the Trust's request. The Trust shall be responsible for all costs
associated with its use of such services.
Section 6. Custodian shall promptly advise the Trust upon Custodian's
actual receipt of notification of the partial redemption, partial payment or
other action affecting less than all Securities of the relevant class. If
Custodian, any Subcustodian, any Depository, or any Foreign Depository holds any
Securities in which the Trust has an interest as part of a fungible mass,
Custodian, such Subcustodian, Depository, or Foreign Depository may select the
Securities to participate in such partial redemption, partial payment or other
action in any non-discriminatory manner that it customarily uses to make such
selection.
Section 7. Custodian shall not under any circumstances accept bearer
interest coupons which have been stripped from United States federal, state or
local government or agency securities unless explicitly agreed to by Custodian
in writing.
Section 8. The Trust on behalf of the applicable Fund shall be liable for
all taxes, assessments, duties and other governmental charges, including any
interest or penalty with respect thereto {"Taxes"), with respect to any cash or
Securities held on behalf of the Trust and the applicable Fund or any
transaction related thereto. The Trust on behalf of the applicable Fund shall
indemnify Custodian and each Subcustodian for the amount of any Tax that
Custodian, any such Subcustodian or any other withholding agent is required
under applicable laws (whether by assessment or otherwise) to pay on behalf of,
or in respect of income earned by or payments or distributions made to or for
the account of the Trust on behalf of the applicable Fund (including any payment
of Tax required by reason of an earlier failure to withhold), except to the
extent that any Taxes are the direct result of the bad faith, negligence or
willful misconduct on the part of the Custodian. Custodian shall, or shall
instruct the applicable Subcustodian or other withholding agent to, withhold the
amount of any Tax which is required to be withheld under applicable law upon
collection of any dividend, interest or other distribution made with respect to
any Security and any proceeds or income from the sale, loan or other transfer of
any Security. In the event that Custodian or any Subcustodian is required under
applicable law to pay any Tax for or in respect of the Trust on behalf of the
applicable Fund, Custodian is hereby authorized to withdraw cash from any cash
account of the applicable Fund in the amount required to pay such Tax and to use
such cash, or to remit such cash to the appropriate Subcustodian or other
withholding agent, for the timely payment of such Tax in the manner required by
applicable law. If the aggregate amount of cash in all cash accounts is not
sufficient to pay such Tax, Custodian shall promptly notify the Trust on behalf
of the applicable Fund of the additional amount of cash (in the appropriate
currency) required, and the Trust on behalf of the applicable Fund shall
directly deposit such additional amount in the appropriate cash account promptly
-9-
after receipt of such notice, for use by Custodian as specified herein. In the
event that Custodian reasonably believes that Trust is eligible, pursuant to
applicable law or to the provisions of any tax treaty, for a reduced rate of, or
exemption from, any Tax which is otherwise required to be withheld or paid for
or in respect of the Trust on behalf of the applicable Fund under any applicable
law, Custodian shall, or shall instruct the applicable Subcustodian or
withholding agent to, (i) provide the Trust with required forms to apply for
such reduction or exemption, if any, and, if such service is provided by the
applicable Subcustodian, request such Subcustodian continually to monitor the
availability of any reduction or exemption (and the Custodian shall provide to
the Trust from time to time upon request a list of the Subcustodians providing
such monitoring service), and (ii) either withhold or pay such Tax at such
reduced rate or refrain from withholding or paying such Tax, as appropriate;
provided that Custodian shall have received from the Trust all documentary
evidence of residence or other qualification for such reduced rate or exemption
required to be received under such applicable law or treaty. In the event that
Custodian reasonably believes that a reduced rate of, or exemption from, any Tax
is obtainable only by means of an application for refund, Custodian and the
applicable Subcustodian shall have no responsibility for the accuracy or
validity of any forms or documentation provided by the Trust to Custodian
hereunder. The Trust on behalf of the applicable Fund hereby agrees to indemnify
and hold harmless Custodian and each Subcustodian in respect of any liability
arising from any underwithholding or underpayment of any Tax which results from
the inaccuracy or invalidity of any such forms or other documentation, and such
obligation to indemnify shall be a continuing obligation of the Trust on behalf
of the applicable Fund, its successors and assigns notwithstanding the
termination of this Agreement.
Section 9. (a) For the purpose of settling Securities and foreign exchange
transactions, the Trust shall provide Custodian with sufficient immediately
available funds for all transactions by such time and date as conditions in the
relevant market dictate. As used herein, "sufficient immediately available
funds" shall mean either (i) sufficient cash denominated in U.S. dollars to
purchase the necessary foreign currency, or (ii) sufficient applicable foreign
currency, to settle the transaction. Custodian shall provide the Trust with
immediately available funds each day which result from the actual settlement of
all sale transactions, based upon advices received by Custodian from
Subcustodians, Depositories, and Foreign Depositories. Such funds shall be in
U.S. dollars or such other currency as the Trust may specify to Custodian.
(b) Any foreign exchange transaction effected by Custodian in connection
with this Agreement may be entered with Custodian or a BNYM Affiliate acting as
principal or otherwise through customary banking channels upon such terms, and
for such compensation, as the Trust and the Custodian or its affiliate may agree
upon. The Trust may issue a standing Certificate or Instructions with respect to
foreign exchange transactions, but Custodian or its affiliate will establish
terms of trading, rules or limitations concerning any foreign exchange facility
made available to the Trust. The Trust shall bear all risks of investing in
Securities or holding cash denominated in a foreign currency. Without limiting
the foregoing, the Trust shall bear the risks that rules or procedures imposed
by Depositories, exchange controls, assets freezes or other laws, rules,
regulations or orders shall prohibit or impose burdens or costs on the transfer
to, by or for the accounts of the Trust with respect to an applicable Fund of
Securities or cash held outside the United States or denominated in a currency
other than U.S. dollars or the conversion of cash from one currency into another
currency. Custodian shall not be obligated to substitute another currency for a
currency whose transferability, convertibility or availability has been affected
by such law, regulation, rule or procedure. Neither Custodian nor any
Subcustodian shall be liable to the Trust or any Fund for loss resulting from
any of the foregoing events.
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(c) To the extent that Custodian has agreed to provide pricing or other
information services in connection with this Agreement, Custodian is authorized
to utilize any vendor (including brokers and dealers of Securities) reasonably
believed by Custodian to be reliable to provide such information. The Trust
understands that certain pricing information with respect to complex financial
instruments (e.g., derivatives) may be based on calculated amounts rather than
actual market transactions and may not reflect actual market values, and that
the variance between such calculated amounts and actual market values may or may
not be material. Where vendors do not provide information for particular
Securities or other property, an Authorized Person may advise Custodian in a
Certificate regarding the fair market value of, or provide other information
with respect to, such Securities or property as determined by it in good faith.
Custodian shall not be liable for any loss, damage or expense incurred as a
result of errors or omissions with respect to any pricing or other information
utilized by Custodian hereunder.
Section 10. Custodian shall promptly send to the Trust (a) any reports it
receives from a Depository on such Depository's system of internal accounting
control, and (b) such reports on its own system of internal accounting control
as the Trust may reasonably request from time to time.
Section 11. Until such time as Custodian receives a certificate to the
contrary with respect to a particular Security, Custodian may release the
identity of the Trust to an issuer which requests such information pursuant to
the Shareholder Communications Act of 1985 for the specific purpose of direct
communications between such issuer and shareholder.
ARTICLE IV
PURCHASE AND SALE OF SECURITIES; CREDITS TO ACCOUNT
Section 1. Promptly after each purchase or sale of Securities by the
Trust, the Trust shall deliver to Custodian a Certificate or Instructions, or
with respect to a purchase or sale of a Security generally required to be
settled on the same day the purchase or sale is made, Oral Instructions
specifying all information Custodian may reasonably request to settle such
purchase or sale. Custodian shall account for all purchases and sales of
Securities on the actual settlement date unless otherwise agreed by Custodian.
Section 2. The Trust understands that when Custodian is instructed to
deliver Securities against payment, delivery of such Securities and receipt of
payment therefor may not be completed simultaneously. Notwithstanding any
-11-
provision in this Agreement to the contrary, settlements, payments and
deliveries of Securities may be effected by Custodian or any Subcustodian in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction in which the transaction
occurs, including, without limitation, delivery to a purchaser or dealer
therefor (or agent) against receipt with the expectation of receiving later
payment for such Securities. The Trust assumes full responsibility for all
risks, including, without limitation, credit risks, involved in connection with
such deliveries of Securities. Section 3. Custodian may, as a matter of
bookkeeping convenience or by separate agreement with the Trust, credit the
Account with the proceeds from the sale, redemption or other disposition of
Securities or interest, dividends or other distributions payable on Securities
prior to its actual receipt of final payment therefor. All such credits shall be
conditional until Custodian's actual receipt of final payment and may be
reversed by Custodian to the extent that final payment is not received. Payment
with respect to a transaction will not be "final" until Custodian shall have
received immediately available funds which under applicable local law, rule
and/or practice are irreversible and not subject to any security interest, levy
or other encumbrance, and which are specifically applicable to such transaction.
ARTICLE V
OVERDRAFTS OR INDEBTEDNESS
Section 1. If Custodian should in its sole discretion advance funds, in
any currency, on behalf of any Fund which results in an overdraft (including,
without limitation, any day-light overdraft) because the money held by Custodian
in an Account for such Fund shall be insufficient to pay the total amount
payable upon a purchase of Securities specifically allocated to such Fund, as
set forth in a Certificate, Instructions or Oral Instructions, or if an
overdraft arises in the separate account of a Fund for some other reason,
including, without limitation, because of a reversal of a conditional credit or
the purchase of any currency, or if the Trust is for any other reason indebted
to Custodian with respect to a Fund, including any indebtedness to The Bank of
New York Mellon under a cash management and related services agreement with the
Trust, if any (except a borrowing for investment or for temporary or emergency
purposes using Securities as collateral pursuant to a separate agreement and
subject to the provisions of Section 2 of this Article), such overdraft or
indebtedness shall be deemed to be a loan made by Custodian to the Trust for
such Fund payable on demand and shall bear interest from the date incurred at a
rate per annum ordinarily charged by Custodian to its institutional customers in
the relevant currency, as such rate may be adjusted from time to time. In
addition, the Trust hereby agrees that Custodian shall to the maximum extent
permitted by law (but in no event greater than the amount of such overdraft or
indebtedness plus applicable accrued interest) have a continuing lien, security
interest, and security entitlement in and to any property, including, without
limitation, any investment property or any financial asset, of such Fund at any
time held by Custodian for the benefit of such Fund or in which such Fund may
-12-
have an interest which is then in Custodian's possession or control or in
possession or control of any third party acting in Custodian's behalf. The Trust
authorizes Custodian, in its sole discretion, at any time to charge any such
overdraft or indebtedness together with interest due thereon against any balance
of account standing to such Fund's credit on Custodian's books. Section 2. If
the Trust borrows money from any bank (including Custodian if the borrowing is
pursuant to a separate agreement) for investment or for temporary or emergency
purposes using Securities held by Custodian hereunder as collateral for such
borrowings, the Trust shall deliver to Custodian a Certificate specifying with
respect to each such borrowing: (a) the Fund to which such borrowing relates;
(b) the name of the bank, (c) the amount of the borrowing, (d) the time and
date, if known, on which the loan is to be entered into, (e) the total amount
payable to the Trust on the borrowing date, (f) the Securities to be delivered
as collateral for such loan, including the name of the issuer, the title and the
number of shares or the principal amount of any particular Securities, and (g) a
statement specifying whether such loan is for investment purposes or for
temporary or emergency purposes and that such loan is in conformance with the
'40 Act and the applicable Fund's prospectus. Custodian shall deliver on the
borrowing date specified in a Certificate the specified collateral against
payment by the lending bank of the total amount of the loan payable, provided
that the same conforms to the total amount payable as set forth in the
Certificate. Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. Custodian shall deliver such Securities as additional collateral as
may be specified in a Certificate to collateralize further any transaction
described in this Section. The Trust shall cause all Securities released from
collateral status to be returned directly to Custodian, and Custodian shall
receive from time to time such return of collateral as may be tendered to it. In
the event that the Trust fails to specify in a Certificate the Fund, the name of
the issuer, the title and number of shares or the principal amount of any
particular Securities to be delivered as collateral by Custodian, Custodian
shall not be under any obligation to deliver any Securities.
ARTICLE VI
SALE AND REDEMPTION OF SHARES
Custodian shall, upon receipt of instructions from the Transfer Agent,
make funds and securities available for payment to, or in accordance with the
instructions of, the Transfer Agent for the redemption or repurchase of shares
of the applicable Fund {"Shares") which shall have been accepted by the Transfer
Agent. The Custodian will transfer any Securities to or on the order of the
person identified by the Transfer Agent in the manner specified by the Transfer
Agent (either through the Depository Trust Company ("DTC") or otherwise). Any
cash redemption payment (less any applicable cash redemption transaction fees)
shall be effected as specified by the Transfer Agent either through DTC or
through wire transfer in the case of redemptions effected outside of DTC. All
funds and securities to be made available for payment with respect to a
transaction, shall be out of funds and securities held for the Account of the
specified Fund.
-13-
ARTICLE VII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
Section 1. Whenever the Trust shall determine that a Fund shall pay a
dividend or distribution on Shares it shall furnish to Custodian Instructions or
a Certificate setting forth with respect to the Fund specified therein the date
of the declaration of such dividend or distribution, the total amount payable,
and the payment date.
Section 2. Upon the payment date specified in such Instructions or
Certificate, Custodian shall pay out of the money held for the account of such
Fund the total amount payable to the dividend agent of the Trust specified
therein.
ARTICLE VIII
CONCERNING CUSTODIAN
Section 1. (a) Custodian shall exercise reasonable care and diligence in
carrying out all of its duties and obligations under this Agreement. Except as
otherwise expressly provided herein, Custodian shall not be liable for any
costs, expenses, damages, liabilities or claims, including attorneys' and
accountants' fees (collectively, "Losses"), incurred by or asserted against the
Trust or, or in respect of, any Fund, except those Losses arising out of
Custodian's own negligence, bad faith, willful misconduct or reckless disregard
of its obligations under this Agreement. Custodian shall have no liability
whatsoever for the action or inaction of any Depositories or of Foreign
Depositories, except in each case to the extent such action or inaction is a
direct result of the Custodian's failure to fulfill its duties hereunder. With
respect to any Losses incurred by the Trust or any Fund as a result of the acts
or any failures to act by any Subcustodian (other than a BNYM Affiliate),
Depository or Foreign Depository, Custodian shall take appropriate action to
recover such Losses from such Subcustodian, Depository or Foreign Depository,
and Custodian's sole responsibility and liability to the Trust or Fund shall be
limited to amounts so received from such Subcustodian, Depository or Foreign
Depository (exclusive of costs and expenses incurred by Custodian) except to the
extent the action or inaction of the relevant Subcustodian; Depository or
Foreign Depository is a direct result of the Custodian's own negligence, bad
faith or willful misconduct. In no event shall Custodian be liable to the Trust,
any Fund or any third party for special, indirect or consequential damages, or
lost profits or loss of business, arising in connection with this Agreement,
except Custodian shall be liable to the Trust and any applicable Fund for direct
money damages caused by Custodian's own negligence, bad faith or willful
misconduct, nor shall the Custodian or any Subcustodian (except only with
respect to clause (vii), which shall not limit a Subcustodian's liability in
respect of its own insolvency) be liable: (i) for acting in accordance with any
Certificate or Oral Instructions actually received by Custodian and reasonably
believed by Custodian to be given by an Authorized Person; (ii) for acting in
accordance with Instructions without reviewing the same; (iii) for conclusively
presuming (in Custodian's reasonable judgment) that all Instructions are given
only by person(s) duly authorized; (iv) for conclusively presuming (in
Custodian's reasonable judgment) that all disbursements of cash directed by the
Trust, whether by a Certificate, an Oral Instruction, or an Instruction, are in
accordance with Sections 2(i) and (j) of Article II hereof; (v) for holding
property in any particular country, including, but not limited to, Losses
-14-
resulting from nationalization, expropriation or other governmental actions;
regulation of the banking or securities industry; exchange or currency controls
or restrictions, devaluations or fluctuations; availability of cash or
Securities or market conditions which prevent the transfer of property or
execution of Securities transactions or affect the value of property; (vi) for
any Losses due to forces beyond the control of Custodian, including without
limitation strikes, work stoppages, acts of war or terrorism, insurrection,
revolution, nuclear or natural catastrophes or acts of God, or interruptions,
loss or malfunctions of utilities, communications or computer (software and
hardware) services (a "Force Majeure Event") provided that Custodian has
established and maintained disaster recovery and contingency plans and systems
as described in Section 1(b) of Article VIII below or, if not, that such Losses
would have occurred even if BNYM had established and maintained such plans and
systems; (vii) for the insolvency of any Subcustodian (other than a BNYM
Affiliate), any Depository, or, except to the extent such action or inaction is
a direct result of the Custodian's failure to fulfill its duties hereunder, any
Foreign Depository; (viii) for any Losses arising from the applicability of any
law or regulation now or hereafter in effect, or from the occurrence of any
event, including, without limitation, implementation or adoption of any rules or
procedures of a Foreign Depository, which may affect, limit, prevent or impose
costs or burdens on, the transferability, convertibility, or availability of any
currency or Composite Currency Unit in any country or on the transfer of any
Securities, and in no event shall Custodian be obligated to substitute another
currency for a currency (including a currency that is a component of a Composite
Currency Unit) whose transferability, convertibility or availability has been
affected, limited, or prevented by such law, regulation or event, and to the
extent that any such law, regulation or event imposes a cost or charge upon
Custodian in relation to the transferability, convertibility, or availability of
any cash currency or Composite Currency Unit, such cost or charge shall be for
the account of the Trust and the respective Fund, and Custodian may treat any
account denominated in an affected currency as a group of separate accounts
denominated in the relevant component currencies; or (ix) for any action or
inaction taken or omitted to by Custodian in good faith and without negligence
or willful misconduct in accordance with the advice or opinion of counsel for
the Trust or its own outside counsel.
(b) Custodian shall maintain throughout the term of this Agreement, such
disaster recovery and contingency plans and systems as it reasonably believes
necessary and appropriate to recover its operations from the occurrence of a
Force Majeure Event which are consistent with the requirements of any statute,
regulation or rule to which it is subject that imposes business resumption and
contingency planning standards.
-15-
(c) Custodian may enter at its own expense into subcontracts, agreements
and understandings with any BNYM Affiliate, whenever and on such terms and
conditions as it deems necessary or appropriate to perform its services
hereunder. No such subcontract, agreement or understanding shall discharge
Custodian from its obligations hereunder.
(d) The Trust on behalf of the applicable Fund agrees to indemnify
Custodian and hold Custodian harmless from and against any and all Losses
sustained or incurred by or asserted against Custodian by reason of or as a
result of any action or inaction, or arising out of Custodian's performance
hereunder, including reasonable fees and expenses of counsel incurred by
Custodian in a successful defense of claims by the Trust on behalf of the
applicable Fund; provided however, that the Trust on behalf of the applicable
Fund shall not indemnify Custodian for those Losses arising out of Custodian's
own negligence, bad faith, willful misconduct or reckless disregard of its
obligations under this Agreement, provided, however, that if the Custodian is
serving as foreign custody manager to a Fund in accordance with a Foreign
Custody Manager Agreement in the form annexed as Appendix II, the Custodian's
indemnification for Losses arising from the acts of any Eligible Foreign
Custodian selected by the Custodian shall be subject to such further limitations
as shall be provided in the Foreign Custody Manager Agreement. This indemnity
shall be a continuing obligation of the Trust on behalf of the applicable Fund,
its successors and assigns, notwithstanding the termination of this Agreement.
(e) Custodian agrees to indemnify the Trust and hold the Trust harmless
from and against any and all Losses sustained or incurred by or asserted against
the Trust and determined by an arbiter of appropriate jurisdiction to be a
direct result of Custodian's negligence, bad faith, willful misconduct or
reckless disregard of its obligations under this Agreement, including reasonable
fees and expenses of counsel incurred by the Trust in a successful defense of
claims by Custodian; provided however, that Custodian shall not indemnify the
Trust for those Losses arising out of the Trust's own negligence, bad faith,
willful misconduct or reckless disregard of its obligations under this
Agreement. This indemnity shall be a continuing obligation of Custodian, its
successors and assigns, notwithstanding the termination of this Agreement.
Section 2. Without limiting the generality of the foregoing, Custodian
shall be under no obligation to inquire into, and shall not be liable for:
(a) Any Losses incurred by the Trust, any Fund or any other person
as a result of the receipt or acceptance of fraudulent, forged or invalid
Securities, or Securities which are otherwise not freely transferable or
deliverable without encumbrance in any relevant market;
(b) The validity of the issue of any Securities purchased, sold, or
written by or for the Trust or any Fund, the legality of the purchase,
sale or writing thereof, or the propriety of the amount paid or received
therefor;
(c) The legality of the sale or redemption of any Shares, or the
propriety of the amount to be received or paid therefor;
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(d) The legality of the declaration or payment of any dividend or
distribution by the Trust in respect of any Fund;
(e) The legality of any borrowing by the Trust;
(f) The legality of any loan of portfolio Securities, nor shall
Custodian be under any duty or obligation to see to it that any cash or
collateral delivered to it by a broker, dealer or financial institution or
held by it at any time as a result of such loan of portfolio Securities is
adequate security for the Trust and the applicable Fund against any loss
it might sustain as a result of such loan, which duty or obligation shall
be the sole responsibility of the Trust and such Fund. In addition,
Custodian shall be under no duty or obligation to see that any broker,
dealer or financial institution to which portfolio Securities of any Fund
are lent makes payment to it of any dividends or interest which are
payable to or for the account of the Fund during the period of such loan
or at the termination of such loan, provided, however that Custodian shall
promptly notify the Trust in the event that such dividends or interest are
not paid and received when due;
(g) The sufficiency or value of any amounts of money and/or
Securities held in any Special Account in connection with transactions by
the Trust; whether any broker, dealer, futures commission merchant or
clearing member makes payment to the Trust of any variation margin payment
or similar payment which the Trust may be entitled to receive from such
broker, dealer, futures commission merchant or clearing member, or whether
any payment received by Custodian from any broker, dealer, futures
commission merchant or clearing member is the amount the Trust is entitled
to receive, or to notify the Trust of Custodian's receipt or non-receipt
of any such payment; or
(h) Whether any Securities at any time delivered to, or held by it
or by any Subcustodian, for the account of the Trust and specifically
allocated to a Fund are such as properly may be held by the Trust or such
Fund under the provisions of its then current prospectus and statement of
additional information, or to ascertain whether any transactions by the
Trust, whether or not involving Custodian, are such transactions as may
properly be engaged in by the Trust.
Notwithstanding the foregoing, to the extent the Trust inquires into any
matter described in Article VIII, Section 2(a) or (b) above, Custodian
shall provide reasonable assistance to the Trust on such inquiries at the
Trust's expense.
Section 3. Custodian may, with respect to questions of law specifically
regarding an Account, obtain the advice of outside counsel and shall not be
liable with respect to anything done or omitted by it in good faith and without
negligence or willful misconduct in conformity with such advice, provided that
any such action or omission by Custodian is consistent with Custodian's rights
and responsibilities under this Agreement.
-17-
Section 4. Custodian shall be under no obligation to take action to
collect any amount payable on Securities in default, or if payment is refused
after due demand and presentment. Custodian shall endeavor to promptly notify
the Trust of any such defaults or refused payments.
Section 5. Custodian shall have no duty or responsibility to inquire into,
make recommendations, supervise, or determine the suitability of any
transactions affecting any Account.
Section 6. The Trust shall pay to Custodian the fees and charges as may be
specifically agreed upon from time to time and such other fees and charges at
Custodian's standard rates for such services as may be applicable. The Trust
shall reimburse Custodian for all costs associated with the conversion of the
Trust's Securities hereunder and the transfer of Securities and records kept in
connection with this Agreement. The Trust shall also reimburse Custodian for
out-ofpocket expenses which are a normal incident of the services provided
hereunder.
Section 7. Custodian has the right to debit any cash account held for the
Trust or applicable Fund for any amount payable by such Fund or the Trust in
respect of such Fund in connection with any and all obligations of the Trust in
respect of such Fund to Custodian. In addition to the rights of Custodian under
applicable law and other agreements, at any time when the Trust shall not have
honored any of its obligations to Custodian, Custodian shall have the right upon
notice to the Trust to retain or set-off, against such obligations of the Trust,
any Securities or cash Custodian or a BNYM Affiliate may directly or indirectly
hold for the account of the Trust or the applicable Fund, and any obligations
(whether matured or unmatured) that Custodian or a BNYM Affiliate may have to
the Trust in any currency or Composite Currency Unit. Custodian will endeavor to
promptly notify the Trust of any such setoffs, with such notice to include an
explanation of such setoffs and any remaining applicable obligations of the
Trust to Custodian, provided that Custodian's failure to so notify shall not
impair its rights as set forth hereunder. Any such asset of, or obligation to,
the Trust or Fund may be transferred to Custodian and any BNYM Affiliate in
order to effect the above rights. Notwithstanding the foregoing, to the extent
any amount payable or other obligation of the Trust to Custodian is only in
respect of a particular Fund, Custodian and/or Custodian Affiliate may only
exercise the rights set forth in this paragraph with respect to the cash
account, Securities or other assets held for the account of such applicable
Fund.
Section 8. The Trust agrees to forward to Custodian a Certificate or
Instructions confirming Oral Instructions by the close of business of the same
day that such Oral Instructions are given to Custodian. The Trust agrees that
the fact that such confirming Certificate or Instructions are not received or
that a contrary Certificate or contrary Instructions are received by Custodian
shall in no way affect the validity or enforceability of transactions authorized
by such Oral Instructions and effected by Custodian. If the Trust elects to
transmit Instructions through an on-line communications system offered by
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Custodian, the Trust's use thereof shall be subject to the Terms and Conditions
attached as Appendix I hereto, and Custodian shall provide user and
authorization codes, passwords and authentication keys only to an Authorized
Person or a person reasonably believed by Custodian to be an Authorized Person.
Section 9. The books and records pertaining to the Trust which are in
possession of Custodian shall be the property of the Trust. Such books and
records shall be prepared and maintained as required by the '40 Act and the
rules thereunder. The Trust, or its authorized representatives, shall have
access to such books and records during Custodian's normal business hours. Upon
the reasonable request of the Trust, copies of any such books and records shall
be provided by Custodian to the Trust or its authorized representative, as soon
as practicable. Upon the reasonable request of the Trust, Custodian shall
provide in hard copy or on computer disc any records included in any such
delivery which are maintained by Custodian on a computer disc, or are similarly
maintained, as soon as practicable. In the event of termination of this
Agreement, the Trust's books and records will be returned to the Trust upon
request.
Section 10. It is understood that Custodian is authorized to supply any
information regarding the Accounts which is required by any law, regulation or
rule now or hereafter in effect. The Custodian shall provide the Trust with any
report obtained by the Custodian on the system of internal accounting control of
a Depository, and with such reports on its own system of internal accounting
control as the Trust may reasonably request from time to time.
Section 11. Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied against Custodian in
connection with this Agreement, except as set forth in this Agreement.
Section 12. From time to time as requested by the Trust, the Custodian
shall provide to the Trust such certifications and sub-certifications, in the
form agreed to by the Trust and the Custodian, with respect to Form N-Qs, Form
N-CSRs, compliance policies and procedures under Rule 38a-l under the Investment
Company Act of 1940, as amended, and such other matters that may be reasonably
requested by the Trust or the Trust's Chief Compliance Officer from time to
time. In addition, the Custodian will, from time to time, provide a written
assessment of its compliance program in conformity with current industry
standards that is reasonably acceptable to the Trust to enable the Trust to
fulfill its obligations under Rule 38a-l of the Investment Company Act of 1940,
as amended. From time to time as requested by the Trust, the Custodian shall
request from each Subcustodian, and provide to the Trust upon receipt, such
Subcustodian's annual financial information, reports on accounting controls and
compliance policies and procedures.
