UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-22080
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First Trust Active Dividend Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: November 30
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Date of reporting period: November 30, 2013
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
ANNUAL REPORT
FOR THE YEAR ENDED
NOVEMBER 30, 2013
FIRST TRUST
DIVIDEND AND
INCOME
FUND
(FAV)
CHARTWELL INVESTMENT PARTNERS
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INSTITUTIONAL AND PRIVATE ASSET MANAGEMENT
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TABLE OF CONTENTS
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
ANNUAL REPORT
NOVEMBER 30, 2013
Shareholder Letter........................................................... 1
At A Glance.................................................................. 2
Portfolio Commentary......................................................... 3
Portfolio of Investments..................................................... 6
Statement of Assets and Liabilities.......................................... 15
Statement of Operations...................................................... 16
Statements of Changes in Net Assets.......................................... 17
Statement of Cash Flows...................................................... 18
Financial Highlights......................................................... 19
Notes to Financial Statements................................................ 20
Report of Independent Registered Public Accounting Firm...................... 27
Additional Information....................................................... 28
Board of Trustees and Officers............................................... 34
Privacy Policy............................................................... 36
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Chartwell Investment Partners, L.P. ("Chartwell"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Dividend and Income Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Chartwell are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV) ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
NOVEMBER 30, 2013
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust Active Dividend Income Fund (the "Fund").
As a shareholder, twice a year you receive a detailed report about your
investment, including portfolio commentary from the Fund's management team, a
performance analysis and a market and Fund outlook. Additionally, First Trust
Advisors L.P. ("First Trust") compiles the Fund's financial statements for you
to review. These reports are intended to keep you up-to-date on your investment,
and I encourage you to read this document and discuss it with your financial
advisor.
As you are probably aware, the twelve months covered by this report saw both
challenging economic and political issues in the U.S. However, the period was
still positive for the markets. In fact, the S&P 500 Index, as measured on a
total return basis, rose 30.30% during the twelve months ended November 30,
2013. Of course, past performance can never be an indicator of future
performance, but First Trust believes that staying invested in quality products
through up and down markets and having a long-term horizon can help investors as
they work toward their financial goals.
First Trust continues to offer a variety of products that we believe could fit
the financial plans for many investors seeking long-term investment success.
Your advisor can tell you about the other investments First Trust offers that
might fit your financial goals. We encourage you to discuss those goals with
your advisor regularly so that he or she can help keep you on track and help you
choose investments that match your goals.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
"AT A GLANCE"
AS OF NOVEMBER 30, 2013 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FAV
Common Share Price $8.55
Common Share Net Asset Value ("NAV") $9.73
Premium (Discount) to NAV (12.13)%
Net Assets Applicable to Common Shares $80,396,131
Current Quarterly Distribution per Common Share (1) $0.1500
Current Annualized Distribution per Common Share $0.6000
Current Distribution Rate on Closing Common Share Price (2) 7.02%
Current Distribution Rate on NAV (2) 6.17%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
11/12 $7.69 $8.63
7.52 8.62
7.52 8.54
7.53 8.61
12/12 7.37 8.46
7.77 8.83
7.99 8.83
8.11 8.93
1/13 7.93 8.82
8.03 8.90
8.16 8.89
8.06 8.91
2/13 8.01 8.89
8.01 8.90
8.18 9.08
8.16 9.12
8.31 9.08
3/13 8.31 9.14
8.15 9.07
8.22 9.22
8.15 9.09
4/13 8.13 9.10
8.23 9.25
8.28 9.34
8.44 9.49
8.42 9.45
5/13 8.27 9.29
8.29 9.37
8.41 9.30
7.91 9.11
6/13 8.14 9.22
8.20 9.26
8.36 9.52
8.64 9.57
7/13 8.38 9.39
8.41 9.45
8.32 9.41
8.24 9.24
8.20 9.31
8/13 8.10 9.18
8.19 9.23
8.36 9.38
8.44 9.52
9/13 8.55 9.46
8.42 9.44
8.38 9.50
8.70 9.68
10/13 8.62 9.63
8.62 9.60
8.52 9.61
8.61 9.73
8.60 9.76
11/13 8.55 9.73
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PERFORMANCE
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Average Annual Total Return
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Inception
1 Year Ended 5 Years Ended (9/20/2007)
11/30/2013 11/30/2013 to 11/30/2013
Fund Performance (3)
NAV 21.52% 10.23% 0.96%
Market Value 19.84% 13.57% -1.86%
Index Performance
Russell 1000(R) Value Index 31.92% 16.40% 3.73%
S&P 500(R) Index 30.30% 17.60% 5.13%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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ConocoPhillips 2.3%
JPMorgan Chase & Co. 2.2
Johnson & Johnson 2.1
Royal Dutch Shell PLC 1.9
Pfizer, Inc. 1.9
AstraZeneca PLC 1.9
Energy Transfer Partners, L.P. 1.8
TAL International Group, Inc. 1.8
Altria Group, Inc. 1.8
National CineMedia, Inc. 1.8
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Total 19.5%
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% OF
CREDIT QUALITY (S&P RATINGS)(4) SENIOR LOANS
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BBB- 0.9%
BB+ 9.1
BB 8.8
BB- 15.8
B+ 31.6
B 29.3
B- 1.1
CCC+ 1.1
Privately rated securities 2.3
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Total 100.0%
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% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
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Financials 24.1%
Energy 15.2
Consumer Discretionary 14.7
Health Care 13.4
Industrials 7.5
Information Technology 7.0
Consumer Staples 5.9
Telecommunication Services 5.2
Materials 4.5
Utilities 2.5
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Total 100.0%
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(1) Most recent distribution paid or declared through 11/30/2013. Subject to
change in the future. The distribution was increased subsequent to
11/30/2013. See Note 7 - Subsequent Events in the Notes to Financial
Statements.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 11/30/2013. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) Ratings are by Standard & Poor's, except where otherwise noted. A credit
rating is an assessment provided by a nationally recognized statistical
rating organization (NRSRO) of the creditworthiness of an issuer with
respect to debt obligations except for those debt obligations that are
only privately rated. Ratings are measured on a scale that generally
ranges from AAA (highest) to D (lowest). Investment grade is defined as
those issuers that have a long-term credit rating of BBB- or higher. "NR"
indicates no rating. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not the Fund or its shares. Credit ratings are subject to change.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
ANNUAL REPORT
NOVEMBER 30, 2013
Effective July 1, 2013, Chartwell Investment Partners, L.P. ("Chartwell" or the
"Sub-Advisor") was appointed the sub-advisor of First Trust Dividend and Income
Fund ("FAV" or the "Fund") by the Fund's Board of Trustees pursuant to an
interim investment sub-advisory agreement with a maximum 150-day term. A new
investment sub-advisory agreement with Chartwell was approved by shareholders
and was entered into on September 16, 2013. Aviance Capital Management, LLC
("Aviance"), a registered investment advisor, was the sub-advisor to the First
Trust Active Dividend Income Fund (the Fund's previous name) during a portion of
the period covered by this report and up through June 30, 2013.
SUB-ADVISOR
Chartwell is an employee-owned investment advisory firm founded on April 1, 1997
by nine investment professionals from Delaware Investment Advisers. The firm is
75% owned by the partners and employees of Chartwell and 25% owned by a limited
partnership comprised of three passive investors in the Philadelphia area. There
are no affiliates at this time. The firm is a research-based equity and
fixed-income manager with a disciplined, team-oriented investment process.
Subsequent to the period covered by this report Chartwell informed the Fund that
it will sell substantially all of its assets to a third party. It is anticipated
that there will be no changes to Chartwell personnel or the manner in which they
perform their sub-advisory duties with respect to the Fund due to this
transaction. See the Subsequent Events note in the Notes to Financial Statement
later in the report.
PORTFOLIO MANAGEMENT TEAM
BERNARD P. SCHAFFER, MANAGING PARTNER, SENIOR PORTFOLIO MANAGER, CHARTWELL
DOUGLAS W. KUGLER, PRINCIPAL, SENIOR PORTFOLIO MANAGER, CHARTWELL
PETER M. SCHOFIELD, PRINCIPAL, SENIOR PORTFOLIO MANAGER, CHARTWELL
WILLIAM HOUSEY, CFA, SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER, FIRST
TRUST
SCOTT D. FRIES, CFA, SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER, FIRST
TRUST
FIRST TRUST DIVIDEND AND INCOME FUND
The primary investment objective of the Fund is to seek a high level of current
income. Its secondary objective is capital appreciation. Prior to July 1, 2013,
the Fund pursued its investment objectives by investing at least 80% of its
managed assets in a diversified portfolio of dividend-paying multi-cap equity
securities of both U.S. and non-U.S. issuers that the Fund's Sub-Advisor
believed offered the potential for attractive income and/or capital
appreciation. Also, on an ongoing and consistent basis, the Fund wrote call
options on stock indices and single stocks on up to 50% of the Fund's portfolio.
Effective July 1, 2013, the Fund pursued its investment objectives by investing
at least 80% of its managed assets in a diversified portfolio of dividend-paying
multi-cap equity securities, debt securities, and beginning on September 17,
2013, senior secured floating rate loans that offer the potential for attractive
income and/or capital appreciation. The Fund employs leverage, in the form of
borrowings, in an effort to enhance the Fund's potential for income. Chartwell
manages the equity securities and options components of the Fund's strategy.
First Trust manages the senior loan and leverage components of the Fund's
strategy. Also subsequent to July 1, 2013, the Fund pursued a revised options
strategy. The Fund may increase its use of options to enhance the Fund's
potential for income as the Fund's ability to write call options is no longer
limited to 50% of the Fund's portfolio. The Fund may also enter into strategic
transactions involving derivatives as it seeks to manage the risks of the Fund's
portfolio securities or for other purposes consistent with the Fund's investment
objectives, policies, and applicable regulatory requirements. There can be no
assurance that the Fund's investment objectives will be achieved. The Fund may
not be appropriate for all investors.
PERFORMANCE SUMMARY
For the Fund's fiscal year ending November 30, 2013, the Fund returned 21.52% on
a total return basis. The S&P 500 returned 30.30% on a total return basis over
the same time period. Relative to the S&P 500, the Fund's equity portfolio faced
some significant headwinds during the year. The Fund's equity portfolio is
primarily focused on higher quality, large-to mid-cap equity securities with
higher yields - each of which underperformed the S&P 500 Index during the year.
Based on an analysis of the S&P 500 performed by Bank of America Merrill Lynch,
for the Fund's fiscal year; higher-yielding stocks underperformed the S&P 500
Index as well as stocks which had either small or no yield, lower quality stocks
were better performers than higher quality stocks and smaller capitalization
stocks outperformed larger capitalization stocks. As an example, the S&P
SmallCap 600 Index, which is
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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an index of companies with market capitalizations in the range of $300 million
to $1.4 billion returned 43.90% during the Fund's fiscal year, beating the S&P
500 by over 13 percentage points. The Fund's covered call writing program
detracted from relative performance, as would be expected, given the equity
market's strong advance. On a stock specific basis, positive contributions to
the return of the Fund came from holdings such as: Citigroup, Inc. (+53.2%),
JPMorgan Chase & Co. (+43.2%), Wynn Resorts, Limited (+42.3%), and Lockheed
Martin Corporation (+35.6%). Holdings in Freeport-McMoRan Copper & Gold, Inc.
(-4.4%), Linn Energy LLC (-29.4%), Exelon Corporation (-6.7%) and Digital Realty
Trust, Inc. (-20.4%) contributed negatively to the Fund's return. On September
17, 2013 the Fund began deploying leverage to purchase senior loans. Through the
end of the fiscal year, these assets were accretive to the Fund's total return
at the margin.
MARKET RECAP
The S&P 500 Index ("Index") returned 30.30% (inclusive of dividends) during the
year ended November 30, 2013. This return was generated with few pauses during
the year - only once in those twelve months did the Index decline by more than
5% from its latest high. While there were many issues for the market to worry
about during the Fund's fiscal year that could have thwarted the Index's rally
(threat of the "fiscal cliff," fears of a "hard landing" by the Chinese economy,
tensions in Syria, and a U.S. federal government shutdown, to name a few), there
were several recurring themes from which the market appeared to gain strength
and overcome the proverbial "wall of worry" that most strong stock markets
climb. The economy, despite occasional weak data, continued to grow and exhibit
resilience. Real GDP in the first three quarters of 2013 was up 1.1%, 2.5% and
2.8% (subsequently revised to 4.1%), respectively. Later in the year the
European economies also appeared to start to grow again lending strength to the
global economy. Measures of employment also improved with the last employment
report prior to the close of the Fund's fiscal year showing the unemployment
rate at 7.3% (down from 7.8% at the start of the fiscal year) and new claims for
unemployment approached ten-year lows. Corporate profits, while not overly
robust, continued to come in better than expected as companies have adapted well
to a lower revenue growth environment. And maybe most importantly, the Federal
Reserve, despite periods of doubt by the market, continued to provide
significant liquidity to the economy. The early part of the Index's rally
favored the defensive sectors of the market. It is believed that a strong demand
for higher yielding equities which are more commonplace in the defensive sectors
helped drive those stocks. The rest of the year favored the more cyclical groups
as the market appeared to become more confident in the global economic recovery
and growth stocks outperformed value stocks. Throughout the year, small
capitalization stocks outperformed large capitalization stocks.
MARKET OUTLOOK
The Index attained an all-time closing high of 1807.23 on November 27, 2013, and
it was up over 150% from its closing low of 676.53 on March 9, 2009. The Index
increase for this fiscal year (+30.30%) was the largest gain in the last 10
years and it followed last year which was the third largest increase (+16.13%)
in the ten years ended November 30. The question is: where to now? The major
issue the market is currently wrestling with is at what pace will the Federal
Reserve continue to slow its injection of liquidity, through quantitative
easing, into the banking system. There is uncertainty as to the timing and size
of this so-called "tapering" and the market can be more volatile during times of
uncertainty. In addition, a new Chairman of the Federal Reserve Board, Janet
Yellen, has been appointed. Though she is not expected to make any significant
changes to policy, the fact that there is a transition at the top of the Fed can
raise questions. There are other issues which add to the uncertain
environment--but all of these uncertainties can also provide positive impetus to
stock prices if they are resolved in a market friendly manner, as we have seen
over the last few years. Stock prices have risen on a combination of the
resolution of uncertainties, strong earnings growth and increased confidence in
the economy's ability to continue to improve coming out of the "Great
Recession." We believe that this can continue, but not without volatility.
Companies have learned how to operate in a lower growth environment and have
shown the ability to raise margins which are at all-time highs. Concurrent with
this increase in corporate earnings and margins, the economy has been growing
the last few years, but at an unspectacular pace. This "plow-horse" level of
growth has led to uncertainty regarding the question of whether the domestic
U.S. economy can sustain this level of growth after the Federal Reserve reduces
the amount of "accommodation" it has been providing through quantitative easing.
It appears as if we will find out soon. Some view the reduction of help from the
Fed as a good thing - meaning that the economy is strong enough to move forward
without help. Others are fearful that growth will stop when the accommodation is
reduced. What this has done is raise the level of interest rates and add
uncertainty.
Our position is that despite these uncertainties, the economy should continue to
grow at a reasonable, but not strong rate, and corporate profits should continue
to grow as well. This could provide a solid backdrop for the market going
forward. However, with valuation of the stock market no longer at the lower end
of historical norms, and with earnings growth flattening out, moves higher in
the Index will likely be more muted going forward with the increased likelihood
of periods of price declines. No matter the outcome of these issues, we will
manage the Fund with the dual objectives of generating a high level of current
income while seeking capital appreciation over the market cycle.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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SENIOR LOAN MARKET RECAP
Few investors anticipated the decision by the Federal Reserve to continue (in
full) its quantitative easing bond buying at its September 18th meeting, and
while Treasury yields were up significantly from the lows early in the year,
Treasury yields plummeted more than 15 basis points (bps) in one day. In
October, investors faced additional market uncertainty as the Federal Government
shutdown was a constant reminder of the wrangling in Washington over a budget
deal and the desire to reach a consensus on the debt ceiling debate. Ultimately,
the combination of the government's decision to revisit the Continuing
Resolution/debt ceiling debate early next year and the Federal Reserve
maintaining its unprecedented bond buying program, proved enough to leave fixed
income markets on solid footing in November.
