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, 2015
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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, 2015
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, 2015
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 14
Statement of Operations..................................................... 15
Statements of Changes in Net Assets......................................... 16
Statement of Cash Flows..................................................... 17
Financial Highlights........................................................ 18
Notes to Financial Statements............................................... 19
Report of Independent Registered Public Accounting Firm..................... 26
Additional Information...................................................... 27
Board of Trustees and Officers.............................................. 32
Privacy Policy.............................................................. 34
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Chartwell Investment Partners, LLC ("Chartwell"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust 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.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's web page at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
First Trust and Chartwell are just that: informed opinions. They should not be
considered to be promises or advice. The opinions, like the statistics, cover
the period through the date on the cover of this report. The material risks of
investing in the Fund are spelled out in the prospectus, the statement of
additional information, this report and other Fund regulatory filing.
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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, 2015
Dear Shareholders:
Thank you for your investment in First Trust Dividend and Income Fund (the
"Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended November 30, 2015, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, most of 2015 has been
volatile. Economic and global factors, such as the continued conflict in the
Middle East, a sharp decline in oil prices and terrorism around the world, have
impacted U.S. and global markets. Another factor that has weighed upon U.S.
markets for most of the year is the fact that many economists had predicted that
the Federal Reserve would begin to raise interest rates in 2015, which has still
not happened as of November 30, 2015.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
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, 2015 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FAV
Common Share Price $8.17
Common Share Net Asset Value ("NAV") $9.30
Premium (Discount) to NAV (12.15)%
Net Assets Applicable to Common Shares $76,817,555
Current Quarterly Distribution per Common Share (1) $0.1700
Current Annualized Distribution per Common Share $0.6800
Current Distribution Rate on Closing Common Share Price (2) 8.32%
Current Distribution Rate on NAV (2) 7.31%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
11/14 $9.19 $10.20
9.20 10.25
8.87 9.79
9.05 10.10
12/14 9.09 10.19
9.17 10.12
8.94 10.01
8.84 9.92
8.82 9.88
1/15 8.62 9.65
8.80 9.94
8.97 10.10
8.97 10.16
2/15 9.02 10.16
8.91 9.95
8.74 9.86
8.88 10.08
3/15 8.85 9.97
8.80 10.02
8.96 10.16
8.89 10.16
4/15 8.87 10.07
8.84 10.08
8.80 10.10
8.88 10.15
5/15 8.89 10.16
8.64 9.98
8.66 10.00
8.65 10.04
6/15 8.60 10.01
8.48 9.85
8.43 9.83
8.56 9.94
8.21 9.51
7/15 8.23 9.64
8.12 9.54
8.20 9.62
7.84 9.15
8/15 7.81 9.20
7.65 8.95
7.81 9.10
7.81 9.07
9/15 7.72 8.97
7.95 9.03
8.25 9.32
8.33 9.39
8.26 9.30
10/15 8.34 9.28
8.33 9.39
8.06 9.11
8.15 9.28
8.17 9.32
11/15 8.17 9.30
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PERFORMANCE
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Average Annual Total Return
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Inception
1 Year Ended 5 Years Ended (9/20/07)
11/30/15 11/30/15 to 11/30/15
Fund Performance (3)
NAV -1.23% 7.31% 2.06%
Market Value -3.79% 3.45% -0.10%
Index Performance
Russell 1000(R) Value Index -1.11% 13.47% 4.39%
S&P 500(R) Index 2.75% 14.40% 6.11%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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General Electric Co. 3.4%
JPMorgan Chase & Co. 3.0
Pfizer, Inc. 2.8
Wells Fargo & Co. 2.5
Merck & Co., Inc. 2.4
Intel Corp. 2.0
Microsoft Corp. 1.8
Medtronic PLC 1.8
Chevron Corp. 1.7
Philip Morris International, Inc. 1.7
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Total 23.1%
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% OF
CREDIT QUALITY (S&P RATINGS)(4) SENIOR LOANS
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BBB 1.0%
BB+ 5.2
BB 9.3
BB- 12.4
B+ 14.0
B 36.0
B- 9.1
CCC+ 7.3
CCC 3.7
Privately rated securities 2.0
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Total 100.0%
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% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
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Financials 28.4%
Health Care 13.8
Consumer Discretionary 13.5
Energy 9.2
Industrials 9.2
Consumer Staples 9.0
Information Technology 8.8
Telecommunication Services 3.9
Utilities 2.0
Other 1.2
Materials 1.0
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Total 100.0%
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(1) Most recent distribution paid or declared through 11/30/2015. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 11/30/2015. 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, 2015
Chartwell Investment Partners, LLC ("Chartwell"), a wholly owned subsidiary of
TriState Capital Holdings, Inc., is a research-based equity and fixed-income
manager with a disciplined, team-oriented investment process. Chartwell manages
the equity component and the options element of the First Trust Dividend and
Income Fund's (the "Fund") strategy. First Trust Advisors L.P. ("First Trust")
manages the senior loan and leverage component of the Fund's strategy.