-19-
ARTICLE IX
TERMINATION
Section 1. Either of the parties hereto may terminate this Agreement by
giving to the other party a notice in writing specifying the date of such
termination, which shall be not less than ninety (90) days after the date of
giving of such notice. In the event such notice is given by the Trust, it shall
be accompanied by a copy of a resolution of the board of the Trust, certified by
the Secretary or any Assistant Secretary, electing to terminate this Agreement
and designating a successor custodian or custodians, each of which shall be a
bank or trust company having not less than $2,000,000 aggregate capital, surplus
and undivided profits. In the event such notice is given by Custodian, the Trust
shall, on or before the termination date, deliver to Custodian a copy of a
resolution of the board of the Trust, certified by the Secretary or any
Assistant Secretary, designating a successor custodian or custodians. In the
absence of such designation by the Trust, Custodian may designate a successor
custodian which shall be a bank or trust company having not less than $2,000,000
aggregate capital, surplus and undivided profits. Upon the date set forth in
such notice this Agreement shall terminate, and Custodian shall upon receipt of
a notice of acceptance by the successor custodian on that date deliver directly
to the successor custodian all Securities and money then owned by the Trust and
any Fund and held by it as Custodian, after deducting all fees, expenses and
other amounts for the payment or reimbursement of which it shall then be
entitled.
Section 2. If a successor custodian is not designated by the Trust or
Custodian in accordance with the preceding Section, the Trust shall, upon the
date specified in the notice of termination of this Agreement and upon the
delivery by Custodian of all Securities (other than Securities which cannot be
delivered to the Trust) and money then owned by the Trust and any Fund, be
deemed to be its own custodian and Custodian shall thereby be relieved of all
duties and responsibilities pursuant to this Agreement, other than the duty with
respect to Securities which cannot be delivered to the Trust to hold such
Securities hereunder in accordance with this Agreement.
Section 3. Notwithstanding Section 1 of this Article IX, the Trust may
terminate the services of Custodian under this Agreement at any time (A) by
providing thirty (30) days' written notice in the event that Custodian (i) shall
fail in any material respect to perform its duties and obligations hereunder
pursuant to the applicable standard of care set forth herein, the Trust shall
have given written notice thereof, and such material failure shall not have been
remedied to the reasonable satisfaction of the Trust within thirty (30) days
after such written notice is received, or (ii) shall have ceased to be qualified
as a custodian under the '40 Act, shall be indicted for a crime directly related
to the services contemplated hereunder, shall commence any bankruptcy or
insolvency proceeding or have such a bankruptcy or insolvency proceeding
initiated against it which shall not be dismissed within sixty (60) days, or (B)
immediately in the event of an appointment of a conservator or receiver for
Custodian or any parent of Custodian by a regulatory agency or court of
competent jurisdiction.
ARTICLE X
MISCELLANEOUS
Section 1. Each party shall keep confidential any information relating to
the other party's business ("Confidential Information"). Confidential
-20-
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 Trust or Custodian and their
respective subsidiaries and affiliated companies; (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 Trust or Custodian 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 Confidential Information and shall not be
subject to such confidentiality obligations if: (a) it is necessary for
Custodian to release such information in connection with the 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 requested or required to be disclosed
by the receiving party pursuant to a court order, subpoena, governmental or
regulatory agency request or law (provided the receiving party will provide the
other party written notice of the same, 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; (h) it has been or is independently developed or
obtained by the receiving party; or (i) it is necessary for Custodian to release
such information to Custodian's internal or external accountants or legal
counsel who are subject to a duty of confidentiality. Custodian acknowledges and
agrees that in connection with its services under this Agreement it receives
non-public confidential portfolio holdings information ("Portfolio Information")
with respect to the Trust. Custodian agrees that, subject to the foregoing
provisions of and the exceptions set forth in this Article X Section 1 (other
than the exception set forth above in this Article X Section 1 as sub-item (a),
which exception set forth in sub-item (a) shall not be applicable to the Trust's
Portfolio Information), Custodian will keep confidential the Trust's Portfolio
Information and will not disclose the Trust's Portfolio Information other than
pursuant to a written Certificate or Instructions; provided that without the
need for such a written Certification or Instructions and notwithstanding any
other provision of this Article X Section 1 to the contrary, the Trust's
Portfolio Information may be disclosed (i) to Subcustodians and (ii) to third
party pricing services which are engaged by Custodian in connection with the
provision of services under this Agreement, and which shall be subject to a duty
of confidentiality with respect to such Portfolio Information. The Custodian's
agreements with its Subcustodians require the Subcustodian, subject to any
applicable law, to use best efforts to maintain the confidentiality of matters
concerning the property held by the Subcustodian for the account of a Fund.
-21-
Section 2. The Trust agrees to furnish to Custodian a new Certificate of
Authorized Persons in the event of any change in the then present Authorized
Persons. Until such new Certificate is received, Custodian shall not be liable
in acting upon Certificates or Oral Instructions of such present Authorized
Persons.
Section 3. Each notice, request, demand, approval or other communication
which may be or is required to be given under this Agreement shall be in writing
in English and shall be deemed to have been sufficiently given when received by
the intended party, if delivered personally at the address set forth below for
the intended party during normal business hours at such address, if sent by
facsimile transmission to the respective facsimile transmission numbers of the
parties set forth below, or if sent by recognized overnight courier service or
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Trust: First Trust Exchange-Traded Fund VIII
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
Attention: General Counsel
Facsimile: 630-517-7437
Confirm: 630-765-8798
If to the
Custodian: The Bank of New York Mellon
101 Barclay Street, 20W
NewYork, New York 10286
Attention: Rosalia Koopman
Facsimile: 212-815-2948
Confirm: 212-815-4647
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Notices shall be given to such other addressee or address, or both, or by way of
such other facsimile transmission number, as a particular party may from time to
time designate by written notice to the other parties hereto given in accordance
with this Section.
Section 4. Each and every right granted to either party hereunder or under
any other document delivered hereunder or in connection herewith, or allowed it
by law or equity, shall be cumulative and may be exercised from time to time. No
failure on the part of either party to exercise, and no delay in exercising, any
right will operate as a waiver thereof, nor will any single or partial exercise
by either party of any right preclude any other or future exercise thereof or
the exercise of any other right.
Section 5. In case any provision in or obligation under this Agreement
shall be invalid, illegal or unenforceable in any exclusive jurisdiction, the
-22-
validity, legality and enforceability of the remaining provisions shall not in
any way be affected thereby. This Agreement may not be amended or modified in
any manner except by a written agreement executed by both parties, except that
any amendment to the Schedule I hereto need be signed only by the Trust and any
amendment to Appendix I hereto need be signed only by Custodian. This Agreement
shall extend to and shall be binding upon the parties hereto, and their
respective successors and assigns; provided, however, that this Agreement shall
not be assignable by either party without the written consent of the other.
Section 6. This Agreement shall be construed in accordance with the
substantive laws of the State of New York, without regard to conflicts of laws
principles thereof. The Trust and Custodian hereby consent to the jurisdiction
of a state or federal court situated in New York City, New York in connection
with any dispute arising hereunder. The Trust and Custodian each hereby
irrevocably waives, to the fullest extent permitted by applicable law, any
objection which it may now or hereafter have to the laying of venue of any such
proceeding brought in such a court and any claim that such proceeding brought in
such a court has been brought in an inconvenient forum. The Trust and Custodian
each hereby irrevocably waives any and all rights to trial by jury in any legal
proceeding arising out of or relating to this Agreement.
Section 7. (a) It is expressly acknowledged and agreed that the
obligations of the Trust (and Funds thereof) hereunder shall not be binding upon
any of the shareholders, Trustees, officers, employees or agents of the Trust
(and Funds thereof), personally, but shall bind only the trust property of the
Trust and the applicable Fund as provided in the Trust's Declaration of Trust.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Trust and signed by an officer of the Trust, acting as such, and
neither such authorization by such Trustees nor such execution and delivery by
such officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
property of the Trust and the applicable Fund as provided in the Trust's
Declaration of Trust.
(b) This Agreement is an agreement entered into between the
Custodian and the Trust with respect to each Fund. With respect to any
obligation of the Trust on behalf of any Fund arising out of this Agreement, the
Custodian shall look for payment of such obligation solely to the assets of the
Fund to which such obligation relates with the same effect as if the Custodian
had separately contracted with the Trust by separate written instrument with
respect to each Fund.
(c) As used herein, the "applicable Fund" shall be each Fund in
respect of which any amount due the Custodian arises, and if any amount due the
Custodian arises in respect of more than one Fund, the same shall be allocated
by the Custodian among such Funds in accordance with Section 7(b) of this
Article. Any amounts due the Custodian which may not be allocated in accordance
with the preceding sentence shall constitute General Liabilities as defined in
the Trust's Declaration of Trust and allocated by the Trust and paid in
accordance with the provisions thereof.
Section 8. The Bank of New York Mellon Corporation is a global financial
organization that provides services to clients through its affiliates and
subsidiaries in multiple jurisdictions (the "BNY Mellon Group"). The BNY Mellon
Group may centralize functions including audit, accounting, risk, legal,
-23-
compliance, sales, administration, product communication, relationship
management, storage, compilation and analysis of customer-related data, and
other functions (the "Centralized Functions") in one or more affiliates,
subsidiaries and third-party service providers. Solely in connection with the
Centralized Functions, (i) the Trust consents to the disclosure of and
authorizes the Custodian to disclose information regarding the Trust and the
Accounts ("Customer-Related Data") to the BNY Mellon Group and to its third-
party service providers who are subject to confidentiality obligations with
respect to such information and (ii) the Custodian may store the names and
business contact information of the Trust's employees and representatives on the
systems or in the records of the BNY Mellon Group or its service providers. The
BNY Mellon Group may aggregate Customer-Related Data with other data collected
and/or calculated by the BNY Mellon Group, and notwithstanding anything in this
Agreement to the contrary the BNY Mellon Group will own all such aggregated
data, provided that the BNY Mellon Group shall not distribute the aggregated
data in a format that identifies Customer-Related Data with the Trust. The Trust
confirms that it is authorized to consent to the foregoing.
Section 9. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
-24-
IN WITNESS WHEREOF, the Trust and Custodian have caused this Agreement to
be executed by their respective officers, thereunto duly authorized, as of the
day and year first above written.
FIRST TRUST EXCHANGE-TRADED FUND VIII
By /s/ James M. Dykas
-------------------------------
Title: President
------------------------
Tax Identification No:
---------
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THE BANK OF NEW YORK MELLON
By /s/ Rosalia A. Koopman
-------------------------------
Title: Managing Director
------------------------
Tax Identification No:
---------
|
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SCHEDULE I
CERTIFICATE OF AUTHORIZED PERSONS (THE
TRUST - ORAL AND WRITTEN INSTRUCTIONS)
The undersigned hereby certifies that he/she is the duly elected and
acting Secretary of First Trust Exchange-Traded Fund VIII (the "Trust"), and
further certifies that the following officers or employees of the Trust have
been duly authorized in conformity with the Trust's Declaration of Trust and
By-Laws to deliver Certificates and Oral Instructions to The Bank of New York
Mellon ("Custodian") pursuant to the Custody Agreement between the Trust and
Custodian dated , 2016 and that the signatures appearing opposite
their names are true and correct:
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NAME TITLE SIGNATURE
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NAME TITLE SIGNATURE
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NAME TITLE SIGNATURE
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NAME TITLE SIGNATURE
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NAME TITLE SIGNATURE
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NAME TITLE SIGNATURE
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NAME TITLE SIGNATURE
(Continued on Following Page)
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NAME TITLE SIGNATURE
This certificate supersedes any certificate of Authorized Persons you may
currently have on file.
By:
[seal] ---------------------------------
Title: Secretary
Date:
-----------------
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SCHEDULE II
SCHEDULE III
FOREIGN DEPOSITORIES
APPENDIX I
ELECTRONIC SERVICES TERMS AND CONDITIONS
1. License; Use, (a) This Appendix I shall govern use by FIRST TRUST
EXCHANGE-TRADED FUND VIII (the "Trust") of electronic communications,
information delivery, portfolio management and banking services, that The Bank
of New York Mellon and its affiliates (herein "BNYM") may provide in connection
with the services as Custodian pursuant to the annexed Custody Agreement (the
"Agreement"), such as The Bank of New York Mellon Inform (TM) and The Bank of
New York Mellon CA$H-Register Plus(R), and any computer software, proprietary
data and documentation provided by BNYM to the Trust in connection therewith
(collectively, the "Electronic Services"). In the event of any conflict between
the terms of this Appendix I and the main body of this Agreement with respect to
the Trust's use of the Electronic Services, the terms of this Appendix I shall
control.
(b) BNYM grants to the Trust a personal, nontransferable and nonexclusive
license to use the Electronic Services to which the Trust subscribes solely for
the purpose of transmitting instructions and information ("Written
Instructions"), obtaining reports, analyses and statements and other information
and data, making inquiries and otherwise communicating with BNYM in connection
with the Trust's relationship with BNYM, as Custodian pursuant to the Agreement.
The Trust shall use the Electronic Services solely for its own internal and
proper business purposes and not in the operation of a service bureau. Except as
set forth herein, no license or right of any kind is granted to the Trust or any
other person with respect to the Electronic Services. The Trust acknowledges
that BNYM and its suppliers retain and have title and exclusive proprietary
rights to the Electronic Services, including any trade secrets or other ideas,
concepts, know-how, methodologies, and information incorporated therein and the
exclusive rights to any copyrights, trade dress, look and feel, trademarks and
patents (including registrations and applications for registration of either),
and other legal protections available in respect thereof (unless such
information was provided by the Trust). The Trust further acknowledges that all
or a part of the Electronic Services may be copyrighted or trademarked (or a
registration or claim made therefor) by BNYM or its suppliers. The Trust shall
not take any action with respect to the Electronic Services inconsistent with
the foregoing acknowledgments, nor shall the Trust attempt to decompile, reverse
engineer or modify the Electronic Services. The Trust may not copy, distribute,
sell, lease or provide, directly or indirectly, the Electronic Services or any
portion thereof to any other person or entity without BNYM's prior written
consent. The Trust may not remove any statutory copyright notice or other notice
included in the Electronic Services. The Trust shall reproduce any such notice
on any reproduction of any portion of the Electronic Services and shall add any
statutory copyright notice or other notice upon BNYM's request.
(c) Portions of the Electronic Services may contain, deliver or rely on
data supplied by third parties ("Third Party Data"), such as pricing data and
indicative data, and services supplied by third parties ("Third Party Services")
such as analytic and accounting services. Third Party Data and Third Party
Services supplied hereunder are obtained from sources that BNYM believes to be
reliable but, except to the extent otherwise expressly provided in the Agreement
with respect to the duties of BNYM as Custodian, are provided without any
independent
Appendix J
investigation by BNYM. BNYM and its suppliers do not represent or warrant that
the Third Party Data or Third Party Services are correct, complete or current.
Third Party Data and Third Party Services are proprietary to their suppliers,
are provided solely for the Trust's internal use, and may not be reused,
disseminated or redistributed in any form. The Trust shall not use any Third
Party Data in any manner that would act as a substitute for obtaining a license
for the data directly from the supplier. Third Party Data and Third Party
Services should not be used in making any investment decision. BNYM AND ITS
SUPPLIERS ARE NOT RESPONSIBLE FOR ANY RESULTS OBTAINED FROM THE USE OF OR
RELIANCE UPON THIRD PARTY DATA OR THIRD PARTY SERVICES. BNYM's suppliers of
Third Party Data and Services are intended third party beneficiaries of this
Section 1(c) and Section 5 below.
(d) The Trust understands and agrees that any links in the Electronic
Services to Internet sites may be to sites sponsored and maintained by third
parties. BNYM makes no guarantees, representations or warranties concerning the
information contained in any third party site (including without limitation that
such information is correct, current, complete or free of viruses or other
contamination), or any products or services sold through third party sites. All
such links to third party Internet sites are provided solely as a convenience to
the Trust and the Trust accesses and uses such sites at its own risk. A link in
the Electronic Services to a third party site does not constitute BNYM's
endorsement, authorisation or sponsorship of such site or any products and
services available from such site.
2. Equipment. The Trust shall obtain and maintain at its own cost and
expense all equipment and services, including but not limited to communications
services, necessary for it to utilize and obtain access to the Electronic
Services, and BNYM shall not be responsible for the reliability or availability
of any such equipment or services.
3. Proprietary Information. The Electronic Services, and any proprietary
data (including Third Party Data), processes, software, information and
documentation made available to the Trust (other than which are or become part
of the public domain or are legally required to be made available to the public)
(collectively, the "Information"), are the exclusive and confidential property
of BNYM or its suppliers. However, for the avoidance of doubt, reports generated
by the Trust containing information relating to its account(s) (except for Third
Party Data contained therein) are not deemed to be within the meaning of the
term "Information." The Trust shall keep the Information confidential by using
the same care and discretion that the Trust uses with respect to its own
confidential property and trade secrets, but not less than reasonable care. Upon
termination of the Agreement or the licenses granted herein for any reason, the
Trust shall return to BNYM any and all copies of the Information which are in
its possession or under its control (except that the Trust may retain such
information as may be required for the Trust to comply with applicable law,
regulation or other record keeping requirements and reports containing Third
Party Data, provided that such Third Party Data remains subject to the
provisions of this Appendix). The provisions of this Section 3 shall not affect
the copyright status of any of the Information which may be copyrighted and
shall apply to all information whether or not copyrighted.
4. Modifications. BNYM reserves the right to modify the Electronic
Services from time to time. It is understood and agreed that Custodian will
Appendix i - 5 -
endeavor to provide the Trust with advance notice of any such modifications
which materially alter the user interface or functionality of the Electronic
Services, provided, however, that prior notice may not be possible under the
circumstances and Custodian shall not have any liability to the Trust for
failing to provide such notice under these circumstances. The Trust agrees not
to modify or attempt to modify the Electronic Services without BNYM's prior
written consent. The Trust acknowledges that any modifications to the Electronic
Services, whether by the Trust or BNYM and whether with or without BNYM's
consent, shall become the property of BNYM.
5. NO REPRESENTATIONS OR WARRANTIES: LIMITATION OF LIABILITY. BNYM AND ITS
MANUFACTURERS AND SUPPLIERS MAKE NO WARRANTIES OR REPRESENTATIONS WITH RESPECT
TO THE ELECTRONIC SERVICES OR ANY THIRD PARTY DATA OR THIRD PARTY SERVICES,
EXPRESS OR IMPLIED, IN FACT OR IN LAW, INCLUDING BUT NOT LIMITED TO WARRANTIES
OF MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE.
CUSTOMER ACKNOWLEDGES THAT THE ELECTRONIC SERVICES, THIRD PARTY DATA AND THIRD
PARTY SERVICES ARE PROVIDED "AS IS." TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, IN NO EVENT SHALL BNYM OR ANY SUPPLIER BE LIABLE FOR ANY
DAMAGES, WHETHER DIRECT, INDIRECT SPECIAL, OR CONSEQUENTIAL, WHICH CUSTOMER MAY
INCUR IN CONNECTION WITH THE ELECTRONIC SERVICES, THIRD PARTY DATA OR THIRD
PARTY SERVICES, EVEN IF BNYM OR SUCH SUPPLIER KNEW OF THE POSSIBILITY OF SUCH
DAMAGES. IN NO EVENT SHALL BNYM OR ANY SUPPLIER BE LIABLE FOR ACTS OF GOD,
MACHINE OR COMPUTER BREAKDOWN OR MALFUNCTION, INTERRUPTION OR MALFUNCTION OF
COMMUNICATION FACILITIES, LABOR DIFFICULTIES OR ANY OTHER SIMILAR OR DISSIMILAR
CAUSE BEYOND THEIR REASONABLE CONTROL (A "FORCE MAJEURE EVENT"). CUSTODIAN WILL
MAINTAIN THROUGHOUT THE TERM OF THIS AGREEMENT SUCH DISASTER RECOVERY AND
CONTINGENCY PLANS AND SYSTEMS AS IT REASONABLY BELIEVES TO BE NECESSARY AND
APPROPRIATE TO RECOVER ITS OPERATIONS FROM THE OCCURRENCE OF A FORCE MAJEURE
EVENT AND WHICH ARE CONSISTENT WITH THE REQUIREMENTS OF ANY STATUTE, REGULATION
OR RULE TO WHICH IT IS SUBJECT THAT IMPOSES BUSINESS RESUMPTIONS AND CONTINGENCY
PLANNING STANDARDS. CUSTODIAN SHALL EMPLOY COMMERCIALLY REASONABLE EFFORTS TO
RESUME PERFORMANCE AS SOON AS PRACTICABLE UNDER THE CIRCUMSTANCES FOLLOWING THE
OCCURRENCE OF A FORCE MAJEURE EVENT.
6. Security: Reliance; Unauthorized Use: Funds Transfers. BNYM will
establish security procedures to be followed in connection with the use of the
Electronic Services, and the Trust agrees to comply with the security
procedures. The Trust understands and agrees that the security procedures are
intended to determine whether instructions received by BNYM as Custodian through
the Electronic Services are authorized but are not (unless otherwise specified
in writing) intended to detect any errors contained in such instructions. The
Trust will cause all persons utilizing the Electronic Services to treat any user
Appendix I - 5 -
and authorization codes, passwords, authentication keys and other security
devices with the highest degree of care and confidentiality. Upon termination of
the Trust's use of the Electronic Services, the Trust shall return to BNYM any
security devices (e.g., token cards) provided by BNYM. BNYM is hereby
irrevocably authorized to comply with and rely upon on Written Instructions and
other communications, whether or not authorized, received by it through the
Electronic Services. The Trust acknowledges that it has sole responsibility for
ensuring that only Authorized Persons (as defined in the Agreement) use the
Electronic Services and that to the fullest extent permitted by applicable law
BNYM shall not be responsible nor liable for any unauthorized use thereof or for
any losses sustained by the Trust arising from or in connection with the use of
the Electronic Services or BNYM's reliance upon and compliance with Written
Instructions and other communications received through the Electronic Services.
With respect to instructions for a transfer of funds issued through the
Electronic Services, when instructed to credit or pay a party by both name and a
unique numeric or alpha-numeric identifier (e.g. ABA number or account number),
BNYM, its affiliates, and any other bank participating in the funds transfer,
may rely solely on the unique identifier, even if it identifies a party
different than the party named. Such reliance on a unique identifier shall apply
to beneficiaries named in such instructions as well as any financial institution
which is designated in such instructions to act as an intermediary in a funds
transfer. It is understood and agreed that unless otherwise specifically
provided herein, and to the extent permitted by applicable law, the parties
hereto shall be bound by the rules of any funds transfer system utilized to
effect a funds transfer hereunder.
7. Acknowledgments. BNYM, as Custodian, shall acknowledge through the
Electronic Services its receipt of each Written Instruction communicated through
the Electronic Services, and in the absence of such acknowledgment BNYM shall
not be liable for any failure to act in accordance with such Written Instruction
and the Trust may not claim that such Written Instruction was received by BNYM.
The Custodian may in its discretion decline to act upon any instructions or
communications that are insufficient or incomplete (and in such event, the
Custodian shall use commercially reasonable efforts to advise the Trust of any
instruction or communication which it determines to be insufficient or
incomplete in such manner that the Trust may submit a revised instruction or
communication) or are not received by the Custodian by the time specified in the
Agreement for the Custodian to act upon, or in accordance with such,
instructions or communications.
8. Viruses. Each of the Trust and BNYM, as Custodian, agrees to use
reasonable efforts to prevent the transmission through the Electronic Services
of any software or file which contains any viruses, worms, harmful component or
corrupted data and agrees not to use any device, software, or routine to
interfere or attempt to interfere with the proper working of the Electronic
Services.
Appendix J -- 5 -
9. Encryption. The Trust acknowledges and agrees that encryption may not
be available for every communication through the Electronic Services, or for all
data. The Trust agrees that BNYM may deactivate any encryption features at any
time, without notice or liability to the Trust, for the purpose of maintaining,
repairing or troubleshooting its systems. It is understood and agreed that
Custodian will endeavor to provide the Trust with notice of any such
deactivation, provided, however, that prior notification may not be possible
under the circumstances and BNYM will not have any liability to the Trust for
failing to provide such notice under these circumstances.
10. On-Line Inquiry and Modification of Records. In connection with the
Trust's use of the Electronic Services, BNYM may, at the Trust's request, permit
the Trust to enter data directly into a BNYM database for the purpose of
modifying certain information maintained by BNYM's systems, including, but not
limited to, change of address information. To the extent that the Trust is
granted such access, the Trust agrees to indemnify and hold BNYM harmless from
all loss, liability, cost, damage and expense (including attorney's fees and
expenses) to which BNYM may be subjected or which may be incurred in connection
with any claim which may arise out of or as a result of changes to BNYM database
records initiated by the Trust.
11. Agents. The Trust may, on advance written notice to the BNYM, permit
its agents and contractors who are not otherwise identified as Authorized
Persons ("Agents") to access and use the Electronic Services on the Trust's
behalf, except that the BNYM reserves the right to prohibit the Trust's use of
any particular Agent for any reason. The Trust shall require its Agent(s) to
agree in writing to be bound by the terms of the Agreement and this Appendix,
and the Trust shall be liable and responsible for any act or omission of such
Agent in the same manner, and to the same extent, as though such act or omission
were that of the Trust. Each submission of a Written Instruction or other
communication by the Agent through the Electronic Services shall constitute a
representation and warranty by the Trust that the Agent continues to be duly
authorized by the Trust to so act on its behalf and the BNYM may rely on the
representations and warranties made herein in complying with such Written
Instruction or communication. Any Written Instruction or other communication
through the Electronic Services by an Agent shall be deemed that of the Trust,
and the Trust shall be bound thereby whether or not authorized. The Trust may,
subject to the terms of this Appendix and upon advance written notice to the
Bank, provide a copy of the Electronic Service user manuals to its Agent if the
Agent requires such copies to use the Electronic Services on the Trust's behalf.
Upon cessation of any such Agent's services, the Trust shall promptly terminate
such Agent's access to the Electronic Services, retrieve from the Agent any
copies of the manuals and destroy them, and retrieve from the Agent any token
cards or other security devices provided by BNYM and return them to BNYM.
12. Proprietary Rights. Notwithstanding Section 5, all intellectual
property rights in the Electronic Services are either owned by BNYM or secured
by it for use as contemplated hereunder.
Appendix J - 5 -
On-line communications terms.doc
(9/06)
Appendix 1 - 5 -
APPENDIX II
FOREIGN CUSTODY MANAGER AGREEMENT
AGREEMENT between FIRST TRUST EXCHANGE-TRADED FUND VIII, a business trust
organized and existing under the laws of the Commonwealth of Massachusetts
having its principal office and place of business at 120 East Liberty Drive,
Suite 400, Wheaton, Illinois 60187 (the "Trust") and The Bank of New York Mellon
("BNYM").
W I T N E S S E T H:
WHEREAS, the Trust desires to appoint BNYM as a Foreign Custody
Manager as defined in the Rule (as such term is defined below) on the terms
and conditions contained herein;
WHEREAS, BNYM desires to serve as a Foreign Custody Manager and perform
the duties set forth herein on the terms and conditions contained herein with
respect to one or more Funds (as such term is defined below);
NOW THEREFORE, in consideration of the mutual promises hereinafter
contained in this Agreement, the Trust and BNYM hereby agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
1. "BOARD" shall mean the board of directors or board of trustees, as the
case may be, of the Trust.