CREDIT QUALITY/DEFAULT RATES
The trailing twelve-month default rate at the end of November 2013 was 2.08% for
the S&P/LSTA Leveraged Loan Index. The default rate remains well inside the
long-term historical average. The long-term average default rate for senior
loans is 3.27% (for the period March 1999 - November 2013).
Two trends in the market that have helped keep default volumes in check have
been solid corporate fundamentals and robust capital markets activity. Regarding
corporate fundamentals, senior loan issuers that file their financial results
publicly grew cash flows by approximately 7% year-over-year in the third quarter
of 2013, which represents 17 straight quarters of cash flow growth. This
extended period of cash flow growth has given companies the ability to
strengthen their balance sheets. The second positive trend is the active capital
markets which have provided companies the opportunity to refinance near-term
debt maturities with longer-dated paper and a lower coupon. This process of
extending maturities may help alleviate a potential catalyst for future defaults
and the lower coupon eases a company's interest burden. Senior loans coming due
with maturities through 2014 stand at a mere $9.8 billion, down from $47.6
billion at December 2012 and $140.3 billion at the end of 2011. Overall, we
believe that the combination of solid corporate performance and the extension of
near-term debt maturities support our view that the default environment will
remain modest.
SENIOR LOAN MARKET OUTLOOK
Our outlook for the leveraged finance market (high yield bonds and senior loans)
remains positive. The combination of a modest default environment and slow but
positive economic growth provides a firm fundamental backdrop for high-yield
bonds and senior loans. As interest rates move higher, especially longer-term
rates, our view is that high-yield will face headwinds as our analysis suggests
that in light of the low yield and high prices within the high-yield market,
there's considerably more interest rate risk embedded in pockets of high-yield
than history would indicate. Notwithstanding these challenges, we would expect
both senior loans and high-yield bonds to outperform traditional fixed income
when interest rates increase.
As we evaluate new investment opportunities for the portfolio, decisions will
continue to be rooted in our rigorous bottom up credit analysis with a specific
focus on the opportunities that offer the best balance between risk and reward.
Page 5
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2013
SHARES DESCRIPTION VALUE
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COMMON STOCKS - 83.8%
AEROSPACE & DEFENSE - 3.1%
8,900 Honeywell International, Inc..................................................... $ 787,739
11,900 Lockheed Martin Corp. (a) ....................................................... 1,685,873
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2,473,612
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CAPITAL MARKETS - 1.8%
4,900 BlackRock, Inc. (a) ............................................................. 1,483,475
--------------
CHEMICALS - 1.4%
29,200 Dow Chemical (The) Co. (a) ...................................................... 1,140,552
--------------
COMMERCIAL BANKS - 1.3%
24,300 Wells Fargo & Co. (a) ........................................................... 1,069,686
--------------
COMMUNICATIONS EQUIPMENT - 1.0%
11,400 QUALCOMM, Inc.................................................................... 838,812
--------------
COMPUTERS & PERIPHERALS - 1.6%
2,300 Apple, Inc. (a) ................................................................. 1,278,961
--------------
CONSUMER FINANCE - 1.0%
11,000 Capital One Financial Corp....................................................... 787,930
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DIVERSIFIED FINANCIAL SERVICES - 4.1%
20,400 Citigroup, Inc. (a) ............................................................. 1,079,568
39,400 JPMorgan Chase & Co. (a) ........................................................ 2,254,468
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3,334,036
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DIVERSIFIED TELECOMMUNICATION SERVICES - 5.3%
43,700 AT&T, Inc. (a) .................................................................. 1,538,677
42,300 CenturyLink, Inc................................................................. 1,298,610
28,900 Verizon Communications, Inc. (a) ................................................ 1,434,018
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4,271,305
--------------
ELECTRIC UTILITIES - 2.2%
11,000 Duke Energy Corp................................................................. 769,560
37,500 Exelon Corp...................................................................... 1,009,125
--------------
1,778,685
--------------
ENERGY EQUIPMENT & SERVICES - 1.6%
30,500 Seadrill Ltd..................................................................... 1,302,655
--------------
FOOD PRODUCTS - 1.0%
15,300 Kraft Foods Group, Inc. (a) ..................................................... 812,736
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 2.1%
22,000 Abbott Laboratories ............................................................. 840,180
12,200 Covidien PLC (a) ................................................................ 832,772
--------------
1,672,952
--------------
HOTELS, RESTAURANTS & LEISURE - 3.2%
7,000 DineEquity, Inc. (a) ............................................................ 588,910
27,000 Six Flags Entertainment Corp..................................................... 1,004,670
Page 6 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
HOTELS, RESTAURANTS & LEISURE (CONTINUED)
6,000 Wynn Resorts Ltd................................................................. $ 995,220
--------------
2,588,800
--------------
INDUSTRIAL CONGLOMERATES - 2.1%
63,000 General Electric Co. (a) ........................................................ 1,679,580
--------------
INSURANCE - 5.5%
16,500 MetLife, Inc..................................................................... 861,135
104,400 Old Republic International Corp.................................................. 1,795,680
5,600 Prudential Financial, Inc........................................................ 497,056
14,000 Travelers (The) Cos., Inc. (a) .................................................. 1,270,360
--------------
4,424,231
--------------
LEISURE EQUIPMENT & PRODUCTS - 1.1%
18,200 Mattel, Inc...................................................................... 842,114
--------------
MEDIA - 4.5%
96,600 National CineMedia, Inc.......................................................... 1,801,590
91,300 Regal Entertainment Group, Class A (a) .......................................... 1,778,524
--------------
3,580,114
--------------
METALS & MINING - 2.2%
13,000 BHP Billiton Ltd., ADR .......................................................... 886,860
25,300 Freeport-McMoRan Copper & Gold, Inc. (a) ........................................ 877,657
--------------
1,764,517
--------------
MULTI-UTILITIES - 1.0%
12,500 National Grid PLC, ADR .......................................................... 792,000
--------------
OIL, GAS & CONSUMABLE FUELS - 10.2%
9,000 Chevron Corp. (a) ............................................................... 1,101,960
31,700 ConocoPhillips (a) .............................................................. 2,307,760
12,700 Occidental Petroleum Corp. (a) .................................................. 1,205,992
29,800 Royal Dutch Shell PLC, ADR ...................................................... 1,987,660
26,200 Total S.A., ADR ................................................................. 1,580,384
--------------
8,183,756
--------------
PHARMACEUTICALS - 9.7%
33,200 AstraZeneca PLC, ADR ............................................................ 1,898,708
22,300 Johnson & Johnson (a) ........................................................... 2,110,918
36,000 Merck & Co., Inc. (a) ........................................................... 1,793,880
62,200 Pfizer, Inc. (a) ................................................................ 1,973,606
--------------
7,777,112
--------------
REAL ESTATE INVESTMENT TRUSTS - 3.9%
16,100 Digital Realty Trust, Inc........................................................ 760,564
22,100 EPR Properties .................................................................. 1,111,409
17,500 Hospitality Properties Trust .................................................... 475,475
24,800 National Retail Properties, Inc.................................................. 787,400
--------------
3,134,848
--------------
See Notes to Financial Statements Page 7
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
SHARES/
UNITS DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 2.7%
64,300 Intel Corp. (a) ................................................................. $ 1,532,912
15,000 Microchip Technology, Inc........................................................ 649,350
--------------
2,182,262
--------------
SOFTWARE - 1.1%
22,600 Microsoft Corp................................................................... 861,738
--------------
THRIFTS & MORTGAGE FINANCE - 1.4%
76,800 People's United Financial, Inc................................................... 1,162,752
--------------
TOBACCO - 5.4%
48,800 Altria Group, Inc. (a) .......................................................... 1,804,624
18,400 Lorillard, Inc................................................................... 944,472
18,800 Philip Morris International, Inc. (a) ........................................... 1,608,152
--------------
4,357,248
--------------
TRADING COMPANIES & DISTRIBUTORS - 2.3%
33,100 TAL International Group, Inc..................................................... 1,808,584
--------------
TOTAL COMMON STOCKS ............................................................. 67,385,053
(Cost $61,642,763) --------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 2.4%
CAPITAL MARKETS - 2.4%
71,000 Ares Capital Corp................................................................ 1,304,980
19,500 Main Street Capital Corp......................................................... 642,525
--------------
TOTAL COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES ............................ 1,947,505
(Cost $1,842,357) --------------
MASTER LIMITED PARTNERSHIPS - 7.6%
DIVERSIFIED FINANCIAL SERVICES - 0.6%
48,200 KKR Financial Holdings LLC ...................................................... 461,756
--------------
OIL, GAS & CONSUMABLE FUELS - 7.0%
10,500 Alliance Resource Partners, L.P.................................................. 769,335
34,700 Energy Transfer Partners, L.P.................................................... 1,879,352
23,600 Golar LNG Partners, L.P.......................................................... 754,728
8,000 Kinder Morgan Energy Partners, L.P............................................... 655,760
26,000 Teekay Offshore Partners, L.P.................................................... 853,320
14,500 Williams Partners, L.P........................................................... 745,155
--------------
5,657,650
--------------
TOTAL MASTER LIMITED PARTNERSHIPS ............................................... 6,119,406
(Cost $5,729,667) --------------
CLOSED-END FUNDS - 1.5%
DIVERSIFIED FINANCIAL SERVICES - 1.5%
32,300 Kayne Anderson MLP Investment Co................................................. 1,202,529
--------------
TOTAL CLOSED-END FUNDS .......................................................... 1,202,529
(Cost $1,193,299) --------------
Page 8 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 27.7%
AEROSPACE & DEFENSE - 0.1%
$ 100,000 Alliant Techsystems, Term Loan B ................... 3.50% 11/01/20 $ 100,292
--------------
AUTO COMPONENTS - 0.1%
116,667 Metaldyne Co., LLC, USDTerm Loan ................... 5.00% 12/18/18 117,308
--------------
CAPITAL MARKETS - 0.6%
500,000 Nuveen Investments, Inc., Term Loan B .............. 4.16% 05/13/17 494,190
--------------
CHEMICALS - 0.8%
100,000 Chromaflo Technologies Corp., Term Loan B .......... 4.50% 12/02/19 100,000
25,000 Chromaflo Technologies Corp., Term Loan B,
Second Lien ..................................... 8.25% 05/01/20 25,125
500,000 Huntsman International, LLC, 2013-2, Additional
Term Loan ....................................... 3.75% 01/31/21 500,210
--------------
625,335
--------------
COMMERCIAL SERVICES & SUPPLIES - 0.9%
40,741 Garda World Security, Delayed Draw Term
Loan (d) ........................................ 0.00%(e) 10/18/20 40,919
159,259 Garda World Security, Term Loan B .................. 4.00% 10/18/20 159,957
498,744 SGS International, Inc., Term Loan ................. 4.25% 10/17/19 499,577
--------------
700,453
--------------
COMMUNICATIONS EQUIPMENT - 0.6%
498,744 Alcatel-Lucent USA, Inc., Term Loan C .............. 5.75% 01/30/19 502,798
--------------
COMPUTERS & PERIPHERALS - 0.5%
132,075 Dell International, Term Loan B..................... 4.50% 04/29/20 130,695
250,000 Dell International, Term Loan C..................... 3.75% 10/29/18 249,188
--------------
379,883
--------------
CONTAINERS & PACKAGING - 1.3%
225,000 Exopack Holding Corp., Term Loan B ................. 5.25% 04/30/19 228,281
293,239 Filtration Group, Initial Term Loan ................ 4.50% 11/21/20 295,315
25,000 Filtration Group, Term Loan, Second Lien ........... 8.25% 11/21/21 25,406
498,750 Pact Group, Term Loan............................... 3.75% 05/29/20 494,077
--------------
1,043,079
--------------
DISTRIBUTORS - 0.1%
100,000 MRC Global, Inc., Term Loan ........................ 5.00% 11/08/19 100,719
--------------
DIVERSIFIED CONSUMER SERVICES - 0.8%
498,744 Asurion Corp., Term Loan B1 ........................ 4.50% 05/24/19 498,400
150,000 Coinmach Services, Incremental Term Loan ........... 4.25% 11/14/19 149,671
--------------
648,071
--------------
DIVERSIFIED FINANCIAL SERVICES - 1.4%
250,000 Duff & Phelps Corp., Initial Term Loan ............. 4.50% 04/23/20 249,452
500,000 First Data Corp., 2017 New Dollar Term Loan ........ 4.17% 03/24/17 501,070
100,000 Fly Funding II S.A.R.L., Loan ...................... 4.50% 08/09/19 100,563
250,000 SAM Finance Lux S.A.R.L., US Term Loan ............. 4.25% 12/17/20 250,000
--------------
1,101,085
--------------
See Notes to Financial Statements Page 9
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.6%
$ 500,000 Cincinnati Bell, Inc., Term Loan B ................. 4.00% 09/10/20 $ 500,000
--------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - 0.6%
500,000 Allflex Holdings III, Term Loan, First Lien ........ 4.25% 07/18/20 502,125
--------------
FOOD & STAPLES RETAILING - 0.8%
83,333 Arby's Restaurant Group, Inc., Term Loan ........... 5.00% 11/15/20 83,646
523,744 BJ's Wholesale Club, Inc., Replacement Loan,
First Lien ...................................... 4.50% 09/26/19 525,268
--------------
608,914
--------------
FOOD PRODUCTS - 0.4%
100,000 Del Monte Consumer Products, Loans ................. 4.25% 01/31/21 100,500
200,000 Dole Food Company, Inc., Term Loan B ............... 4.50% 11/01/18 200,888
--------------
301,388
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 1.9%
493,750 Carestream Health, Inc., Term Loan (First
Lien 2013) ...................................... 5.00% 06/07/19 498,954
498,744 DJO Finance, LLC, Term Loan B ...................... 4.75% 09/15/17 503,607
500,000 Sage Products, Inc., Replacement Term Loan
(First Lien) .................................... 4.25% 12/13/19 502,190
--------------
1,504,751
--------------
HEALTH CARE PROVIDERS & SERVICES - 1.7%
500,000 CHG Healthcare Services, Term Loan, First Lien ..... 4.25% 11/19/19 502,030
250,000 Gentiva Health Services, Inc, Initial Term Loan C... 5.75% 10/18/18 246,875
83,333 Heartland Dental Care, Term B-1
Loans ........................................... 5.50% 12/21/18 83,437
500,000 U.S. Renal Care, Inc., First Lien Term Loan B-1 .... 5.25% 07/03/19 504,375
--------------
1,336,717
--------------
HEALTH CARE TECHNOLOGY - 0.3%
250,000 Healthport, Term Loan .............................. 5.25% 10/04/19 251,250
--------------
HOTELS, RESTAURANTS & LEISURE - 4.1%
500,000 Bally Technologies, Inc., Term Loan B .............. 4.25% 11/25/20 502,915
250,000 Caesars Entertainment Resort Properties, LLC,
Term Loan B ..................................... 7.00% 10/11/20 245,470
506,714 City Center Holdings, LLC, First Lien Term
Loan B .......................................... 5.00% 10/16/20 512,258
494,452 Focus Brands, Inc., Refinancing Term Loan
(First Lien) .................................... 4.25%-5.50% 02/21/18 491,570
493,421 Hilton Worldwide, Term Loan ........................ 4.00% 09/23/20 494,797
500,000 ROC Finance, LLC, Term Loan B ...................... 5.00% 06/20/19 478,440
500,000 Scientific Games International, Inc., Initial
Term Loan ....................................... 4.25% 10/18/20 499,750
100,000 Station Casinos, Inc., Term Loan B ................. 5.00% 03/02/20 101,021
--------------
3,326,221
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.3%
200,000 Calpine Corp., Delayed Draw Term Loan .............. 4.00% 10/31/20 201,166
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
INSURANCE - 0.4%
$ 96,939 Amwins Group, LLC, New Term Loan (First Lien) ...... 5.00% 09/06/19 $ 97,333
225,000 USI, Inc., Initial Term Loan ....................... 5.00% 12/27/19 225,632
--------------
322,965
--------------
LEISURE EQUIPMENT & PRODUCTS - 0.6%
500,000 Live Nation Entertainment, Inc., Term Loan B-1 ..... 3.50% 08/17/20 500,250
--------------
MACHINERY - 0.3%
250,000 Husky Injection Molding System Ltd., Term Loan ..... 4.25% 06/30/18 251,625
--------------
MEDIA - 3.2%
500,000 Alpha Topco, Ltd., Term Loan B ..................... 4.50% 04/30/19 504,610
250,000 Clear Channel Communications, Inc., Term Loan B .... 3.81% 01/29/16 240,625
39,683 Mission Broadcasting, Inc., Term Loan B2 ........... 3.75% 10/01/20 39,782
250,000 NEP Holdco, Inc., Refinanced New Term Loan
(First Lien) .................................... 4.75% 01/22/20 250,625
7,937 Nexstar Broadcasting, Inc., Term Loan B2 ........... 3.75% 09/30/20 7,956
1,000,000 Tribune Co., Term Loan ............................. 4.00% 12/27/20 995,310
500,000 Univision Communications, Inc., 2013 Converted
Extended First Lien Term Loan ................... 4.50% 03/01/20 501,940
--------------
2,540,848
--------------
OIL, GAS & CONSUMABLE FUELS - 0.3%
250,000 Fieldwood Energy, LLC, Closing Date Loan ........... 3.88% 09/28/18 251,522
--------------
PHARMACEUTICALS - 1.5%
213,636 Akorn, Inc., Loan .................................. 4.50% 01/31/21 214,305
500,000 Par Pharmaceutical, Inc., Term Loan B-1 ............ 4.25% 09/30/19 502,125
498,744 Valeant Pharmaceuticals International, Inc., Series E
Tranche B Term Loan ............................. 4.50% 08/05/20 504,145
--------------
1,220,575
--------------
PROFESSIONAL SERVICES - 0.4%
100,000 CPA Global, Initial Dollar Term Loans .............. 4.50% 12/03/20 100,375
208,360 Information Resources, Inc., Term Loan ............. 4.75% 09/30/20 210,184
--------------
310,559
--------------
REAL ESTATE INVESTMENT TRUSTS - 0.6%
480,063 iStar Financial, Inc., Term Loan ................... 4.50% 10/15/17 482,166
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 0.2%
150,000 Starwood Property Trust, Term Loan ................. 3.50% 04/17/20 149,344
--------------
SOFTWARE - 1.3%
498,750 Blue Coat Systems, Inc., New Term Loan ............. 4.50% 05/31/19 500,620
500,000 BMC Software, Initial Term Loan .................... 5.00% 09/10/20 502,500
50,000 Genesys, Series 2 Term Loan Commitment ............. 4.50% 11/13/20 49,907
25,000 Genesys, Series 2 Term Loan ........................ 4.50% 11/13/20 24,953
--------------
1,077,980
--------------
See Notes to Financial Statements Page 11
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
SPECIALTY RETAIL - 1.0%
$ 100,000 Britax Group, First Lien Term Loan B ............... 4.50% 10/07/20 $ 100,321
500,000 Neiman Marcus Group, Inc., Term Loan ............... 5.00% 10/25/20 503,000
187,500 Serta Simmons Holdings, LLC, Term Loan B ........... 4.25% 10/01/19 188,151
--------------
791,472
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS ....................................... 22,245,051
(Cost $22,218,796) --------------
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
$25 PAR PREFERRED SECURITIES - 3.3%
CAPITAL MARKETS - 0.8%
29,300 Goldman Sachs Group, Inc............................ 5.95% (f) 644,014
--------------
COMMERCIAL BANKS - 0.8%
31,500 PNC Financial Services Group, Inc., Series Q ....... 5.38% (f) 646,065
--------------
CONSUMER FINANCE - 1.2%