PORTFOLIO MANAGEMENT TEAM
DOUGLAS W. KUGLER, SENIOR PORTFOLIO MANAGER, CHARTWELL
PETER M. SCHOFIELD, SENIOR PORTFOLIO MANAGER, CHARTWELL
WILLIAM HOUSEY, CFA, SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER, FIRST
TRUST
SCOTT D. FRIES, CFA, SENIOR VICE PRESIDENT, PORTFOLIO MANAGER, FIRST TRUST
EQUITY MARKET RECAP
The S&P 500(R) Index (the "Index") returned 2.75% (inclusive of dividends) for
the 12-month period ended November 30, 2015. Since the two previous fiscal years
returned a rather large total of 52%, we had been anticipating a period of
relatively muted returns with the possibility of some larger than recent history
downdrafts, and the last fiscal year fits that description. The Index started
the fiscal year just below an all-time high and for approximately the next six
months, it alternated between climbing and falling within a fairly narrow but
rising range, culminating in another all-time high on May 21, 2015. From there
the market traded sideways for approximately three months. It seemed that the
market was slowly coming to grips with the low-growth environment and the fact
that the Federal Reserve was likely to raise short-term interest rates for the
first time in the last nine years sometime in the fall. But on August 11, 2015,
the Chinese government unexpectedly devalued their currency. The markets seemed
to accept this without too much angst at first. But as market participants
digested that news, the continuing slide in oil prices and mixed economic news,
fears of a global economic slowdown began to materialize. Starting on August 20,
2015, and for the next four trading days, the Index fell over 10% taking the
Index into "correction" territory (a downward movement of over 10% from recent
highs) - something that had not happened in over four years. A good portion of
that swift and steep decline was reversed on August 26th and 27th when the Index
bounced back by just over 6%. That bounce was brought about by better than
expected U.S. economic data and an official with the Federal Reserve making
comments that indicated that the start of the "normalization" of short-term
interest rates may not be coming in September. From there the Index vacillated a
few times due to global growth concerns, but as more data came out that disputed
that fear, the Index ground higher and closed on November 30, 2015, 2.4% below
its all-time high. Excitement and volatility were not just reserved for the
equity markets. Both the energy and interest rate markets saw their share of
both during the fiscal year. The price of a barrel of Brent crude went from $73
at the beginning of the fiscal period to $47 to $65 and finally back to $45 at
the end of November 2015. This price volatility started with OPEC deciding
during a meeting in late November 2014 to not cut their production despite a
global over-supply of oil brought on by the development of U.S. Shale Oil
Fields. From that point on, any data showing changes in crude oil supply/demand
was greeted with a large move in the price of oil. Longer-term interest rates in
the U.S. also saw a great deal of volatility. The U.S. 10-year Treasury yield
moved from 2.16%, at the beginning of the fiscal period, to 1.64%, then on to
2.48%, before settling in a range between 2.00% and 2.30% before closing at
2.21% at the end of November. The 10-year Treasury yield was buffeted about by
the same global growth worries that influenced the equity markets as well as the
anticipation of when the first actions from the Federal Reserve may occur and
how far they might go in their "normalization" process.