2. "ELIGIBLE FOREIGN CUSTODIAN" shall have the meaning provided in the
Rule.
3. "MONITORING SYSTEM" shall mean a system established by BNYM to fulfill
the Responsibilities specified in clauses (d) and (e) of Section 1 of Article
III of this Agreement.
4. "RESPONSIBILITIES" shall mean the responsibilities delegated to BNYM
under the Rule as a Foreign Custody Manager to a Fund with respect to each
Specified Country and each Eligible Foreign Custodian selected by BNYM, as such
responsibilities are more fully described in Article III of this Agreement.
5. "RULE" shall mean Rule 17f-5 under the Investment Company Act of 1940,
as amended effective June 12, 2000.
Appendix II
6. "Fund" shall mean the respective portfolios, if any, of the Trust
listed on Schedule I hereto, and if none are listed, references to Fund shall be
references to the Trust.
7. "Specified Country" shall mean each country listed on Schedule II
attached hereto and each country, other than the United States, constituting the
primary market for a security with respect to which the Trust has given
settlement instructions to The Bank of New York Mellon as custodian (the
"Custodian") under its Custody Agreement with the Trust.
ARTICLE II.
BNYM AS A FOREIGN CUSTODY MANAGER
1. The Trust on behalf of its Board hereby delegates to BNYM with respect
to each Specified Country the Responsibilities to be performed for each Fund of
the Trust.
2. BNYM accepts the Board's delegation of Responsibilities with respect to
each Specified Country and agrees in performing the Responsibilities as a
Foreign Custody Manager to exercise reasonable care, prudence and diligence such
as a person having responsibility for the safekeeping of the Trust's assets
would exercise.
3. BNYM shall provide to the Board at such times as the Board deems
reasonable and appropriate based on the circumstances of the Trust's foreign
custody arrangements written reports notifying the Board of the placement of
assets of the Trust with a particular Eligible Foreign Custodian within a
Specified Country and of any material change in the arrangements (including the
contract governing such arrangements) with respect to assets of the Trust with
any such Eligible Foreign Custodian.
ARTICLE III.
RESPONSIBILITIES
1. Subject to the provisions of this Agreement, BNYM shall with respect to
each Specified Country select an Eligible Foreign Custodian. In connection
therewith, BNYM shall: (a) determine that assets of the Trust held by such
Eligible Foreign Custodian will be subject to reasonable care, based on the
standards applicable to custodians in the relevant market in which such Eligible
Foreign Custodian operates, after considering all factors relevant to the
safekeeping of such assets, including, without limitation, those contained in
paragraph (c)(1) of the Rule; (b) determine that the Trust's foreign custody
arrangements with each Eligible Foreign Custodian are governed by a written
contract with the Custodian which will provide reasonable care for the Trust's
assets based on the standards specified in paragraph (c)(1) of the Rule; (c)
determine that each contract with an Eligible Foreign Custodian shall include
the provisions specified in paragraph (c)(2)(i)(A) through (F) of the Rule or,
alternatively, in lieu of any or all of such (c)(2)(i)(A) through (F)
provisions, such other provisions as BNYM determines will provide, in their
entirety, the same or a greater level of care and protection for the assets of
the Trust as such specified provisions; (d) monitor pursuant to the Monitoring
System the appropriateness of maintaining the assets of the Trust with a
particular Eligible Foreign Custodian pursuant to paragraph (c)(1) of the Rule
and the performance of the contract governing such arrangement; and (e) advise
the Trust whenever BNYM determines under the Monitoring System that an
arrangement (including, any material change in the contract governing such
arrangement) described in preceding clause (d) no longer meets the requirements
of the Rule.
Appendix II-2-
2. For purposes of preceding Section 1 of this Article, BNYM's
determination of appropriateness shall not include, nor be deemed to include,
any evaluation of Country Risks associated with investment in a particular
country. For purposes hereof, "Country Risks" shall mean systemic risks of
holding assets in a particular country including but not limited to (a) an
Eligible Foreign Custodian's use of any depositories that act as or operate a
system or a transnational system for the central handling of securities or any
equivalent book-entries; (b) such country's financial infrastructure; (c) such
country's prevailing custody and settlement practices; (d) nationalization,
expropriation or other governmental actions; (e) regulation of the banking or
securities industry; (f) currency controls, restrictions, devaluations or
fluctuations; and (g) market conditions which affect the orderly execution of
securities transactions or affect the value of securities.
ARTICLE IV.
REPRESENTATIONS
1. The Trust hereby represents that: (a) this Agreement has been duly
authorized, executed and delivered by the Trust on behalf of the Fund,
constitutes a valid and legally binding obligation of the Trust enforceable in
accordance with its terms, and no statute, regulation, rule, order, judgment or
contract binding on the Trust prohibits the Trust's execution or performance of
this Agreement; (b) this Agreement has been approved and ratified by the Board
at a meeting duly called and at which a quorum was at all times present, and (c)
the Trust's investment advisor has indicated that it will consider the Country
Risks associated with investment in each Specified Country prior to any
settlement instructions being given to the Custodian with respect to any other
country.
2. BNYM hereby represents that: (a) BNYM is duly organized and existing
under the laws of the State of New York, with full power to carry on its
businesses as now conducted, and to enter into this Agreement and to perform its
obligations hereunder; (b) this Agreement has been duly authorized, executed and
delivered by BNYM, constitutes a valid and legally binding obligation of BNYM
enforceable in accordance with its terms, and no statute, regulation, rule,
order, judgment or contract binding on BNYM prohibits BNYM's execution or
performance of this Agreement; and (c) BNYM has established the Monitoring
System.
ARTICLE V.
CONCERNING BNYM
1. BNYM shall not be liable for any costs, expenses, damages, liabilities
or claims, including attorneys' and accountants' fees, sustained or incurred by,
or asserted against, the Trust or any Fund except to the extent the same arises
out of the failure of BNYM to exercise the care, prudence and diligence required
by Section 2 of Article II hereof. In no event shall BNYM be liable to the
Appendix II-3-
Trust, any Fund, the Board, or any third party for special, indirect or
consequential damages, or for lost profits or loss of business, arising in
connection with this Agreement.
2. The Trust on behalf of the applicable Fund shall indemnify BNYM and
hold it harmless from and against any and all costs, expenses, damages,
liabilities or claims, including attorneys' and accountants' fees, sustained or
incurred by, or asserted against, BNYM by reason or as a result of any action or
inaction, or arising out of BNYM's performance hereunder, provided that the
Trust, on behalf of the applicable Fund, shall not indemnify BNYM to the extent
any such costs, expenses, damages, liabilities or claims arises out of BNYM's
failure to exercise the reasonable care, prudence and diligence required by
Section 2 of Article II hereof or to the extent any such costs, expenses,
damages, liabilities or claims is attributable to the actions or omissions of an
Eligible Foreign Custodian selected by BNYM and arises out of the failure of
BNYM to exercise the reasonable care, prudence and diligence required by Section
2 of Article II hereof.
3. For its services hereunder, the Trust agrees to pay to BNYM such
compensation and out-of-pocket expenses as shall be mutually agreed.
4. BNYM shall have only such duties as are expressly set forth herein. In
no event shall BNYM be liable for any Country Risks associated with investments
in a particular country.
ARTICLE VI.
MISCELLANEOUS
1. This Agreement constitutes the entire agreement between the Trust and
BNYM as a Foreign Custody Manager, and no provision in the Custody Agreement
between the Trust and the Custodian shall affect the duties and obligations of
BNYM hereunder, nor shall any provision in this Agreement affect the duties or
obligations of the Custodian under the Custody Agreement.
2. Each notice, request, demand, approval or other communication which may
be or is required to be given under this Agreement shall be in writing in
English and shall be deemed to have been sufficiently given when received by the
intended party, if delivered personally at the address set forth below for the
intended party during normal business hours at such address, if sent by
facsimile transmission to the respective facsimile transmission numbers of the
parties set forth below, or if sent by recognized overnight courier service or
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Trust: First Trust Exchange-Traded Fund VIII
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
Attention: General Counsel
Facsimile: 630-517-7437
Confirm: 630-765-8798
If to BNYM: The Bank of New York Mellon
101 Barclay Street, 20W
Appendix II-4-
|
New York, New York 10286
Attention: Rosalia Koopman
Facsimile: 212-815-2948
Confirm: 212-815-4647
Notices shall be given to such other addressee or address, or both, or by way of
such other facsimile transmission number, as a particular party may from time to
time designate by written notice to the other parties hereto given in accordance
with this Section.
3. 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 Trust or BNYM and their respective
subsidiaries and affiliated companies; (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 Trust or BNYM 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 Confidential Information and shall not be
subject to such confidentiality obligations if: (a) it is necessary for BNYM to
release such information in connection with the 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 requested or required to be disclosed by the
receiving party pursuant to a court order, subpoena, governmental or regulatory
agency request or law (provided the receiving party will provide the other party
written notice of the same, 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; (h) it has been or is independently developed or obtained by
the receiving party; or (i) it is necessary for BNYM to release such information
to BNYM's internal or external accountants or legal counsel who are subject to a
duty of confidentiality. BNYM acknowledges and agrees that in connection with
its services under this Agreement it receives non-public confidential portfolio
holdings information ("Portfolio Information") with respect to the Trust. BNYM
agrees that, subject to the foregoing provisions of and the exceptions set forth
in this Section 3 (other than the exception set forth above in this Section 3 as
sub-item (a), which exception set forth in sub-item (a) shall not be applicable
to the Trust's Portfolio Information), BNYM will keep confidential the Trust's
Portfolio Information and will not disclose the Trust's Portfolio Information
other than pursuant to a written instruction from the Trust; provided that
without the need for such a written instruction and notwithstanding any other
provision of this Section 3 to the contrary, the Trust's Portfolio Information
may be disclosed to third party pricing services which are engaged by BNYM in
connection with the provision of services under this Agreement and which shall
be subject to a duty of confidentiality with respect to such Portfolio
Information.
Appendix II-5-
4. From time to time as requested by the Trust, BNYM shall provide to the
Trust such certifications and sub-certifications, in the form agreed to by the
Trust and BNYM, with respect to Form N-Qs, Form N-CSRs, and compliance policies
and procedures under Rule 38a-l under the 1940 Act, as amended, and such other
matters that may be reasonably requested by the Trust or the Trust's Chief
Compliance Officer from time to time. In addition, BNYM will, from time to time,
provide a written assessment of its compliance program in conformity with
current industry standards that is reasonably acceptable to enable the Trust to
fulfill its obligations under Rule 38a- l of the 1940 Act.
5. In the event that the Trust establishes one or more additional Funds
with respect to which it desires to have BNYM serve as Foreign Custody Manager
under the terms hereof, it shall so notify BNYM in writing, and if BNYM agrees
in writing to provide such services, such Fund will be added to this Agreement.
6. In case any provision in or obligation under this Agreement shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
thereby. This Agreement may not be amended or modified in any manner except by a
written agreement executed by both parties. This Agreement shall extend to and
shall be binding upon the parties hereto, and their respective successors and
assigns; provided however, that this Agreement shall not be assignable by either
party without the written consent of the other.
7. This Agreement shall be construed in accordance with the substantive
laws of the State of New York, without regard to conflicts of laws principles
thereof. The Trust and BNYM hereby consent to the jurisdiction of a state or
federal court situated in New York City, New York in connection with any dispute
arising hereunder. The Trust hereby irrevocably waives, to the fullest extent
permitted by applicable law, any objection which it may now or hereafter have to
the laying of venue of any such proceeding brought in such a court and any claim
that such proceeding brought in such a court has been brought in an inconvenient
forum. The Trust and BNYM each hereby irrevocably waives any and all rights to
trial by jury in any legal proceeding arising out of or relating to this
Agreement.
8. The parties hereto agree that in performing hereunder, BNYM is acting
solely on behalf of the Trust and no contractual or service relationship shall
be deemed to be established hereby between BNYM and any other person by reason
of this Agreement.
9. (a) It is expressly acknowledged and agreed that the obligations of the
Trust (and Funds thereof) hereunder shall not be binding upon any of the
shareholders, Trustees, officers, employees or agents of the Trust (and Funds
thereof), personally, but shall bind only the trust property of the Trust and
the applicable Fund, as provided in the Trust's Declaration of Trust. The
execution and delivery of this Agreement have been authorized by the Trustees of
the Trust and signed by an officer of the Trust, acting as such, and neither
such authorization by such Trustees nor such execution and delivery by such
officer shall be deemed to have been by any of them individually or to impose
any liability on any of them personally, but shall bind only the trust property
of the Trust and the applicable Fund as provided in the Trust's Declaration of
Trust.
(b) This Agreement is an agreement entered into between BNYM and the Trust
with respect to each Fund. With respect to any obligation of the Trust on behalf
of any Fund arising out of this Agreement, the BNYM shall look for payment of
Appendix II-6-
such obligation solely to the assets of the Fund to which such obligation
relates with the same effect as if the BNYM had separately contracted with the
Trust by separate written instrument with respect to each Fund.
(c) As used herein, the "applicable Fund" shall be each Fund in respect of
which any costs, expenses, damages, liabilities or claims previously specified
arise in whole or in part, and if any such costs, expenses, damages, liabilities
or claims arise in respect of more than one Fund, the same shall be allocated by
BNYM among such Funds in accordance with Section 7 of Article X of the Custody
Agreement between the Trust and BNYM. Any amounts due BNYM which may not be
allocated in accordance with the preceding sentence shall constitute General
Liabilities as defined in the Trust's Declaration of Trust and allocated by the
Trust and paid in accordance with the provisions thereof.
10. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
11. This Agreement shall terminate simultaneously with the termination of
the Custody Agreement between the Trust and the Custodian, and may otherwise be
terminated by either party giving to the other party a notice in writing
specifying the date of such termination, which shall be not less than thirty
(30) days after the date of such notice.
IN WITNESS WHEREOF, the Trust and BNYM have caused this Agreement to be
executed by their respective officers, thereunto duly authorized, as of the date
first above written.
FIRST TRUST EXCHANGE-TRADED FUND VIII
By
Title:
Tax Identification No.:
THE BANK OF NEW YORK MELLON
Title:
Appendix II-7-
SCHEDULE I
FUNDS OF THE TRUST
Appendix II--
Schedule I
SCHEDULE II
Specified Countries
Appendix II
Schedule II
APPENDIX III
The Custodian shall furnish, upon the initial placing of Securities and
cash into a country and annually thereafter, unless the Custodian has otherwise
notified the Trust, the following information:
A. An Opinion or Memorandum of local counsel concerning:
i. Whether applicable foreign law would restrict the access afforded
the Trust's independent public accountants to books and records kept
by an Eligible Foreign Custodian located in that country.
ii. Whether applicable foreign law would restrict the Trust's ability to
recover its Securities and cash in the event of the bankruptcy of an
Eligible Foreign Custodian located in that country.
iii. Whether applicable foreign law would restrict the Trust's ability to
recover Securities that are lost while under the control of an
Eligible Foreign Custodian located in that country.
B. Written information concerning:
i. Expropriation, nationalization, freezes or confiscation of the
Securities in that country.
ii. Difficulties in converting cash and cash equivalents to U.S. dollars
in that country.
C. A market report with respect to the following topics:
i. the securities regulatory environment of the country,
ii. restrictions on ownership by foreigners, including preinvestment
approvals,
iii. foreign exchange and money transfer
iv. execution andsettlement of trades
v. taxation, and
vi. depositories.
D. Analysis of Foreign Depositories specified in paragraph (e) of
Section 1 of Article III of the Custody Agreement.
To aid the Trust in monitoring country risk, the Custodian shall
also make available market flashes with respect to changes in the
information in market reports.
Appendix III
EXECUTION
FUND ADMINISTRATION AND ACCOUNTING AGREEMENT
AGREEMENT made as of June 23, 2016, by and between First Trust
Exchange-Traded Fund VIII (the "Trust"), and The Bank of New York Mellon, a New
York banking corporation ("BNYM").
W I T N E S S E T H:
WHEREAS, the Trust is an investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Trust, so authorized, intends that this Agreement be
applicable to each of its series as set forth on Exhibit A (each such series
together with all other series subsequently established by the Trust and made
subject to this Agreement in accordance with Section 12 herein, being referred
to as a "Fund" and collectively as the "Funds")-, and
WHEREAS, the Trust desires to retain BNYM to provide for the Funds the
services described herein, and BNYM is willing to provide such services, all as
more fully set forth below;
Now, THEREFORE, in consideration of the mutual promises and agreements
contained herein, the parties hereby agree as follows:
1. Appointment. The Trust hereby appoints BNYM as its agent for the term
of this Agreement to perform the services described herein. BNYM hereby accepts
such appointment and agrees to perform the duties hereinafter set forth.
2. Representations and Warranties. The Trust hereby represents and
warrants to BNYM, which representations and warranties shall be deemed to be
continuing, that:
(a) It is duly organized and existing under the laws of the
jurisdiction of its organization, with full power to carry on its business
as now conducted, to enter into this Agreement and to perform its
obligations hereunder;
(b) This Agreement has been duly authorized, executed and delivered
by the Trust in accordance with all requisite action and constitutes a
valid and legally binding obligation of the Trust, enforceable in
accordance with its terms;
(c) It is conducting its business in compliance with all applicable
laws and regulations, both state and federal, and has obtained all
regulatory licenses, approvals and consents necessary to cany on its
business as now conducted; there is no statute, regulation, rule, order or
judgment binding on it and no provision of its Declaration of Trust or
by-laws, nor of any mortgage, indenture, credit agreement or other
contract binding on it or affecting its property which would prohibit its
execution or performance of this Agreement; and
(d) To the extent the performance of any services described in
Schedule II attached hereto by BNYM in accordance with the then effective
Prospectus (as hereinafter defined) for any Fund would violate any
applicable laws or regulations, the Trust shall so notify BNYM as soon as
practicable to the extent Trust officers have knowledge or reasonably
should have knowledge of such violation in writing and thereafter shall
either furnish BNYM with the appropriate values of securities, net asset
value or other computation, as the case may be, or, subject to the prior
approval of BNYM, instruct BNYM in writing to value securities and/or
compute net asset value or other computations in a manner the Trust
specifies in writing, and either the furnishing of such values or the
giving of such instructions shall constitute a representation by the Trust
that the same is consistent with all applicable laws and regulations and
with its Prospectus.
BNYM hereby represents and warrants to the Funds, which representations and
warranties shall be deemed to be continuing that:
(a) It is duly organized and existing under the laws of the
jurisdiction of its organization, with full power and authority to carry on its
business as now conducted, to enter into this Agreement and to perform its
obligations hereunder;
(b) This Agreement has been duly authorized, executed and delivered
by BNYM in accordance with all requisite corporate action and constitutes a
valid and legally binding obligation of BNYM enforceable in accordance with its
terms;
(c) BNYM has obtained all regulatory licenses, approvals and
consents necessary to carry on its business as currently conducted; there is no
statute, regulation, rule, order or judgment binding on BNYM and no provision of
its charter or by-laws, nor of any mortgage, indenture, credit agreement or
other contract binding on BNYM or affecting its property which would prohibit
the execution or performance by BNYM of this Agreement; and
(d) To the extent the performance of any services described in
Schedule II attached hereto by BNYM in accordance with the then effective
Prospectus (as hereinafter defined) for the Fund would violate any applicable
laws or regulations applicable to BNYM, BNYM shall so notify the Fund in writing
as soon as practicable, to the extent that BNYM personnel responsible for the
performance of such services have knowledge, or should reasonably have
knowledge, of such violation.
3. Delivery of Documents, (a) The Trust will promptly deliver to BNYM true
and correct copies of each of the following documents as currently in effect and
will promptly deliver to it all future amendments and supplements thereto, if
any:
(i) The Trust's Declaration of Trust or other organizational
document and all amendments thereto (the "Trust Agreement")',
(ii) The Trust's bylaws (the "Bylaws")',
-2-
(iii) Resolutions of the Trust's Board of Trustees authorizing the
execution, delivery and performance of this Agreement by the Trust;
(iv) The registration statement most recently filed with the
Securities and Exchange Commission (the "SEC") relating to the shares of
each Fund (each, a "Registration Statement")',
(v) The Trust's Notification of Registration under the 1940 Act on
Form N-8A filed with the SEC; and
(vi) The Prospectus and Statement of Additional Information
pertaining to each Fund (collectively, the "Prospectus").
(b) The copy of the Trust Agreement shall be certified by the Secretary of
State (or other appropriate official) of the state of organization, and if the
Trust Agreement is required by law also to be filed with a county or other
officer or official body, a certificate of such filing shall be filed with a
certified copy submitted to BNYM. Each copy of the Bylaws, Registration
Statement and Prospectus, and all amendments thereto, and copies of Board
resolutions, shall be certified by the Secretary or an Assistant Secretary of
the Trust.
(c) It shall be the sole responsibility of the Trust to deliver to BNYM
the currently effective Prospectus for each Fund and BNYM shall not be deemed to
have notice of any information contained in such Prospectus until it is actually
received or a copy is obtained by BNYM.
4. Duties and Obligations of BNYM. (a) Subject to the direction and
control of the Trust's Trustees and the provisions of this Agreement, BNYM shall
provide to the Trust (i) the administrative services set forth on Schedule I
attached hereto and (ii) the valuation and computation services listed on
Schedule //attached hereto.
(b) In performing hereunder, BNYM shall provide, at its expense, office
space, facilities, equipment and personnel.
(c) BNYM shall not provide any services relating to the management,
investment advisory or sub-advisory functions of the Trust, distribution of
shares of any Fund, maintenance of the Trust's financial records, except to the
extent specifically set forth herein or the schedules hereto or other services
normally performed by the Trusts' respective counsel or independent auditors.
-3-
(d) Upon receipt of the Trust's prior written consent (which shall not be
unreasonably withheld), BNYM may delegate any of its duties and obligations
hereunder to any delegee or agent whenever and on such terms and conditions as
it deems necessary or appropriate. BNYM shall bear any costs and expenses
associated with BNYM's delegation to such delegees and agents. Notwithstanding
the foregoing, no Trust consent shall be required for any such delegation to any
other subsidiary of The Bank of New York Mellon Corporation. BNYM shall not be
liable to the Trust or any Fund for any loss or damage arising out of, or in
connection with, the actions or omissions to act of any delegee or agent
unaffiliated with BNYM and utilized hereunder so long as BNYM acts in good faith
and without negligence or willful misconduct in the selection or retention of
such delegee or agent, provided, however, that BNYM shall use commercially
reasonable efforts to pursue any rights or remedies in respect of such loss or
damage which BNYM may have against any such unaffiliated delegee or agent in the
event of its default; any recovery shall be for the account of the Trust and
applicable Fund, and BNYM shall be reimbursed by the Trust on behalf of the
applicable Fund for any cost incurred in pursuing the same. For purposes of this
Agreement, BNYM shall be subject to the same standard of care with respect to
and liable for, the actions and omissions of any such delegee or agent who is a
BNYM affiliate to the same extent a BNYM's direct actions or omissions under
this Agreement.
(e) The Trust shall cause its officers, advisors, sponsor, distributor,
legal counsel, independent accountants, current administrator (if any) and
transfer agent to cooperate with BNYM and to provide BNYM, upon request, with
such information or documents relating to the Trust as is within the possession
or knowledge of such persons, in order to enable BNYM to perform its duties
hereunder. In connection with its duties hereunder, BNYM shall be entitled to
rely, and shall be held harmless by the Trust when acting in reasonable
reliance, upon the instructions, advice or any documents provided to BNYM from
(i) a person reasonably believed by BNYM to have been identified by the Trust as
authorized to give advice on behalf of the Trust or its advisors (each an
"Authorized Person"), (ii) Trust counsel, (iii) the Trust's independent
accountants, (iv) the Trust's adviser and (v) the Trust's distributor. BNYM
shall not be liable for any loss, damage or expense resulting from or arising
out of the failure of the Trust to cause any information, documents or advice
from legal counsel or independent accountants to be provided to BNYM as provided
herein. All fees or costs charged by such persons shall be borne by the
applicable Fund.
(f) Nothing in this Agreement shall limit or restrict BNYM, any affiliate
of BNYM or any officer or employee thereof from acting for the Trust or any Fund
in other capacities or acting for or with any third parties, and providing
services similar or identical to some or all of the services provided hereunder.
The Trust acknowledges that in performing services under this Agreement, BNYM
may be required to review or calculate amounts due BNYM or its affiliates from
the Trust and its respective Funds, and agrees that such conflicting interests
shall not prevent BNYM from so acting.
(g) The Trust shall furnish BNYM with any and all instructions,
explanations, information, specifications and documentation deemed necessary by
BNYM in the performance of its duties hereunder, including, without limitation,
the amounts or written formula for calculating the amounts and times of accrual
of liabilities and expenses for each Fund. BNYM shall not be required to include
-4-
as liabilities and expenses, nor as a reduction of net asset value, any accrual
for any federal, state, or foreign income taxes unless the Trust shall have
specified to BNYM the precise amount of the same to be included in liabilities
and expenses or used to reduce net asset value. The Trust shall also furnish
BNYM with bid, offer, or market values of the portfolio securities
("Securities") of any Fund if BNYM notifies the Trust that same are not
available to BNYM from a security pricing or similar service utilized, or
subscribed to, by BNYM which BNYM in its judgment deems reliable at the time
such information is required for calculations hereunder. At any time and from
time to time, the Trust also may furnish BNYM with bid, offer, or market values
of Securities and instruct BNYM to use such information in its calculations
hereunder. BNYM shall at no time be required or obligated to commence or
maintain any utilization of, or subscriptions to, any securities pricing or
similar service. In no event shall BNYM be required to determine, or have any
obligations with respect to, whether a market price represents any fair or true
value, nor to adjust any price to reflect any events or announcements,
including, without limitation, those with respect to the issuer thereof, it
being agreed that all such determinations and considerations shall be solely for
the Trust.
(h) BNYM may apply to an officer of the Trust for written instructions
with respect to any matter arising in connection with BNYM's performance
hereunder for the Trust, and BNYM shall not be liable for any action taken or
omitted to be taken by it in good faith and without negligence or willful
misconduct in accordance with such instructions. Such application for
instructions may, at the option of BNYM, set forth in writing any action
proposed to be taken or omitted to be taken by BNYM with respect to its duties
or obligations under this Agreement and the date on and/or after which such
action shall be taken, and BNYM shall not be liable for any action taken or
omitted to be taken in good faith and without negligence or willful misconduct
in accordance with a proposal included in any such application on or after the
date specified therein unless, prior to taking or omitting to take any such
action, BNYM has received written instructions in response to such application
specifying the action to be taken or omitted.
(i) If BNYM shall be in doubt as to any question of law pertaining to any
action it should or should not take, BNYM may, with prior notice to the Trust,
request advice from outside counsel of its own choosing (who may be counsel for
the Trust, the Trust's investment adviser or BNYM, at the option of BNYM),
provided, however, that the Trust may request BNYM to obtain and consider advice
of counsel for the Trust or its investment advisor before engaging counsel of
its own choosing. Expense of counsel to the Trust or its investment advisor
shall be borne by the Trust on behalf of the applicable Fund; expense of other
counsel shall be borne by BNYM.
(j) Notwithstanding any other provision contained in this Agreement or
Schedule I or II attached hereto, BNYM shall have no duty or obligation with
respect to, including, without limitation, any duty or obligation to determine,
or advise or notify the Trust of: (i) the taxable nature of any distribution or
amount received or deemed received by, or payable to, any Fund (ii) the taxable
nature or effect on any Fund or its shareholders of any corporate actions, class
actions, tax reclaims, tax refunds or similar events, (iii) the taxable nature
or taxable amount of any distribution or dividend paid, payable or deemed paid,
by any Fund to its shareholders, or (iv) the effect under any federal, state, or
foreign income tax laws of any Fund making or not making any distribution or
dividend payment, or any election with respect thereto.