42,800 Discover Financial Services, Series B .............. 6.50% (f) 998,524
--------------
MARINE - 0.5%
14,700 Seaspan Corp., Series D ............................ 7.95% (f) 367,500
--------------
TOTAL $25 PAR PREFERRED SECURITIES .............................................. 2,656,103
(Cost $2,922,415) --------------
$50 PAR PREFERRED SECURITIES - 1.1%
REAL ESTATE INVESTMENT TRUSTS - 1.1%
16,300 Weyerhaeuser Co., Series A ......................... 6.38% 07/01/16 893,566
--------------
TOTAL $50 PAR PREFERRED SECURITIES .............................................. 893,566
(Cost $841,149) --------------
TOTAL INVESTMENTS (g) - 127.4% .................................................. 102,449,213
(Cost $96,390,446) --------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.3%)
Apple, Inc. Call
10 @ $545.00 due December 2013 ..................................................... (18,650)
--------------
BHP Billiton Ltd. Call
70 @ 72.50 due December 2013 ..................................................... (1,190)
--------------
BlackRock, Inc. Call
20 @ 320.00 due December 2013 ..................................................... (1,700)
--------------
Capital One Financial Corp. Call
60 @ 72.50 due December 2013 ..................................................... (3,780)
--------------
Page 12 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
NUMBER OF
CONTRACTS DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
CALL OPTIONS WRITTEN (CONTINUED)
Citigroup, Inc. Call
75 @ $ 52.50 due December 2013.................................................... $ (9,150)
--------------
ConocoPhillips Call
175 @ 75.00 due December 2013.................................................... (6,475)
--------------
Dow Chemical (The) Co. Call
175 @ 42.00 due December 2013.................................................... (2,450)
--------------
Freeport-McMoRan Copper & Gold, Inc. Call
150 @ 38.00 due December 2013 ................................................... (1,050)
--------------
General Electric Co. Call
600 @ 28.00 due December 2013 ................................................... (3,600)
--------------
Honeywell International, Inc. Call
50 @ 90.00 due December 2013 ................................................... (3,250)
--------------
JPMorgan Chase & Co. Call
150 @ 57.50 due December 2013 ................................................... (13,050)
--------------
MetLife, Inc. Call
80 @ 55.00 due December 2013 ................................................... (1,680)
--------------
Microsoft Corp. Call
226 @ 39.00 due December 2013 ................................................... (11,300)
--------------
Occidental Petroleum Corp. Call
65 @ 100.00 due December 2013 ................................................... (3,510)
--------------
Prudential Financial, Inc. Call
56 @ 90.00 due December 2013 ................................................... (8,960)
--------------
QUALCOMM, Inc. Call
75 @ 75.00 due December 2013 ................................................... (4,725)
--------------
S&P 500 Index Calls (h)
50 @ 1,825.00 due December 2013 ................................................... (46,000)
70 @ 1,835.00 due December 2013 ................................................... (42,700)
50 @ 1,840.00 due December 2013 ................................................... (24,500)
--------------
(113,200)
--------------
Travelers (The) Cos., Inc. Call
50 @ 90.00 due December 2013 ................................................... (7,250)
--------------
Verizon Communications, Inc. Call
175 @ 52.50 due December 2013 ................................................... (1,050)
--------------
Wells Fargo & Co. Call
100 @ 43.00 due December 2013 ................................................... (12,900)
--------------
Wynn Resorts Ltd. Call
60 @ 167.00 due December 2013 ................................................... (18,900)
--------------
TOTAL CALL OPTIONS WRITTEN ...................................................... (247,820)
(Premiums received $222,338) --------------
OUTSTANDING LOAN - (22.4%) ...................................................... (18,000,000)
NET OTHER ASSETS AND LIABILITIES - (4.7%) ....................................... (3,805,262)
--------------
NET ASSETS - 100.0% ............................................................. $ 80,396,131
==============
See Notes to Financial Statements Page 13
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
(a) All or a portion of this security serves as collateral on the
outstanding loan.
(b) Senior Floating-Rate Loan Interests ("Senior Loans") in which the
Fund invests pay interest at rates which are periodically
predetermined by reference to a base lending rate plus a premium.
These base lending rates are generally (i) the lending rate offered
by one or more major European banks, such as the London Inter-Bank
Offered Rate ("LIBOR"), (ii) the prime rate offered by one or more
United States banks or (iii) the certificate of deposit rate.
Certain Senior Loans are subject to a LIBOR floor that establishes a
minimum LIBOR rate. The interest rate shown reflects the rate in
effect at November 30, 2013. When a range of rates is disclosed the
Fund holds more than one contract within the same tranche at varying
rates.
(c) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior
Loans may be substantially less than the stated maturities shown.
(d) Delayed Draw Loan (all or a portion of which is unfunded). See Note
2D - Unfunded Loan Commitments in the Notes to Financial Statements.
(e) Represents commitment fee rate on unfunded loan commitment. The
commitment fee rate steps up at predetermined time intervals.
(f) Perpetual maturity.
(g) Aggregate cost for federal income tax purposes is $96,620,683. As of
November 30, 2013, the aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost
was $7,338,120 and the aggregate gross unrealized depreciation for
all securities in which there was an excess of tax cost over value
was $1,509,590.
(h) Call options on securities indices were written on a portion of the
common stock positions that were not used to cover call options
written on individual equity securities held in the Fund's
portfolio.
ADR American Depositary Receipt
---------------------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of November 30,
2013 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 11/30/2013 PRICES INPUTS INPUTS
------------------------------------------------ -------------- ------------- ------------ ------------
Common Stocks*.................................. $ 67,385,053 $ 67,385,053 $ -- $ --
Common Stocks - Business Development
Companies*................................... 1,947,505 1,947,505 -- --
Master Limited Partnerships*.................... 6,119,406 6,119,406 -- --
Closed-End Funds*............................... 1,202,529 1,202,529 -- --
Senior Floating-Rate Loan Interests*............ 22,245,051 -- 22,245,051 --
$25 Par Preferred Securities*................... 2,656,103 2,656,103 -- --
$50 Par Preferred Securities*................... 893,566 893,566 -- --
-------------- ------------- ------------ ------------
Total Investments............................... $ 102,449,213 $ 80,204,162 $ 22,245,051 $ --
============== ============= ============ ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
11/30/2013 PRICES INPUTS INPUTS
-------------- ------------- ------------ ------------
Call Options Written............................ $ (247,820) $ (247,820) $ -- $ --
============== ============= ============ ============
* See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at November 30, 2013.
Page 14 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2013
ASSETS:
Investments, at value
(Cost $96,390,446) .......................................................................... $ 102,449,213
Cash........................................................................................... 727,399
Receivables:
Investment securities sold................................................................. 367,049
Dividends.................................................................................. 302,228
Interest................................................................................... 59,920
Dividend reclaims.......................................................................... 16,686
Prepaid expenses .............................................................................. 3,738
-------------
Total Assets............................................................................... 103,926,233
-------------
LIABILITIES:
Outstanding loan .............................................................................. 18,000,000
Options written, at value (Premiums received $222,338) ........................................ 247,820
Payables:
Investment securities purchased............................................................ 5,096,023
Investment advisory fees................................................................... 78,575
Audit and tax fees......................................................................... 53,500
Interest and fees on loan.................................................................. 13,448
Printing fees.............................................................................. 13,332
Administrative fees........................................................................ 8,624
Custodian fees............................................................................. 8,135
Legal fees................................................................................. 4,344
Trustees' fees and expenses................................................................ 3,237
Transfer agent fees........................................................................ 2,142
Financial reporting fees................................................................... 771
Other liabilities 151
-------------
Total Liabilities.......................................................................... 23,530,102
-------------
NET ASSETS .................................................................................... $ 80,396,131
=============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................... $ 141,663,471
Par value ..................................................................................... 82,595
Accumulated net investment income (loss) ...................................................... (189,271)
Accumulated net realized gain (loss) on investments and options ............................... (67,193,949)
Net unrealized appreciation (depreciation) on investments and options ......................... 6,033,285
-------------
NET ASSETS .................................................................................... $ 80,396,131
=============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .......................... $ 9.73
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 8,259,517
=============
See Notes to Financial Statements Page 15
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2013
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $47,165).......................................... $ 2,712,641
Interest....................................................................................... 85,022
Other.......................................................................................... 12,540
-------------
Total investment income..................................................................... 2,810,203
-------------
EXPENSES:
Investment advisory fees....................................................................... 779,348
Administrative fees............................................................................ 94,494
Printing fees.................................................................................. 78,145
Audit and tax fees............................................................................. 52,982
Legal fees..................................................................................... 30,844
Transfer agent fees............................................................................ 26,027
Interest and fees on loan...................................................................... 19,476
Trustees' fees and expenses.................................................................... 18,500
Custodian fees................................................................................. 9,251
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 39,398
-------------
Total expenses.............................................................................. 1,157,715
-------------
NET INVESTMENT INCOME (LOSS)................................................................... 1,652,488
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 8,061,400
Written option transactions (a)............................................................. (1,240,312)
-------------
Net realized gain (loss)....................................................................... 6,821,088
-------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 5,719,889
Written options held (a).................................................................... 144,692
-------------
Net change in unrealized appreciation (depreciation)........................................... 5,864,581
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 12,685,669
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 14,338,157
=============
(a) Primary risk exposure is equity option contracts.
Page 16 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
11/30/2013 11/30/2012
------------ ------------
Net investment income (loss)....................................................... $ 1,652,488 $ 4,192,874
Net realized gain (loss)........................................................... 6,821,088 (2,923,384)
Net change in unrealized appreciation (depreciation)............................... 5,864,581 (53,989)
Net increase from payment by the former Sub-Advisor................................ -- 12,651
------------ ------------
Net increase (decrease) in net assets resulting from operations.................... 14,338,157 1,228,152
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (2,713,901) (4,223,907)
Return of capital.................................................................. (2,489,595) (1,722,945)
------------ ------------
Total distributions to shareholders................................................ (5,203,496) (5,946,852)
------------ ------------
Total increase (decrease) in net assets............................................ 9,134,661 (4,718,700)
NET ASSETS:
Beginning of period................................................................ 71,261,470 75,980,170
------------ ------------
End of period...................................................................... $ 80,396,131 $ 71,261,470
============ ============
Accumulated net investment income (loss) at end of period.......................... $ (189,271) $ (192,427)
============ ============
COMMON SHARES:
Common Shares at end of period..................................................... 8,259,517 8,259,517
============ ============
See Notes to Financial Statements Page 17
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.................... $ 14,338,157
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used in operating activities:
Purchases of investments........................................................ (162,840,794)
Sales, maturities and paydowns of investments................................... 147,857,076
Proceeds from written options................................................... 2,134,494
Amount paid to close written options............................................ (3,197,752)
Return of capital received from investments in MLPs............................. 420,104
Net amortization/accretion of premiums/discounts on investments................. 4,673
Net realized gain/loss on investments and written options....................... (6,821,088)
Net change in unrealized appreciation/depreciation on investments and
written options............................................................... (5,864,581)
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable................................................. (59,920)
Decrease in dividends receivable................................................ 21,282
Decrease in prepaid expenses.................................................... 532
Increase in interest and fees on loan payable................................... 13,448
Increase in investment advisory fees payable.................................... 20,848
Increase in audit and tax fees payable.......................................... 19,200
Decrease in legal fees payable.................................................. (93)
Decrease in printing fees payable............................................... (246)
Increase in administrative fees payable......................................... 1,124
Increase in custodian fees payable.............................................. 1,787
Decrease in transfer agent fees payable......................................... (3,739)
Decrease in Trustees' fees and expenses payable................................. (54)
Decrease in other liabilities................................................... (3,924)
--------------
CASH USED IN OPERATING ACTIVITIES.................................................. $ (13,959,466)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income................. (2,713,901)
Distributions to Common Shareholders from return of capital..................... (2,489,595)
Proceeds from borrowing......................................................... 18,000,000
--------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES........................................ 12,796,504
--------------
Decrease in cash................................................................... (1,162,962)
Cash at beginning of period........................................................ 1,890,361
--------------
CASH AT END OF PERIOD.............................................................. $ 727,399
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees.................................. $ 6,028
==============
Page 18 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
11/30/2013 (a) 11/30/2012 11/30/2011 11/30/2010 11/30/2009
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period ........ $ 8.63 $ 9.20 $ 9.93 $ 10.48 $ 10.61
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................ 0.20 0.51 0.84 (b) 1.15 (b) 1.90 (b)
Net realized and unrealized gain (loss) ..... 1.53 (0.36) (0.56) (0.45) (0.20)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.73 0.15 0.28 0.70 1.70
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ....................... (0.33) (0.51) (0.78) (1.21) (1.84)
Return of capital ........................... (0.30) (0.21) (0.24) (0.21) --
---------- ---------- ---------- ---------- ----------
Total distributions to Common Shareholders... (0.63) (0.72) (1.02) (1.42) (1.84)
---------- ---------- ---------- ---------- ----------
Premiums from shares sold in Common Share
offering .................................. -- -- 0.01 0.17 0.01
---------- ---------- ---------- ---------- ----------
Net asset value, end of period .............. $ 9.73 $ 8.63 $ 9.20 $ 9.93 $ 10.48
========== ========== ========== ========== ==========
Market value, end of period ................. $ 8.55 $ 7.69 $ 8.41 $ 10.47 $ 12.10
========== ========== ========== ========== ==========
Total return based on net asset value (c) ... 21.52% 2.24% (d) 2.81% 7.59% 18.44%
========== ========== ========== ========== ==========
Total return based on market value (c) ...... 19.84% (0.34)% (10.96)% (1.56)% 80.51%
========== ========== ========== ========== ==========
--------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........ $ 80,396 $ 71,261 $ 75,980 $ 80,302 $ 76,196
Ratio of total expenses to average net
assets ................................... 1.52% 1.48% 1.60% 1.66% 1.89%
Ratio of total expenses to average net assets
excluding interest expense ................ 1.50% 1.48% 1.60% 1.66% 1.89%
Ratio of net investment income (loss) to
average net assets ........................ 2.18% 5.60% 8.42% 11.34% 19.31%
Portfolio turnover rate ..................... 184% 790% 1,297% 1,516% 2,030%
INDEBTEDNESS:
Total loan outstanding (in 000's) ........... $ 18,000 N/A N/A N/A N/A
Asset coverage per $1,000 of
indebtedness (e) .......................... $ 5,466 N/A N/A N/A N/A
--------------------
(a) On June 9, 2013, the Fund's Board of Trustees approved an interim and a
new sub-advisory agreement with Chartwell Investment Partners, L.P., which
became the Fund's sub-advisor on July 1, 2013, under the interim
sub-advisory agreement. On September 16, 2013, the shareholders voted to
approve the new sub-advisory agreement.