PERFORMANCE SUMMARY - EQUITY COMPONENT
For the 12 months ended November 30, 2015, the Fund's net asset value ("NAV")
and market price returns were -1.23% and -3.79%, respectively, on a total
return(1) basis. The Russell 1000(R) Value Index returned -1.11% on a total
return(1) basis over the same period. The equity portion of the Fund's assets
was down 1.32% over the period slightly trailing the Russell 1000(R) Value
Index. The covered call options program delivered a slight positive return
during the period which was not unexpected given the weak equity returns and
volatility during the period. The equity portion of the portfolio is invested in
higher-yielding dividend stocks as a way to meet the Fund's primary objective of
seeking a high level of current income. This focus on higher-yielding stocks
proved to be a headwind this fiscal year. In a study done by Bank of America
Merrill Lynch, the two highest yielding quintiles of stocks in the Index
underperformed the Index by 4.0% during the period. Within the equity portion of
the portfolio, the largest detractor to relative performance was the Energy
group with stock selection within the group responsible for the majority of the
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(1) Total return is based on the combination of reinvested dividends, capital
gains and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
ANNUAL REPORT
NOVEMBER 30, 2015
underperformance. The portfolio had exposure to several Master Limited
Partnerships (MLPs) which had steep price declines. The severe decline in the
price of oil caused both a reduction in earnings estimates and valuations for
these holdings. We believe the MLPs that are held by the portfolio are of high
quality and their share prices should recover when the energy markets recover.
However, we are carefully watching their fundamentals to ensure the
appropriateness of continuing those investments. In addition, the portfolio did
not hold any refining companies, which generally performed well during the
period. Outside of the Energy group, portfolio positioning and stock selection
was weak in the Health Care group as the portfolio's pharmaceutical holdings did
not perform as well as expected and the portfolio did not hold enough weight in
the Health Care Equipment & Services group which was a strong group during the
year. On the positive side, stock selection in the Food, Beverage & Tobacco
group was very strong and benefited from the takeover of Kraft Foods. Within the
Software & Services group, stock selection benefited from what the portfolio did
not own, while stock selection in the Retailing and Automobile & Components
groups was strong and was aided mostly by stocks that were held by the
portfolio.
PERFORMANCE SUMMARY - SENIOR LOAN COMPONENT
The 12-month period ended November 30, 2015 was generally softer for the senior
loan market after starting the year off relatively strong. The S&P/LSTA
Leveraged Loan Index had a positive return of 1.99% for the six-month period
ended May 31, 2015, only to finish with a return of -0.87% for the 12-month
period ended November 30, 2015 and as a result, leverage was a detractor to the
performance of the Fund. From a credit quality perspective, higher credit-rated
issues provided the strongest performance for the period. Higher quality
BB-rated issues returned 1.92% in the period, outperforming lower quality
B-rated issues' return of -0.92%, and significantly outperforming CCC-rated
issues' return of -6.61%. The average price of loans in the market began the
period at $97.51, and after peaking at $97.57 at the end of April, loan prices
ended the period at $92.63. (Source: S&P/LSTA)
CREDIT QUALITY/DEFAULT RATES
The default rate of the S&P/LSTA Leveraged Loan Index entered the period at
3.33% and hit a 12-month high of 3.99% in January. The higher default rate was
primarily driven by the default of Texas Competitive Electric Holdings Co. LLC
("TXU"), an electric utility in the state of Texas. While the default occurred
in April of 2014, it remained in the trailing 12-month data. TXU is the largest
senior loan debt issuer to default and a large high-yield bond issuer. The
trailing 12-month default rate in the senior loan market declined sharply in
April 2015, when TXU's default rolled off, and then remained relatively benign,
ending the period at 1.47%, which is well below the long-term average for the
asset class.