(k) BNYM shall have no duties or responsibilities whatsoever except such
duties and responsibilities as are specifically set forth in this Agreement and
Schedules I and II attached hereto, and no covenant or obligation shall be
implied against BNYM in connection with this Agreement.
-5-
(l) BNYM, in performing the services required of it under the terms of
this Agreement, shall be entitled to rely fully on the accuracy and validity of
any and all instructions, explanations, information, specifications and
documentation furnished to it by any Authorized Person on behalf of the Trust
and shall have no duty or obligation to review the accuracy, validity or
propriety of such instructions, explanations, information, specifications or
documentation, including, without limitation, evaluations of securities; the
amounts or formula for calculating the amounts and times of accrual of the
liabilities and expenses of any Fund; the amounts receivable and the amounts
payable on the sale or purchase of Securities; and amounts receivable or amounts
payable for the sale or redemption of the shares of any Fund effected by or on
behalf of the Trust. In the event BNYM's computations hereunder rely, in whole
or in part, upon information, including, without limitation, bid, offer or
market values of securities or other assets, or accruals of interest or earnings
thereon, from a pricing or similar service utilized, or subscribed to, by BNYM
which BNYM in its judgment deems reliable, BNYM shall not be responsible for,
under any duty to inquire into, or deemed to make any assurances with respect
to, the accuracy or completeness of such information. Without limiting the
generality of the foregoing, BNYM shall not be required to inquire into any
valuation of securities or other assets by the Trust or any third party
described in this paragraph (1) even though BNYM in performing services similar
to the services provided pursuant to this Agreement for others may receive
different valuations of the same or different securities of the same issuers.
(m) BNYM, in performing the services required of it under the terms of
this Agreement, shall not be responsible for determining whether any interest
accruable to any Fund is or will be actually paid, but will accrue such interest
until otherwise instructed by the Trust.
(n) BNYM shall not be responsible for delays or errors which occur by
reason of circumstances beyond its control in the performance of its duties
under this Agreement, including, without limitation, labor difficulties within
or without BNYM, mechanical breakdowns, flood or catastrophe, acts of God,
failures of transportation, interruptions, loss, or malfunctions of utilities,
communications or computer (hardware or software) services (a "Force Majeure
Event"), provided that BNYM has established and maintained a disaster recovery
and contingency plans and systems as described in Section 4(o) below or, if not,
that such delay or error would have occurred even if BNYM had established and
maintained such plans and systems. Nor shall BNYM be responsible for delays or
failures to supply the information or services specified in this Agreement where
such delays or failures are caused by the failure of any person(s) other than
BNYM to supply any instructions, explanations, information, specifications or
documentation deemed necessaiy by BNYM in the performance of its duties under
this Agreement.
-6-
(o) BNYM will maintain throughout the term of this Agreement, such
disaster recovery and contingency plans and systems as it reasonably believes to
be necessaiy and appropriate to recover its operations from the occurrence of a
Force Majeure Event and which are consistent with the requirements of any
statute, regulation or rule to which it is subject that imposes business
resumption and contingency planning standards. BNYM shall employ commercially
reasonable efforts to resume performance as soon as practicable under the
circumstances, following the occurrence of a Force Majeure Event.
5. Allocation of Expenses. Except as otherwise provided herein, including
Section 17(b) and 17(c)hereunder, all costs and expenses arising or incurred in
connection with the performance of this Agreement shall be paid by the Trust on
behalf of the applicable Fund, including but not limited to, organizational
costs and costs of maintaining the existence of the Trust and the applicable
Fund, taxes, interest, brokerage fees and commissions, insurance premiums,
compensation and expenses of the Trust's Trustees, directors, officers or
employees, legal, accounting and audit expenses, management, advisory,
sub-advisory, administration and shareholder servicing fees, charges of
custodians, transfer and dividend disbursing agents, expenses (including
clerical expenses) incident to the issuance, redemption or repurchase of the
shares of any Fund, fees and expenses incident to the registration or
qualification under federal or state securities laws of the Trust, any Fund or
the shares of any Fund, costs (including printing and mailing costs) of
preparing and distributing Prospectuses, reports, notices and proxy material to
the shareholders of any Fund, all expenses incidental to holding meetings of the
Trust's Trustees, directors and shareholders, and extraordinary expenses as may
arise, including litigation affecting the Trust or any Fund and legal
obligations relating thereto for which the Trust may have to indemnify its
Trustees, directors and officers.
6. Standard of Care; Indemnification, (a) Except as otherwise provided
herein, BNYM shall not be liable for any costs, expenses, damages, liabilities
or claims (including attorneys' and accountants' fees) incurred by the Trust or
any Fund, except those costs, expenses, damages, liabilities or claims arising
out of BNYM's own negligence, bad faith or willful misconduct. In no event shall
BNYM be liable to the Trust, any Fund or any third party for special, indirect
or consequential damages, or lost profits or loss of business, arising under or
in connection with this Agreement, even if previously informed of the
possibility of such damages and regardless of the form of action, but BNYM shall
be liable to the Trust and the applicable Fund for direct money damages caused
by BNYM's own negligence, bad faith or willful misconduct. BNYM shall not be
liable for any loss, damage or expense, including counsel fees and other costs
and expenses of a defense against any claim or liability, resulting from,
arising out of, or in connection with its performance hereunder, including its
actions or omissions, the incompleteness or inaccuracy of any specifications or
other information furnished by the Trust, or for delays caused by circumstances
beyond BNYM's control, unless such loss, damage or expense arises out of the
negligence, bad faith or willful misconduct of BNYM. BNYM shall indemnify and
hold harmless each Fund from and against any and all direct costs, expenses,
damages, liabilities and claims, and reasonable attorneys' and accountants' fees
relating thereto ("Losses") where such Losses have been finally determined by a
court of competent jurisdiction (pursuant to the terms of this Agreement) to
have arisen out of BNYM's failure to discharge its duties in accordance with its
standard of care as set forth hereunder. This indemnity shall be a continuing
obligation of BNYM, its successors and assigns, notwithstanding the termination
of this Agreement.
-7-
(b) The Trust on behalf of the applicable Fund shall indemnify and hold
harmless BNYM from and against any and all costs, expenses, damages, liabilities
and claims, and reasonable attorneys' and accountants' fees relating thereto,
which are sustained or incurred or which may be asserted against BNYM, by reason
of or as a result of any action taken or omitted to be taken by BNYM in good
faith and without negligence or willful misconduct hereunder or in reliance upon
(i) any law, act, regulation or interpretation of the same, (ii) the
Registration Statement or Prospectus of any Fund, (iii) any instructions of an
Authorized Person, or (iv) any opinion of legal counsel for the Trust or BNYM,
or arising out of transactions or other activities of the Trust which occurred
prior to the commencement of this Agreement; provided, that neither the Trust
nor any applicable Fund shall indemnify BNYM for costs, expenses, damages,
liabilities or claims for which BNYM is liable under preceding 6(a). This
indemnity shall be a continuing obligation of the Trust on behalf of the
applicable Fund, its successors and assigns, notwithstanding the termination of
this Agreement. Without limiting the generality of the foregoing, the Trust on
behalf of the applicable Fund shall indemnify BNYM against and save BNYM
harmless from any loss, damage or expense, including counsel fees and other
costs and expenses of a defense against any claim or liability, arising from any
one or more of the following:
(i) Errors in records or instructions, explanations, information,
specifications or documentation of any kind, as the case may be, supplied
to BNYM by any third party described above in 4(e) or 4(h) above;
(ii) Action or inaction taken or omitted to be taken by BNYM
pursuant to written or oral instructions of the Trust or otherwise without
negligence or willful misconduct;
(iii) Any action taken or omitted to be taken by BNYM in good faith
and without negligence or willful misconduct in accordance with the advice
or opinion of counsel for the Trust or its own outside counsel, provided
that any such action or omission by BNYM in conformity with such advice or
opinion of its own counsel is consistent with BNYM's rights and
responsibilities under this Agreement;
(iv) Any improper use by the Trust or its agents, distributor or
investment advisor of any valuations or computations supplied by BNYM
pursuant to this Agreement;
(v) The method of valuation of the securities and the method of
computing each Fund's net asset value; or
(vi) Any valuations of securities or net asset value provided by the
Trust.
(c) Actions taken or omitted in reliance on oral or written instructions,
or upon any information, order, indenture, stock certificate, power of attorney,
assignment, affidavit or other instrument reasonably believed by BNYM to be
genuine or bearing the signature of a person or persons believed to be
authorized to sign, countersign or execute the same, or upon the opinion of
legal counsel for the Trust or its own outside counsel, shall be presumed (in
BNYM's reasonable judgment) to have been taken or omitted in good faith.
7. Record Retention and Confidentiality, (a) BNYM shall keep and maintain
on behalf of the Trust all books and records which the Trust and BNYM are, or
may be, required to keep and maintain in connection with the services to be
-8-
provided hereunder pursuant to any applicable statutes, rules and regulations,
including, without limitation, Rules 3la-1 and 3la-2 under the 1940 Act. BNYM
further agrees that all such books and records shall be the property of the
Trust and to make such books and records available for inspection by the Trust,
by the investment adviser to the Trust, or by the SEC at reasonable times.
(b) Each party shall keep confidential any information relating to the
other party's business ("Confidential Information"). Confidential Information
shall include (1) 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 Trust or BNYM and their respective
subsidiaries and affiliated companies; (2) 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 Trust or BNYM a competitive advantage over its competitors; (3) 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 (4) anything designated as confidential. Notwithstanding the
foregoing, information shall not be Confidential Information and shall not be
subject to such confidentiality obligations if: (a) it is necessary for BNYM to
release such information in connection with the 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 requested or required to be disclosed by the
-9-
receiving party pursuant to a court order, subpoena, governmental or regulatory
agency request or law (provided the receiving party will provide the other party
written notice of the same, 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; (h) it has been or is independently developed or obtained by
the receiving party; or (i) it is necessary for BNYM to release such information
to BNYM's internal or external accountants or legal counsel who are subject to a
duty of confidentiality. BNYM acknowledges and agrees that in connection with
its services under this Agreement it receives non-public confidential portfolio
holdings information ("Portfolio Information") with respect to the Trust. BNYM
agrees that, subject to the foregoing provisions of and the exceptions set forth
in this Section 7(b) (other than the exception set forth above in this Section
7(b) as sub-item (1), which exception set forth in sub-item (1) shall not be
applicable to the Trust's Portfolio Information), BNYM will keep confidential
the Trust's Portfolio Information and will not disclose the Trust's Portfolio
Information other than pursuant to a written instruction from the Trust;
provided that without the need for such a written instruction and
notwithstanding any other provision of this Section 7(b) to the contrary, the
Trust's Portfolio Information may be disclosed to third party pricing services
which are engaged by BNYM in connection with the provision of services under
this Agreement and which shall be subject to a duty of confidentiality with
respect to such Portfolio Information.
(c) The Bank of New York Mellon Corporation is a global financial
organization that provides services to clients through its affiliates and
subsidiaries in multiple jurisdictions (the "BNY Mellon Group"). The BNY Mellon
Group may centralize functions including audit, accounting, risk, legal,
compliance, sales, administration, product communication, relationship
management, storage, compilation and analysis of customer-related data, and
other functions (the "Centralized Functions") in one or more affiliates,
subsidiaries and third-party service providers. Solely in connection with the
Centralized Functions, (i) the Trust consents to the disclosure of and
authorizes BNYM to disclose information regarding the Trust ("Customer-Related
Data") to the BNY Mellon Group and to its third-party service providers who are
subject to confidentiality obligations with respect to such information and (ii)
BNYM may store the names and business contact information of the Trust's
employees and representatives on the systems or in the records of the BNY Mellon
Group or its service providers. The BNY Mellon Group may aggregate
Customer-Related Data with other data collected and/or calculated by the BNY
Mellon Group, and notwithstanding anything in this Agreement to the contrary the
BNY Mellon Group will own all such aggregated data, provided that the BNY Mellon
Group shall not distribute the aggregated data in a format that identifies
Customer-Related Data with a particular customer. The Trust confirms that it is
authorized to consent to the foregoing.
8. Regulation S-P. BNYM agrees to make reasonable efforts to adhere to the
Trust's policy regarding the use of shareholder and potential shareholder
information as required by Regulation S-P. BNYM shall be free to share
information regarding shareholders and potential shareholders of the Funds of
the Trust, on an as needed basis in order to fulfill its role as administrator,
with other authorized agents of the Trust including service providers and
brokers. BNYM shall also be free to provide such information to its internal and
external auditors, counsel and accountants, its regulators and examiners, and to
any other person when advised by its counsel that it could be liable for failure
to provide such information.
9. Compensation. For the services provided hereunder, the Trust agrees to
pay BNYM such compensation as is mutually agreed from time to time and such
out-of-pocket expenses (e.g. telecommunication charges, postage and delivery
-10-
charges, record retention costs, reproduction charges and transportation and
lodging costs) as are incurred by BNYM in performing its duties hereunder.
Except as hereinafter set forth, compensation shall be calculated and accrued
daily and paid monthly. The Trust authorizes BNYM to debit the custody account
of the applicable Fund for all amounts due and payable by such Fund or the Trust
in respect of such Fund in connection with any and all obligations of the Trust
in respect of such Fund to BNYM under this Agreement. BNYM shall deliver to the
Trust invoices for services rendered after debiting the applicable custody
account with an indication that payment has been made. Upon termination of this
Agreement before the end of any month, the compensation for such part of a month
shall be prorated according to the proportion which such period bears to the
full monthly period and shall be payable upon the effective date of termination
of this Agreement. For the purpose of determining compensation payable to BNYM,
the Trust's net asset value shall be computed at the times and in the manner
specified in the Prospectus of the respective Fund.
10. Term of Agreement, (a) This Agreement shall continue until terminated
by either BNYM giving to the Trust, or the Trust giving to BNYM, a notice in
writing specifying the date of such termination, which date shall be not less
than 90 days after the date of the giving of such notice. Upon termination
hereof, the Trust shall pay to BNYM such compensation as may be due as of the
date of such termination, and shall reimburse BNYM for any disbursements and
expenses made or incurred by BNYM and payable or reimbursable hereunder.
(b) Notwithstanding the foregoing, BNYM may terminate this Agreement upon
30 days prior written notice to the Trust if the Trust shall terminate its
custody agreement with The Bank of New York Mellon, or fail to perform its
obligations hereunder in a material respect.
11. Authorized Persons. Attached hereto as Exhibit B is a list of persons
duly authorized by the Trustees of the Trust to execute this Agreement and give
any written or oral instructions, or written or oral specifications, by or on
behalf of the Trust. From time to time the Trust may deliver a new Exhibit B to
add or delete any person and BNYM shall be entitled to rely on the last Exhibit
B actually received by BNYM.
12. Amendment. This Agreement may not be amended or modified in any manner
except by a written agreement executed by BNYM and the Trust, and authorized or
approved by the Trust's Trustees. Notwithstanding the foregoing, in the event
that the Trust establishes one or more series of shares in addition to the Funds
listed on Exhibit A attached hereto with respect to which it desires to have
BNYM render services under the terms hereof and if BNYM wishes to provide such
services, the parties will execute a revised Exhibit A adding such additional
series. Upon execution of such revised Exhibit A, the series so added shall
become a Fund hereunder.
13. Assignment. This Agreement shall extend to and shall be binding upon
the parties hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by the Trust without the
written consent of BNYM, or by BNYM without the written consent of the Trust
accompanied by the authorization or approval of the Trust's Trustees.
14. Governing Law; Consent to Jurisdiction. This Agreement shall be
construed in accordance with the laws of the State of New York, without regard
to conflict of laws principles thereof. The Trust and BNYM each hereby consents
to the jurisdiction of a state or federal court situated in New York City, New
York in connection with any dispute arising hereunder, and waives to the fullest
-11-
extent permitted by law its right to a trial by jury. To the extent that in any
jurisdiction the Trust may now or hereafter be entitled to claim, for itself or
its assets, immunity from suit, execution, attachment (before or after judgment)
or other legal process, the Trust irrevocably agrees not to claim, and it hereby
waives, such immunity.
15. Severability. In case any provision in or obligation under this
Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or obligations
shall not in any way be affected or impaired thereby, and if any provision is
inapplicable to any person or circumstances, it shall nevertheless remain
applicable to all other persons and circumstances.
16. No Waiver. Each and every right granted to BNYM and the Trust
hereunder or under any other document delivered hereunder or in connection
herewith, or allowed it by law or equity, shall be cumulative and may be
exercised from time to time. No failure on the part of BNYM or the Trust to
exercise, and no delay in exercising, any right will operate as a waiver
thereof, nor will any single or partial exercise by BNYM or the Trust of any
right preclude any other or future exercise thereof or the exercise of any other
right.
17. Limitations of Liability of the Trustees and Shareholders, (a) It is
expressly acknowledged and agreed that the obligations of the Trust (and Funds
thereof) hereunder shall not be binding upon any of the shareholders, Trustees,
officers, employees or agents of the Trust (and Funds thereof), personally, but
shall bind only the trust property of the Trust and the applicable Fund, as
provided in the Trust's Declaration of Trust. The execution and delivery of this
Agreement have been authorized by the Trustees of the Trust and signed by an
officer of the Trust, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be deemed to have
been made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Trust and the
applicable Fund, as provided in the Trust's Declaration of Trust.
(b) This Agreement is an agreement entered into between BNYM and the Trust
with respect to each Fund. With respect to any obligation of the Trust on behalf
of any Fund arising out of this Agreement, BNYM shall look for payment of such
obligation solely to the assets of the Fund to which such obligation relates
with the same effect as if BNYM had separately contracted with the Trust by
separate written instrument with respect to each Fund.
-12-
(c) As used herein, the "applicable Fund" shall be each Fund in respect of
which any amount due BNYM arises, and if any amount due BNYM arises in respect
of more than one Fund, the same shall be allocated by BNYM among such Funds in
accordance with Section 17(b) hereof. Any amounts due BNYM which may not be
allocated in accordance with the preceding sentence shall constitute General
Liabilities as defined in the Trust's Declaration of Trust and allocated by the
Trust and paid in accordance with the provisions thereof. The parties
acknowledge that the obligations of the Funds hereunder are several and not
joint, that no Fund shall be liable for any amount owing by another Fund and
that the Funds have executed one instrument for convenience only.
18. Notices. Each notice, request, demand, approval or other communication
which may be or is required to be given under this Agreement shall be in writing
in English and shall be deemed to have been sufficiently given when received by
the intended party, if delivered personally at the address set forth below for
the intended party during normal business hours at such address, if sent by
facsimile transmission to the respective facsimile transmission numbers of the
parties set forth below, or if sent by recognized overnight courier service or
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Trust: First Trust Exchange-Traded Fund VIII
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
Attention: General Counsel
Facsimile: 630-517-7437
Confirm: 630-765-8798
If to BNYM: The Bank of New York Mellon
101 Barclay Street, 20W
New York, New York 10286
Attention: Rosalia Koopman
Facsimile: 212-815-2948
Confirm: 212-815-4647
|
Notices shall be given to such other addressee or address, or both, or by way of
such other facsimile transmission number, as a particular party may from time to
time designate by written notice to the other parties hereto given in accordance
with this Section.
19. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original; but such
counterparts together shall constitute only one instrument.
-13-
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers and their seals to
be hereunto affixed, all as of the day and year first above written.
FIRST TRUST EXCHANGE-TRADED FUND VIII
By /s/ James M. Dykas
------------------------------
Title: President
-----------------------
James M. Dykas
|
THE BANK OF NEW YORK MELLON
By /s/ Rosalia A. Koopman
------------------------------
Title: Managing Director
-----------------------
|
-14-
EXHIBIT A
EXHIBIT B
I, ______________________, General Counsel of First Trust Advisors L.P.
and ________________________________________ of FIRST TRUST EXCHANGE-TRADED FUND
VIII, a Massachusetts business trust (the "Trust"), do hereby certify that:
The following individuals serve in the following positions with the First
Trust Advisors L.P., and each has been duly authorized by the Board of Trustees
of the Trust to give written or oral instructions or written or oral
specifications by or on behalf of the Trust to BNYM and the signatures set forth
opposite their respective names are their true and correct signatures.
NAME POSITION SIGNATURE
MANAGING DIRECTOR AND
CHIEF FINANCIAL OFFICER
ASSISTANT VICE PRESIDENT
VICE PRESIDENT
GENERAL COUNSEL
SENIOR VICE PRESIDENT
DEPUTY GENERAL COUNSEL
SENIOR VICE PRESIDENT
SENIOR VICE PRESIDENT
VICE PRESIDENT
VICE PRESIDENT
ASSOCIATE
MANAGING DIRECTOR
SCHEDULE I
ADMINISTRATIVE SERVICES
1. Oversee the maintenance by the Trust's custodian of certain books and
records of the Trust as required under Rule 31 a-1 (b) of the 1940 Act.
2. Establish appropriate expense accruals, maintain expense files and
coordinate the payment of invoices.
3. Prepare for review and approval by the treasurer for the Trust, its
counsel and its independent accountants financial information for the
semi-annual and annual reports of the Funds of the Trust, proxy statements and
other communications required or otherwise to be sent to the shareholders of a
Fund or the Securities and Exchange Commission ("SEC") and arrange for the
printing and dissemination of such reports and communications to record and
beneficial shareholders through The Depository Trust Company.
4. Prepare federal, state and local income tax returns for each Fund and
file such returns upon the approval of the Trust's independent accountants;
monitor and report on SubChapter M qualifications; prepare and file all Form
1099s with respect to the Trust's directors or trustees; monitor compliance with
Section 4982 of the Internal Revenue Code; calculate and maintain records
pertaining to original issue discount and premium amortization as required;
perform ongoing wash sales review (i.epurchases and sales of investments of a
Fund within 30 days of each other). Prepare and maintain tax lot schedules for
each security purchased for each Fund.
5. Prepare and, subject to approval of the Trust's treasurer, disseminate
to the Trust's board quarterly unaudited financial statements and schedules of
investments of each Fund and make presentations to the board, as appropriate.
6. Prepare for review and approval by the treasurer and chief executive
officer of the Trust, its counsel and its independent accountants the Trust's
periodic financial reports for its respective Funds required to be filed with
the SEC on Form N-SAR, Form N-Q, FormN-CSR and financial information required by
Form N-l A and such other reports, forms or filings as may be mutually agreed
upon.
7. Prepare recommendations as to each Fund's income and capital gains
available for distribution; calculate such distributions for each Fund in
accordance with applicable regulations and the distribution for each Fund in
accordance with applicable regulations and the distribution policies set forth
in the Fund's registration statement, and assist Trust management in making
final determination of distribution amounts.
8. Oversee and review calculation of fees paid to the Trust's investment
adviser, custodian and transfer agent.
9. Respond to, or refer to the Trust's officers or the distributor or the
transfer agent, shareholder inquiries relating to the Trust.
10. Provide testing of portfolios on a weekly basis, to assist the Trust's
investment adviser in complying with Internal Revenue Code mandatory
qualification requirements, the requirements of the 1940 Act and a Fund's
Prospectus and Statement of Additional Information limitations as may be
mutually agreed upon.
11. Review and provide assistance on shareholder communications.
12. Prepare for review and approval by the treasurer of the Trust, its
counsel and its independent accountants and file annual and semi-annual
shareholder reports with the appropriate regulatory agencies; review text of
"President's letters" to shareholders and "Management's Discussion of Fund
Performance" (which shall also be subject to review by the Trust's legal
counsel).
13. Organize, attend and prepare minutes of shareholder meetings.
14. Counsel and assist the Trust in the handling of routine regulatory
examinations and work closely with the Trust's legal counsel in response to any
non-routine regulatory matters.
15. Prepare for review and approval by the treasurer for the Trust, its
counsel and its independent accountants and file with the SEC amendments to the
registration statement for a Fund, including updating a Fund's Prospectus and
Statement of Additional Information, where applicable.
16. Prepare for review and approval by the treasurer for the Trust, its
counsel and its independent accountants and file with the SEC proxy statements
and proxy cards; provide consultation on proxy solicitation matters.
17. Prepare agenda and board materials for board meetings, make
presentations where appropriate, prepare minutes and follow-up on matters raised
at board meetings and maintain minute books.
18. Prepare and file with the SEC Rule 24f-2 notices.
19. Prepare statistical reports for outside information services
(e.g. IBC/Donoghue, ICI, Lipper Analytical and Morningstar).
20. Prepare and execute periodic certifications and sub-certifications, in
a form agreed to by the Trust and BNYM, with respect to Form N-Qs, Form N-CSRs,
compliance policies and procedures under Rule 38a-l of the Investment Company
Act of 1940, as amended ("Rule 38a- 1"), and such other matters that may be
reasonably requested by the Trust or the Trust's Chief Compliance Officer from
time to time.
21. Periodically provide a written assessment of BNYM's Rule 38a-l
compliance program to the Trust in conformity with current industry standards
that is reasonably acceptable to the Trust.
22. As appropriate, compute yields, total returns, expense ratios,
portfolio turnover rate and, if requested, portfolio average dollar-weighted
maturity.
SCHEDULE II
VALUATION AND COMPUTATION SERVICES
I. BNYM shall maintain the following records on a daily basis for each
Fund.
1. Report of priced portfolio securities
2. Statement of net asset value per share
II. BNYM shall prepare on behalf of the Trust all books and records of the
Trust as required by Rule31a-1 under the 1940 Act, and as such rule or any
successor rule, may be amended from time to time, that are applicable to the
fulfillment of BNYM's duties hereunder, as well as any other documents necessary
or advisable for compliance with applicable regulation as may be mutually agreed
to between the Trust and BNYM. Without limiting the generality of the foregoing,
BNYM will prepare and maintain the following records upon receipt of information
in proper form from the Trust or its authorized agents for each Fund:
1. General Ledger
2. General Journal
3. Cash Receipts Journal
4. Cash Disbursements Journal
5. Subscriptions Journal
6. Redemptions Journal
7. Accounts Receivable Reports
8. Accounts Payable Reports
9. Open Subscriptions/Redemption Reports
10. Transaction (Securities) Journal
11. Broker Net Trades Reports
III. BNYM shall prepare a Holdings Ledger on a quarterly basis, and a
Buy-Sell Ledger (Broker's Ledger) on a semiannual basis for each Fund. Schedule
D shall be produced on an annual basis for each Fund. The above reports may be
printed according to any other required frequency to meet the requirements of
the Internal Revenue Service, the Securities and Exchange Commission and the
Trust's Auditors.
IV. For internal control purposes, BNYM uses the Account Journals produced
by The Bank of New York Mellon Custody System to record daily settlements of the
following for each Fund:
1. Securities bought
2. Securities sold
3. Interest received
4. Dividends received
5. Capital stock sold
6. Capital stock redeemed
7. Other income and expenses
All portfolio purchases for the Trust are recorded to reflect expected
maturity value and total cost including any prepaid interest.