(b) Based on average shares outstanding.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) The Fund received a reimbursement from the former sub-advisor in the
amount of $12,651. The reimbursement from the sub-advisor represents less
than $0.01 per share and had no effect on the Fund's total return.
(e) Calculated by taking the Fund's total assets less the Fund's liabilities
(not including the loan outstanding), and dividing by the outstanding loan
balance in 000's.
See Notes to Financial Statements Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013
1. ORGANIZATION
First Trust Dividend and Income Fund (formerly known as First Trust Active
Dividend Income Fund) (the "Fund") is a diversified, closed-end management
investment company organized as a Massachusetts business trust on June 14, 2007
and is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund trades
under the ticker symbol FAV on the New York Stock Exchange ("NYSE"). Effective
July 1, 2013, the Fund's name was changed to its current name and Chartwell
Investment Partners, L.P. ("Sub-Advisor" or "Chartwell") began serving as
sub-advisor of the Fund.
The Fund's primary investment objective is to seek a high level of current
income. It has a secondary objective of capital appreciation. The Fund seeks to
achieve its objectives by investing at least 80% of its Managed Assets (as
defined below) in a diversified portfolio of dividend-paying, multi-cap equity
securities, that Chartwell believes offer the potential for attractive income
and/or capital appreciation, and debt securities and senior, secured floating
rate loans ("Senior Loans")1 that First Trust believes offer the potential for
attractive income and/or capital appreciation. The Fund's portfolio will consist
of two components: (1) the "Equity Component," which will consist primarily of
equity securities of both U.S. and non-U.S. issuers of any market capitalization
that are readily traded on a registered U.S. national securities exchange
("Equity Securities"); and (2) the "Senior Loan/High Yield Debt Component." The
Equity Securities in which the Fund may invest will include common stocks,
preferred securities, convertible securities, American Depositary Receipts,
including American Depositary Shares, European Depositary Receipts, Global
Depositary Receipts and warrants, all of which will generally trade on a
registered U.S. national securities exchange. In addition, Equity Securities
will also include (including for purposes of the 80% test set forth above)
investments in Real Estate Investment Trusts, Master Limited Parternships and
investment companies, including Exchange Traded Funds and business development
companies. The Senior Loan/High Yield Debt Component will primarily consist of
(i) Senior Loans and (ii) debt securities that are rated below investment grade
(i.e., "junk bonds") or unrated at the time of purchase and deemed to be of
comparable credit quality. The Fund may invest up to 25% of its Managed Assets
in U.S. dollar-denominated Equity Securities of non-U.S. issuers. On an ongoing
and consistent basis, the Fund expects to write (sell) covered call options on
equity indices and/or Equity Securities within the Equity Component. The Fund
will normally write (sell) covered call options against equity indices and/or
Equity Securities with strike prices and expiration dates that are collectively
intended to provide risk/reward characteristics that are consistent with the
Fund's investment objectives. Prior to July 1, 2013, the Fund pursued its
investment objectives by investing at least 80% of its managed assets in a
diversified portfolio of dividend-paying multi-cap equity securities of both
U.S. and non-U.S. issuers that the Fund's Sub-Advisor believed offered the
potential for attractive income and/or capital appreciation. Also, on an ongoing
and consistent basis, the Fund wrote call options on stock indices and single
stocks on up to 50% of the Fund's portfolio. Managed Assets are defined as the
total asset value of the Fund minus the sum of the Fund's liabilities other than
the principal amount of borrowings. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund may not be appropriate for all
investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. Domestic debt securities
and foreign securities are priced using data reflecting the earlier closing of
the principal markets for those securities. The NAV per Common Share is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid, and any borrowings of the Fund) by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value, or in the absence of
market value with respect to any portfolio securities, at fair value in
accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Market quotations and prices
used to value the Fund's investments are primarily obtained from third party
pricing services. The Fund's securities will be valued as follows:
Common stocks, master limited partnerships ("MLPs") and other securities
listed on any national or foreign exchange (excluding the NASDAQ Stock
Market LLC ("NASDAQ") and the London Stock Exchange Alternative Investment
Market ("AIM")) are valued at the last sale price on the exchange on which
they are principally traded or, for NASDAQ and AIM securities, the
official closing price. Securities traded on more than one securities
exchange are valued at the last sale price or official closing price, as
applicable, at the close of the securities exchange representing the
principal market for such securities.
The Senior Loans in which the Fund invests are not listed on any
securities exchange or board of trade. Senior Loans are typically bought
and sold by institutional investors in individually negotiated private
transactions that function in many respects like an over-the-counter
secondary market, although typically no formal market-makers exist. This
market, while having grown substantially since
-------------------
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013
its inception, generally has fewer trades and less liquidity than the secondary
market for other types of securities. Some Senior Loans have few or no trades,
or trade infrequently, and information regarding a specific Senior Loan may not
be widely available or may be incomplete. Accordingly, determinations of the
value of Senior Loans may be based on infrequent and dated information. Because
there is less reliable, objective data available, elements of judgment may play
a greater role in valuation of Senior Loans than for other types of securities.
Typically, Senior Loans are valued using information provided by a third party
pricing service. The third party pricing service primarily uses over-the-counter
pricing from dealer runs and broker quotes from indicative sheets to value the
Senior Loans.
Securities traded in an over-the-counter market are valued at the mean of
the bid and asked prices, if available, and otherwise at the closing bid
price.
Exchange-traded options contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded options contracts are valued at the mean
between the most recent bid and asked prices.
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate at fair value. These securities generally include, but are not limited
to, restricted securities (securities which may not be publicly sold without
registration under the Securities Act of 1933, as amended) for which a pricing
service is unable to provide a market price; securities whose trading has been
formally suspended; a security whose market 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 NAV 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 Fund might reasonably expect to receive
for the security upon its current sale. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from 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,
including, but not limited to the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
Fair valuation of a Senior Loan is based on the consideration of all available
information, including, but not limited to the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of the security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry;
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013
12) issuer's competitive position within the industry;
13) issuer's ability to access additional liquidity through public
and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of November 30, 2013, is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
The goal of the option overlay strategy is to generate additional income from
option premiums in an attempt to enhance the distributions payable to
shareholders and reduce overall portfolio volatility. The Fund generally will
write "at-the-money" or "out-of-the-money" call options on stock indices and
single stocks. Through June 30, 2013, the option strategy was managed by the
Alternatives Group at First Trust, the investment advisor to the Fund. As of
July 1, 2013 the option strategy is managed by Chartwell. The Fund will not
write (sell) "naked" or uncovered options. When the Fund writes (sells) an
option, an amount equal to the premium received by the Fund is included in
"options written, at value" on the Statement of Assets and Liabilities. Options
are marked-to-market daily and their value will be affected by changes in the
value and dividend rates of the underlying equity securities, changes in
interest rates, changes in the actual or perceived volatility of the securities
markets and the underlying equity securities and the remaining time to the
options' expiration. The value of options may also be adversely affected if the
market for the options becomes less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If a single stock option written (sold) by the
Fund is exercised, the Fund would be obligated to deliver the underlying equity
security to the option holder upon payment of the strike price. In this case,
the option premium received by the Fund will be added to the amount realized on
the sale of the underlying security for purposes of determining gain or loss.
Index options, if exercised, are settled in cash and therefore the Fund never
has to deliver any physical securities. If the price of the underlying equity
security is less than the option's strike price, the option will likely expire
without being exercised. The option premium received by the Fund will, in this
case, be treated as short-term capital gain on the expiration date of the
option. The Fund may also elect to close out its position in an option prior to
its expiration by purchasing an option of the same series as the option written
(sold) by the Fund. Gain or loss on options is presented separately as "Net
realized gain (loss) on written options" on the Statement of Operations.
Single stock options that the Fund writes (sells) give the option holder the
right, but not the obligation, to purchase a security from the Fund at the
strike price on or prior to the option's expiration date. The purchaser of an
index option written by the Fund has the right to any appreciation in the cash
value of the index over the strike price on the expiration date. The ability to
successfully implement the writing (selling) of covered call options depends on
the ability of the Sub-Advisor to predict pertinent market movements, which
cannot be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market value, which may limit the amount of appreciation the Fund can realize on
an investment, or may cause the Fund to hold a security that it might otherwise
sell. As the writer (seller) of a covered option, the Fund foregoes, during the
option's life, the opportunity to profit from increases in the market value of
the security covering the option above the sum of the premium and the strike
price of the option, but has retained the risk of loss should the price of the
underlying security decline. The writer (seller) of an option has no control
over the time when it may be required to fulfill its obligation as a writer
(seller) of the option. Once an option writer (seller) has received an exercise
notice, it cannot effect a closing purchase transaction in order to terminate
its obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Market premiums and discounts are amortized over the
expected life of each respective borrowing.
Distributions received from the Fund's investments in MLPs generally are
comprised of return of capital from the MLP to the extent of the cost basis of
such MLP investments. Cumulative distributions received in excess of the Fund's
cost basis in an MLP generally are recorded as capital gain. For the fiscal year
ended November 30, 2013, distributions of $420,104 received from MLPs have been
reclassified as return of capital. The cost basis of applicable MLPs has been
reduced accordingly.
D. UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund had unfunded delayed draw loan commitments of
$40,741 as of November 30, 2013.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Level dividend distributions are declared and paid quarterly or as the Board of
Trustees may determine from time to time. If, for any quarterly distribution,
net investment company taxable income, if any (which term includes net
short-term capital gain), as determined as of the close of the Fund's taxable
year, is less than the amount of the distribution, the difference will generally
be a tax-free return of capital distributed from the Fund's assets.
Distributions of any net long-term capital gains earned by the Fund are
distributed at least annually. Distributions will automatically be reinvested
into additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan
unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future. Permanent differences
incurred during the fiscal year ended November 30, 2013, primarily as a result
of book/tax treatment of sale of MLP investments, have been reclassified at year
end to reflect an increase in accumulated net investment income (loss) by
$1,064,569, an increase in accumulated net realized gain (loss) on investments
by $118,278 and a decrease to paid-in capital of $1,182,847.
The tax character of distributions paid during the fiscal years ended November
30, 2013 and 2012 was as follows:
Distributions paid from: 2013 2012
Ordinary income.................................. $ 2,713,901 $ 4,223,907
Capital gain..................................... -- --
Return of capital................................ 2,489,595 1,722,945
As of November 30, 2013 the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income.................... $ --
Undistributed capital gains...................... --
------------
Total undistributed earnings..................... --
Accumulated capital and other losses............. (67,087,832)
Net unrealized appreciation (depreciation)....... 5,811,284
------------
Total accumulated earnings (losses).............. 61,276,548)
Other ........................................... (73,387)
Paid-in capital.................................. 141,746,066
------------
Net assets....................................... $ 80,396,131
============
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013
F. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward for
up to eight years and treated as short-term losses. As a transition rule, the
Act requires that post-enactment net capital losses be used before pre-enactment
net capital losses. During the taxable year ended November 30, 2013, the Fund
utilized pre-enactment capital loss carryforwards in the amount of $1,249,755
and post-enactment capital loss carryforwards in the amount of $3,730,263 for
federal income tax purposes. At November 30, 2013, the Fund had pre-enactment
capital losses for federal income tax purposes of $67,069,191 expiring as
follows and no non-expiring post-enactment capital loss carryforwards:
EXPIRATION DATE AMOUNT
November 30, 2016 $ 42,833,814
November 30, 2017 17,263,318
November 30, 2018 5,877,626
November 30, 2019 1,094,433
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended November 30, 2013, the Fund
intends to elect to defer net realized capital losses in the amount of $18,641.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2010, 2011,
2012 and 2013 remain open to federal and state audit. As of November 30, 2013,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
G. EXPENSES:
The Fund will pay all expenses directly related to its operations.
H. ACCOUNTING PRONOUNCEMENT:
In December 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). This disclosure requirement is intended to help
investors and other financial statement users better assess the effect or
potential effect of offsetting arrangements on a fund's financial position. ASU
2011-11 requires entities to disclose both gross and net information about both
instruments and transactions eligible for offset on the Statement of Assets and
Liabilities, and disclose instruments and transactions subject to master netting
or similar agreements. In addition, in January 2013, FASB issued Accounting
Standards Update No. 2013-1 "Clarifying the Scope of Offsetting Assets and
Liabilities" ("ASU 2013-1"), specifying which transactions are subject to
offsetting disclosures. The scope of the disclosure requirements is limited to
derivative instruments, repurchase agreements and reverse repurchase agreements,
and securities borrowing and securities lending transactions. ASU 2011-11 and
ASU 2013-1 are effective for financial statements with fiscal years beginning on
or after January 1, 2013, and interim periods within those fiscal years.
Management is currently evaluating the impact of the updated standards on the
Fund's financial statements, if any.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Prior to July 1, 2013, Aviance Capital Management, LLC ("Aviance") served as the
Fund's sub-advisor and managed the Fund's portfolio subject to First Trust's
supervision. Aviance received a monthly sub-advisory fee calculated at an annual
rate of 0.50% of the Fund's Managed Assets that was paid by First Trust out of
its investment advisory fee.
During the first seven months of the time period covered by this report, FTIA
Holdings, LLC, an affiliate of the Advisor, held a 28% ownership interest in
Aviance. On June 28, 2013, FTIA Holdings, LLC divested its 28% interest in
Aviance.
During the year ended November 30, 2012, the Fund received a payment from the
former Sub-Advisor of $12,651 in connection with a trade error.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013
Effective July 1, 2013, the Board of Trustees appointed Chartwell as sub-advisor
pursuant to an interim investment sub-advisory agreement. A special shareholder
meeting of the Fund to vote on a proposal to approve a new investment
sub-advisory agreement was held on September 16, 2013, at which time the new
investment sub-advisory agreement with Chartwell was approved by the Fund's
shareholders. (See Additional Information - Submission of Matters to a Vote of
Shareholders.)
Chartwell serves as the Fund's sub-advisor and manages the Fund's equity
component of the portfolio subject to First Trust's supervision. The Sub-Advisor
receives a monthly sub-advisory fee calculated at an annual rate of 0.50% of the
Fund's Managed Assets allocated to the Sub-Advisor that is paid by First Trust
out of its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
chairman will serve two-year terms until December 31, 2013 before rotating to
serve as chairman of another committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee Chairman will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, other than U.S.
government obligations and short-term obligations, for the year ended November
30, 2013 were $162,874,561 and $143,359,570, respectively.