Despite the strength of corporate balance sheets today, the lack of near-term
debt maturities, and access to robust capital markets, we believe the default
rates for both senior loans and high-yield bonds could drift higher in 2016
driven by lower commodity prices, principally oil, gas, coal and iron ore.
However, we believe that increasing corporate defaults will likely be contained
within these cyclical commodity sectors and not systemic to the overall market.
SENIOR LOAN MARKET OUTLOOK
While the turmoil in financial markets caused a great deal of concern recently,
we believe firmly that this is a correction rather than the beginning of a
recession in the U.S. However, we believe that in the near future, there remains
a healthy probability that this correction is not yet over and we may indeed see
further volatility. The last time U.S. equities declined over 10% (as they did
this August) was in 2011. Such a prolonged period of relative stability can
sometimes lead to financial market complacency. Generally, corrections are
largely technical in nature (rather than fundamental) and can reprice risk, akin
to throwing the baby out with the bath water, thereby creating potential
opportunities. As such, we view this current correction as a healthy opportunity
for patient investors willing to wait for fundamentals to drive returns again.
Our outlook for U.S. credit markets including senior bank loans and high-yield
bonds is consistent with our prior outlook. We believe the combination of strong
technical tailwinds created by global central bank policy, attractive valuations
within the credit markets, a below trend default rate environment, modest but
healthy economic growth and sound corporate fundamentals provide a firm backdrop
for potential returns in the periods ahead. We continue to believe that steadily
improving economic data (GDP growth of approximately 2.0%-2.5% and the improved
unemployment picture) will provide the Federal Reserve the motivation they
require to begin the process of raising interest rates in the near-term.
We believe today's high-yield bond yields (Yield-to-Worst) and spreads over U.S.
Treasuries remain attractive at 8.14%, and 640 basis points (bps), respectively,
as of November 30, 2015. While weak pricing in energy (oil & gas) and
metals/mining commodities (coal & iron ore) may lead to higher defaults within
the high-yield bond market, we believe those defaults will likely be contained
within those specific sectors, and hence, not necessarily systemic to other
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
ANNUAL REPORT
NOVEMBER 30, 2015
areas of the market. We have maintained a significant underweight position in
energy and metals/mining, which has proven beneficial in the wake of the
commodity price declines. Importantly, energy-induced volatility is likely to
weigh on the high-yield bond benchmark, which we believe further supports the
rationale for active decision making, rather than passive, within the high-yield
credit market.
Retail investors have been reducing exposure to senior loans in the wake of
declining Treasury yields, while institutional investors have simultaneously
embraced senior loans. We believe that with a potential increase in the Federal
Funds rate on the horizon, we'll likely begin to see greater demand for senior
loans in the coming months from retail investors. Based on current valuations,
we believe senior loans, given their senior secured position in the capital
structure and floating interest rate, are well positioned as we move through the
remainder of 2015 and into 2016. The respite in retail demand has helped to
somewhat balance supply and demand within the senior loan market, given reduced
new senior loan issuance that resulted from new regulatory constraints that have
been placed on banks issuing senior loans. Moreover, as high-yield bond funds
suffered redemptions throughout the last few months, we believe they were
selling some of their senior loan positions, given how well loans held up
relative to the broad high-yield market. This supply has also supported a
balanced market.
In summary, we believe that both the high-yield bond and senior loan markets
offer compelling opportunities today, principally within an actively managed
framework where risk can be appropriately managed. As we evaluate new investment
opportunities, decisions will continue to be rooted in our rigorous bottom-up
credit analysis and will focus on the opportunities that we believe offer the
best risk and reward balance. Despite the many distractions that ebb and flow
every quarter, we remain firmly focused on finding value in the high-yield bond
and senior loan markets.