EXECUTION
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of June 23, 2016, by and between FIRST TRUST
EXCHANGE-TRADED FUND VIII (the "Trust"), a Massachusetts business trust, having
its principal office and place of business at 120 East Liberty Drive, Suite 400,
Wheaton, Illinois 60187 (the "Trust") and THE BANK OF NEW YORK MELLON, a New
York banking corporation having its principal office and place of business at
225 Liberty Street, New York, New York 10286 (the "Bank").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Trust is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Trust, so authorized, intends that this Agreement be
applicable to each of its series as set forth on Exhibit A (each such series
together with all other series subsequently established by the Trust and made
subject to this Agreement by amendment hereof in accordance with Section 11,
being referred to as a "Fund' and collectively as the "Funds"); and
WHEREAS, the Trust and designated agents will issue for purchase and
redeem shares of the Funds only in aggregations of shares known as "Creation
Units" (50,000 shares or such other aggregation as is specified in the
prospectus for a Fund) (each a "Creation Unit") principally in kind;
WHEREAS, The Depository Trust Company, a limited purpose trust company
organized under the laws of the State of New York ("DTC"), or its nominee (Cede
& Co.), will be the initial record or registered owner (the "Shareholder") of
all shares;
WHEREAS, the Trust on behalf of the Funds (identified on Exhibit A as the
same may be amended from time to time) desires to appoint the Bank as its
transfer agent, dividend disbursing agent, and agent in connection with certain
other activities, and the Bank desires to accept such appointment;
Now, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
SECTION 1. TERMS OF APPOINTMENT; DUTIES OF THE BANK.
Section 1.1. Subject to the terms and conditions set forth in this
Agreement, the Trust, on behalf of the Funds, hereby employs and appoints the
Bank to act as, and the Bank agrees to act as its transfer agent for the
authorized and issued shares of beneficial interest, $.01 par value per share of
each Fund ("Shares"), and as the Trust's dividend disbursing agent.
Section 1.2. The Bank agrees that it will perform the following services:
(a) The Bank shall enter into Participant Agreements with the
Participants identified therein in the form attached hereto as Exhibit B
with such changes and modifications as shall be approved by the
Distributor identified therein (the Distributor's execution of the
Participant Agreement being conclusive as to its approval of any such
changes and modifications), provided that no changes or modifications
which adversely affect the Bank's rights or obligations shall be made
without its consent, and in accordance with the terms and conditions of
such Participant Agreements the Bank shall:
(i) Perform and facilitate the performance of purchases and
redemption of Creation Units;
(ii) Prepare and transmit by means of DTC's book-entry system
payments for dividends and distributions declared by the Trust on
behalf of the applicable Fund;
(iii) Maintain the record of the name and address of the
Shareholder and the number of Shares issued by the Funds of the
Trust and held by the Shareholder;
(iv) Record the issuance of Shares of the respective Funds of
the Trust and maintain a record of the total number of outstanding
Shares of the Funds of the Trust, and, which are authorized, based
upon data provided to it by the Trust. The Bank shall have no
obligation, when recording the issuance of Shares, to monitor the
issuance of such Shares or to take cognizance of any laws relating
to the issue or sale of such Shares, which functions shall be the
sole responsibility of the Trust.
(v) Prepare and transmit to the Trust and the Trust's
administrator and to any applicable securities exchange (as
specified to the Bank by the administrator or by the Trust)
information with respect to purchases and redemptions of Shares;
(vi) On days that the Trust may accept orders for purchases
or redemptions, calculate and transmit to the Bank and the Trust's
administrator the number of outstanding Shares for each Fund;
(vii) On days that the Trust may accept orders for purchases
or redemptions (pursuant to the Participant Agreement), transmit to
the Bank, the Trust and DTC the amount of Shares purchased on such
day;
(viii) Confirm to DTC the number of Shares issued to the
Shareholder, as DTC may reasonably request;
(ix) Prepare and deliver other reports, information and
documents to DTC as DTC may reasonably request;
(x) Extend the voting rights to the Shareholder and/or
beneficial owners of Shares in accordance with the policies and
procedures of DTC for book-entry only securities;
-2-
(xi) Distribute or maintain, as directed by the Trust,
amounts related to purchases and redemptions of Creation Units and
dividends and distributions;
(xii) Maintain those books and records of the Trust specified
by the Trust in Schedule A attached hereto;
(xiii) Prepare a monthly report of all purchases and
redemptions during such month on a gross transaction basis and
identify on a daily basis the net number of Shares either redeemed
or purchased on such business day and with respect to the
Participant (as defined in the Participant Agreement) purchasing or
redeeming Shares, the amount of Shares purchased or redeemed;
(xiv) Receive from the Distributor (as defined in the
Participant Agreement) purchase orders from Participants (as defined
in the Participant Agreement) for Creation Unit aggregations of
Shares received in good form and accepted by or on behalf of the
Trust by the Distributor, transmit appropriate trade instructions to
the National Securities Clearance Corporation ("NSCC") and/or DTC,
if applicable, and pursuant to such orders issue the appropriate
number of Shares of the applicable Fund and hold such Shares in the
account of the Shareholder for each of the respective Funds of the
Trust;
(xv) Receive from the Participants (as defined in the
Participant Agreement) redemption requests, deliver the appropriate
documentation thereof to The Bank of New York Mellon as custodian
for the Trust, generate and transmit or cause to be generated and
transmitted confirmation of receipt of such redemption requests to
the Participants submitting the same; transmit appropriate trade
instructions to the NSCC and/or DTC, if applicable, and redeem the
appropriate number of Creation Unit Aggregations of Shares held in
the account of the Shareholder;
(xvi) Confirm the name, U.S. taxpayer identification number
and principal place of business of each Authorized Participant; and
(xvii) Act in conformity with the Trust's Declaration of
Trust, as presently in effect and as amended from time to time, the
Trust's By-Laws, each Fund's prospectus, all as provided to the Bank
by the Trust or its adviser, and will be subject to the standard set
forth in Section 6, comply with and conform to the requirements of
-3-
the 1940 Act, the Securities Exchange Act of 1934, as amended,
particularly Section 17A thereof, and all other applicable federal
and state laws, regulations and rulings as such apply to the Bank
and the services provided as contemplated herein.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall: perform the
customary services of a transfer agent and dividend disbursing agent
including but not limited to: maintaining the account of the Shareholder;
obtaining a list of DTC participants holding interests in the Global
Certificate at the request of the Trust; mailing proxy materials,
shareholder reports and prospectuses to the Shareholder or DTC
participants or beneficial owners of Shares at the request of the Trust;
and maintaining the items set forth on Schedule A attached hereto and
performing such services identified in each Participant Agreement.
(c) The following shall be delivered to DTC for delivery to
beneficial owners in accordance with the procedures for book-entry only
securities of DTC:
(i) Annual and semi-annual reports of the Funds of the
Trust;
(ii) Trust proxies, proxy statements and other proxy
soliciting materials;
(iii) The Trust's prospectus(es) and amendments and
supplements to the Prospectus, including stickers; and
(iv) Other communications or materials as may be required by
law or reasonably requested by the Trust.
(d) If the Shares are represented by individual Certificates, the
Bank shall perform the services agreed to in writing by the Bank and the
Trust.
(e) The Bank shall provide additional services (if any) on behalf
of the Trust (i.e., escheatment services) which may be agreed upon in
writing between the Trust and the Bank.
(f) The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner required by applicable law,
rules and regulations under the 1940 Act. To the extent required by
Section 31 of the 1940 Act and the rules thereunder (the "Rules"), the
Bank agrees that all such records prepared or maintained by the Bank
relating to the services to be performed by the Bank hereunder are the
property of the Trust and will be preserved, maintained and made available
in accordance with such Section and Rules, and will be surrendered
promptly to the Trust on and in accordance with its request.
-4-
SECTION 2. FEES AND EXPENSES.
Section 2.1. The Bank shall receive from the Trust such compensation for
the Transfer Agent's services provided pursuant to this Agreement as may be
agreed to from time to time in a written fee schedule approved by the parties.
The fees are accrued daily and billed monthly and shall be due and payable upon
receipt of the invoice. Upon the termination of this Agreement before the end of
any month, the fee for the part of the month before such termination shall be
prorated according to the proportion which such part bears to the full monthly
period and shall be payable upon the date of termination of this Agreement.
Section 2.2. In addition to the fee paid under Section 2.1 above, the
Trust on behalf of the applicable Fund agrees to reimburse the Bank for
reasonable out-of-pocket expenses, including but not limited to confirmation
production, postage, forms, telephone, microfilm, microfiche, tabulating
proxies, records storage, or advances incurred by the Bank for the items set out
in the fee schedule attached hereto or relating to dividend distributions and
reports (whereas all expenses related to creations and redemptions of the
securities of any Fund shall be borne by the relevant Participant in such
creations and redemptions). In addition, any other expenses incurred by the Bank
at the request or with the consent of the Trust, will be reimbursed by the Trust
on behalf of the applicable Fund.
Section 2.3. The Trust on behalf of the applicable Fund agrees to pay all
fees and reimbursable expenses within ten business days following the receipt of
the respective billing notice accompanied by supporting documentation, as
appropriate. Postage for mailing of dividends, proxies, reports and other
mailings to all shareholder accounts shall be advanced to the Bank by the Trust
at least seven (7) days prior to the mailing date of such materials.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF TFIE BANK.
Section 3.1. The Bank represents and warrants to the Trust that:
It is a banking corporation duly organized and existing and in good
standing under the laws of the State of New York.
It is duly qualified to carry on its business in the State of New
York.
It is empowered under applicable laws and by its Charter and By-Laws
to act as transfer agent and dividend disbursing agent and to enter into
and perform its obligations under this Agreement.
All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
-5-
It has obtained all regulatory licenses, approvals and consents
necessary to carry on its business as currently conducted; there is no
statue, regulation, rule, order or judgment binding on the Bank and no
provisions of its charter or by-laws, nor of any mortgage, indenture,
credit agreement or other contract binding on the Bank or affecting its
property which would prohibit the execution or performance by the Bank of
this Agreement.
It has established and will continue to maintain throughout the term
of this Agreement, policies and procedures reasonably designed to comply
with the requirements of applicable law relating to the privacy of
non-public personal consumer financial information.
It has implemented and shall maintain appropriate policies,
procedures and processes reasonably designed to satisfy the requirements
of federal and New York Law applicable to Bank, including, without
limitations, the requirements of The Gramm- Leach-Bliley Act (15 U.S.C.
Section 6801 and 6805) and regulations promulgated thereunder and the
Interagency Guidelines Establishing Standards for Safeguarding Customer
Information issued by the Board of Governors of the Federal Reserve
System.
No legal or administrative proceedings have been instituted or
threatened which would impair the Bank's ability to perform its duties and
obligations under this Agreement.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE TRUST.
Section 4.1. The Trust represents and warrants to the Bank that:
It is a business trust duly organized and existing and in good
standing under the laws of Massachusetts.
It is empowered under applicable laws and by its Declaration of
Trust and By-Laws to enter into and perform this Agreement.
All corporate proceedings required by said Declaration of Trust and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
It is an open-end management investment company registered under the
Investment Company Act of 1940, as amended.
A registration statement under the Securities Act of 1933, as amended, on behalf
of each of the Funds will become effective or is currently effective and will
remain effective, and appropriate state securities law filings have been made
and will continue to be made, with respect to all Shares of the Funds of the
Trust being offered for sale.
-6-
SECTION 5. RESERVED.
SECTION 6. INDEMNIFICATION.
Section 6.1. Except for Losses (as defined below) for which the Bank has
accepted liability pursuant to Section 6 of this Agreement, the Bank shall not
be responsible for, and the Trust on behalf of the applicable Fund shall
indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability ("Losses
") arising out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors required
to be taken pursuant to this Agreement, provided that such actions are
taken without negligence, bad faith or willful misconduct. NSCC, DTC or
any third party described in Section 5 are not agents or subcontractors of
the Bank.
(b) The Trust's negligence or willful misconduct in respect of the
applicable Fund.
(c) The breach of any representation or warranty of the Trust
hereunder in respect of the applicable Fund.
(d) The reasonable reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services in respect
of the applicable Fund which (i) are received by the Bank or its agents or
subcontractors, and (ii) have been prepared, maintained or performed by
the Trust or any other person or firm on behalf of the Trust in respect of
the applicable Fund including but not limited to any previous transfer
agent or registrar.
(e) The reasonable reliance on, or the carrying out by the Bank or
its agents or subcontractors of any instructions or requests of the Trust
on behalf of the applicable Fund.
(f) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations or the securities laws or
regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any
federal agency or any state with respect to the offer or sale of such
Shares in such state.
In no event shall the Trust be liable for special, indirect or
consequential damages, regardless of the form of action and even if the
same were foreseeable.
Section 6.2. At any time the Bank may apply to any officer of the Trust
for instructions, and may consult with legal counsel of the Bank's choosing with
respect to any matter arising in connection with the services to be performed by
the Bank under this Agreement, and the Bank and its agents or subcontractors
-7-
shall not be liable and shall be indemnified by the Trust on behalf of the
applicable Fund for any action taken or omitted by it in reasonable reliance
upon such instructions or upon the advice or opinion of such counsel and shall
promptly advise the Trust of such advice or opinion (except for actions or
omissions by Bank taken with negligence or willful misconduct). The Bank, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document, reasonably believed to be genuine and to have been signed by
the proper person or persons, or upon any instruction, information, data,
records or documents provided the Bank or its agents or subcontractors by
machine readable input, CRT data entry or other similar means authorized by the
Trust, and shall not be held to have notice of any change of authority of any
person, until receipt of written notice thereof from the Trust.
Section 6.3. Neither the Trust nor any Fund shall be responsible for, and
the Bank shall be liable for and shall indemnify the Trust and the applicable
Fund against direct money damages arising out of or attributable to:
(a) The Bank's own negligence, bad faith or willful misconduct.
(b) The breach of any representation or warranty of the Bank
hereunder.
Section 6.4. The provisions of Section 6 shall survive and remain in effect
after any termination of this Agreement or any resignation or removal of the
Bank as transfer agent hereunder.
SECTION 7. STANDARD OF CARE.
The Bank shall act in good faith, reasonable care, diligence and prudence
in carrying out its duties and obligations set forth herein as a professional
transfer agent would exercise under the facts and circumstances. The Bank shall
have no responsibility and shall not be liable for any loss or damage unless
such loss or damage is caused by its own negligence, bad faith or willful
misconduct or that of its employees, or its breach of any of its representations
or warranties hereunder. In no event shall the Bank be liable for special,
indirect or consequential damages regardless of the form of action and even if
the same were foreseeable.
SECTION 8. CONCERNING THE BANK.
Section 8.1. The Bank may, at its own expense, enter into subcontracts,
agreements and understandings with any Bank affiliate, whenever and on such
terms and conditions as it deems necessaiy or appropriate to perform its
services hereunder. No such subcontract, agreement or understanding shall
discharge the Bank from its obligations hereunder and the Bank shall be liable
and responsible to the Trust for any act or omission of any Bank affiliate in
the manner, and to the same extent, as though such act or omission were that of
the Bank.
-8-
Section 8.2. The Bank shall be entitled to conclusively rely upon any
written or oral instruction actually received by the Bank and reasonably
believed by the Bank to be duly authorized and delivered. The Trust agrees to
forward to Bank written instructions confirming oral instructions by the close
of business of the same day that such oral instructions are given to the Bank.
The Trust agrees that the fact that such confirming written instructions are not
received or that contrary written instructions are received by the Bank shall in
no way affect the validity or enforceability of transactions authorized by such
oral instructions and effected by the Bank. If the Trust elects to transmit
written instructions through an on-line communication system offered by the
Bank, the Trust's use thereof shall be subject to the terms and conditions
attached hereto as Appendix A.
Section 8.3. The Bank shall establish and maintain a disaster recovery plan
and back-up system at all times satisfying the requirements of all applicable
law, rules, and regulations (the "Disaster Recovery Plan and Back-Up System ").
The Bank shall not be responsible or liable for any failure or delay in the
performance of its obligations under this Agreement arising out of or caused,
directly or indirectly, by circumstances beyond its control which are not a
result of its negligence, including without limitation, acts of God;
earthquakes; fires; floods; wars; civil or military disturbances; sabotage;
epidemics; riots; interruptions, loss or malfunctions of utilities,
transportation, computer (hardware or software) or communications service;
accidents; labor disputes; acts of civil or military authority; governmental
actions; or inability to obtain labor, material, equipment or transportation,
provided that the Bank has established and is maintaining the Disaster Recovery
Plan and Back-Up System, or if not, that such delay or failure would have
occurred even if Bank had established and was maintaining the Disaster Recovery
Plan and Back-Up System. Upon the occurrence of any such delay or failure, the
Bank shall use commercially reasonable best efforts to resume performance as
soon as practicable under the circumstances.
Section 8.4. The Bank shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement and each Participant Agreement, and no covenant or obligation shall be
implied against the Bank in connection with this Agreement except as set forth
in this Agreement and each Participant Agreement.
Section 8.5. At any time the Bank may apply to an officer of the Trust for
written instructions with respect to any matter arising in connection with the
Bank's duties and obligations under this Agreement, and the Bank shall not be
liable for any action taken or omitted to be taken by the Bank in good faith and
without negligence or willful misconduct in accordance with such instructions.
Such application by the Bank for instructions from an officer of the Trust may,
at the option of the Bank, set forth in writing any action proposed to be taken
or omitted to be taken by the Bank with respect to its duties or obligations
under this Agreement and the date on and/or after which such action shall be
taken, and the Bank shall not be liable for any action taken or omitted to be
taken in accordance with a proposal included in any such application on or after
the date specified therein unless, prior to taking or omitting to take any such
action, the Bank has received written instructions in response to such
application specifying the action to be taken or omitted. In connection with the
foregoing, if the Bank personnel who are responsible for receiving and/or
-9-
implementing such Trust instructions have actual knowledge that any instructions
provided by the Trust at the request of the Bank pursuant to this section would
cause the Bank to take any action or omit to take any action in a manner
contrary to any law or regulation, the Bank will notify the Customer of its
concerns, without any liability for failing to do so. If the Bank shall be in
doubt as to any question of law pertaining to any action it should take or
should not take, the Bank may request advice from outside counsel (who may be
counsel for the Trust, the Trust's investment adviser or the Bank, at the option
of the Bank). The Bank shall pay the cost of any counsel retained by the Bank.
The Bank shall not be liable with respect to anything done or omitted by it in
good faith and without negligence or willful misconduct in accordance with the
advice or opinion of such counsel.
Section 8.6. Notwithstanding any provisions of this Agreement to the
contrary, the Bank shall be under no duty or obligation to inquire into, and
shall not be liable for:
(a) The legality of the issue, sale or transfer of any Shares, the
sufficiency of the amount to be received in connection therewith, or the
authority of the Trust to request such issuance, sale or transfer;
(b) The legality of the purchase of any Shares, the sufficiency of
the amount to be paid in connection therewith, or the authority of the
Trust to request such purchase;
(c) The legality of the declaration of any dividend by the Trust in
respect of the Shares of any Fund, or the legality of the issue of any
Shares in payment of any stock dividend; or
(d) The legality of any recapitalization or readjustment of the
Shares.
SECTION 9. COVENANTS OF THE TRUST AND THE BANK
Section 9.1. The Trust shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of Trustees of
the Trust authorizing the appointment of the Bank and the execution and
delivery of this Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the Trust and
all amendments thereto.
(c) Shares will be transferred upon presentation to the Bank of
Shares to its electronic account at DTC, accompanied by such documents as
the Bank deems necessary to evidence the authority of the person making
such transfer, and bearing satisfactory evidence of the payment of
applicable stock transfer taxes, if any. In the case of small estates
where no administration is contemplated, the Bank may, when furnished with
an appropriate surety bond, and without further approval of the Trust,
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transfer Shares registered in the name of the decedent where the current
market value of the Shares being transferred does not exceed such amount
as may from time to time be prescribed by the various states. The Bank
reserves the right to refuse to transfer Shares until it is satisfied that
the endorsements on documents submitted to it are valid and genuine, and
for that purpose it may require, unless otherwise instructed by an Officer
of the Trust, a guaranty of signature by an "eligible guarantor
institution" meeting the requirements of the Bank, which requirements
include membership or participation in STAMP or such other "signature
guarantee program" as may be determined by the Bank in addition to, or in
substitution for, STAMP, all in accordance with the Securities Exchange
Act of 1934, as amended. The Bank also reserves the right to refuse to
transfer Shares until it is satisfied that the requested transfer is
legally authorized, and it shall incur no liability for the refusal in
good faith and without negligence or willful misconduct to make transfers
which the Bank, in its judgment, deems improper or unauthorized, or until
it is satisfied that there is no basis to any claims adverse to such
transfer. The Bank may, in effecting transfers of Shares, rely upon those
provisions of the Uniform Act for the Simplification of Fiduciary Security
Transfers or the Uniform Commercial Code, as the same may be amended from
time to time, applicable to the transfer of securities, and the Trust on
behalf of the applicable Fund shall indemnify the Bank for any act done or
omitted by it in good faith and without negligence or willftil misconduct
in reliance upon such laws.
(d) The Bank assumes no responsibility with respect to the transfer
of restricted securities where counsel for the Trust advises that such
transfer may be properly effected.
Section 9.2. The Trust shall deliver to the Bank the following documents
on or before the initial issuance of Shares of any Fund:
(a) At the reasonable request of the Bank, an opinion of counsel for
the Trust, in a form satisfactory to the Bank, with respect to the
validity of the Shares, the obtaining of all necessary governmental
consents, whether such Shares are fully paid and nonassessable and the
status of such Shares under the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and any other applicable
federal law or regulations (i.e., if subject to registration, that they
have been registered and that the Registration Statement has become
effective or, if exempt, the specific grounds therefore); and
(b) A certified copy of a resolution of the Board of Directors of
the Trust establishing the authority of the Bank.
Section 9.3. Prior to the issuance of any additional Shares of any Fund
pursuant to stock dividends or stock splits, and prior to any reduction in the
number of Shares of any Fund outstanding pursuant to any reverse stock split,
the Trust shall deliver the following documents to the Bank:
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(a) A certified copy of the resolutions adopted by the Board of
Trustees and/or the shareholders of the applicable Fund authorizing such
issuance of additional Shares of the Fund or such reduction, as the case
may be;
(b) A certified copy of the order or consent of each governmental or
regulatory authority required by law as a prerequisite to the issuance or
reduction of such Shares, as the case may be; and
(c) At the request of the Bank, an opinion of counsel for the Trust,
in a form satisfactory to the Bank, with respect to the validity of the
Shares, whether such Shares are fully paid and non-assessable and the
status of such Shares under the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and any other applicable
federal law or regulations (i.e., if subject to registration, that they
have been registered and that the Registration Statement has become
effective or, if exempt, the specific grounds therefore).
Section 9.4. The Bank agrees that all books and records listed on Schedule
A hereto or otherwise prepared or maintained by the Bank relating to the
services to be performed by the Bank hereunder as required by applicable law are
the property of the Trust and will be preserved, maintained and made available
upon reasonable request, and will be surrendered promptly to the Trust on and in
accordance with its request.
Section 9.5. 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 Trust or the Bank and their
respective subsidiaries and affiliated companies; (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 Trust or the Bank 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 Confidential Information and shall not be
subject to such confidentiality obligations if: (a) it is necessary for the Bank
to release such information in connection with the 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 requested or required to be disclosed by the
receiving party pursuant to a court order, subpoena, governmental or regulatory
agency request or law (provided the receiving party will provide the other party
written notice of the same, to the extent such notice is permitted); (g) it is
-12-
relevant to the defense of any claim or cause of action asserted against the
receiving party; (h) it has been or is independently developed or obtained by
the receiving party; or (i) it is necessary for Bank to release such information
to the Bank's internal or external accountants or legal counsel who are subject
to a duty of confidentiality. Bank acknowledges and agrees that in connection
with its services under this Agreement it receives non-public confidential
portfolio holdings information ("Portfolio Information") with respect to the
Trust. Bank agrees that, subject to the foregoing provisions of and the
exceptions set forth in this Section 9.5 (other than the exception set forth
above in this Section 9.5 as sub-item (a), which exception set forth in sub-item
(a) shall not be applicable to the Trust's Portfolio Information), Bank will
keep confidential the Trust's Portfolio Information and will not disclose the
Trust's Portfolio Information other than pursuant to a written instruction from
the Trust; provided that without the need for such a written instruction and
notwithstanding any other provision of this Section 9.5 to the contrary, the
Trust's Portfolio Information may be disclosed to third party pricing services
which are engaged by Bank in connection with the provision of services under
this Agreement and which shall be subject to a duty of confidentiality with
respect to such Portfolio Information.
Section 9.6. In case of any requests or demands for the inspection of the
Shareholder records of a Fund of the Trust, the Bank will endeavor to promptly
notify the Trust and to secure instructions from an authorized officer of the
Trust as to such inspection. The Bank reserves the right, however, to exhibit
the Shareholder records to any person whenever it is advised by its counsel that
it may be held liable for the failure to exhibit the Shareholder records to such
person.
Section 9.7. The Bank shall file such appropriate information returns
concerning the payment and composition of dividends and capital gain
distributions and tax withholding with the proper Federal, State and local
authorities as are required by law to be filed by the Trust and shall withhold
such sums as are required to be withheld by applicable law.
Section 9.8. From time to time as requested by the Trust, the Bank shall
provide to the Trust such certifications and sub-certifications, in the form
reasonably agreed to by the Trust and Bank, with respect to Form N-Qs, Form
N-CSRs, compliance policies and procedures under Rule 38a-l under the Investment
Company Act of 1940, as amended, and such other matters that may be reasonably
requested by the Trust or the Trust's Chief Compliance Officer from time to
time. In addition, the Bank will, from time to time, provide a written
assessment of its compliance program in conformity with current industry
standards that is reasonably acceptable to enable the Trust to fulfill its
obligations under Rule 38a-l of the Investment Company Act of 1940, as amended.
SECTION 10. TERMINATION OF AGREEMENT.
Section 10.1. Either of the parties may terminate this Agreement by giving
to the other party a notice in writing specifying the date of such termination,
which shall not be less than ninety (90) days after the date of giving such
notice.
-13-
Section 10.2. Should the Trust exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Trust. Additionally, the Bank reserves the right to charge for
any other reasonable expenses associated with such termination.
Section 10.3. Either party hereto may terminate this Agreement immediately
by sending notice thereof to the other party upon the happening of any of the
followings: (i) a party commences as debtor any case or proceeding under any
bankruptcy, insolvency or similar law, or there is commenced against such party
any such case or proceeding; (ii) a party commences as debtor any case or
proceeding seeking the appointment of a receiver, conservator, trustee,
custodian or similar official for such party or any substantial part of its
property or there is commenced against the party any such case or proceeding;
(iii) a party makes a general assignment for the benefit of creditors; or (iv) a
party states in any medium, written, electronic or otherwise, any public
communication or in any other public manner its inability to pay debts as they
come due, Either party hereto may exercise its termination right under this
Section 10.2 at any time after occurrence of any of the foregoing events
notwithstanding that such event may cease to be continuing prior to such
exercise, and any delay in exercising this right shall not be construed as a
waiver or other extinguishment of that right.
Section 10.4 The terms of Section 2 and Section 6 shall survive the
termination of this Agreement.
SECTION 11. ADDITIONAL FUNDS.
Section 11.1. In the event that the Trust establishes one or more
additional Funds with respect to which it desires to have the Bank render
services as transfer agent under the terms hereof, it shall so notify the Bank
in writing, and if the Bank agrees in writing to provide such services, such
additional issuance shall become Shares hereunder and Exhibit A shall be amended
to include the Fund.
SECTION 12. ASSIGNMENT.
Section 12.1. Neither this Agreement nor any rights or obligations
hereunder may be assigned by either party without the written consent of the
other party.
Section 12.2. This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
SECTION 13. SEVERABILITY AND BENEFICIARIES.
Section 13.1. In case any provision in or obligation under this Agreement
shall be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected thereby. This Agreement shall extend to and shall be binding upon the
-14-
parties hereto, and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by either party without the written
consent of the other.