Written option activity for the Fund for the fiscal year to date period
(December 1, 2012 through November 30, 2013) was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-----------------------------------------------------------------------------
Options outstanding at November 30, 2012... 140 $ 111,751
Options Written............................ 19,591 2,134,494
Options Expired............................ (9,764) (518,142)
Options Exercised.......................... (1,515) (66,467)
Options Closed............................. (5,860) (1,439,298)
--------- -----------
Options outstanding at November 30, 2013... 2,592 $ 222,338
========= ===========
5. BORROWINGS
On September 18, 2013, the Fund entered into a committed facility agreement with
Bank of America Merrill Lynch that has a maximum commitment amount of
$25,000,000. The borrowing rate under the facility is equal to the 1-month LIBOR
plus 70 basis points. In addition, under the facility, the Fund pays a
commitment fee of 0.25% on the undrawn amount of such facility on any day that
the loan balance is less than 20% of the total commitment amount. The average
amount outstanding between September 18, 2013 and November 30, 2013, was
$10,027,027 with a weighted average interest rate of 0.87%. As of November 30,
2013, the Fund had outstanding borrowings of $18,000,000 under this committed
facility agreement. The high and low annual interest rates for the period ended
November 30, 2013, were 0.88% and 0.86%, respectively. The interest rate at
November 30, 2013, was 0.87%.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On January 9, 2014, the Fund declared a dividend of $0.16 per share to Common
Shareholders of record on January 24, 2014, payable January 31, 2014.
On January 8, 2014, Chartwell advised the Fund that it entered into a definitive
asset-purchase agreement with TriState Capital Holdings, Inc. ("TriState") (NYSE
TSC) whereby TriState will acquire substantially all of the assets of Chartwell
(the "Transaction"). The Transaction is expected to close in the first quarter
of 2014, subject to regulatory requirements, obtaining certain Chartwell-client
consents and other customary closing conditions. The consummation of the
Transaction may be deemed to be an "assignment" (as defined in the 1940 Act) of
the sub-advisory agreement between the Fund, First Trust and Chartwell, which
would result in the automatic termination of the agreement. The Board of
Trustees of the Fund is expected to consider the impact of the Transaction on
the Fund at a meeting scheduled for February 20, 2014 and to consider the Fund's
options at that time.
Effective December 31, 2013, Bernard P. Schaffer retired from his position at
Chartwell and, consequently, will no longer be involved as a member of
Chartwell's portfolio management team for the Fund. Douglas W. Kugler and Peter
M. Schofield will continue as members of Chartwell's portfolio management team
for the Fund.
Page 26
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST DIVIDEND AND INCOME
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Dividend and Income Fund (the "Fund"), including the portfolio of
investments, as of November 30, 2013, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of November 30, 2013 by correspondence with the Fund's
custodian and brokers. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Dividend and Income Fund, as of November 30, 2013, and the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
January 24, 2014
Page 27
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended November 30, 2013, 44.49% qualified for the
corporate dividends received deduction available to corporate shareholders.
The Fund hereby designates as qualified dividend income 55.36% of the ordinary
income distributions for the year ended November 30, 2013.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of May 14, 2013, he was not aware of any violation by the Fund of NYSE corporate
governance listing standards. In addition, the Fund's reports to the SEC on
Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's principal
executive officer and principal financial officer that relate to the Fund's
public disclosure in such reports and are required by Rule 30a-2 under the 1940
Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of First Trust
Energy Infrastructure Fund, 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, and First Trust High Income Long/Short Fund was held
on April 17, 2013 (the "Annual Meeting"). At the Annual Meeting, Trustees James
A. Bowen and Niel B. Nielson were elected by the Common Shareholders of the
First Trust Dividend and Income Fund as Class III Trustees for three-year terms
expiring at the Fund's annual meeting of shareholders in 2016. The number of
votes cast in favor of Mr. Bowen was 7,003,741, the number of votes against was
304,451 and the number of abstentions was 951,325. The number of votes cast in
favor of Mr. Nielson was 7,032,436, the number against was 275,756 and the
number of abstentions was 951,325. Richard E. Erickson, Thomas R. Kadlec and
Robert F. Keith are the other current and continuing Trustees.
A special meeting of shareholders of the Fund was held on September 16, 2013. At
the meeting, shareholders approved a new investment sub-advisory agreement
between the Fund, First Trust and Chartwell Investment Partners, L.P. 4,206,326
(50.93%) of the outstanding voting securities were voted at the meeting. The
number of votes cast in favor of the new investment sub-advisory agreement was
3,693,856, the number of votes against was 173,094, and the number of
abstentions was 339,376. The terms of the new investment sub-advisory agreement
are substantially similar to the terms of the previous agreement.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
DIVIDEND STRATEGY RISK: The Sub-Advisor may not be able to anticipate the level
of dividends that companies will pay in any given timeframe. The Fund's
strategies require the Sub-Advisor to identify and exploit opportunities such as
the announcement of major corporate actions that may lead to high current
dividend income. These situations are typically not recurring in nature or the
frequency may be difficult to predict and may not result in an opportunity that
allows the Sub-Advisor to fulfill the Fund's investment objectives. In addition,
the dividend policies of the Fund's target companies are heavily influenced by
the current economic climate.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013 (UNAUDITED)
MLP RISK: 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 exist between common unit holders and the general partner,
including those arising from incentive distribution payments.
QUALIFIED DIVIDEND INCOME TAX RISK: There can be no assurance as to what portion
of the distributions paid to the Fund's Common Shareholders will consist of
tax-advantaged qualified dividend income. Certain distributions designated by
the Fund as derived from qualified dividend income will be taxed in the hands of
non-corporate Common Shareholders at the rates applicable to long-term capital
gains, provided certain holding period and other requirements are satisfied by
both the Fund and the Common Shareholders. Additional requirements apply in
determining whether distributions by foreign issuers should be regarded as
qualified dividend income. Certain investment strategies of the Fund will limit
the Fund's ability to meet these requirements and consequently will limit the
amount of qualified dividend income received and distributed by the Fund. A
change in the favorable provisions of the federal tax laws with respect to
qualified dividends may result in a widespread reduction in announced dividends
and may adversely impact the valuation of the shares of dividend-paying
companies.
OPTION RISK: The Fund may write (sell) covered call options on all or a portion
of the equity securities held in the Fund's portfolio as determined to be
appropriate by the Fund's Sub-Advisor, consistent with the Fund's investment
objective. The ability to successfully implement the Fund's investment strategy
depends on the Sub-Advisor's ability to predict pertinent market movements,
which can not be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold an equity security that it might
otherwise sell. There can be no assurance that a liquid market for the options
will exist when the Fund seeks to close out an option position. Additionally, to
the extent that the Fund purchases options pursuant to a hedging strategy, the
Fund will be subject to additional risks.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. If the income and gains from the securities and
investments purchased with such proceeds do not cover the cost of leverage, the
Common Shares' return will be less than if leverage had not been used. The funds
borrowed pursuant to a leverage borrowing program constitute a substantial lien
and burden by reason of their prior claim against the income of the Fund and
against the net assets of the Fund in liquidation. The rights of lenders to
receive payments of interest on and repayments of principal on any borrowings
made by the Fund under a leverage borrowing program are senior to the rights of
holders of Common Shares upon liquidation. If the Fund is not in compliance with
certain credit facility provisions, the Fund may not be permitted to declare
dividends or other distributions, including dividends and distributions with
respect to Common Shares or purchase Common Shares. The use of leverage by the
Fund increases the likelihood of greater volatility of NAV and market price of
the Common Shares. Leverage also increases the risk that fluctuations in
interest rates on borrowings and short-term debt that the Fund may pay will
reduce the return to the Common Shareholders or will result in fluctuations in
the dividends paid on the Common Shares.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
CREDIT RISK: The Senior Loans in which the Fund invests are also subject to
credit risk. Credit risk is the risk of nonpayment of scheduled contractual
repayments whether interest and/or principal payments or payments for services.
Credit risk also is the risk that one or more investments in the Fund's
portfolio will decline in price, or fail to pay interest or principal when due,
because the issuer of the security or contractual counterparty experiences a
decline in its financial status.
SENIOR LOAN RISK: In the event a borrower fails to pay scheduled interest or
principal payments on a Senior Loan held by the Fund, the Fund will experience a
reduction in its income and a decline in the value of the Senior Loan, which
will likely reduce dividends and lead to a decline in the net asset value of the
Fund's Common Shares. If the Fund acquires a Senior Loan from another Lender,
for example, by acquiring a participation, the Fund may also be subject to
credit risks with respect to that lender. Although Senior Loans may be secured
by specific collateral, the value of the collateral may not equal the Fund's
investment when the Senior Loan is acquired or may decline below the principal
amount of the Senior Loan subsequent to the Fund's investment. Also, to the
extent that collateral consists of stock of the borrower or its subsidiaries or
affiliates, the Fund bears the risk that the stock may decline in value, be
relatively illiquid, and/ or may lose all or substantially all of its value,
causing the Senior Loan to be under collateralized. Therefore, the liquidation
of the collateral underlying a Senior Loan may not satisfy the issuer's
obligation to the Fund in the event of non-payment of scheduled interest or
principal, and the collateral may not be readily liquidated.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT
The Board of Trustees of First Trust Dividend and Income Fund (formerly known as
First Trust Active Dividend Income Fund) (the "Fund"), including the Independent
Trustees, approved the continuation of the Investment Management Agreement (the
"Agreement") between the Fund and First Trust Advisors L.P. ("First Trust" or
the "Advisor") at a meeting held on June 9-10, 2013 (the "Meeting"). The Board
determined that
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013 (UNAUDITED)
the continuation of the Agreement is in the best interests of the Fund in light
of the extent and quality of the services provided and such other matters as the
Board considered to be relevant in the exercise of its reasonable business
judgment. Also at the Meeting, and consistent with First Trust's recommendation,
the Board determined not to renew the investment sub-advisory agreement with the
Fund's then current sub-advisor, Aviance Capital Management, LLC ("Aviance").
At the Meeting, the Advisor recommended various actions to be taken with respect
to the Fund to address the Fund's underperformance (in terms of both share price
and net asset value) relative to its benchmarks and peer group average and to
narrow its trading discount, including replacing Aviance with Chartwell
Investment Partners, L.P. ("Chartwell") and changing certain of the Fund's
investment strategies. The Advisor proposed that Chartwell manage the Fund's
equity portfolio and option overlay strategy (the latter of which was being
managed by the Alternatives Group at First Trust), but also proposed that the
Fund use leverage to add a senior loan/high yield debt portfolio to be managed
by the Advisor's Leveraged Finance Investment Team. The Advisor had previously
discussed with the Board these proposed actions, along with various other
alternatives for addressing the Fund's underperformance and trading discount, at
meetings held in March and April 2013. At the April 2013 meeting, a member of
the Advisor's Leveraged Finance Investment Team made a presentation to the Board
regarding the investment strategy for the Fund's proposed senior loan/high yield
debt portfolio and how the Team would implement its strategy. Prior to the
Meeting, the Advisor and Chartwell provided to the Board written responses to
questions posed by independent legal counsel on behalf of the Independent
Trustees with respect to the Advisor's anticipated recommendation that Chartwell
replace Aviance as sub-advisor to the Fund. At the Meeting, and also during an
executive session prior to the Meeting, the Independent Trustees met separately
with their independent legal counsel to discuss the information provided by the
Advisor and Chartwell. After reviewing the various alternatives for the Fund,
the Board determined to approve the Advisor's proposed course of action for the
Fund, including the use of leverage by the Fund to add a senior loan/high yield
debt portfolio to be managed by the Advisor's Leveraged Finance Investment Team.
To reach its determination as to the continuation of the Agreement, the Board
considered its duties under the Investment Company Act of 1940, as amended (the
"1940 Act"), as well as under the general principles of state law in reviewing
and approving advisory contracts; the requirements of the 1940 Act in such
matters; the fiduciary duty of investment advisors with respect to advisory
agreements and compensation; the standards used by courts in determining whether
investment company boards have fulfilled their duties; and the factors to be
considered by the Board in voting on such agreements. To assist the Board in its
evaluation of the Agreement, the Independent Trustees received a report from the
Advisor in advance of the Meeting responding to a request for information from
counsel to the Independent Trustees. The report, among other things, outlined
the services provided or to be provided by the Advisor (including the relevant
personnel responsible for these services and their experience); the advisory
fees for the Fund as compared to fees charged to other clients of the Advisor
and as compared to fees charged by investment advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor; any fall out
benefits to the Advisor; and information on the Advisor's compliance program.
The Board applied its business judgment to determine whether the arrangement
between the Fund and the Advisor is a reasonable business arrangement from the
Fund's perspective as well as from the perspective of shareholders. The Board
considered that shareholders chose to invest or remain invested in the Fund
knowing that the Advisor manages the Fund.
In reviewing the Agreement, the Board considered the nature, extent and quality
of services provided or to be provided by the Advisor under the Agreement. The
Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. The Board
considered that the Advisor is responsible for the overall management and
administration of the Fund and reviewed the services provided by the Advisor to
the Fund, including the oversight of the sub-advisor. The Board noted the
compliance program that had been developed by the Advisor and considered that it
includes a robust program for monitoring the sub-advisor's compliance with the
1940 Act and the Fund's investment objectives and policies. The Board also
considered the services to be provided to the Fund by the Advisor's Leveraged
Finance Investment Team in connection with the management of the proposed senior
loan/high yield debt portfolio for the Fund, noting the Leveraged Finance
Investment Team's prior presentation at the April 2013 meeting and the Board's
familiarity with the quality of services provided by the Leveraged Finance
Investment Team to other funds managed by First Trust that are overseen by the
Board. In light of the information presented and the considerations made, the
Board concluded that the nature, extent and quality of services provided or to
be provided to the Fund by the Advisor under the Agreement have been and are
expected to remain satisfactory and that the Advisor has overseen the
sub-advisor's management of the Fund consistent with its investment objectives
and policies. The Board considered that it appeared that certain of the Fund's
investment strategies may have contributed to its performance issues, and that
changes to the Fund's investment strategies to effect a repositioning of its
portfolio, including the addition of the senior loan/high yield debt portfolio
to be managed by the Advisor's Leveraged Finance Investment Team approved at the
Meeting, were designed to enable the Fund to better achieve its investment
objectives.
The Board considered the advisory fees paid under the Agreement. The Board
considered the advisory fees charged by the Advisor to similar funds and other
non-fund clients, noting that the Advisor provides advisory services to one
other closed-end fund with investment objectives and policies similar to the
Fund's. The Board noted that the Advisor charges the same advisory fee rate to
the other closed-end fund. The Board also noted that the Advisor would retain
the entire advisory fee on the portion of the Fund's assets allocated to the
senior loan/high yield debt portfolio managed by the Advisor's Leveraged Finance
Investment Team and that the introduction of leverage for the Fund would
increase the asset base on which the Advisor's advisory fee rate is charged. In
addition, the Board reviewed data prepared by Lipper Inc. ("Lipper"), an
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013 (UNAUDITED)
independent source, showing the advisory fees and expense ratios of the Fund as
compared to the advisory fees and expense ratios of an expense peer group
selected by Lipper and similar data from the Advisor for a separate peer group
selected by the Advisor. The Board noted that the Lipper and Advisor peer groups
included no overlapping peer funds. The Board discussed with representatives of
the Advisor the limitations in creating a relevant peer group for the Fund,
including that (i) the Fund is unique in its composition, which makes assembling
peers with similar strategies and asset mix difficult; (ii) most peer funds do
not employ an advisor/sub-advisor management structure; and (iii) many of the
peer funds are larger than the Fund, which causes the Fund's fixed expenses to
be higher on a percentage basis as compared to the larger peer funds. The Board
also noted that, similar to the Fund in its current state, none of the Lipper
peer funds used leverage, but that the Advisor proposed to implement leverage
for the Fund. The Board noted the Advisor's statement that adding leverage to
the Fund will increase the Fund's expenses, but that the benefits of leverage
are expected to outweigh the costs. The Board took these limitations into
account in considering the peer data. In reviewing the peer data, the Board
noted that the Fund's contractual advisory fee was above the median of the
Lipper peer group.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance and portfolio risk on an ongoing basis. In addition to the Board's
ongoing review of performance, the Board also received data prepared by Lipper
comparing the Fund's performance to a performance peer universe selected by
Lipper and to three benchmarks. The Board also considered the Fund's dividend
yield as of March 28, 2013. In addition, the Board compared the Fund's
premium/discount over the past eight quarters to the average and median
premium/discount of the Advisor peer group over the same period. As previously
described, at the Meeting, the Board approved various actions recommended by the
Advisor to address the Fund's underperformance (in terms of both share price and
net asset value) relative to its benchmarks and peer group average and to narrow
its trading discount.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory fees were
reasonable and appropriate in light of the nature, extent and quality of
services provided or to be provided by the Advisor under the Agreement.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board determined that due to the Fund's
closed-end structure, the potential for realization of economies of scale as
Fund assets grow was not a material factor to be considered. The Board also
considered the costs of the services provided and profits realized by the
Advisor from serving as investment advisor to the Fund for the twelve months
ended December 31, 2012, as set forth in the materials provided to the Board.