EQUITY MARKET AND FUND OUTLOOK
The Index attained an all-time closing high of 2,130.82 on May 21, 2015, and it
closed this fiscal year down only 2.4% from that record level. As was stated
earlier, the Index was up 52% in the two preceding years and up over 200% from
its closing low of 676.53 on March 9, 2009 through November 30, 2015. So is the
paltry (by comparison) 2.75% gain this year a respite which will allow the
market to advance more strongly in the coming years? We believe that depends on
the answers to a myriad of questions that remain unanswered. Some of them are:
How quickly and to what level will the Federal Reserve raise short-term interest
rates after its first change to policy in the last nine years? What will be the
impact of those hikes (assuming they occur) on the economy? Will the U.S.
employment picture continue to improve? What are the not-so-visible impacts of
the collapse in oil prices? Will China be able to maneuver through its economic
transition? What will happen in the upcoming US elections? There are many other
issues which add to the uncertain environment - but these uncertainties can
provide positive impetus to stock prices if they are resolved in a market
friendly manner. Stock prices have risen the last few years on a combination of
the mostly positive resolution of uncertainties, strong earnings growth and
increased confidence in the economy's ability to continue to improve coming out
of the "Great Recession". Given valuations in the equity markets are above
longer-term averages and higher interest rates (which are typically viewed as a
headwind to equity valuations) appear to be coming, we believe that earnings
growth will have to improve in order for the equity market to move substantially
higher. While this earnings growth may prove more difficult than in prior years,
we believe that companies have learned how to operate well in the low growth
environment that the global economy has been experiencing and that we believe
will continue. Absent a global recession, revenues should move higher and
companies will continue to be vigilant on controlling costs thereby keeping
profit margins at or near current high levels. In addition, we believe that the
uptick in mergers and acquisitions will continue as will strong stock
repurchases, which should help corporations in their search for earnings growth.
Low interest rates have helped facilitate these corporate actions and despite
the increase in short-term rates that is expected, we believe rates will remain
low enough to continue to drive these actions.
Our position is essentially unchanged. Despite the uncertainties, the economy
should continue to grow at a reasonable, but not overly 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, we believe 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 5
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2015
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
COMMON STOCKS - 82.4%
AEROSPACE & DEFENSE - 1.5%
11,500 Honeywell International, Inc. (a)................................................ $ 1,195,425
--------------
AUTOMOBILES - 1.4%
30,000 General Motors Co................................................................ 1,086,000
--------------
BANKS - 13.5%
28,000 BB&T Corp. (a)................................................................... 1,081,360
70,000 F.N.B. Corp...................................................................... 1,016,400
40,000 Fifth Third Bancorp.............................................................. 826,800
43,000 JPMorgan Chase & Co. (a)......................................................... 2,867,240
9,500 M&T Bank Corp.................................................................... 1,190,635
20,000 PacWest Bancorp.................................................................. 940,400
44,000 Wells Fargo & Co. (a)............................................................ 2,424,400
--------------
10,347,235
--------------
BIOTECHNOLOGY - 2.0%
26,000 AbbVie, Inc. (a)................................................................. 1,511,900
--------------
CAPITAL MARKETS - 2.3%
27,500 Charles Schwab (The) Corp........................................................ 927,025
25,000 Invesco Ltd...................................................................... 842,250
--------------
1,769,275
--------------
CHEMICALS - 0.9%