Section 13.2. This Agreement is solely for the benefit of the Bank and the
Trust, and none of any authorized Participant (as defined in the Participation
Agreement), any Shareholder or beneficial owner of any Shares shall be or be
deemed a third party beneficiary of this Agreement.
SECTION 14. AMENDMENT.
Section 14.1. This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Trustees of the Trust.
SECTION 15. NEW YORK LAW TO APPLY
Section 15.1. This Agreement shall be construed in accordance with the
substantive laws of the State of New York, without regard to conflicts of laws
principles thereof. The Trust and the Bank hereby consent to the jurisdiction of
a state or federal court situated in New York City, New York in connection with
any dispute arising hereunder. The Trust and the Bank hereby irrevocably waive,
to the fullest extent permitted by applicable law, any objection which it may
now or hereafter have to the laying of venue of any such proceeding brought in
such a court and any claim that such proceeding brought in such a court has been
brought in an inconvenient forum. The Trust and the Bank each hereby irrevocably
waives any and all rights to trial by jury in any legal proceeding arising out
of or relating to this Agreement.
SECTION 16. MERGER OF AGREEMENT.
Section 16.1. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
SECTION 17. LIMITATIONS OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS,
Section 17.1. It is expressly acknowledged and agreed that the obligations
of the Trust (and Funds thereof) hereunder shall not be binding upon any of the
shareholders, Trustees, officers, employees or agents of the Trust (and Funds
thereof), personally, but shall bind only the trust property of the Trust and
the applicable Fund, as provided in the Trust's Declaration of Trust. The
execution and delivery of this Agreement have been authorized by the Trustees of
the Trust and signed by an officer of the Trust, acting as such, and neither
such authorization by such Trustees nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
property of the Trust and the applicable Fund as provided in the Trust's
Declaration of Trust.
-15-
Section 17.2. This Agreement is an agreement entered into between the Bank
and the Trust with respect to each Fund. With respect to any obligation of the
Trust on behalf of any Fund arising out of this Agreement, the Bank shall look
for payment of such obligation solely to the assets of the Fund to which such
obligation relates with the same effect as if the Bank had separately contracted
with the Trust by separate written instrument with respect to each Fund.
Section 173. As used herein, the "applicable Fund" shall be each Fund in
respect of which any amount due the Bank arises, and if any amount due the Bank
arises in respect of more than one Fund, the same shall be allocated by the Bank
among such Funds in accordance with Section 17.2. Any amounts due the Bank which
may not be allocated in accordance with the preceding sentence shall constitute
General Liabilities as defined in the Trust's Declaration of Trust and allocated
by the Trust and paid in accordance with the provisions thereof.
SECTION 18. NOTICES.
Section 18.1. Each notice, request, demand, approval or other
communication which may be or is required to be given under this Agreement shall
be in writing in English and shall be deemed to have been sufficiently given
when received by the intended party, if delivered personally at the address set
forth below for the intended party during normal business hours at such address,
if sent by facsimile transmission to the respective facsimile transmission
numbers of the parties set forth below, or if sent by recognized overnight
courier service or by United States registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Trust: First Trust Exchange-Traded Fund VIII
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
Attention: General Counsel
Facsimile: 630-517-7437
Confirm: 630-765-8798
IftoBNYM: The Bank of New York Mellon
101 Barclay Street, 20W
New York, New York 10286
Attention: Rosalia A. Koopman
Facsimile: 212 815-4647
Confirm: 212 815-2948
|
Notices shall be given to such other addressee or address, or both, or by way of
such other facsimile transmission number, as a particular party may from time to
time designate by written notice to the other parties hereto given in accordance
with this Section.
-16-
SECTION 19. COUNTERPARTS.
Section 19.1. This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
SECTION 20. INFORMATION SHARING.
The Bank of New York Mellon Corporation is a global financial organization
that provides services to clients through its affiliates and subsidiaries in
multiple jurisdictions (the "BNY Mellon Group"). The BNY Mellon Group may
centralize functions including audit, accounting, risk, legal, compliance,
sales, administration, product communication, relationship management, storage,
compilation and analysis of customer-related data, and other functions (the
"Centralized Functions") in one or more affiliates, subsidiaries and third-party
service providers. Solely in connection with the Centralized Functions, (i) the
Trust consents to the disclosure of and authorizes the Bank to disclose
information regarding the Trust ("Customer-Related Data") to the BNY Mellon
Group and to its third-party service providers who are subject to
confidentiality obligations with respect to such information and (ii) the Bank
may store the names and business contact information of the Trust's employees
and representatives on the systems or in the records of the BNY Mellon Group or
its service providers. The BNY Mellon Group may aggregate Customer-Related Data
with other data collected and/or calculated by the BNY Mellon Group, and
notwithstanding anything in this Agreement to the contrary the BNY Mellon Group
will own all such aggregated data, provided that the BNY Mellon Group shall not
distribute the aggregated data in a format that identifies Customer-Related Data
with a particular customer. The Trust confirms that it is authorized to consent
to the foregoing.
-17-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
FIRST TRUST EXCHANGE-TRADED FUND VIII
By /s/ James M. Dykas
------------------------------
Name : James M. Dykas
-----------------------
Title: President
-----------------------
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THE BANK OF NEW YORK MELLON
By /s/ Rosalia A. Koopman
------------------------------
Name : Rosalia A. Koopman
-----------------------
Title: Managing Director
-----------------------
|
-18-
EXHIBIT A
Funds of First Trust Exchange-Traded Fund VIII
As of _______________________
Exhibit A
SCHEDULE A
BOOKS AND RECORDS TO BE MAINTAINED BY BANK
Source Documents requesting Creations and Redemptions
Correspondence/AP Inquiries
Reconciliations, bank statements, copies of canceled checks, cash proofs
Daily/Monthly reconciliation of outstanding units between the Trust and DTC
Net Asset Computation Documentation Dividend Records
Year-end Statements and Tax Forms
Schedule A
EXHIBIT B
FORM OF PARTICIPANT AGREEMENT
To be provided
Exhibit B
Attachment A
Appendix A
FIRST TRUST EXCHANGE-TRADED FUND VIII
SUBSCRIPTION AGREEMENT
This Subscription Agreement (the "Agreement") made this 16th day of
September, 2016 by and between First Trust Exchange-Traded Fund VIII, a
Massachusetts business trust (the "Trust"), on behalf of its series, First Trust
CEF Income Opportunity ETF (the "Fund"), and First Trust Portfolios L.P., an
Illinois limited partnership (the "Subscriber").
RECITALS:
1. The Trust has been formed for the purposes of carrying on business as
an open-end management investment company;
2. The Fund is a series of the Trust; and
2. The Subscriber wishes to subscribe for and purchase, and the Trust
wishes to sell to the Subscriber, 5,000 shares of the Fund at $20 per share.
NOW, THEREFORE, IT IS AGREED:
l. The Subscriber subscribes for and agrees to purchase from the Trust
5,000 shares of the Fund at $20 per share. Subscriber agrees to make payment for
these shares of the Fund at such time as demand for payment may be made by an
officer of the Trust.
2. The Trust, on behalf of the Fund, agrees to issue and sell said shares
to Subscriber promptly upon its receipt of the purchase price.
3. To induce the Trust, on behalf of 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 Trust'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 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 Trust, on behalf of 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 Agreement and all of its provisions shall be binding upon the
legal representatives, heirs, successors and assigns of the parties hereto.
6. The Trust'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 Trust's officers as officers and not individually and the obligations
imposed upon the Trust by this Agreement are not binding upon any of the Trust's
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Fund, a series of the Trust.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.]
IN WITNESS WHEREOF, this Subscription Agreement has been executed by the
parties hereto as of the day and date first above written.
FIRST TRUST EXCHANGE-TRADED FUND VIII,
ON BEHALF OF ITS SERIES,
FIRST TRUST CEF INCOME OPPORTUNITY ETF
By _______________________________________
Name:
Title:
FIRST TRUST PORTFOLIOS L.P.
By _______________________________________
Name:
Title:
PARTICIPANT AGREEMENT
FIRST TRUST EXCHANGE-TRADED FUND
FIRST TRUST EXCHANGE-TRADED FUND II
FIRST TRUST EXCHANGE-TRADED ALPHADEX(R) FUND AND
FIRST TRUST EXCHANGE-TRADED FUND IV
FIRST TRUST EXCHANGE-TRADED FUND VIII
This Participant Agreement (this "Agreement") is entered into between
First Trust Portfolios, L.P. (the "Distributor"), ______________________________
(the "Participant") and The Bank of New York Mellon (the "Transfer Agent"). The
Transfer Agent serves as the Transfer Agent of the First Trust Exchange-Traded
Fund, First Trust Exchange-Traded Fund II, First Trust Exchange-Traded
AlphaDEX(R) Fund and First Trust Exchange-Traded Fund IV and [First Trust
Exchange-Traded Fund VIII] (each, a "Trust" and, collectively, the "Trusts") and
is an Index Receipt Agent as that term is defined in the rules of the National
Securities Clearing Corporation ("NSCC"). The Distributor has been retained to
provide certain services with respect to acting as principal underwriter of each
Trust in connection with the sale and distribution of shares of beneficial
interest, par value $0.01 per share ("Shares"), of the Series of each Trust
(each a "Fund") on Schedule I attached hereto and incorporated herein, as the
same may be amended from time to time. Certain Funds (each, an "International
Fund") may include securities of issuers that are domiciled outside the United
States and listed on the foreign equivalent of a U.S. national securities
exchange (a "U.S. exchange"). The Distributor, the Transfer Agent and the
Participant acknowledge and agree that each Trust and Fund shall be a
third-party beneficiary of this Agreement and shall receive the benefits
contemplated by this Agreement to the extent specified herein. The prospectus
and statement of additional information for each Fund (collectively, the
"Prospectus") are incorporated herein and included as part of the respective
Trust's Registration Statement as amended on Form N-1A. Shares may be created or
redeemed only in aggregations of 50,000 (or such other aggregation as is
specified in the relevant Fund's Prospectus), referred to therein and herein as
a "Creation Unit." Capitalized terms not otherwise defined herein are used
herein as defined in the relevant Fund's Prospectus. All references to "cash"
shall refer to U.S. dollars.
This Agreement is intended to set forth certain premises and the
procedures by which the Participant may create and/or redeem Creation Units (i)
through the Continuous Net Settlement ("CNS") clearing processes of NSCC as such
processes have been enhanced to effect creations and redemptions of Creation
Units, such processes being referred to herein as the "Trusts' Clearing
Process," or (ii) outside the Trusts' Clearing Process (e.g., through the
facilities of the Depository Trust Company ("DTC")).
This Agreement supersedes any prior Participant Agreement entered into by
the parties with respect to the Trusts and any Fund from and after the date
hereof. Any and all prior Participant Agreements entered into by the parties are
deemed terminated upon execution of this Agreement.
The parties hereto in consideration of the premises and of the agreements
contained herein agree as follows:
SECTION 1. STATUS OF PARTICIPANT.
The Participant hereby represents, covenants and warrants that (i) with
respect to orders for the creation or redemption of Creation Units by means of
the Trusts' Clearing Process, it is a member of NSCC and a participant in the
CNS System of NSCC (as defined in the Prospectus, a "Participating Party"); and
(ii) with respect to orders for the creation or redemption of Creation Units
outside the Trusts' Clearing Process, it is a DTC Participant (as defined in the
Prospectus, a "DTC Participant"). The Participant may place orders for the
creation or redemption of Creation Units (a "Creation Order" and "Redemption
Order," respectively) either through the Trusts' Clearing Process or outside the
Trusts' Clearing Process, subject to the procedures for creation and redemption
referred to in Section 2 of this Agreement ("Execution of Orders") and the
procedures described in Attachment A attached hereto and incorporated herein and
made a part hereof, as the same may be amended from time to time ("Attachment
A"). Any change in the foregoing status of the Participant shall terminate this
Agreement, and the Participant shall give immediate notice to the Distributor
and the Transfer Agent of such change.
The Participant further represents that it is a broker-dealer registered
with the Securities and Exchange Commission and a member of the Financial
Industry Regulatory Authority. ("FINRA") or is exempt from or otherwise not
required to be licensed as a broker-dealer or a member of FINRA. The Participant
is qualified as a broker or dealer, or otherwise, under all applicable state
laws where it is required to do so in order that Shares may be sold in such
states where the Participant intends to sell such Shares. The Participant agrees
to conform to the rules of FINRA and the securities laws of any jurisdiction in
which it sells, directly or indirectly, Shares, to the extent such laws, rules
and regulations relate to the Participant's transactions in, and activities with
respect to, the Shares.
The Participant understands and acknowledges that the proposed method by
which Creation Units of Shares will be purchased and traded may raise certain
issues under applicable securities laws. For example, because new Creation Units
of Shares may be issued and sold by the Trusts and their respective Funds on an
ongoing basis, the offer and sale of Shares to investors may involve a
"distribution," as such term is used in the Securities Act of 1933 (the
"Securities Act"). The Participant understands and acknowledges that its offer
and sale of Shares to investors, depending on the circumstances, may result in
its being deemed a participant in a distribution in a manner which could render
it a statutory underwriter and subject it to the prospectus delivery and
liability provisions of the Securities Act. The Participant also understands and
acknowledges that dealers who are not "underwriters" but are effecting
transactions in Shares, whether or not participating in the distribution of
Shares, may be required to deliver a prospectus.
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SECTION 2. EXECUTION OF ORDERS.
All orders for the creation or redemption of Creation Units shall be
handled in accordance with the terms of the respective Fund's Prospectus, and
the procedures described in Attachment A to this Agreement. In the event the
procedures include the use of recorded telephone lines, the Participant hereby
consents to such use. Each Trust reserves the right to issue additional or other
procedures relating to the manner of creating or redeeming Creation Units (and
the procedures for the Trusts may, but need not be, identical), and the
Participant, the Distributor and the Transfer Agent agree to comply with such
procedures as may be issued from time to time, upon reasonable notice thereof.
The Participant understands and agrees that Creations Orders and
Redemption Orders may be submitted only on days that the U.S. exchange where the
Shares are principally listed (as specified in the Prospectus) is open for
trading or business.
SECTION 3. NSCC.
Solely with respect to orders for the creation or redemption of Creation
Units through the Trusts' Clearing Process, the Participant as a Participating
Party hereby authorizes the Transfer Agent to transmit to NSCC on behalf of the
Participant such instructions, including share and cash amounts as are necessary
with respect to the creation and redemption of Creation Units consistent with
the instructions issued by the Participant to the Trust telephone representative
identified in Attachment A hereto (the "Trust Telephone Representative"). The
Participant agrees to be bound by the terms of such instructions issued by the
Transfer Agent, as the case may be, and reported to NSCC as though such
instructions were issued by the Participant directly to NSCC.
With respect to any Redemption Order, the Participant also acknowledges
and agrees to use its best efforts to return to the applicable Fund any
dividend, distribution or other corporate action paid to it or to the party for
which it is acting in respect of any Deposit Securities that are transferred to
the Participant or any party for which it is acting that, based on the valuation
of such Deposit Securities at the time of transfer, should have been paid to the
Fund. With respect to any Redemption Order, the Participant also acknowledges
and agrees that the applicable Fund is entitled to reduce the amount of money or
other proceeds due to the Participant or any party for which it is acting that,
based on the valuation of such Deposit Securities at the time of transfer,
should be paid to the Fund. With respect to any Creation Order, the Distributor
shall cause the applicable Fund's Custodian to return to the Participant or any
party for which it is acting any dividend, distribution or other corporate
action paid to the Fund in respect of any Deposit Securities that are
transferred to a Fund that, based on the valuation of such Deposit Securities at
the time of transfer, should have been paid to the Participant or any party for
which it is acting.
SECTION 4. DEPOSIT SECURITIES.
The Participant understands that the number and names of the designated
portfolio of securities (each, a "Deposit Security" and, collectively, the
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"Deposit Securities") and relevant cash amounts (the "Cash Component") to be
deposited in connection with the purchase of a Creation Unit (the current "Fund
Deposit") for each Fund will be made available each day that the New York Stock
Exchange (the "NYSE") is open for trading through the facilities of the NSCC.
The Participant will not be responsible for errors in the information relating
to the Deposit Securities to be included in the current Fund Deposit to be
transmitted through the facilities of the NSCC in connection with Redemption
Orders and Creation Orders that are caused by the applicable Trust or Fund, the
Distributor or the Transfer Agent.
Under certain circumstances, a Trust may, in its discretion, permit or
require, with respect to one or more Funds, a Participant to substitute cash in
lieu of depositing some or all of the requisite Deposit Securities. A Trust may
additionally permit, in its discretion, with respect to one or more
International Funds under certain circumstances, a Participant to substitute a
different security in lieu of depositing some or all of the Deposit Securities.
Substitution of cash or a different security might be permitted or required, for
example, because one or more Deposit Securities may be unavailable, may not be
available in the quantity needed, or may not be eligible for trading by the
Participant (or any party on whose behalf the Participant is acting) due to
local trading restrictions (including, for example, requirements that securities
be traded only for cash in local currency) or other circumstances.
SECTION 5. ROLE OF PARTICIPANT.
The Participant shall have no authority in any transaction to act as agent
of the Distributor, the Transfer Agent, any Trust or any Fund.
(a) The Participant agrees (i) subject to any privacy obligations or other
obligations arising under the federal or state securities laws it may have to it
customers, to assist the Distributor in ascertaining certain information
regarding sales of Shares made by or through Participant upon the request of a
Trust or Fund or the Distributor necessary for the applicable Trust or Fund to
comply with its obligation to distribute information to its shareholders as may
be required from time to time under applicable state or federal securities laws,
or (ii) in lieu thereof, and at the option of the Participant, the Participant
may undertake to deliver Prospectuses, as may be amended or supplemented from
time to time, proxy material, annual and other reports of a Fund or other
similar information that the applicable Trust or Fund is obligated to deliver to
its shareholders to the Participant's customers that custody Fund Shares with
the Participant, after receipt from the applicable Trust or Fund or the
Distributor of sufficient quantities to allow mailing thereof to such customers.
The expenses associated with such transmissions shall be borne by the
Distributor or the applicable Trust or Fund in accordance with usual custom and
practice in respect of such communications. None of the Distributor, the
applicable Trust or Fund or any of their respective affiliates shall use the
names and addresses and other information concerning Participant's customers for
any purpose except in connection with the performance of their duties and
responsibilities hereunder and except for servicing and informational mailings
described in this clause (a) of Section 5, or as may otherwise be required by
applicable law.
(b) The Participant certifies that it has policies, procedures and
internal controls in place that are reasonably designed to comply with all
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applicable anti-money laundering laws and regulations, including applicable
provisions of the USA Patriot Act of 2001 and the regulations administered by
the U.S. Department of the Treasury's Office of Foreign Assets Control as the
same may in effect from time to time.
SECTION 6. PARTICIPANT REPRESENTATIONS.
(a) The Participant represents, warrants and agrees that it will not make
any representations concerning any Fund, the applicable Trust, the Creation
Units or the Shares other than those consistent with the Fund's then current
Prospectus or any promotional or sales literature furnished to the Participant
by the Distributor or the applicable Trust or Fund, or any such materials
permitted by clause (b) of this Section 6.
(b) The Participant agrees not to furnish or cause to be furnished by
Participant or its employees to any person or to display or publish any
information or materials relating to a Trust or any Fund (including, without
limitation, promotional materials and sales literature, advertisements, press
releases, announcements, statements, posters, signs or other similar materials,
but not including any materials prepared and used for Participant's internal use
only, any brokerage communications between employees of Participant and
customers or any communications prepared and directed to registered
broker-dealers) ("Marketing Materials"), except (i) such Marketing Materials as
may be furnished to the Participant by the Distributor or the applicable Trust
or Fund and (ii) such other Marketing Materials as are consistent with the
applicable Fund's then current Prospectus or otherwise approved by the
Distributor or the Trust; provided that such Marketing Materials clearly
indicate that such Marketing Materials are prepared and distributed by
Participant and, upon request, a copy is forwarded to the Distributor as soon as
practicable.
(c) Notwithstanding anything to the contrary in this Agreement,
Participant and its affiliates may prepare and circulate in the regular course
of their businesses (i) research reports that include information, opinions or
recommendations relating to Shares; and (ii) without reference to a Fund or its
Prospectus, data and information relating to the various indices to which the
Funds are benchmarked.
SECTION 7. SUBCUSTODIAN ACCOUNTS.
The Participant understands and agrees that in the case of an
International Fund, the relevant Trust has caused The Bank of New York Mellon
acting in its capacity as the Trust's custodian ("Custodian") to maintain with
one or more applicable subcustodians (each, a "Subcustodian") for such
International Fund an account in the relevant foreign jurisdiction(s) to which
the Participant shall deliver or cause to be delivered in connection with the
purchase of a Creation Unit the securities and any other cash amounts (or the
cash value of all or a part of such securities, in the case of a permitted or
required cash purchase or "cash in lieu" amount) on behalf of itself or any
party for which it is acting (whether or not a customer), with any appropriate
adjustments as advised by the Trust or such International Fund, in accordance
with the terms and conditions applicable to such account in such foreign
jurisdiction.
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SECTION 8. TITLE TO SECURITIES: RESTRICTED SHARES.
The Participant represents that upon delivery of a portfolio of Deposit
Securities to a Fund's custodian, the Fund will acquire good and unencumbered
title to such securities, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claims, including, without
limitation, any special restriction upon the sale or transfer of such securities
imposed by (i) any agreement or arrangement entered into by the Participant or
any party for which it is acting in connection with a Creation Order or (ii) any
provision of the Securities Act, and any regulations thereunder (except that
portfolio securities of issuers other than U.S. issuers shall not be required to
have been registered under the Securities Act if exempt from such registration),
or of the applicable laws or regulations of any other applicable jurisdiction.
SECTION 9. FEES.
In connection with the creation or redemption of Creation Units, the
Transfer Agent shall charge, and the Participant agrees to pay to the Transfer
Agent, (i) the Creation Transaction Fee or Redemption Transaction Fee (each also
sometimes referred to individually herein as the "Transaction Fee") prescribed
in the relevant Fund's Prospectus applicable to creations or redemptions through
the Trusts' Clearing Process, or (ii) the applicable Creation Transaction Fee or
Redemption Transaction Fee plus, in each case, such additional variable amounts
as may be prescribed in the relevant Fund's Prospectus for (a) creations or
redemptions outside the Trusts' Clearing Process and (b) creations through the
Trusts' Clearing Process where the cash equivalent value of one or more Deposit
Securities is being deposited in lieu of the inclusion of such Deposit
Securities in the securities portion of the Fund Deposit. The Transaction Fee
may be waived or otherwise adjusted from time to time subject to the provisions
relating thereto and any limitations as prescribed in the relevant Fund's
Prospectus. With respect to International Funds (for which creations and
redemptions are processed outside the Trusts' Clearing Process), such additional
variable amounts may include any expenses incurred by a Fund in the transfer of
Deposit Securities to the Fund in connection with a creation of Creation Units,
and in the transfer of Deposit Securities to the Participant in connection with
a redemption of Creation Units; such expenses may include operational processing
and brokerage costs, transfer fees, stamp taxes and the like. When an
International Fund permits a Participant to substitute cash or a different
security in lieu of depositing one or more of the requisite Deposit Securities,
the Participant may be assessed a higher Transaction Fee on the substitute
security portion of its investment to cover the cost of purchasing the Deposit
Securities and/or disposing of the substituted securities, including operational
processing and brokerage costs, transfer fees, stamp taxes, and part or all of
the spread between the expected bid and offer side of the market related to such
Deposit Securities and/or substitute securities.
SECTION 10. AUTHORIZED PERSONS.
Concurrently with the execution of this Agreement and from time to time
thereafter, the Participant shall deliver to the Distributor and the Transfer
Agent, duly certified as appropriate by its secretary or other duly authorized
person, a certificate setting forth the names and signatures of all persons
authorized to give instructions relating to activity contemplated hereby or any
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other notice, request or instruction on behalf of the Participant (each, an
"Authorized Person"). Such certificate may be accepted and relied upon by the
Distributor and the Transfer Agent as conclusive evidence of the facts set forth
therein and shall be considered to be in full force and effect until delivery to
the Distributor and the Transfer Agent of a superseding certificate bearing a
subsequent date. The Transfer Agent shall issue to each Authorized Person a
unique personal identification number ("PIN Number") by which such Authorized
Person and the Participant shall be identified and instructions issued by the
Participant hereunder shall be authenticated. Upon the termination or revocation
of authority of such Authorized Person by the Participant, the Participant shall
give prompt written notice of such fact to the Distributor and the Transfer
Agent and such notice shall be effective upon receipt by both the Distributor
and the Transfer Agent.
SECTION 11. REDEMPTION.
The Participant represents and warrants that it will not obtain a
Submission Number (as defined in Attachment A) from the Transfer Agent for the
purpose of redeeming a Creation Unit unless it first ascertains that (a) it or
its customer, as the case may be, owns outright or has full legal authority and
legal beneficial right to tender for redemption the requisite number of Shares
of any Fund to be redeemed, and the entire proceeds of the redemption, (b) the
delivery of such Shares to the Transfer Agent in accordance with the Prospectus
or as otherwise required by the Trust or Fund would not be precluded as the
result of their being subject to or the subject of a loan, repurchase agreement,
securities lending agreement or other arrangement and (c) upon delivery to the
Fund's custodian, the Shares will be free and clear of all liens.
A Trust may make redemptions in cash in lieu of transferring one or more
Deposit Securities if the Trust or Fund determines, in its discretion, that such
method is warranted because a Participant who has placed the Redemption Order is
restrained by regulation or policy from transacting in the Deposit Securities,
delivery of the Deposit Securities is not permissible under applicable law or
foreign stock exchange regulations, or for other reasons.
In connection with an International Fund, a Participant must maintain
appropriate securities broker-dealer, bank or other custody arrangements to
which account Deposit Securities will be delivered in connection with a
redemption. If a redeeming Participant, or any party on whose behalf the
Participant is acting, does not have appropriate arrangements to take delivery
of the Deposit Securities in the relevant foreign jurisdiction(s) and it is not
possible to make other such arrangements, or if it is not possible to effect
deliveries of the Deposit Securities in such foreign jurisdiction(s) and in
certain other circumstances, the Trust or Fund may in its discretion redeem
Shares for cash, and the redeeming Participant, on behalf of itself or any part
for which it is acting, will be required to receive redemption proceeds in cash.
In such case, the Participant will receive a cash payment equal to the net asset
value (next determined after receipt of the Redemption Order) times the number
of Shares in a Creation Unit of the relevant International Fund, minus the
Transaction Fee and other costs specified in Section 9.
In the case of a beneficial owner of an International Fund who is a
resident of Australia or New Zealand, the Participant understands and agrees
that such beneficial owner is only entitled to receive cash upon its redemption
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of Creation Units. In a Redemption Order, the Participant will be required to
confirm that an in-kind redemption request has not been submitted on behalf of a
beneficial owner who is an Australian or New Zealand resident.
SECTION 12. FUND'S TAX BASIS.
The Participant represents and warrants to the Distributor and each Trust
and Fund that with respect to any Creation Units it shall only deliver or
transfer, or cause to be delivered or transferred, Deposit Securities (or
contracts therefor) that, should Section 351 of the Internal Revenue Code of
1986, as amended, apply to such delivery or transfer, will have a tax basis in
the hands of the Fund receiving the Deposit Securities equal to the closing
market price of such Deposit Securities on the date the Creation Order with
respect thereto is Deemed Received (as such term is defined in Attachment A
hereto). Such representation and warranty shall be deemed repeated with respect
to each Creation Order.
SECTION 13. INDEMNIFICATION.