The Board noted the inherent limitations in the profitability analysis, and
concluded that the Advisor's estimated profitability appeared to be not
excessive in light of the services provided to the Fund. In addition, the Board
considered fall-out benefits described by the Advisor that may be realized from
its relationship with the Fund, including the Advisor's compensation for fund
reporting services pursuant to a separate Fund Reporting Services Agreement.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement continue to be fair and reasonable and that the continuation of
the Agreement is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
BOARD CONSIDERATIONS REGARDING APPROVAL OF INTERIM AND NEW INVESTMENT
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Dividend and Income Fund (formerly known as
First Trust Active Dividend Income Fund) (the "Fund"), including the Independent
Trustees, approved an Interim Sub-Advisory Agreement and a New Sub-Advisory
Agreement (collectively, the "Agreements") among the Fund, First Trust Advisors
L.P. ("First Trust" or the "Advisor") and Chartwell Investment Partners, L.P.
("Chartwell") at a meeting held on June 9-10, 2013 (the "Meeting"). The Board
determined that the Agreements are in the best interests of the Fund in light of
the extent and quality of the services to be provided and such other matters as
the Board considered to be relevant in the exercise of its reasonable business
judgment.
At the Meeting, the Advisor recommended various actions to be taken with respect
to the Fund to address the Fund's underperformance (in terms of both share price
and net asset value) relative to its benchmarks and peer group average and to
narrow its trading discount, including replacing the Fund's then current
sub-advisor, Aviance Capital Management, LLC ("Aviance"), with Chartwell and
changing certain of the Fund's investment strategies. The Advisor proposed that
Chartwell manage the Fund's equity portfolio and option overlay strategy (the
latter of which was being managed by the Alternatives Group at First Trust), but
also proposed that the Fund use leverage to add a senior loan/high yield debt
portfolio to be managed by the Advisor's Leveraged Finance Investment Team. The
Advisor had previously discussed with the Board these proposed actions, along
with various other alternatives for addressing the Fund's underperformance and
trading discount, at meetings held in March and April 2013. At the Meeting and
at the April 2013 meeting, Chartwell made presentations to the Board regarding
its proposed investment strategy for the Fund and how it would implement its
proposed strategy. Prior to the Meeting, Chartwell also provided to the Board
written responses to questions posed by independent legal counsel on behalf of
the Independent Trustees. The Board considered all the information provided and
noted its familiarity with Chartwell as sub-advisor to First Trust Enhanced
Equity Income Fund ("FFA"), another closed-end fund for which First Trust serves
as manager that is overseen by the Board. At the Meeting, the Independent
Trustees met separately with their independent legal counsel to discuss the
information provided by Chartwell and the Advisor. After reviewing the various
Page 32
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013 (UNAUDITED)
alternatives for the Fund, the Board determined to approve the Advisor's
proposed course of action for the Fund and, at the Meeting, did not renew
Aviance's sub-advisory agreement and appointed Chartwell to serve as the interim
sub-advisor to the Fund pursuant to the Interim Sub-Advisory Agreement,
effective following the termination of Aviance's sub-advisory agreement with
First Trust and the Fund on June 30, 2013. The Board also approved the New
Sub-Advisory Agreement and determined to recommend it to shareholders of the
Fund for their approval.
To reach its determinations as to the Agreements, the Board considered its
duties under the 1940 Act, as well as under the general principles of state law
in reviewing and approving advisory contracts; the requirements of the 1940 Act
in such matters; the fiduciary duty of investment advisors with respect to
advisory agreements and compensation; the standards used by courts in
determining whether investment company boards have fulfilled their duties; and
the factors to be considered by the Board in voting on such agreements. In its
evaluation of the Agreements, the Board considered a report from Chartwell
responding to a request for information from counsel to the Independent
Trustees. The report, among other things, outlined the services to be provided
by Chartwell to the Fund (including the relevant personnel responsible for these
services and their experience); the proposed sub-advisory fee for the Fund as
compared to fees charged to other clients of Chartwell; the potential for
economies of scale, if any; financial data on Chartwell; fall out benefits to
Chartwell; and information regarding Chartwell's compliance program. The Board
applied its business judgment to determine whether the proposed arrangements
between the Fund, the Advisor and Chartwell are reasonable business arrangements
from the Fund's perspective as well as from the perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services to be provided by Chartwell under the Agreements. The Board
considered Chartwell's investment style and the backgrounds of the investment
personnel who would be responsible for the day-to-day management of the Fund,
noting that they also serve as portfolio managers of FFA. The Board considered
that Chartwell intended to manage the Fund in a manner that combined aspects of
its Premium Yield Equity strategy and its Covered Call strategy and the Board
reviewed the returns of Chartwell's Premium Yield Equity composite and also the
returns of FFA, which is sub-advised by Chartwell using its Covered Call
strategy. The Board also discussed with the prospective portfolio managers the
approach Chartwell planned to take in transitioning the Fund's portfolio. In
light of the information presented and the considerations made, the Board
concluded that the nature, extent and quality of services to be provided to the
Fund by Chartwell under the Agreements are expected to be satisfactory.
The Board considered the sub-advisory fees to be paid under the Agreements. The
Board considered that the sub-advisory fee rate under the Agreements would be
the same as the sub-advisory fee rate under Aviance's sub-advisory agreement,
but noted that Chartwell will only receive a fee on the portion of the Fund's
assets allocated to it by the Advisor. The Board considered that the
sub-advisory fee was negotiated at arm's length between the Advisor and
Chartwell, an unaffiliated third party, and noted that the fees to be paid to
Chartwell would be paid by the Advisor from its advisory fee. The Board
considered the sub-advisory fee rate charged by Chartwell for sub-advising FFA,
noting that it was the same as the Fund's. The Board also considered information
provided by Chartwell as to the fees it charges to other non-fund clients with
investment objectives and policies similar to the Fund's, noting that the
sub-advisory fee rate is within the range of the fee rates charged by Chartwell
to these other clients, and that services provided to registered investment
companies are more extensive. On the basis of all the information provided, the
Board concluded that the sub-advisory fees to be paid under the Agreements were
reasonable and appropriate in light of the nature, extent and quality of
services expected to be provided by Chartwell under the Agreements.
The Board considered Chartwell's statement that it had continually reinvested
its capital to build a large, experienced group of professionals to serve its
clients, including the Fund, and noted Chartwell's statements about potential
economies of scale in providing services to the Fund. The Board also considered
data provided by Chartwell as to the estimated profitability of the Agreements
to Chartwell, noting that it appeared to be not excessive in light of the
services expected to be provided to the Fund. The Board considered potential
fall-out benefits identified by Chartwell from its relationship with the Fund,
including soft-dollar arrangements, and considered a summary of such
arrangements.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements are fair and reasonable and that the approval of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 33
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE (2) DURING PAST 5 YEARS TRUSTEE 5 YEARS
-----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-----------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 105 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership; Member Sportsmed
Suite 400 Inception LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President (March 2010 to Present), Senior 105 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund (May 2007 to March 2010), ADM Services, Inc. and ADM
Suite 400 Inception Inc. (Futures Commission Merchant) Investor Services
Wheaton, IL 60187 International
D.O.B.: 11/57
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 105 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since Fund Consulting) Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term President and Chief Executive Officer 105 Director of
c/o First Trust Advisors L.P. (June 2012 to Present), Dew Learning LLC Covenant
120 East Liberty Drive, o Since Fund (Educational Products and Services); President Transport Inc.
Suite 400 Inception (June 2002 to June 2012), Covenant College
Wheaton, IL 60187
D.O.B.: 03/54
-----------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee and o Three-Year Term Chief Executive Officer (December 2010 105 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund 2010), First Trust Advisors L.P. and First
Suite 400 Inception Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
(2) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2014 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2015 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2016 annual meeting of shareholders.
Page 34
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to January 2011), Vice
Suite 400 Accounting Officer o Since January 2012 President (January 2005 to April 2007), First Trust
Wheaton, IL 60187 Advisors L.P. and First Trust Portfolios L.P.
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief Legal o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Officer First Trust Portfolios L.P.; Secretary and
Suite 400 o Since Fund Inception General Counsel, BondWave LLC (Software
Wheaton, IL 60187 Development Company/Investment Advisor);
D.O.B.: 05/60 Secretary of Stonebridge Advisors LLC
(Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July
Suite 400 o Since Fund Inception 2012), First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer Since
D.O.B.: 12/66 January 2011
o Assistant Secretary
Since Fund Inception
-------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 35
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2013 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") value our relationship with you and consider your privacy an important
priority in maintaining that relationship. We are committed to protecting the
security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis, to collect certain anonymous
information when you visit our website. These companies may use non-personally
identifiable information during your visits to this and other websites in order
to provide advertisements about goods and services likely to be of greater
interest to you. These companies typically use a cookie, third party web beacon
or pixel tags, to collect this information. To learn more about this behavioral
advertising practice, you can visit www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, we restrict access to your
nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 36
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners L.P.
1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party, and that relates to any element of the code
of ethics description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party, that relates to one or more of the items set
forth in paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas
R. Kadlec and Robert F. Keith are qualified to serve as audit committee
financial experts serving on its audit committee and that each of them is
"independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years were
$28,000 for the fiscal year ended November 30, 2012 and $28,000 for the fiscal
year ended November 30, 2013.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years for assurance and related services by the principal
accountant that are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph (a) of
this Item were $0 for the fiscal year ended November 30, 2012 and $0 for the
fiscal year ended November 30, 2013.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0 for the fiscal year ended November 30, 2012 and $0 for
the fiscal year ended November 30, 2013.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $4,500
for the fiscal year ended November 30, 2012 and $4,500 for the fiscal year ended
November 30, 2013. These fees were for tax consultation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning to the registrant's
adviser were $0 for the fiscal year ended November 30, 2012 and $0 for the
fiscal year ended November 30, 2013.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for the fiscal year ended November 30, 2011 and
$0 for the fiscal year ended November 30, 2012.
All Other Fees (Investment Adviser) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal
accountant to the registrant's investment adviser, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year
ended November 30, 2012 and $0 for the fiscal year ended November 30, 2013.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the registrant and the registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the pre-approval
exceptions included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for the fiscal year
ended November 30, 20121, were $0 for the registrant and $4,120 for the
registrant's investment adviser, and for the fiscal year ended November 30, 2013
, were $0 for the registrant and $3,000 for the registrant's investment adviser.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
CHARTWELL INVESTMENT PARTNERS
PROXY VOTING POLICIES AND PROCEDURES
As Further Amended February, 2012
PURPOSE. Chartwell Investment Partners ("Chartwell") has adopted these Proxy
Voting Policies and Procedures ("Policies") to seek to ensure that it exercises
voting authority on behalf of Chartwell clients in a manner consistent with the
best interests of each client and its agreement with the client.
SCOPE. These Policies apply where clients have delegated the authority and
responsibility to Chartwell to decide how to vote proxies. Chartwell does not
accept or retain authority to vote proxies in accordance with individual client
guidelines with the exception of those clients who wish their proxies voted in
accordance with Taft-Hartley Proxy Voting Guidelines and who have instructed
Chartwell to do so. In addition, Clients who wish to instruct Chartwell not to
vote in accordance with AFL-CIO Key Vote Survey recommendations, as described
below, retain that authority. Clients who wish to arrange to vote proxies in
accordance with their own guidelines may elect to do so at any time by notifying
Chartwell. Chartwell generally will follow these Policies if asked to make
recommendations about proxy voting to clients who request that advice but have
not delegated proxy voting responsibility to Chartwell.
GUIDING PRINCIPLES. Chartwell believes that voting proxies in the best interests
of each client means making a judgment as to what voting decision is most likely
to maximize total return to the client as an investor in the securities being
voted, and casting the vote accordingly. For this reason, Chartwell's evaluation
of the possible impact of a proxy vote on the economic interests of company
shareholders similarly situated to Chartwell's clients will be the primary
factor governing Chartwell's proxy voting decisions.
USE OF INDEPENDENT PROXY VOTING SERVICE. Chartwell has retained ISS, an
independent proxy voting service, to assist it in analyzing specific proxy votes
with respect to securities held by Chartwell clients and to handle the
mechanical aspects of casting votes. Historically, Chartwell has placed
substantial reliance on ISS' analyses and recommendations and generally gives
instructions to ISS to vote proxies in accordance with ISS' recommendations,
unless Chartwell reaches a different conclusion than ISS about how a particular
matter should be voted. ISS' proxy voting recommendations typically are made
available to Chartwell about a week before the proxy must be voted, and are
reviewed and monitored by members of the Proxy Voting Committee (and, in certain
cases, by Chartwell portfolio managers), with a view to determining whether it
is in the best interests of Chartwell's clients to vote proxies as recommended
by ISS, or whether client proxies should be voted on a particular proposal in
another manner. In addition, Chartwell generally votes in accordance with
AFL-CIO Key Votes Survey, a list of proposals and meetings based on
recommendations by the AFL-CIO Office of Investment. To the extent that any of
the proxy voting positions stated in these Policies are inconsistent with a Key
Vote Survey recommendation, Chartwell will generally vote in accordance with the
Key Vote Survey recommendation on all impacted securities unless any client has
chosen to instruct Chartwell to refrain from doing so. In that case, Chartwell
will vote the client's securities position in accordance with these Policies
(which may or may not cause the vote to be the same as the Key Vote Survey
recommendation).
ADMINISTRATION OF POLICIES. Chartwell has established a Proxy Voting Committee
to oversee and administer the voting of proxies on behalf of clients, comprised
of approximately five representatives of the firm's compliance and operations
departments. The Committee's responsibilities include reviewing and updating
these Policies as may be appropriate from time to time; identifying and
resolving any material conflicts of interest on the part of Chartwell or its
personnel that may affect particular proxy votes; evaluating and monitoring, on
an ongoing basis, the analyses, recommendations and other services provided by
ISS or another third party retained to assist Chartwell in carrying out its
proxy voting responsibilities; when deemed appropriate by the Committee,
consulting with Chartwell portfolio managers and investment professionals on
particular proposals or categories of proposals presented for vote; and
determining when and how client proxies should be voted other than in accordance
with the general rules and criteria set forth in Chartwell's Proxy Voting
Guidelines or with the recommendations of ISS or another independent proxy
voting service retained by Chartwell.
CONFLICTS OF INTEREST. It is Chartwell's policy not to exercise its authority to
decide how to vote a proxy if there is a material conflict of interest between
Chartwell's interests and the interests of the client that owns the shares to be
voted that could affect the vote on that matter. To seek to identify any such
material conflicts, a representative of the Proxy Voting Committee screens all
proxies and presents any potential conflicts identified to the Committee for
determination of whether the conflict exists and if so, whether it is material.
Conflicts of interest could result from a variety of circumstances, including,
but not limited to, significant personal relationships between executive
officers of an issuer and Chartwell personnel, a current or prospective
investment adviser-client relationship between an issuer or a pension plan
sponsored by an issuer and Chartwell, a significant ownership interest by
Chartwell or its personnel in the issuer and various other business, personal or
investment relationships. Generally, a current or prospective adviser-client
relationship will not be considered material for these purposes if the net
advisory revenues to Chartwell have not in the most recent fiscal year and are
not expected in the current fiscal year to exceed 1/2 of 1 percent of
Chartwell's annual advisory revenue.
Currently, the Proxy Voting Committee has determined that voting in accordance
with AFL-CIO Key Votes Survey recommendations is not a material conflict of
interest. In reaching this decision, the Committee recognized that Chartwell has
many union clients and many clients that are not union-oriented. By voting all
impacted securities positions in accordance with AFL-CIO recommendations, it
could be said that Chartwell is attempting to retain or attract existing and
prospective union clients. However, the overall number of proxy issues in the
AFL-CIO Key Votes Survey on which Chartwell has historically voted is
approximately 14 - 30 out of a total of approximately 500 company meetings and
thousands of proxy votes cast by Chartwell each year. Chartwell does not use its
AFL-CIO Key Votes Survey rankings for marketing purposes, so to the extent any
client or prospect becomes aware of how Chartwell votes in the Surveys, it does
so on its own. In addition, Union Clients have the ability to instruct Chartwell
to vote their proxies entirely in accordance with the Taft-Hartley policy.