7,500 LyondellBasell Industries N.V., Class A.......................................... 718,650
--------------
COMMERCIAL SERVICES & SUPPLIES - 1.1%
54,000 Covanta Holding Corp............................................................. 872,100
--------------
CONSUMER FINANCE - 1.3%
13,500 American Express Co.............................................................. 967,140
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 3.6%
48,700 AT&T, Inc. (a)................................................................... 1,639,729
25,200 Verizon Communications, Inc. (a)................................................. 1,145,340
--------------
2,785,069
--------------
ELECTRIC UTILITIES - 1.3%
30,000 PPL Corp. (a).................................................................... 1,021,200
--------------
ENERGY EQUIPMENT & SERVICES - 0.6%
33,500 Noble Corp. PLC.................................................................. 444,545
--------------
FOOD & STAPLES RETAILING - 1.5%
12,000 CVS Health Corp.................................................................. 1,129,080
--------------
FOOD PRODUCTS - 1.0%
20,000 B&G Foods, Inc................................................................... 755,600
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 2.2%
22,300 Medtronic PLC (a)................................................................ 1,680,082
--------------
HEALTH CARE PROVIDERS & SERVICES - 1.1%
9,500 Cardinal Health, Inc............................................................. 825,075
--------------
HOTELS, RESTAURANTS & LEISURE - 2.7%
11,500 DineEquity, Inc. (a)............................................................. 975,660
22,000 Six Flags Entertainment Corp. (a)................................................ 1,141,800
--------------
2,117,460
--------------
INDUSTRIAL CONGLOMERATES - 4.3%
110,000 General Electric Co. (a)......................................................... 3,293,400
--------------
Page 6 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2015
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
INSURANCE - 4.7%
12,000 ACE, Ltd......................................................................... $ 1,378,200
23,000 Arthur J. Gallagher & Co......................................................... 1,006,250
24,500 MetLife, Inc..................................................................... 1,251,705
--------------
3,636,155
--------------
IT SERVICES - 1.7%
15,000 Automatic Data Processing, Inc. (a).............................................. 1,293,900
--------------
MEDIA - 3.2%
30,000 Cinemark Holdings, Inc........................................................... 1,041,000
43,000 National CineMedia, Inc.......................................................... 682,410
40,000 Regal Entertainment Group, Class A (a)........................................... 750,000
--------------
2,473,410
--------------
MULTI-UTILITIES - 1.1%
11,000 DTE Energy Co. (a)............................................................... 885,390
--------------
OIL, GAS & CONSUMABLE FUELS - 8.6%
18,000 Chevron Corp. (a)................................................................ 1,643,760
20,500 ConocoPhillips (a)............................................................... 1,108,025
12,000 Exxon Mobil Corp................................................................. 979,920
10,000 Occidental Petroleum Corp. (a)................................................... 755,900
29,800 Royal Dutch Shell PLC, ADR (a)................................................... 1,482,848
13,200 TOTAL S.A., ADR (a).............................................................. 652,740
--------------
6,623,193
--------------
PHARMACEUTICALS - 7.8%
30,000 AstraZeneca PLC, ADR............................................................. 1,021,500
42,500 Merck & Co., Inc. (a)............................................................ 2,252,925
82,800 Pfizer, Inc. (a)................................................................. 2,713,356
--------------
5,987,781
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 3.8%
55,800 Intel Corp. (a).................................................................. 1,940,166
20,000 Microchip Technology, Inc. (a)................................................... 965,600
--------------
2,905,766
--------------
SOFTWARE - 2.3%
32,000 Microsoft Corp................................................................... 1,739,200