(a) The Participant hereby agrees to indemnify and hold harmless the
Distributor in its capacity as principal underwriter, each Trust, each Fund, the
Transfer Agent, their respective affiliates, directors, officers, employees and
agents, and each person, if any, who controls such persons within the meaning of
Section 15 of the Securities Act (each, for purposes of this paragraph, an
"Indemnified Party") from and against any loss, liability, cost and expense
(including reasonable attorneys' fees) incurred by such Indemnified Party as a
result of (i) any breach by the Participant of any provision of this Agreement
that relates to the Participant; (ii) any failure on the part of the Participant
to perform any of its obligations set forth in this Agreement; (iii) any failure
by the Participant to comply with applicable laws, including rules and
regulations of self-regulatory organizations in relation to the sales, trading
or marketing of Shares and the creation or redemption of or investment in a Fund
or Funds, except that the Participant shall not be required to indemnify an
Indemnified Party to the extent that such failure was caused by Participant's
adherence to instructions given or representations made by the Distributor, the
Transfer Agent or any Indemnified Party, as applicable; or (iv) actions of such
Indemnified Party in reliance upon any instructions issued or representations
made in accordance with Attachment A (as it may be amended from time to time)
reasonably believed by the Distributor or the Transfer Agent, as applicable, to
be genuine and to have been given by the Participant except to the extent that
the Participant had previously revoked a PIN Number used in giving such
instructions or representations (where applicable) and such revocation was given
by the Participant and received by the Distributor and the Transfer Agent in
accordance with the terms of Section 10 hereto. The Participant and the
Distributor understand and agree that each Trust and Fund as a third party
beneficiary of this Agreement is entitled and intends to proceed directly
against the Participant in the event that the Participant fails to honor any of
its obligations pursuant to this Agreement that benefit each such Trust and
Fund.
(b) The Distributor hereby agrees to indemnify and hold harmless the
Participant, its respective subsidiaries, affiliates, directors, officers,
employees and agents, and each person, if any, who controls such persons within
the meaning of Section 15 of the Securities Act (each, for purposes of this
paragraph, an "Indemnified Party") from and against any loss, liability, cost
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and expense (including reasonable attorneys' fees) incurred by such Indemnified
Party as a result of (i) any breach by the Distributor of any provision of this
Agreement that relates to the Distributor; (ii) any failure on the part of the
Distributor to perform any of its obligations set forth in this Agreement; (iii)
any failure by the Distributor to comply with applicable laws, including rules
and regulations of self-regulatory organizations in relation to its role as
Distributor of the Funds; or (iv) actions of such Indemnified Party in reliance
upon any instructions issued or representations made in accordance with
Attachment A (as it may be amended from time to time) reasonably believed by the
Participant to be genuine and to have been given by the Distributor or the
Transfer Agent.
(c) Each of the Distributor and Participant agrees to jointly and
severally indemnify Transfer Agent and hold Transfer Agent harmless from and
against any and all losses sustained or incurred by or asserted against Transfer
Agent by reason of or as a result of any action or inaction, or arising out of
Transfer Agent's performance hereunder, including reasonable fees and expenses
of counsel incurred by Transfer Agent in a successful defense of claims by the
Distributor and/or Participant; provided however, Distributor and/or Participant
shall not indemnify Transfer Agent for those losses arising out of Transfer
Agent's own negligence or willful misconduct or that of its employees. This
indemnity shall be a continuing obligation of the Distributor and/or
Participant, and their respective successors and assigns, notwithstanding the
termination of this Agreement.
(d) Except to the extent that the Transfer Agent is to be indemnified as
provided in this Section 13, no party to this Agreement shall be liable to the
other party or to any other person for any damages arising out of mistakes or
errors in data provided to such Indemnified Party by a third party, or out of
interruptions or delays of electronic means of communications with the
Indemnified Parties.
SECTION 14. STANDARD OF CARE.
Transfer Agent shall have no responsibility and shall not be liable for
any loss or damage unless such loss or damage is caused by its own negligence or
willful misconduct or that of its employees, or its breach of any of its
obligations hereunder. In no event shall the Transfer Agent be liable for
special, indirect or consequential damages regardless of the form of action and
even if the same were foreseeable.
SECTION 15. FORCE MAJEURE.
Transfer Agent shall establish and maintain a disaster recovery plan and
back-up system at all times satisfying the requirements of all laws, rules and
regulations (the "Disaster Recovery Plan and Back-Up System") applicable to the
Transfer Agent for providing services as such. Transfer Agent shall not be
responsible or liable for any failure or delay in the performance of its
obligations under this Agreement arising out of or caused, directly or
indirectly, by circumstances beyond its control which are not a result of its
negligence, including without limitation, acts of God; earthquakes; fires;
floods; wars; civil or military disturbances; sabotage; epidemics; riots;
interruptions, loss or malfunctions of utilities, transportation, computer
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(hardware or software) or communications service; accidents; labor disputes;
acts of civil or military authority; governmental actions; or inability to
obtain labor, material, equipment or transportation, provided that Transfer
Agent has established and is maintaining the Disaster Recovery Plan and Back-Up
System, or if not, that such delay or failure would have occurred even if
Transfer Agent had established and was maintaining the Disaster Recovery Plan
and Back-Up System. Upon the occurrence of any such delay or failure, Transfer
Agent shall use commercially reasonable best efforts to resume performance as
soon as practicable under the circumstances.
SECTION 16. ACKNOWLEDGMENT.
The Participant acknowledges receipt of each relevant Fund's Prospectus
and represents it has reviewed such document and understands the terms thereof.
SECTION 17. NOTICES.
Except as otherwise specifically provided in this Agreement, all notices
required or permitted to be given pursuant to this Agreement shall be given in
writing and delivered by personal delivery or by postage prepaid registered or
certified United States first class mail, return receipt requested, or facsimile
or similar means of same day delivery (with a confirming copy by mail as
provided herein). Unless otherwise notified in writing, all notices to the
Transfer Agent shall be given or sent as follows: The Bank of New York Mellon,
101 Barclay Street, New York, New York 10286, Attn: ETF Services Group. All
notices to the Participant and the Distributor shall be directed to the address,
telephone or facsimile indicated below the signature line of such party.
SECTION 18. TERMINATION.
This Agreement shall become effective in this form as of the date accepted
by the Transfer Agent and may be terminated at any time by any party upon thirty
(30) days prior notice to the other parties (i) unless earlier terminated by the
Transfer Agent in the event of a breach of this Agreement or the procedures
described herein by the Participant or (ii) in the event that a Trust is
terminated pursuant to its Declaration of Trust. This Agreement supersedes any
prior Participant Agreement entered into by the parties. Any and all prior
Participant Agreements entered into by the parties are deemed terminated upon
execution of this Agreement.
SECTION 19. PROSPECTUS.
(a) The Distributor will provide to the Participant copies of the then
current Prospectus for each Fund and any printed supplemental information in
reasonable quantities upon request. The Distributor represents, warrants and
agrees that it will notify the Participant when a revised, supplemented or
amended Prospectus for any Shares is available and deliver or otherwise make
available to the Participant copies of such revised, supplemented or amended
Prospectus at such time and in such numbers as to enable the Participant to
comply with any obligation it may have to deliver such Prospectus to customers.
As a general matter, the Distributor will make such revised, supplemented or
amended Prospectus available to the Participant no later than its effective
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date. The Distributor shall be deemed to have complied with this Section 19 when
the Participant has received such revised, supplemented or amended Prospectus by
email at _____________________, in printable form, with such number of hard
copies as may be agreed from time to time by the parties promptly thereafter.
(b) Distributor represents and warrants that (i) the registration
statement(s) for First Trust Exchange-Traded Fund on Form N-1A (No. 333-125751)
and the Prospectus(es) contained therein, the registration statement(s) for
First Trust Exchange-Traded Fund II on Form N-1A (No. 333-137036) and the
Prospectus(es) contained therein, and the registration statement(s) for First
Trust Exchange-Traded AlphaDEX(R) Fund (No. 333-140895) and the Prospectus(es)
contained therein, and the registration statement(s) for First Trust
Exchange-Traded Fund IV (No. 333-174332) and the Prospectus(es) contained
therein, and the registration statement(s) for [First Trust Exchange-Traded Fund
VIII on Form N-1A (No. 333-210186)] and the Prospectus(es) contained therein,
conform in all material respects to the requirements of the Securities Act, and
the rules and regulations of the Securities and Exchange Commission thereunder
and do not and will not, as of the applicable effective date as to the
registration statement and any amendment thereto and as of the applicable filing
date as to the Prospectus and any amendment or supplement thereto, 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 not misleading;
(ii) the sale and distribution of the Shares as contemplated herein will not
conflict with or result in a breach or violation of any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Trusts, any Fund or the Distributor; and (iii) no consent,
approval, authorization, order, registration or qualification of or with any
such court or governmental agency or body is required for the issue and sale of
the Shares, except the registration under the Securities Act of the Shares.
SECTION 20. COUNTERPARTS.
This Agreement may be simultaneously executed in several counterparts,
each of which shall be an original and all shall constitute but one and the same
instrument.
SECTION 21. NO WAIVER.
Each and every right granted to any party hereunder or under any other
document delivered hereunder or in connection herewith, or allowed it by law or
equity, shall be cumulative and may be exercised from time to time. No failure
on the part of any party hereto to exercise, and no delay in exercising, any
right will operate as a waiver thereof, nor will any single or partial exercise
by any party hereto of any right preclude any other or future exercise thereof
or the exercise of any other right.
SECTION 22. ENFORCEABILITY; AMENDMENT.
In case any provision in or obligation under this Agreement shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
thereby. This Agreement may not be amended or modified in any manner except by a
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written agreement executed by the parties hereto, except that any amendment to
Schedule I approved in writing by the Distributor (upon which written approval
the Transfer Agent may conclusively rely) and any amendment to Attachment A
hereto need be signed only by the Transfer Agent. The Transfer Agent shall
provide the Participant a copy of any such amendment in the manner provided in
Section 17. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by any party without the written consent
of the others.
SECTION 23. GOVERNING LAW; CONSENT TO JURISDICTION.
This Agreement shall be construed in accordance with the substantive laws
of the State of New York, without regard to conflicts of laws principles
thereof. The parties hereby consent to the jurisdiction of a state or federal
court situated in New York City, New York in connection with any dispute arising
hereunder. Each party hereby irrevocably waives, to the fullest extent permitted
by applicable law, any objection which it may now or hereafter have to the
laying of venue of any such proceeding brought in such a court and any claim
that such proceeding brought in such a court has been brought in an inconvenient
forum. Each party hereby irrevocably waives any and all rights to trial by jury
in any legal proceeding arising out of or relating to this Agreement.
SECTION 24. STATUS OF FUND
The Distributor hereby represents that each Series (i) of the First Trust
Exchange-Traded Fund (ii) of the First Trust Exchange-Traded Fund II, (iii) of
the First Trust Exchange-Traded AlphaDEX (R) Fund, (iv) of First Trust
Exchange-Traded Fund IV, and (v) of the First Trust Exchange-Traded Fund VIII is
a registered open ended investment company operating in accordance with the
exemptive order granted under 812-13000 and I.C. Release No. 27068 dated
September 20, 2005, as the same may be amended from time to time, and I.C.
Release No. 27051 dated August 26, 2005 and any additional I.C. Releases related
to such amendments.
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FIRST TRUST PORTFOLIOS, L.P.
By
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Name:
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Title:
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Address: 120 E. Liberty Drive, Suite 400
Wheaton, Illinois 60187
Telephone: (630) 765-8798
Facsimile: (630) 517-7437
|
By
Name:
Title:
Address:
Telephone:
Facsimile:
THE BANK OF NEW YORK MELLON, as Transfer Agent
By
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Name:
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Title:
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Address: 101 Barclay Street
New York, New York 10286
Telephone: (212) 815-5031
Facsimile: (212) 815-2889
Dated:
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|
-13-
SERIES OF FIRST TRUST EXCHANGE-TRADED FUND
First Trust Dow Jones Select MicroCap Index(SM) Fund
First Trust Morningstar(R) Dividend Leaders(SM) Index Fund
First Trust NASDAQ-100 Equal Weighted Index(SM) Fund
First Trust NASDAQ-100-Technology Sector Index(SM) Fund
First Trust US IPO Index Fund
First Trust NYSE Arca Biotechnology Index Fund
First Trust Capital Strength ETF
First Trust Dow Jones Internet Index(SM) Fund
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund
First Trust NASDAQ-100 Ex-Technology Sector Index(SM) Fund
First Trust Value Line(R) Dividend Index Fund
First Trust Total US Market AlphaDEX ETF
First Trust S&P REIT Index Fund
First Trust ISE Water Index Fund
First Trust ISE-Revere Natural Gas Index Fund
First Trust ISE Chindia Index Fund
First Trust Value Line(R) 100 Exchange-Traded Fund
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund
First Trust CBOE VIX Tail Hedge Index Fund
SERIES OF FIRST TRUST EXCHANGE-TRADED FUND II
First Trust STOXX(R) European Select Dividend Index Fund
First Trust FTSE EPRA/NAREIT Developed Markets Real Estate Index Fund
First Trust Dow Jones Global Select Dividend Index Fund
First Trust ISE Global Wind Energy Index Fund
First Trust ISE Global Engineering and Construction Index Fund
First Trust NASDAQ(R) Clean Edge(R) Smart Grid Infrastructure Index Fund
First Trust Indxx Global Natural Rserouces Income ETF
First Trust Indexx Global Agriculature ETF
First Trust ISE BICK Index Fund
First Trust NASDAQ Smartphone Index Fund
First Trust NASDAQ Global Auto Index Fund
First Trust ISE Cloud Computing Index Fund
First Trust International IPO ETF
First Trust NASDAQ Cybersecurity ETF
Sch. I
SERIES OF FIRST TRUST EXCHANGE-TRADED FUND IV
First Trust North American Energy Infrastructure Index Fund
First Trust Tactical High Yield ETF
First Trust Senior Load Fund
First Trust Enhanced Short Maturity ETF
First Trust Strategic Income ETF
First Trust Low Duration Opportunities ETF
[SERIES OF FIRST TRUST EXCHANGE-TRADED FUND VIII
First Trust Equity Market Neutral ETF
First Trust Long/Short Currency Strategy ETF]
SERIES OF FIRST TRUST EXCHANGE-TRADED ALPHADEX(R) FUND
First Trust Consumer Discretionary AlphaDEX(R) Fund
First Trust Consumer Staples AlphaDEX(R) Fund
First Trust Energy AlphaDEX(R) Fund
First Trust Financials AlphaDEX(R) Fund
First Trust Health Care AlphaDEX(R) Fund
First Trust Industrials/Producer Durables AlphaDEX(R) Fund
First Trust Materials AlphaDEX(R) Fund
First Trust Technology AlphaDEX(R) Fund
First Trust Utilities AlphaDEX(R) Fund
First Trust Large Cap Core AlphaDEX(R) Fund
First Trust Mid Cap Core AlphaDEX(R) Fund
First Trust Small Cap Core AlphaDEX(R) Fund
First Trust Large Cap Growth AlphaDEX(R) Fund
First Trust Large Cap Value AlphaDEX(R) Fund
First Trust Multi Cap Growth AlphaDEX(R) Fund
First Trust Multi Cap Value AlphaDEX(R) Fund
First Trust Mid Cap Growth AlphaDEX Fund
First Trust Mid Cap Value AlphaDEX Fund
First Trust Small Cap Growth AlphaDEX Fund
First Trust Small Cap Value AlphaDEX Fund
First Trust Mega Cap AlphaDEX Fund
-2-
ATTACHMENT A
Subject to the terms and conditions of the attached Participant Agreement,
this document supplements the Prospectuses for the Series of First Trust
Exchange-Traded Fund, for the Series of First Trust Exchange-Traded Fund II, for
the Series of First Trust Exchange-Traded AlphaDEX(R) Fund and for the Series of
First Trust Exchange-Traded Fund IV and for the Series of [First Trust
Exchange-Traded Fund VIII] and is an attachment to, and incorporated into and
made a part of, the Participant Agreement with respect to the procedures to be
used by (i) the Transfer Agent in processing an order for the creation of
Shares, and (ii) the Transfer Agent in processing a request for the redemption
of Shares, and (iii) the Participants and the Transfer Agent in delivering or
arranging for the delivery of requisite cash payments, Fund Deposit or Shares,
as the case may be, in connection with the submission of orders for creation or
requests for redemption. Capitalized terms not otherwise defined have the
meaning assigned to them in the Participant Agreement.
A Participant is first required to have signed the Participant Agreement.
Upon acceptance of the Participant Agreement by the Distributor, the Transfer
Agent will assign a unique personal identification number ("PIN Number") to each
Authorized Person authorized to act for the Participant. This will allow a
Participant through its Authorized Person(s) to place orders for either creation
or redemption of Shares.
SECTION I. TO PLACE AN ORDER FOR CREATION OR REDEMPTION OF SHARES
1. Call to Receive a Submission Number. An Authorized Person for the
Participant will call the Trust Telephone Representative at (212) 815-5031 not
later than the closing time of the regular trading session on The New York Stock
Exchange (the "NYSE Closing Time") (ordinarily 4:00 p.m. New York time) to
receive a submission number ("Submission Number"). In the case of custom orders,
the order must be received by the Transfer Agent no later than 3:00 p.m. Eastern
time on the trade date. Upon verifying the authenticity of the caller (as
determined by the use of the appropriate PIN Number) and the terms of the order
for creation or request for redemption, the Trust Telephone Representative will
issue a unique Submission Number. All orders with respect to the creation or
redemption of Shares are required to be in writing and accompanied by the
designated Submission Number. Incoming telephone calls are queued and will be
handled in the sequence received. Calls placed before the NYSE Closing Time will
be processed even if the call is taken after this cut-off time. ACCORDINGLY, DO
NOT HANG UP AND REDIAL. INCOMING CALLS THAT ARE ATTEMPTED LATER THAN THE NYSE
CLOSING TIME WILL NOT BE ACCEPTED.
2. Assemble the Submission. The Authorized Person submitting an order to
create or a request to redeem shall assemble (a) written instructions regarding
such creation order or redemption request and (b) the designated Submission
Number in one document and transmit such document by facsimile to the Trust
Telephone Representative and the Distributor, as applicable, according to the
procedures set forth below in subsection 3. The document so transmitted is
hereinafter referred to as the "Submission," and the Business Day on which a
Submission is made is hereinafter referred to as the "Transmittal Date." As used
herein, a Business Day ("Business Day") is any day on which The New York Stock
Attachment 1-1-
Exchange is open. NOTE THAT THE TELEPHONE CALL IN WHICH THE SUBMISSION NUMBER IS
ISSUED INITIATES THE ORDER PROCESS BUT DOES NOT ALONE CONSTITUTE THE ORDER. AN
ORDER OR REQUEST IS ONLY COMPLETED AND PROCESSED UPON RECEIPT OF THE SUBMISSION.
3. Transmit the Submission. A Submission Number is only valid for a
limited time. The Submission for either creations or redemptions of Shares must
be sent by facsimile to the Trust Telephone Representative, as applicable,
within fifteen (15) minutes of the issuance of the Submission Number. In the
event that the Submission is not received within such time period, the Trust
Telephone Representative will attempt to contact the Participant to request
immediate transmission of the Submission.
(a) In the case of a Submission for creation, unless the Submission
is received by the Trust Telephone Representative upon the earlier of
within (i) fifteen (15) minutes of contact with the Participant or (ii)
forty-five (45) minutes after the NYSE Closing Time, the Submission will
be deemed invalid.
(b) In the case of a Submission for redemption, unless such
Submission is received by the Trust Telephone Representative within (i)
fifteen (15) minutes of contact with the Participant or (ii) forty-five
(45) minutes after the NYSE Closing Time, whichever is earlier, such order
for redemption contained therein shall be deemed invalid.
4. Await Receipt of Confirmation.
(a) Trusts' Clearing Process-Creation Orders. The Transfer Agent
shall issue to the Participating Party a confirmation of acceptance of an
order to create Shares in Creation Unit size aggregations ("Creation
Order") through the Trusts' Clearing Process within fifteen (15) minutes
of its receipt of a Submission received in good form. In the event the
Participating Party does not receive a timely confirmation from the
Transfer Agent, it should contact the Distributor and the Trust Telephone
Representative at the business numbers indicated.
(b) Trusts' Clearing Process-Requests for Redemptions. The Transfer
Agent shall issue to the Participating Party a confirmation of acceptance
of a request to redeem Shares in Creation Unit size aggregations
("Redemption Order") through the Trusts' Clearing Process within fifteen
(15) minutes of its receipt of a Submission received in good form. In the
event the Participating Party does not receive a timely confirmation from
the Transfer Agent, it should contact the Transfer Agent directly at the
business number indicated.
(c) Outside the Trusts' Clearing Process -- Creation Orders. The
Transfer Agent shall issue to the DTC Participant an acknowledgment of
receipt of a Creation Order outside the Trusts' Clearing Process within
fifteen (15) minutes of its receipt of a Submission received in good form.
In the event the DTC Participant does not receive a timely acknowledgment
from the Transfer Agent, it should contact the Transfer Agent at the
business numbers indicated.
Attachment 1-2
(d) Outside the Trusts' Clearing Process -- Redemption Orders. The
Transfer Agent shall issue to the DTC Participant an acknowledgment of
receipt of a Redemption Order outside the Trusts' Clearing Process within
fifteen (15) minutes of its receipt of a Submission received in good form.
In the event the DTC Participant does not receive a timely acknowledgment
from the Transfer Agent, it should contact the Transfer Agent directly at
the business number indicated.
SECTION II. PARTICIPANTS' RESPONSIBILITY FOR DELIVERING OR EFFECTING THE
DELIVERY OF REQUISITE FUND DEPOSIT OR SHARES AND CASH PAYMENTS IN
CONNECTION WITH CREATION ORDERS OR REDEMPTION ORDERS
1. Trusts' Clearing Process -- Creation Orders. The Participating Party
notified of confirmation of a Creation Order to create Shares through the
Trusts' Clearing Process shall be required to transfer or arrange for the
transfer of (a) the requisite Deposit Securities (or contracts to purchase such
Deposit Securities expected to be delivered through NSCC by the "regular way"
settlement date) and (b) the Cash Component, if any, to the Transfer Agent by
means of the Trusts' Clearing Process so as to be received no later than on the
"regular way" settlement date following the Business Day on which such order is
Deemed Received by the Transfer Agent as set forth below in Section IV.
2. Trusts' Clearing Process -- Redemption Orders. The Participating Party
notified of confirmation of a Redemption Order to redeem Shares through the
Trusts' Clearing Process shall be required to transfer or arrange for the
transfer of the requisite Shares and the Cash Redemption Amount, as defined in
the applicable Fund's Prospectus ("Cash Redemption Amount"), if any, to the
Transfer Agent by means of the Trusts' Clearing Process so as to be received no
later than on the "regular way" settlement date following the Business Day on
which such order is Deemed Received by the Transfer Agent as set forth below in
Section IV.
3. Outside the Trusts' Clearing Process -- Creation Orders. The DTC
Participant notified of acknowledgment of a Creation Order to create Shares
outside the Trusts' Clearing Process shall be required to effect a transfer to
the Transfer Agent of (a) the requisite Deposit Securities through DTC so as to
be received by the Transfer Agent no later than 11:00 a.m., Eastern Time, on the
next Business Day immediately following the Business Day on which such order is
Deemed Received by the Distributor as set forth below in Section IV, in such a
way as to replicate the Fund Deposit established on the Transmittal Date by the
Transfer Agent and (b) the Cash Component, if there is a positive Cash
Component, through the Federal Reserve Bank wire system so as to be received by
the Transfer Agent by 2:00 p.m., Eastern Time, on the next Business Day
immediately following the day such order is Deemed Received. If the Transfer
Agent does not receive the Deposit Securities by 11:00 a.m. Eastern Time and the
Cash Component, if any, by 2:00 p.m., Eastern Time, on the Business Day
immediately following the day such order is Deemed Received, the Creation Order
contained in such Submission shall be canceled. Upon written notice to the
Transfer Agent, the DTC Participant may resubmit such canceled order on the
following Business Day using a Fund Deposit as newly constituted.
4. Purchase of Creation Unit Aggregations Prior to Receipt of Deposit
Securities. Creation Unit Aggregations may be created in advance of receipt by a
Fund of all or a portion of the applicable Deposit Securities as described
Attachment 1-3
below. In these circumstances, the initial deposit will have a value greater
than the NAV of the applicable Fund's Shares on the date the Creation Order is
placed in proper form since, in addition to available Deposit Securities, cash
must be deposited in an amount equal to the sum of (i) the Cash Component, plus
(ii) one hundred fifteen percent (115%) of the market value of the undelivered
Deposit Securities (the "Additional Cash Deposit"). The Creation Order shall be
deemed to be received on the Business Day on which the order is placed provided
that the Creation Order is placed in proper form prior to 4:00 p.m., Eastern
time, on such date, and federal funds in the appropriate amount are deposited
with the Transfer Agent by 11:00 a.m., Eastern time, the following Business Day.
If the Creation Order is not placed in proper form by 4:00 p.m., Eastern time,
or federal funds in the appropriate amount are not received by 11:00 a.m.,
Eastern time, the next Business Day, then the Creation Order may be deemed to be
canceled and the Authorized Participant shall be liable to the Fund for losses,
if any, resulting therefrom. An additional amount of cash shall be required to
be deposited with the applicable Fund, pending delivery of the missing Deposit
Securities to the extent necessary to maintain the Additional Cash Deposit with
the Fund in an amount at least equal to one hundred fifteen percent (115%) of
the daily marked to market value of the missing Deposit Securities. The parties
hereto further agree that the Trust may purchase the missing Deposit Securities
at any time and the Participant agrees to accept liability for any shortfall
between the cost to the Trust of purchasing such securities and the amount of
the Additional Cash Deposit maintained with the Fund, as the Trust may determine
in its sole discretion.
5. Outside the Trusts' Clearing Process -- Redemption Orders. The DTC
Participant notified of acknowledgment of a Redemption Order to redeem Shares
outside the Trusts' Clearing Process shall be required to effect a transfer to
the Transfer Agent of (a) the requisite number of Shares through DTC no later
than the NYSE Closing Time on the Business Day on which such Redemption Order is
Deemed Received by the Transfer Agent and (b) the Cash Redemption Amount, if
any, through the Federal Reserve Bank wire system by no later than 2:00 p.m. on
the next Business Day immediately following the Business Day on which such order
is Deemed Received by the Transfer Agent.
6. Transaction Fee. In connection with the creation or redemption of
Creation Units, the Transfer Agent shall charge, and the Participant agrees to
pay to the Transfer Agent, (i) the Creation Transaction Fee or Redemption
Transaction Fee prescribed in the relevant Fund's Prospectus applicable to
creations or redemptions through the Trusts' Clearing Process, or (ii) the
applicable Creation Transaction Fee or Redemption Transaction Fee plus, in each
case, such additional variable amounts as may be prescribed in the relevant
Fund's Prospectus for (a) creations or redemptions outside the Trusts' Clearing
Process and (b) creations through the Trusts' Clearing Process where the cash
equivalent value of one or more Deposit Securities is being deposited in lieu of
the inclusion of such Deposit Securities in the securities portion of the Fund
Deposit. The Cash Component or Cash Redemption Amount payable or to be received,
as the case may be, by the Participant in connection with the Creation Order or
Redemption Order shall be adjusted by the amount of such applicable Transaction
Fee and additional variable amounts, if any.