Recognizing that deciding this is not a material conflict of interest is
fundamentally subjective, Chartwell nonetheless discloses its practices to
clients and invites clients to instruct Chartwell not to change any vote in
these Policies to be consistent with an AFL-CIO Key Votes Survey recommendation
(even though voting consistently with these Policies may result in voting the
same way).
In the event the Committee determines that there is a material conflict of
interest that may affect a particular proxy vote, Chartwell will NOT make the
decision how to vote the proxy in accordance with these Policies unless the
Policies specify how votes shall be cast on that particular type of matter,
i.e., "for" or "against" the proposal. Where the Policies provide that the
voting decision will be made on a "case-by-case" basis, Chartwell will either
request the client to make the voting decision, or the vote will be cast in
accordance with the recommendations of ISS or another independent proxy voting
service retained by Chartwell for that purpose. Chartwell also will not provide
advice to clients on proxy votes without first disclosing any material conflicts
to the client requesting such advice.
WHEN CHARTWELL DOES NOT VOTE PROXIES. Chartwell may not vote proxies respecting
client securities in certain circumstances, including, but not limited to,
situations where (a) the securities are no longer held in a client's account;
(b) the proxy and other relevant materials are not received in sufficient time
to allow analysis or an informed vote by the voting deadline; (c) Chartwell
concludes that the cost of voting the proxy will exceed the expected potential
benefit to the client; or (d) the securities have been loaned out pursuant to a
client's securities lending program and are unavailable to vote.
PROXY VOTING GUIDELINES
Generally, Chartwell votes all proxies in accordance with the ISS guidelines.
These guidelines may be changed or supplemented from time to time. Votes on
matters not covered by these guidelines will be determined in accordance with
the principles set forth above. Client guidelines may be inconsistent with these
guidelines and may cause Chartwell to vote differently for different clients on
the same matter.
The policies contained herein are a sampling of select, key proxy voting
guidelines and are not exhaustive.
ROUTINE/MISCELLANEOUS:
AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors, unless any of the following apply:
o An auditor has a financial interest in or association with the
company and is therefore not independent;
o There is reason to believe that the independent auditor has rendered
an opinion which is neither accurate nor indicative of the company's
financial position;
o Poor accounting practices are identified that rise to a serious
level of concern, such as: fraud; misapplication of GAAP; and
material weaknesses identified in Section 404 disclosures; or
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
o Non-audit ("other") fees > audit fees + audit-related fees + tax
compliance/preparation fees
BOARD OF DIRECTORS:
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be determined CASE-BY-CASE.
Four fundamental principles apply when determining votes on director nominees:
1. Board Accountability
2. Board Responsiveness
3. Director Independence
4. Director Competence
1. BOARD 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:
-------------
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 OPPOSITION VOTE 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.
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
- any or all appropriate nominees (except new) may be held
accountable;
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 five-year operational metrics.
Problematic provisions include but are not limited to:
o A classified board structure;
o A supermajority vote requirement;
o Either a plurality vote standard in uncontested director elections
or a majority vote standard for director elections with no plurality
carve-out for contested elections;
o The inability for shareholders to call special meetings;
o The inability for shareholders to act by written consent;
o A dual-class capital structure; and/or o A non-shareholder-approved
poison pill.
POISON PILLS:
1.3 The company's poison pill has a "dead-hand" or "modified dead-hand"
feature. Vote WITHHOLD/AGAINST 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. This policy applies to all companies adopting or renewing
pills after the announcement of this policy (November 19, 2009); 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:
o 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 ballot for shareholder ratification given the
circumstances;
o The issuer's rationale;
o The issuer's governance structure and practices; and
o 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 practice 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 WITHHOLD/AGAINST 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;
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 proposal received the support of
less than 70 percent of votes cast, taking into account;
o The company's response, including:
o Disclosure of engagement efforts with major institutional
investors regarding the issues that contributed to the low
level of support;
o Specific actions taken to address the issues that contributed
to the low level of support;
o Other recent compensation actions taken by the company.
o Whether the issues raised are recurring or isolated; o The company's
ownership structure; and
o Whether the support level was less than 50 percent, which would
warrant the highest degree of responsiveness.
Governance Failures
Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors
individually, committee members, or the entire board, due to:
1.17 Material failures of governance, stewardship, risk oversight or
fiduciary responsibilities at the company;
1.18 Failure to replace management as appropriate; or
1.19 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. BOARD RESPONSIVENESS
Vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who
should be considered on a CASE-BY-CASE basis), if:
2.1 The board failed to act on a shareholder proposal that received
approval of a majority of the shares outstanding the previous year;
2.2 The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years;
2.3 The board failed to act on takeover offers where the majority of
shares are tendered;
2.4 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; or
2.5 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.
Vote CASE-BY-CASE on the entire board if:
2.6 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:
o The board's rationale for selecting a frequency that is different
from the frequency that received a plurality;
o The company's ownership structure and vote results;
o ISS' analysis of whether there are compensation concerns or a
history of problematic compensation practices; and
o The previous year's support level on the company's say-on-pay
proposal.
3. DIRECTOR INDEPENDENCE
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the Categorization of Directors below) when:
3.1 The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
3.2 The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
3.3 The company lacks a formal nominating committee, even if the board
attests that the independent directors fulfill the functions of such
a committee; or
3.4 The full board is less than majority independent.
4. DIRECTOR COMPETENCE
Vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who
should be considered CASE-BY-CASE), if:
4.1 The company's proxy indicated that not all directors attended 75
percent of the aggregate board and committee meetings, but fails to
provide the required disclosure of the names of the director(s)
involved.
Generally vote AGAINST or WITHHOLD from individual directors who:
4.2 Attend less than 75 percent of the board and committee meetings
(with the exception of new nominees). Acceptable reasons for
director(s) absences are generally limited to the following:
o Medical issues/illness;
o Family emergencies; and
o Missing only one meeting.
These reasons for directors' absences will only be considered by ISS
if disclosed in the proxy or another SEC filing. If the disclosure
is insufficient to determine whether a director attended at least 75
percent of board and committee meetings in aggregate, vote
AGAINST/WITHHOLD from the director.
OVERBOARDED DIRECTORS:
Vote AGAINST or WITHHOLD from individual directors who:
4.3 Sit on more than six public company boards; or
4.4 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.
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS Vote CASE BY CASE on the
election of directors in contested elections, considering the following factors:
o Long-term financial performance of the target company relative to
its industry;
o Management's track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved
(both slates);
o Stock ownership positions.
PROXY ACCESS
ISS supports proxy access as an important shareholder right, one that is
complementary to other best-practice corporate governance features. However, in
the absence of a uniform standard, proposals to enact proxy access may vary
widely; as such, ISS is not setting forth specific parameters at this time and
will take a case-by-case approach in evaluating these proposals.
Vote CASE-BY-CASE on proposals to enact proxy access, taking into account, among
other factors:
o Company-specific factors; and
o Proposal-specific factors, including:
o The ownership thresholds proposed in the resolution (i.e.,
percentage and duration);
o The maximum proportion of directors that shareholders may
nominate each year; and
o The method of determining which nominations should appear on
the ballot if multiple shareholders submit nominations.
SHAREHOLDER RIGHTS & DEFENSES:
EXCLUSIVE VENUE
Vote CASE-BY-CASE on exclusive venue proposals, taking into account:
o Whether the company has been materially harmed by shareholder
litigation outside its jurisdiction of incorporation, based on
disclosure in the company's proxy statement; and
o Whether the company has the following good governance features:
o An annually elected board;
o A majority vote standard in uncontested director elections;
and
o The absence of a poison pill, unless the pill was approved by
shareholders.
POISON PILLS - MANAGEMENT PROPOSALS TO RATIFY POISON PILL
Vote CASE BY CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limit the
ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the
board refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or
seek a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses, and any problematic governance concerns.
POISON PILLS - MANAGEMENT PROPOSALS TO RATIFY A PILL TO PRESERVE NET OPERATING
LOSSES (NOLS)
Vote AGAINST proposals to adopt a poison pill for the stated purpose of
protecting a company's net operating losses ("NOLs") if the term of the pill
would exceed the shorter of three years and the exhaustion of the NOL.
Vote CASE-BY-CASE on management proposals for poison pill ratification,
considering the following factors, if the term of the pill would be the shorter
of three years (or less) and the exhaustion of the NOL:
o The ownership threshold to transfer (NOL pills generally have a
trigger slightly below 5%);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision, or commitment
to cause expiration of the pill upon exhaustion or expiration of
NOLs);
o The company's existing governance structure including: board
independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic governance
concerns; and
o Any other factors that may be applicable.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Generally vote AGAINST management and shareholder proposals to restrict or
prohibit shareholders' ability to act by written consent. Generally vote FOR
management and shareholder proposals that provide shareholders with the ability
to act by written consent, taking into account the following factors:
o Shareholders' current right to act by written consent;
o The consent threshold;
o The inclusion of exclusionary or prohibitive language;
o Investor ownership structure; and
o Shareholder support of, and management's response to, previous
shareholder proposals.
Vote CASE-BY-CASE on shareholder proposals if, in addition to the considerations
above, the company has the following governance and antitakeover provisions:
o An unfettered(3) right for shareholders to call special meetings at
a 10 percent threshold;
o A majority vote standard in uncontested director elections;
o No non-shareholder-approved pill; and
o An annually elected board.
CAPITAL/RESTRUCTURING
COMMON STOCK AUTHORIZATION
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.
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
which include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized shares during the last three
years;
o The Current Request:
o Disclosure in the proxy statement of the specific reasons for
the proposed increase;
o Disclosure in the proxy statement of specific and severe risks
to shareholders of not approving the request; and
o The dilutive impact of the request as determined by 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.
--------------
3 "UNFETTERED" MEANS NO RESTRICTIONS ON AGENDA ITEMS, NO RESTRICTIONS ON THE
NUMBER OF SHAREHOLDERS WHO CAN GROUP TOGETHER TO REACH THE 10 PERCENT
THRESHOLD, AND ONLY REASONABLE LIMITS ON WHEN A MEETING CAN BE CALLED: NO
GREATER THAN 30 DAYS AFTER THE LAST ANNUAL MEETING AND NO GREATER THAN 90
PRIOR TO THE NEXT ANNUAL MEETING.
PREFERRED STOCK AUTHORIZATION
Vote FOR proposals to increase the number of authorized preferred 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 or series of
preferred stock to increase the number of authorized shares of the class or
series of preferred stock that has superior voting rights.
Vote CASE-BY-CASE on all other proposals to increase the number of shares of
preferred stock authorized for issuance. Take into account company-specific
factors that include, at a minimum, the following:
o Past Board Performance
o The company's use of authorized preferred shares during the
last three years;
o The Current Request:
o Disclosure in the proxy statement of specific reasons for the
proposed increase;
o Disclosure in the proxy statement of specific and severe risks
to shareholders of not approving the request;
o In cases where the company has existing authorized preferred
stock, the dilutive impact of the request as determined by 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; and
o Whether the shares requested are blank check preferred shares
that can be used for antitakeover purposes.
DUAL CLASS STRUCTURE
Generally vote AGAINST proposals to create a new class of common stock unless:
o The company discloses a compelling rationale for the dual-class
capital structure, such as:
o The company's auditor has concluded that there is substantial
doubt about the company's ability to continue as a going
concern; or
o The new class of shares will be transitory;
o The new class is intended for financing purposes with minimal or no
dilution to current shareholders in both the short term and long
term; and
o The new class is not designed to preserve or increase the voting
power of an insider or significant shareholder.
MERGERS AND ACQUISITIONS
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:
o Valuation - Is the value to be received by the largest 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.
o Market reaction - How has the market responded to the proposed deal?
A negative market reaction should cause closer scrutiny of a deal.
o 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.
o 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.
o 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 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.
o 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.
ADVISORY VOTES ON EXECUTIVE COMPENSATION - MANAGEMENT PROPOSALS (SAY-ON-PAY)
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:
o There is a significant misalignment between CEO pay and company
performance (pay for performance);
o The company maintains significant problematic pay practices;
o 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:
o 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;
o The board fails to respond adequately to a previous MSOP proposal
that received less than 70 percent support of votes cast;
o The company has recently practiced or approved problematic pay
practices, including option repricing or option backdating; or
o The situation is egregious.
Vote AGAINST an equity plan on the ballot if:
o A pay for performance misalignment is found, and a significant
portion of the CEO's misaligned pay is attributed to
non-performance-based equity awards, taking into consideration:
o Magnitude of pay misalignment;
o Contribution of non-performance-based equity grants to overall
pay; and
o The proportion of equity awards granted in the last three
fiscal years concentrated at the named executive officer (NEO)
level.
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 index, this analysis considers the
following:
1. Peer Group(4) Alignment:
o The degree of alignment between the company's TSR rank and the
CEO's total pay rank within a peer group, as measured over
one-year and three-year periods (weighted 40/60);
o The multiple of the CEO's total pay relative to the peer group
median.
2. Absolute Alignment: 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 non-Russell 3000 index
companies, misaligned pay and performance are otherwise suggested, analyze the
---------------
4 THE PEER GROUP IS GENERALLY COMPRISED OF 14-24 COMPANIES THAT ARE SELECTED
USING MARKET CAP, REVENUE (OR ASSETS FOR FINANCIAL FIRMS), AND GICS
INDUSTRY GROUP, VIA A PROCESS DESIGNED TO SELECT PEERS THAT ARE CLOSEST TO
THE SUBJECT COMPANY, AND WHERE THE SUBJECT COMPANY IS CLOSE TO MEDIAN IN
REVENUE/ASSET SIZE. THE RELATIVE ALIGNMENT EVALUATION WILL CONSIDER THE
COMPANY'S RANK FOR BOTH PAY AND TSR WITHIN THE PEER GROUP (FOR ONE- AND
THREE-YEAR PERIODS) AND THE CEO'S PAY RELATIVE TO THE MEDIAN PAY LEVEL IN
THE PEER GROUP.
following qualitative factors to determine how various pay elements may work to
encourage or to undermine long-term value creation and alignment with
shareholder interests:
o The ratio of performance- to time-based equity awards;
o The ratio of performance-based compensation to overall compensation;
o The completeness of disclosure and rigor of performance goals;
o The company's peer group benchmarking practices;
o Actual results of financial/operational metrics, such as growth in
revenue, profit, cash flow, etc., both absolute and relative to
peers;
o Special circumstances related to, for example, a new CEO in the
prior fiscal year or anomalous equity grant practices (e.g.,
biennial awards); and
o Any other factors deemed relevant.
PROBLEMATIC PAY PRACTICES
The focus is on executive compensation practices that contravene the global pay
principles, including:
o Problematic practices related to non-performance-based compensation
elements;
o Incentives that may motivate excessive risk-taking; and
o 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:
o Repricing or replacing of underwater stock options/SARS without
prior shareholder approval (including cash buyouts and voluntary
surrender of underwater options);
o Excessive perquisites or tax gross-ups, including any gross-up
related to a secular trust or restricted stock vesting;
o New or extended agreements that provide for:
o CIC payments exceeding 3 times base salary and
average/target/most recent bonus;
o CIC severance payments without involuntary job loss or
substantial diminution of duties ("single" or "modified
single" triggers);
o CIC payments with excise tax gross-ups (including "modified"
gross-ups).
INCENTIVES THAT MAY MOTIVATE EXCESSIVE RISK-TAKING
o Multi-year guaranteed bonuses;
o A single performance metric used for short- and long-term plans;
o Lucrative severance packages;
o High pay opportunities relative to industry peers;
o Disproportionate supplemental pensions; or
o 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.
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:
o Reason and motive for the options backdating issue, such as
inadvertent vs. deliberate grant changes;
o Duration of options backdating;
o Size of restatement due to options backdating;
o 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
o Adoption of a grant policy that prohibits backdating and creates a
fixed grant schedule or window period for equity grants in the
future.
BOARD COMMUNICATIONS AND RESPONSIVENESS
Consider the following factors CASE-BY-CASE when evaluating ballot items related
to executive pay.
o Failure to respond to majority-supported shareholder proposals on
executive pay topics; or
o 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:
o The company's response, including:
o Disclosure of engagement efforts with major
institutional investors regarding the issues that
contributed to the low level of support;
o Specific actions taken to address the issues that
contributed to the low level of support;
o Other recent compensation actions taken by the company.
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which
would warrant the highest degree of responsiveness.
FREQUENCY OF ADVISORY VOTE ON EXECUTIVE COMPENSATION (MANAGEMENT "SAY ON PAY")
Vote FOR annual advisory votes on compensation, which provide the most
consistent and clear communication channel for shareholder concerns about
companies' executive pay programs.