Attachment 1-4
7. International Funds -- Creation Orders.
(a) Except as provided below, Deposit Securities must be delivered
to an account maintained at the applicable local Subcustodian of the Trust
on or before the International Contractual Settlement Date (defined
below). The Participant must also pay on or before the International
Contractual Settlement Date immediately available or same day funds
estimated by Trust to be sufficient to pay the Cash Component next
determined after acceptance of the Creation Order, together with the
applicable Creation Transaction Fee and additional variable amounts (as
described below and in the Prospectus). The "International Contractual
Settlement Date" with respect to each International Fund is the earlier of
(i) the date upon which all of the required Deposit Securities, the Cash
Component and any other cash amounts which may be due are delivered to the
Fund and (ii) the latest day for settlement on the customary settlement
cycle in the jurisdiction(s) where any of the securities of such
International Fund are customarily traded.
(b) Except as provided in the next two paragraphs, a Creation Unit
of Shares will not be issued until the transfer of good title to the Trust
of the portfolio of Deposit Securities, the payment of the Cash Component,
the payment of any other cash amounts and the Creation Transaction Fee
have been completed. When the Subcustodian confirms to Custodian that the
required Deposit Securities (or, when permitted in the sole discretion of
Trust, the cash in lieu thereof) have been delivered to the account of the
relevant Subcustodian, the Custodian shall notify Distributor and the
Transfer Agent which, acting on behalf of the Trust, will issue and cause
the delivery of the Creation Unit of Shares.
(c) The Trust may in its sole discretion permit or require the
substitution of an amount of cash (i.e., a "cash in lieu" amount) to be
added to the Cash Component to replace any Deposit Security which may not
be available in sufficient quantity for delivery or for other similar
reasons. If the Distributor, acting on behalf of the Trust, determines
that a "cash in lieu" amount will be accepted, Distributor will notify the
Participant and the Transfer Agent, and the Participant shall deliver, on
behalf of itself or the party on whose behalf it is acting, the "cash in
lieu" amount, with any appropriate adjustments as advised by the Trust.
(d) In the event that a Fund Deposit is incomplete on the
International Contractual Settlement Date for a Creation Order because
certain or all of the Deposit Securities are missing, the Trust may issue
a Creation Unit of Shares notwithstanding such deficiency in reliance on
the undertaking of the Participant to deliver the missing Deposit
Securities as soon as possible, which undertaking shall be secured by an
Additional Cash Deposit with respect to undelivered Deposit Securities as
described above in Section 4.
(e) Cash shall be delivered in the manner provided above for
Creation Orders outside the Trusts' Clearing Process.
Attachment 1-5
(f) In addition to the Creation Transaction Fee, the Participant
shall pay additional variable amounts which may include expenses incurred
by the Fund in the transfer of Deposit Securities to the Fund in
connection with a creation of Creation Units. These expenses may include
operational processing and brokerage costs, transfer fees, stamp taxes and
the like. When an International Fund permits a Participant to substitute
cash or a different security in lieu of depositing one or more of the
requisite Deposit Securities, the Participant may also be assessed an
amount to cover the cost of purchasing the Deposit Securities and/or
disposing of the substituted securities, including operational processing
and brokerage costs, transfer fees, stamp taxes, and part or all of the
spread between the expected bid and offer side of the market related to
such Deposit Securities and/or substitute securities.
8. International Funds -- Redemption Orders.
(a) A Participant must maintain appropriate securities
broker-dealer, bank or other custody arrangements to which account Deposit
Securities will be delivered in connection with a Redemption Order. If the
Participant, or any party on whose behalf the Participant is acting, does
not have appropriate arrangements to take delivery of the Deposit
Securities in the relevant foreign jurisdiction(s) and it is not possible
to make other such arrangements, the Participant will be required to
receive redemption proceeds in cash, as described in paragraph (d) below.
(b) The delivery of redemption proceeds will be made within twelve
calendar days after the Redemption Order is received in proper form,
except to the extent that a delivery is delayed due to the introduction of
new or special holidays, the treatment by participants in the local market
of certain days as "informal holidays" (e.g., days on which no or limited
securities transactions occur, as a result of substantially shortened
trading hours), or changes in local securities delivery practices. Under
these circumstances, the Fund will notify the Participant as soon as
reasonably practicable
(c) The Trust may in its sole discretion permit or require the
substitution of an amount of cash (i.e., a "cash in lieu" amount) to be
added to the Cash Component to replace any Deposit Security which may not
be available in sufficient quantity for delivery or for other similar
reasons. If the Distributor, acting on behalf of the Trust, determines
that a "cash in lieu" amount will be delivered, Distributor will notify
the Participant and the Transfer Agent and the Participant shall receive
the "cash in lieu" amount, with any appropriate adjustments as advised by
Trust.
(d) If a redeeming Participant, or any party on whose behalf the
Participant is acting, does not have appropriate arrangements to take
delivery of the Deposit Securities in the relevant foreign jurisdiction(s)
and it is not possible to make other such arrangements, or if it is not
possible to effect deliveries of the Deposit Securities in such foreign
jurisdiction(s) and in certain other circumstances, the Trust may in its
discretion redeem Shares for cash, and the redeeming Participant, on
behalf of itself or any party for which it is acting, will be required to
receive redemption proceeds in cash. In such case, the Participant will
receive a cash payment equal to the net asset value (next determined after
Attachment 1-6
receipt of the Redemption Order) times the number of Shares in a Creation
Unit of the relevant International Fund, minus the Transaction Fee.
(e) Cash shall be delivered in the manner provided above for
Redemption Orders outside the Trusts' Clearing Process.
(f) In addition to the Redemption Transaction Fee, the Participant
shall pay additional variable amounts which may include expenses incurred
by the Fund in the transfer of Deposit Securities to the Participant.
These expenses may include operational processing and brokerage costs,
transfer fees, stamp taxes and the like. When an International Fund
redeems Shares for cash, the Participant may also be assessed an amount to
cover the cost of selling the Deposit Securities, including operational
processing and brokerage costs, transfer fees and stamp taxes.
SECTION III. TRANSFER AGENT'S RESPONSIBILITY FOR EFFECTING DELIVERY OF
REQUISITE SHARES OR SECURITIES AND CASH PAYMENTS IN CONNECTION
WITH ORDERS FOR CREATION OR REQUESTS FOR REDEMPTION
1. Trusts' Clearing Process -- Creation Orders. After the Transfer Agent
has received notification of a Submission from the Participant for a Creation
Order for Shares through the Trusts' Clearing Process which has been Deemed
Received by the Transfer Agent as set forth below in Section IV, the Transfer
Agent shall initiate procedures to transfer the requisite Shares and the Cash
Component, if any, through the Trusts' Clearing Process so as to be received by
the creator no later than on the "regular way" settlement date following the
Business Day on which the Submission is Deemed Received by the Transfer Agent.
2. Trusts' Clearing Process -- Redemption Orders. After the Transfer Agent
has received a Submission for a Redemption Order for Shares through the Trusts'
Clearing Process which has been Deemed Received by the Transfer Agent as set
forth below in Section IV, the Transfer Agent shall initiate procedures to
transfer the requisite securities (or contracts to purchase such securities
expected to be delivered through NSCC by the "regular way" settlement date) and
the Cash Redemption Amount, if any, through the Trusts' Clearing Process so as
to be received by the beneficial owner no later than on the "regular way"
settlement date following the Business Day on which the Submission is Deemed
Received by the Transfer Agent.
3. Outside the Trusts' Clearing Process -- Creation Orders. After the
Transfer Agent has received notification of a Submission from the Participant
for a Creation Order for Shares outside the Trusts' Clearing Process which has
been Deemed Received by the Transfer Agent as set forth below in Section IV, the
Transfer Agent shall initiate procedures to transfer the requisite Shares
through DTC and the DTC Participants and the Cash Component, if any, through the
Federal Reserve Bank wire system so as to be received by the creator no later
than the same Business Day on which the transfer of Deposit Securities is
required to be made pursuant to Section IV (3) in order for the Deemed Received
order to continue to be Deemed Received. A Creation Order relating to Shares of
an International Fund will be processed in the manner provided in this
paragraph.
Attachment 1-7
4. Outside the Trusts' Clearing Process -- Redemption Orders. After the
Transfer Agent has received a Submission for a Redemption Order for Shares
outside the Trusts' Clearing Process which has been Deemed Received by the
Transfer Agent as set forth below in Section IV, the Transfer Agent shall
initiate procedures to transfer the requisite securities (or contracts to
purchase such securities expected to be delivered within three Business Days)
through DTC and the DTC Participants and the Cash Redemption Amount, if any,
through the Federal Reserve Bank wire system so as to be received by the
Participant no later than the same Business Day on which the transfer of Shares
is required to be made pursuant to Section IV (4) in order for the Deemed
Received order to continue to be Deemed Received. A Redemption Order relating to
Shares of an International Fund will be processed in the manner provided in this
paragraph, except as otherwise provided in Section II 8 (b).
SECTION IV. PROCEDURES BY WHICH AN ORDER TO CREATE OR A REQUEST TO REDEEM
SHALL BE "DEEMED RECEIVED"
1. Trusts' Clearing Process -- Creation Orders. A Creation Order to create
Shares through the Trusts' Clearing Process shall be "Deemed Received" by the
Transfer Agent on the Transmittal Date only if (a) the Submission containing
such order is in proper form and (b) such Submission is received by the Transfer
Agent no later than the time on such Transmittal Date as set forth in Section I
(3) (a) hereof. Orders to create Shares contained in Submissions transmitted
after such time on a Transmittal Date shall be deemed invalid.
2. Trusts' Clearing Process -- Redemption Orders. A Redemption Order to
redeem Shares through the Trusts' Clearing Process shall be Deemed Received by
the Transfer Agent on the Transmittal Date only if (a) the Submission containing
such request is in proper form and (b) such Submission is received by the
Transfer Agent no later than the time on such Transmittal Date as set forth in
Section I(3)(b) hereof. Requests to redeem Shares contained in Submissions
transmitted after such time on a Transmittal Date shall be "Deemed Received" by
the Transfer Agent on the next Business Day immediately following such
Transmittal Date.
3. Outside the Trusts' Clearing Process -- Creation Orders. An Creation
Order to create Shares outside the Trusts' Clearing Process shall be Deemed
Received by the Transfer Agent on the Transmittal Date only if: (a) the
Submission containing such order is in proper form, and (b) such Submission is
received by the Transfer Agent no later than the time on such Transmittal Date
as set forth in Section I(3)(a) hereof, provided, however, that such order shall
cease to be Deemed Received unless (a) the requisite number of Deposit
Securities is transferred through DTC to the account of the applicable Fund no
later than 11:00 a.m., Eastern Time, on the Business Day next following the
Transmittal Date and (b) the cash equal to the Cash Component, if any, is
transferred via the Federal Reserve Bank wire system to the account of the
applicable Fund by no later than 2:00 p.m., Eastern Time, on the Business Day
next following the Transmittal Date. If either the Submission, the requisite
Deposit Securities or the cash equal to the Cash Component is not received by
the Transfer Agent within the time periods set forth above, such order shall be
deemed invalid.
4. Outside the Trusts' Clearing Process -- Redemption Orders. A request to
redeem Shares outside the Trusts' Clearing Process shall be Deemed Received by
Attachment 1-8
the Transfer Agent on the Transmittal Date only if (a) the Submission containing
such request is in proper form, and (b) such Submission is received by the
Transfer Agent no later than the time as set forth in Section I(3)(b) hereof,
provided, however, that such order shall cease to be Deemed Received unless (a)
the requisite number of Shares is transferred via DTC to the account of the
Transfer Agent by the NYSE Closing Time on such Transmittal Date and (b) the
Cash Redemption Amount owed to the applicable Fund, if any, is received by the
Transfer Agent no later than 2:00 p.m., Eastern Time, of the Business Day next
following such Transmittal Date. If either the Submission, the Shares or cash
equal to the Cash Redemption Amount, if any, is not received by the applicable
Fund within the time periods set forth above, such redemption request shall be
Deemed Received by the Transfer Agent on the Business Day on which both the
Submission and the requisite number of Shares are delivered to the Transfer
Agent within the proper time periods as set forth above; provided that the Cash
Redemption Amount, if any, is then paid on the next Business Day within the time
period set forth above.
5. Ambiguous Instructions. In the event that a Submission contains terms
that differ from the information provided in the telephone call at the time of
issuance of the Submission Number, the Trust Telephone Representative will
attempt to contact the Participant to request confirmation of the terms of the
order. If an Authorized Person confirms the terms as they appear in the
Submission then the Submission will be accepted and processed. If an Authorized
Person contradicts its terms, the Submission will be deemed invalid, and a
corrected Submission must be received by the Transfer Agent, as applicable, not
later than the earlier of (i) within fifteen (15) minutes of such contact with
the Participant or (ii) forty-five (45) minutes after the NYSE Closing Time. For
the avoidance of doubt, notwithstanding the invalidation of the initial
Submission pursuant to this paragraph, a Submission that is otherwise in proper
form shall be deemed submitted at the time of its initial Submission for
purposes of determining when orders are Deemed Received hereunder. If the Trust
Telephone Representative is not able to contact an Authorized Person, then the
Submission shall be accepted and processed in accordance with its terms
notwithstanding any inconsistency from the terms of the telephone information.
In the event that a Submission contains terms that are illegible, the Submission
will be deemed invalid and the Trust Telephone Representative will attempt to
contact the Participant to request retransmission of the Submission. A corrected
Submission must be received by the Transfer Agent, as applicable, not later than
the earlier of (i) within fifteen (15) minutes of such contact with the
Participant or (ii) forty-five (45) minutes after the NYSE Closing Time.
6. Suspension or Rejection of an Order. Each Trust reserves the absolute
right to reject a Creation Order transmitted to it by the Distributor in respect
of a Fund if: (i) the order is not in proper form; (ii) the Deposit Securities
delivered are not as disseminated for that date by the Custodian, as described
above; (iii) acceptance of the Fund Deposit would, in the opinion of counsel, be
unlawful; (iv) acceptance of the Fund Deposit would otherwise, in the reasonable
opinion of the applicable Trust or its investment adviser (the "Adviser"), have
an adverse effect on the Trust, the applicable Fund or the rights of beneficial
owners; or (v) in the event that circumstances exist outside the control of the
applicable Trust or Fund, the Transfer Agent, the Distributor and the Adviser
that, in their reasonable judgment, make it for all practical purposes
impossible to process Creation Orders. Examples of such circumstances include
acts of God; public service or utility problems such as fires, floods, extreme
weather conditions and power outages resulting in telephone, telecopy and
computer failures; market conditions or activities causing trading halts;
Attachment 1-9
systems failures involving computer or other information systems affecting a
Trust or Fund, the Adviser, the Distributor, DTC, NSCC, the Transfer Agent, the
Custodian or sub-custodian or any other participant in the creation process, and
similar extraordinary events. The applicable Trust shall notify immediately a
prospective creator of a Creation Unit and/or the Authorized Participant acting
on behalf of such prospective creator of its rejection of the order of such
person. Each Trust and Fund, the Custodian, any sub-custodian and the
Distributor are under no duty, however, to give notification of any defects or
irregularities in the delivery of Fund Deposits, and shall not incur any
liability for the failure to give any such notification.
SECTION V. TELEPHONE AND FACSIMILE
FIRST TRUST EXCHANGE-TRADED FUND, FIRST TRUST EXCHANGE-TRADED FUND II, FIRST
TRUST EXCHANGE-TRADED ALPHADEX (R) FUND AND FIRST TRUST EXCHANGE-TRADED FUND IV
AND [FIRST TRUST EXCHANGE-TRADED FUND VIII:]
Telephone: (630) 765-8000
Facsimile: (630) 517-7509
TRANSFER AGENT:
Telephone: (212) 815-2793
Facsimile: (212) 667-9549
PARTICIPANT::
Telephone:
Facsimile:
FIRST TRUST PORTFOLIOS, L.P.
By
Title:
PARTICIPANT:
By
Title:
Attachment 1-10
ACCEPTED BY:
THE BANK OF NEW YORK MELLON,
as Transfer Agent
By
Title:
Dated:
Attachment 1-11
September 23, 2016
First Trust Exchange-Traded Fund VIII
120 E. Liberty Street
Wheaton, Illinois 60187
Chapman and Cutler LLP
111 West Monroe Street
Chicago, IL 60603
Re: First Trust Exchange-Traded Fund VIII
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to First Trust
Exchange-Traded Fund VIII (the "Trust") on behalf of its series First Trust CEF
Income Opportunity ETF and First Trust Municipal CEF Income Opportunity ETF
(each, a "Fund") in connection with the Trust's Pre-Effective Amendment to its
Registration Statement on Form N-1A to be filed with the Securities and Exchange
Commission on or about September 23, 2016 (as so amended, the "Registration
Statement") with respect to each Fund's shares of beneficial interest, par value
$.01 per share (the "Shares"). You have requested that we deliver this opinion
to you in connection with the Trust's filing of such Registration Statement.
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 Trust;
(b) a copy, stamped as filed with the Secretary of the Commonwealth
of Massachusetts on February 25, 2016, of the Trust's Declaration of Trust
dated as of February 22, 2016 (the "Declaration");
(c) a copy of Trust's Establishment and Designation of Series of
Shares of Beneficial Interest, included as Appendix A to the Declaration
and effective as of February 22, 2016 (the "Designation");
(d) a certificate executed by an appropriate officer of the Trust,
certifying as to, and attaching copies of, the Trust's Declaration,
Designation, By-Laws, and minutes of the meeting of the Trust's Board of
Trustees held on June 13, 2016 (the "Resolutions"); and
(e) a draft of the Registration Statement received on September 15,
2016.
First Trust Exchange-Traded Fund VIII
Chapman and Cutler LLP
September 23, 2016
Page 2
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 also assumed that the Registration Statement, as
filed with the Securities and Exchange Commission, will be in substantially the
form of filing referred to in paragraph (e) above. We have further assumed that
the Trust's Declaration, Designation, By-Laws and the Resolutions will not have
been amended, modified or withdrawn with respect to matters relating to the
Shares and will be in full force and effect on the date of the 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 any opinion below relating to the due formation or existence of the
Trust under the laws of the Commonwealth of Massachusetts, our opinion relies
entirely upon and is limited by the certificate of public officials referred to
in (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 which any tribunal
may apply to such transaction. In addition, to the extent that the Trust's
Declaration, Designation 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 Trust, except for the internal substantive laws of
the Commonwealth of Massachusetts, as aforesaid, we have assumed compliance by
the Trust 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 Trust has been formed and is existing under the Trust's Declaration
of Trust and the laws of the Commonwealth of Massachusetts as a voluntary
First Trust Exchange-Traded Fund VIII
Chapman and Cutler LLP
September 23, 2016
Page 3
association with transferable shares of beneficial interest commonly referred to
as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Resolutions and
for the consideration described in the Registration Statement, will be validly
issued, fully paid and nonassessable, except that, as set forth in the
Registration Statement, shareholders of the Trust 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 Trust with
respect to the Shares and to the filing of this opinion as an exhibit to the
Registration Statement. In rendering this opinion and giving this consent, we do
not concede that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ MORGAN, LEWIS & BOCKIUS LLP
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CHAPMAN AND CUTLER LLP 111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
September 23, 2016
First Trust Exchange-Traded Fund VIII
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
Re: First Trust Exchange-Traded Fund VIII
Ladies and Gentlemen:
We have served as counsel for the First Trust Exchange-Traded Fund VIII
(the "Trust"), which proposes to offer and sell shares of each of its series
(the "Shares"), First Trust CEF Income Opportunity ETF and First Trust Municipal
CEF Income Opportunity ETF (the "Funds"), in the manner and on the terms set
forth in Amendment No. 2 and Pre-Effective Amendment No. 2 to its Registration
Statement on Form N-1A filed on or about September 23, 2016 (the "Amendment")
with the Securities and Exchange Commission under the Investment Company Act of
1940, as amended, and the Securities Act of 1933, as amended, respectively.
In connection therewith, we have examined such pertinent records and
documents and matters of law, including the opinion of Morgan, Lewis & Bockius
LLP issued to the Trust or Trust's counsel upon which we have relied as they
relate to the laws of the Commonwealth of Massachusetts, as we have deemed
necessary in order to enable us to express the opinion hereinafter set forth.
Based upon the foregoing, we are of the opinion that:
The Shares of the Funds may be issued from time to time in accordance with
the Trust's Declaration of Trust dated February 22, 2016 and the Trust's
By-Laws, and subject to compliance with the Securities Act of 1933, as amended,
the Investment Company Act of 1940, as amended, and applicable state laws
regulating the sale of securities and the receipt by the Funds of the purchase
price of not less than the net asset value per Share, and such Shares, when so
issued and sold by the Funds, will be legally issued, fully paid and
non-assessable, except that, as set forth in the Amendment, shareholders of a
Fund may under certain circumstances be held personally liable for its
obligations.
September 23, 2016
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement (File No. 333-210186) relating to the Shares referred to
above, to the use of our name and to the reference to our firm in said
Registration Statement.
Respectfully submitted,
/s/ CHAPMAN AND CUTLER LLP
-----------------------------
CHAPMAN AND CUTLER LLP
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in the Pre-Effective Amendment No.2 to Registration
Statement No. 333-210186 on Form N-1A of our report dated September 23, 2016,
related to the statement of assets and liabilities of First Trust CEF Income
Opportunities ETF, appearing in the Statement of Additional Information, which
is part of such Registration Statement, and to the reference to us under the
heading "Independent Registered Public Accounting Firm" in the Statement of
Additional Information, which is part of the Registration Statement.
/s/ Deloitte & Touche LLP
Chicago, Illinois
September 23, 2016
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FIRST TRUST EXCHANGE-TRADED FUND VIII
DISTRIBUTION AND SERVICE PLAN
1. The Trust. First Trust Exchange-Traded Fund VIII (the "Trust") is an
open-end management investment company registered as such under the Investment
Company Act of 1940, as amended (the "1940 Act"), and organized as a series
trust (each such series is referred to herein as a "Fund").
2. The Plan. The Trust desires to adopt a plan of distribution pursuant to
Rule l2b-1 under the 1940 Act with respect to the shares of beneficial interest
("Shares") of certain of the Funds which are identified in Exhibit A hereof, and
the Board of Trustees of the Trust (the "Board of Trustees") has determined that
there is a reasonable likelihood that adoption of this Distribution and Service
Plan (the "Plan") will benefit each such Fund (the "Designated Funds") and its
holders of Shares. Accordingly, on behalf of each Designated Fund, the Trust
hereby adopts this Plan in accordance with Rule 12b-1 under the 1940 Act on the
following terms and conditions (capitalized terms not otherwise defined herein
have the meanings assigned thereto in the Trust's registration statement under
the 1940 Act and under the Securities Act of 1933, as amended, as such
registration statement is amended by any amendments thereto at the time in
effect).
3. The Distributor. The Trust has entered into a written Distribution
Agreement with First Trust Portfolios L.P. (the "Distributor"), pursuant to
which the Distributor will act as the exclusive distributor with respect to the
creation and distribution of Creation Unit size aggregations of Shares as
described in the Trust's registration statement ("Creation Units") of each Fund.
4. Payments. (a) The Trust may pay a monthly fee not to exceed 0.25% per
annum of each Fund's average daily net assets to reimburse the Distributor for
actual amounts expended to finance any activity primarily intended to result in
the sale of Creation Units of each Fund or the provision of investor services,
including but not limited to (i) delivering copies of the Trust's then-current
prospectus to prospective purchasers of such Creation Units, statement of
additional information or annual or semi-annual reports relating to the Trust;
(ii) marketing and promotional services including advertising; (iii)
facilitating communications with beneficial owners of shares of the Trust,
including providing explanations to owners regarding fund investment objectives
and policies and other information about the Trust or any Funds thereof; (iv)
delivering any notices of shareholder meetings and proxy statements accompanying
such notices in connection with general and special meetings of interest holders
of the Trust; and (v) such other services and obligations as are set forth in
the Distribution Agreement. Such payments shall be made within ten (10) days of
the end of each calendar month. The determination of daily net assets shall be
made at the close of business each day throughout the month and computed in the
manner specified in the then current Prospectus for the determination of the net
asset value of Creation Units.
(b) Distribution expenses incurred in any one year in excess of 0.25% of
each Fund's average daily net assets may be reimbursed in subsequent years
subject to the annual 0.25% limit and subject further to the approval of the
Board of Trustees including a majority of the Trustees who are not "interested
persons" of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of this Plan or in any agreement
related to this Plan (the "Independent Trustees").
(c) The Distributor may use all or any portion of the amount received
pursuant to this Plan to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services,
pursuant to agreements with the Distributor, or to pay any of the expenses
associated with other activities authorized under paragraph 4(a) hereof.
(d) First Trust Advisors L.P., may use any portion of its advisory fee to
compensate dealers, including the Distributor, for expenses incurred in
connection with the sales and distribution of a Fund's shares, including,
without limitation, compensation of its sales force, expenses of printing and
distributing prospectuses to persons other than shareholders, expenses of
preparing, printing and distributing advertising and sales literature and
reports to shareholders used in connection with the sale of a Fund's share,
certain other expenses associated with the distribution of shares of a Fund, and
any distribution-related expenses that may be authorized from time to time by
the Board of Trustees.
All such expenses covered by the Plan shall be deemed incurred whether
paid directly by the Distributor or by a third party to the extent reimbursed
therefor by the Distributor.
5. Effective Date. This Plan shall become effective upon approval by a
vote of both a majority of the Board of Trustees and a majority of the
Independent Trustees, cast in person at a meeting called for the purpose of
voting on this Plan.
6. Term. This Plan shall, unless terminated as hereinafter provided,
remain in effect with respect to the Designated Fund for one year from its
effective date and shall continue thereafter, provided that its continuance is
specifically approved at least annually by a vote of both a majority of the
Trustees and a majority of the Independent Trustees, cast in person at a meeting
called for the purpose of voting on this Plan.
7. Amendment. This Plan may be amended at any time by the Board of
Trustees, provided that (a) any amendment to increase materially the amount to
be spent for the services provided for in paragraph 4 hereof shall be effective
only upon approval by a vote of a majority of the outstanding voting securities
(as such term is defined in the 1940 Act) of the Designated Fund, and (b) any
material amendment of this Plan shall be effective only upon approval by a vote
of both a majority of the Board of Trustees and a majority of the Independent
Trustees, cast in person at a meeting called for the purpose of voting on such
amendment.
8. Termination. This Plan may be terminated at any time, without payment
of any penalty, by vote of a majority of the Independent Trustees, or by vote of
a majority of the outstanding voting securities (as such term is defined in the
1940 Act) of the Designated Fund. In the event of termination or non-continuance
of this Plan, the Trust may reimburse any expense which it incurred prior to
such termination or non-continuance, provided that such reimbursement is
specifically approved by both a majority of the Board of Trustees and a majority
of the Independent Trustees.
9. Assignment. This Plan will not be terminated by an assignment, however,
an assignment will terminate any agreement under the Plan involving any such
assignment.
10. Reports. While this Plan is in effect, the Distributor shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended pursuant to the Plan and the purposes for which
such expenditures were made.
11. Records. The Trust shall preserve copies of this Plan, each agreement
related hereto and each report referred to in paragraph 9 hereof for a period of
at least six years from the date of the Plan, agreement and report, the first
two years in an easily accessible place.
12. Independent Trustees. While this Plan is in effect, the selection and
nomination of Independent Trustees shall be committed to the discretion of the
Trustees who are not "interested persons" of the Trust (as defined in the 1940
Act).
13. Severability. If any provision of the Plan shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Plan shall not be affected thereby.
EXHIBIT A
(AS OF SEPTEMBER 15, 2016)
FUND EFFECTIVE DATE
----------------------------------------------------------- ------------------
First Trust CEF Income Opportunity ETF September 28, 2016
First Trust Municipal CEF Income Opportunity ETF September 28, 2016
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