VOTING ON GOLDEN PARACHUTES IN AN ACQUISITION, MERGER, CONSOLIDATION OR PROPOSED
SALE
Vote CASE-BY-CASE on proposals to approve the company's golden parachute
compensation, consistent with ISS' policies on problematic pay practices related
to severance packages. Features that may lead to a vote AGAINST include:
o Recently adopted or materially amended agreements that include
excise tax gross-up provisions (since prior annual meeting);
o Recently adopted or materially amended agreements that include
modified single triggers (since prior annual meeting);
o Single trigger payments that will happen immediately upon a change
in control, including cash payment and such items as the
acceleration of performance-based equity despite the failure to
achieve performance measures;
o Single trigger vesting of equity based on a definition of change in
control that requires only shareholder approval of the transaction
(rather than consummation);
o Potentially excessive severance payments;
o Recent amendments or other changes that may make packages so
attractive as to influence merger agreements that may not be in the
best interests of shareholders;
o In the case of a substantial gross-up from
pre-existing/grandfathered contract: the element that triggered the
gross-up (i.e., option mega-grants at low point in stock price,
unusual or outsized payments in cash or equity made or negotiated
prior to the merger); or
o The company's assertion that a proposed transaction is conditioned
on shareholder approval of the golden parachute advisory vote. ISS
would view this as problematic from a corporate governance
perspective.
In cases where the golden parachute vote is incorporated into a company's
separate advisory vote on compensation ("management "say on pay"), ISS will
evaluate the "say on pay" proposal in accordance with these guidelines, which
may give higher weight to that component of the overall evaluation.
EQUITY-BASED AND OTHER INCENTIVE PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits the repricing;
o A pay-for-performance misalignment is found;
o The company's three-year burn rate exceeds the burn rate cap of its
industry group;
o The plan has a liberal change-of-control definition; or
o The plan is a vehicle for poor pay practices.
SOCIAL/ENVIRONMENTAL ISSUES
OVERALL APPROACH
When evaluating social and environmental shareholder proposals, ISS considers
the following factors:
o Whether adoption of the proposal is likely to enhance or protect
shareholder value;
o Whether the information requested concerns business issues that
relate to a meaningful percentage of the company's business as
measured by sales, assets and earnings;
o The degree to which the company's stated position on the issues
raised in the proposal could affect its reputation or sales, or
leave it vulnerable to a boycott or selective purchasing;
o Whether the issues presented are more appropriately/effectively
dealt with through governmental or company-specific action;
o Whether the company has already responded in some appropriate manner
to the request embodied in the proposal;
o Whether the company's analysis and voting recommendation to
shareholders are persuasive;
o What other companies have done in response to the issue addressed in
the proposal;
o Whether the proposal itself is well framed and the cost of preparing
the report is reasonable;
o Whether implementation of the proposal's request would achieve the
proposal's objectives;
o Whether the subject of the proposal is best left to the discretion
of the board;
o Whether the requested information is available to shareholders
either from the company or from a publicly available source; and
o Whether providing this information would reveal proprietary or
confidential information that would place the company at a
competitive disadvantage.
POLITICAL SPENDING & LOBBYING ACTIVITIES
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
o There are no recent, significant controversies, fines or litigation
regarding the company's political contributions or trade association
spending; and
o The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees
(PACs) are strictly voluntary and prohibits coercion.
Vote AGAINST proposals to publish in newspapers and other media the company's
political contributions. Such publications could present significant cost to the
company without providing commensurate value to shareholders.
Generally vote FOR proposals requesting greater disclosure of a company's
political contributions and trade association spending policies and activities.
However, the following will be considered:
o The company's current disclosure of policies and oversight
mechanisms related to its direct political contributions and
payments to trade associations or other groups that may be used for
political purposes, including information on the types of
organizations supported and the business rationale for supporting
these organizations; and
o Recent significant controversies, fines or litigation related to the
company's political contributions or political activities.
Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state and local level;
barring political contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals asking for list of company executives, directors,
consultants, legal counsels, lobbyists or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
activities, including direct lobbying as well as grassroots lobbying activities,
considering:
o The company's current disclosure of relevant policies and oversight
mechanisms;
o Recent significant controversies, fines or litigation related to the
company's public policy activities; and
o The impact that the policy issues may have on the company's business
operations.
HYDRAULIC FRACTURING
Generally vote FOR proposals requesting greater disclosure of a company's
(natural gas) hydraulic fracturing operations, including measures the company
has taken to manage and mitigate the potential community and environmental
impacts of those operations, considering:
o The company's current level of disclosure of relevant policies and
oversight mechanisms;
o The company's current level of such disclosure relative to its
industry peers;
o Potential relevant local, state or national regulatory developments;
and
o Controversies, fines or litigation related to the company's
hydraulic fracturing operations.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF NOVEMBER 30, 2013
PORTFOLIO MANAGEMENT TEAM
EQUITIES AND OPTIONS - CHARTWELL INVESTMENT PARTNERS, L.P.
Chartwell Investment Partners, L.P. ("Chartwell" or the "Sub-Adviser"), founded
in 1997, is an employee-owned investment firm focusing on institutional,
sub-advisory and private client relationships. The firm is a research-based
equity and fixed-income manager with a disciplined, team-oriented investment
process. The Chartwell Portfolio Management Team consists of the following:
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Schaffer is a founding partner of Chartwell and has 39 years of investment
industry experience. He serves as senior portfolio manager for Chartwell's
closed-end fund and hedged large-cap equity strategies. As the lead portfolio
manager for the Fund since 2007, he focuses on securities in the Energy,
Financials and Consumer Staples sectors. He was employed as a Senior Portfolio
Manager at Delaware Investment Advisers from 1990 to 1997, managing closed-end
equity income funds that utilized option strategies to generate portfolio gains.
Mr. Schaffer earned a Bachelor's degree in Economics from Villanova University
and an MBA from the University of Pennsylvania's Wharton School.
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 16 years of investment industry experience. His areas of
focus include the Consumer Discretionary, Industrials, Materials and Technology
sectors of the market. He has been a portfolio manager for the Fund since 2007.
From 1993 to 2003, he held several positions at Morgan Stanley Investment
Management (Miller Anderson & Sherrerd) the last of which was Senior Associate
and Analyst for the Large Cap Value team. Mr. Kugler is a member of the CFA
(Chartered Financial Analysts) Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. Mr. Kugler earned a
Bachelor's degree in Accounting from the University of Delaware.
PETER M. SCHOFIELD, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
Mr. Schofield is a Senior Portfolio Manager on Chartwell's large-cap equity
portfolio management team and has 28 years of investment industry experience.
His areas of focus include Consumer Staples, Health Care and Information
Technology. From 2005 to 2010, he was a Co-Chief Investment Officer at Knott
Capital. From 1996 to 2005, he was a Portfolio Manager at Sovereign Asset
Management. Prior to Sovereign Asset Management, he was a portfolio manager at
Geewax, Terker & Company. Mr. Schofield holds the Chartered Financial Analyst
designation and is a member of the CFA (Chartered Financial Analysts) Institute
and the CFA Society of Philadelphia. Mr. Schofield earned a Bachelor's degree in
History from the University of Pennsylvania.
The investment team for the First Trust Enhanced Equity Income Fund consists of
three portfolio managers with an average of 30 years of investment experience.
All team members conduct fundamental research and meet with company management.
Purchase and sale decisions are made by the portfolio managers. The day-to-day
work and the management of the Fund is divided evenly among the portfolio
managers.
SENIOR LOANS AND LEVERAGE - FIRST TRUST ADVISORS, L.P.
William Housey is the Senior Portfolio Manager for the Leveraged Finance
Investment Team of First Trust Advisors L.P. ("First Trust") and has primary
responsibility for investment decisions. Scott Fries assists Mr. Housey and is
also a Senior Credit Analyst assigned to certain industries. The portfolio
managers are supported in their portfolio management activities by a team of
credit analysts, a designated trader and operations personnel. Senior Credit
Analysts are assigned industries and Associate Credit Analysts support the
Senior Credit Analysts.
WILLIAM HOUSEY, CFA
SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
Mr. Housey joined First Trust in June 2010 as Senior Portfolio Manager in the
Leveraged Finance Investment Team and has nearly 16 years of investment
experience. Prior to joining First Trust, Mr. Housey was at Morgan Stanley/Van
Kampen Funds, Inc. for 11 years and served as Executive Director and
Co-Portfolio Manager. Mr. Housey has extensive experience in portfolio
management of both leveraged and unleveraged credit products, including senior
loans, high-yield bonds, credit derivatives and corporate restructurings. Mr.
Housey received a BS in Finance from Eastern Illinois University and an MBA in
Finance as well as Management and Strategy from Northwestern University's
Kellogg School of Business. Mr. Housey holds the Chartered Financial Analyst
("CFA") designation.
SCOTT D. FRIES, CFA
VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Fries joined First Trust in June 2010 as Portfolio Manager in the Leveraged
Finance Investment Team and has over 16 years of investment industry experience.
Prior to joining First Trust, Mr. Fries spent 15 years and served as
Co-Portfolio Manager of Institutional Separately Managed Accounts for Morgan
Stanley/Van Kampen Funds, Inc. Mr. Fries received a BA in International Business
from Illinois Wesleyan University and an MBA in Finance from DePaul University.
Mr. Fries holds the Chartered Financial Analyst designation.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER AND POTENTIAL CONFLICTS OF
INTEREST
INFORMATION PROVIDED AS OF NOVEMBER 30, 2011
# of Accounts Total Assets
Managed for for which
Total # of which Advisory Advisory Fee is
Name of Portfolio Manager Accounts Total Fee is Based on Based on
or Team Member Type of Accounts Managed Assets Performance Performance
Bernard P. Schaffer Registered Investment 1 $301.6 0 $0
Companies:
Other Pooled Investment 1 $.5 0 $0
Vehicles:
Other Accounts: $344.9
10 Million 0 $0
Douglas W. Kugler Registered Investment 1 $301.6 0 $0
Companies:
Other Pooled Investment 1 $.5 0 $0
Vehicles:
Other Accounts: $344.9
10 Million 0 $0
Peter M. Schofield Registered Investment 1 $301.6 0 $0
Companies:
Other Pooled Investment 1 $.5 0 $0
Vehicles:
Other Accounts: $344.9 0 $0
10 Million
William Housey Registered Investment
Companies: 5 $944 0 $0
Other Pooled Investment
Vehicles: 0 $0 0 $0
Other Accounts: $133.5
1 Million 0 $0
Scott Fries Registered Investment
Companies: 5 $944 0 $0
Other Pooled Investment
Vehicles: 0 $0 0 $0
Other Accounts: $133.5
1 Million 0 $0
POTENTIAL CONFLICTS OF INTERESTS
CHARTWELL INVESTMENT PARTNERS, L.P.
The portfolio managers manage other accounts for Chartwell including
institutional portfolios of similar investment styles. None of these portfolio
managers manage any hedge funds nor any accounts with performance-based fees.
When registered funds and investment accounts are managed side-by-side, firm
personnel must strictly follow the policies and procedures outlined in our Trade
Allocation Policy to ensure that accounts are treated in a fair and equitable
manner, and that no client or account is favored over another. When registered
funds and investment accounts are trading under the same investment product, and
thus trading the same securities, shares are allocated on a pro-rata basis based
on market value, and all portfolios obtain the same average price.
On a monthly basis, Jon Caffey, a member of Chartwell's Compliance Group,
oversees the performance calculation process handled in Operations, and
completes a spreadsheet of monthly portfolio returns by client. Caffey provides
this spreadsheet to the CEO, CCO and various investment personnel for their
review. Any performance dispersion noted by anyone on the distribution list is
investigated by Caffey by reviewing the underlying transactional detail,
holdings & security weightings by portfolio. This monthly process ensures that
all portfolios that are managed under the same investment product are treated
fairly, and traded in accordance with firm policy.
FIRST TRUST ADVISORS, L.P.
Potential conflicts of interest may arise when a portfolio manager of the
Registrant has day-to-day management responsibilities with respect to one or
more other funds or other accounts. The First Trust Leveraged Finance Investment
Team adheres to its trade allocation policy utilizing a pro-rata methodology to
address this conflict.
First Trust and its affiliate, First Trust Portfolios L.P. ("FTP"), have in
place a joint Code of Ethics and Insider Trading Policies and Procedures that
are designed to (a) prevent First Trust personnel from trading securities based
upon material inside information in the possession of such personnel and (b)
ensure that First Trust personnel avoid actual or potential conflicts of
interest or abuse of their positions of trust and responsibility that could
occur through such activities as front running securities trades for the
Registrant. Personnel are required to have duplicate confirmations and account
statements delivered to First Trust and FTP compliance personnel who then
compare such trades to trading activity to detect any potential conflict
situations. In addition to the personal trading restrictions specified in the
Code of Ethics and Insider Trading Policies and Procedures, employees in the
Leveraged Finance Investment Team currently are prohibited from buying or
selling equity securities (including derivative instruments such as options,
warrants and futures) and corporate bonds for their personal account and in any
accounts over which they exercise control. Employees in the Leveraged Finance
Investment Team are also prohibited from engaging in any personal transaction
while in possession of material non-public information regarding the security or
the issuer of the security. First Trust and FTP also maintain a confidential
watch list of all issuers for which the Leveraged Finance Investment Team has
material non-public information in its possession.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF NOVEMBER 30, 2013.
CHARTWELL INVESTMENT PARTNERS, L.P.
The compensation paid to a Chartwell portfolio manager and analyst consists of
base salary, annual bonus, ownership distribution, and an annual profit-sharing
contribution to the firm's retirement plan.
A portfolio manager's and analyst's base salary is determined by Chartwell's
Compensation Committee and is reviewed at least annually. A portfolio manager's
and analyst's experience, historical performance, and role in firm or product
team management are the primary considerations in determining the base salary.
Industry benchmarking is utilized by the Compensation Committee on an annual
basis.
Annual bonuses are determined by the Compensation Committee based on a number of
factors. The primary factor is a performance-based compensation schedule that is
applied to all accounts managed by a portfolio manager within a particular
investment product, and is not specific to any one account. The bonus is
calibrated based on the gross composite performance of such accounts versus the
appropriate benchmark and peer group rankings. Portfolio construction, sector
and security weighting, and performance are reviewed by the Compliance Committee
and Compensation Committee to prevent a manager from taking undue risks.
Additional factors used to determine the annual bonus include the portfolio
manager's contribution as an analyst, product team management, and contribution
to the strategic planning and development of the investment group as well as the
firm.
Ownership distributions are paid to a portfolio manager and analyst based on the
portfolio manager's and analyst's level and type of ownership interest(s). There
are currently three types of equity: (1) straight limited partnership interests,
(2) Class B share interests, and (3) phantom stock interests. In all cases, the
annual ownership distributions are paid to employees based on their respective
percentage equity interest(s) multiplied by total net cash distributions paid
during the year.
Chartwell also provides a profit sharing and 401(k) plan for all employees. The
annual profit sharing contribution and/or matching contribution from Chartwell
is discretionary and based solely on the profitability of the firm.
Annual bonuses are determined by the Compensation Committee based on a number of
factors. The primary factor is a performance-based compensation schedule that is
applied to all accounts managed by a portfolio manager within a particular
investment product, and is not specific to any one account. The bonus is
calibrated based on the gross composite performance of such accounts versus the
appropriate benchmark and peer group rankings. Portfolio construction, sector
and security weighting, and performance are reviewed by the Compliance Committee
and Compensation Committee to prevent a manager from taking undue risks.
Additional factors used to determine the annual bonus include the portfolio
manager's contribution as an analyst, product team management, and contribution
to the strategic planning and development of the investment group as well as the
firm.
FIRST TRUST ADVISORS L.P.
The compensation structure for the First Trust Advisors Leveraged Finance
Investment Team 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
members of the First Trust Advisors Leveraged Finance Investment Team are not
based upon criteria such as performance of the Registrant and are not directly
tied to the value of assets of the Fund.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF NOVEMBER 30, 2013
Dollar Range of Registrant
Name Shares Beneficially Owned
Bernard P. Schaffer $0
Douglas W. Kugler $0
Peter M. Schofield $0
William Housey $0
Scott Fries $0
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required by
this paragraph, based on their evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Active Dividend Income Fund
--------------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: January 24, 2014
--------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: January 24, 2014
--------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: January 24, 2014
--------------------
* Print the name and title of each signing officer under his or her signature.