--------------
SPECIALTY RETAIL - 1.4%
11,000 L Brands, Inc. (a)............................................................... 1,049,510
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 1.3%
8,600 Apple, Inc. (a).................................................................. 1,017,380
--------------
TOBACCO - 4.2%
27,000 Altria Group, Inc. (a)........................................................... 1,555,200
18,800 Philip Morris International, Inc. (a)............................................ 1,642,932
--------------
3,198,132
--------------
TOTAL COMMON STOCKS.............................................................. 63,329,053
(Cost $64,997,953) --------------
See Notes to Financial Statements Page 7
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2015
SHARES/
UNITS DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
MASTER LIMITED PARTNERSHIPS - 4.2%
CAPITAL MARKETS - 1.2%
28,500 Blackstone Group, L.P............................................................ $ 890,055
--------------
OIL, GAS & CONSUMABLE FUELS - 3.0%
26,000 Alliance Resource Partners, L.P.................................................. 445,900
16,700 Energy Transfer Partners, L.P.................................................... 638,107
25,000 Enterprise Products Partners, L.P................................................ 634,750
18,000 Golar LNG Partners, L.P.......................................................... 258,120
26,000 Teekay Offshore Partners, L.P.................................................... 345,540
--------------
2,322,417
--------------
TOTAL MASTER LIMITED PARTNERSHIPS................................................ 3,212,472
(Cost $4,628,578) --------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 1.3%
CAPITAL MARKETS - 1.3%
61,000 Ares Capital Corp................................................................ 965,020
(Cost $1,066,660) --------------
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 25.4%
AEROSPACE & DEFENSE - 0.2%
$ 158,253 DynCorp International, Inc., Term Loan.............. 6.25% 07/07/16 150,076
--------------
AUTO COMPONENTS - 0.1%
124,217 Gates Global LLC, Initial Dollar Term Loan.......... 4.25% 07/06/21 115,885
--------------
CAPITAL MARKETS - 0.3%
199,500 American Beacon Advisors, Inc., Term Loan B......... 5.50% 04/30/22 198,503
--------------
CHEMICALS - 0.2%
99,000 Emerald Performance Materials LLC, Initial Term Loan
(First Lien)..................................... 4.50% 07/30/21 98,109
99,500 Ineos US Finance LLC, 2022 Dollar Term Loan......... 4.25% 03/31/22 97,385
--------------
195,494
--------------
COMMERCIAL SERVICES & SUPPLIES - 1.4%
49,625 PSSI (Packers Holdings LLC), Term B Loan............ 5.00% 12/02/21 49,377
396,665 SMG Holdings, Inc., Term Loan (First Lien).......... 4.50% 02/27/20 392,203
464,824 Southern Graphic, Inc., New Term Loan............... 4.25% 10/17/19 458,818
196,500 WTG Holdings III Corp. (EWT Holdings III Corp.),
Term Loan (First Lien)........................... 4.75% 01/15/21 194,289
--------------
1,094,687
--------------
CONSUMER FINANCE - 0.3%
237,292 Walter Investment Management Corp., Tranche B Term
Loan............................................. 4.75% 12/18/20 205,110
--------------
CONTAINERS & PACKAGING - 0.1%
96,344 Anchor Glass Container Corp., Term B Loan........... 4.50% 06/30/22 95,862
--------------
DIVERSIFIED CONSUMER SERVICES - 1.0%
230,536 Asurion LLC, Incremental Tranche B-1 Term Loan...... 5.00% 05/24/19 216,992
352,941 Asurion LLC, Term Loan (Second Lien)................ 8.50% 03/03/21 310,412
238,541 Asurion LLC, Incremental Tranche B-4 Term Loan...... 5.00% 08/04/22 220,292
--------------
747,696
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES - 1.3%
$ 200,000 AlixPartners LLP, Initial Term Loan................. 4.50% 07/28/22 $ 198,376
299,964 Duff & Phelps Corp., Initial Term Loan.............. 4.75% 04/23/20 295,090
500,000 First Data Corp., 2021 Extended Dollar Term Loan.... 4.21% 03/24/21 497,970
--------------
991,436
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.3%
250,000 Level 3 Financing, Inc., Tranche B-II 2022 Term
Loan............................................. 3.50% 05/31/22 247,375
--------------
ELECTRONIC EQUIPMENT, INSTRUMENTS &
COMPONENTS - 0.2%
186,364 Zebra Technologies Corp., Term Loan B............... 4.75% 10/27/21 186,513
--------------
FOOD & STAPLES RETAILING - 1.3%
512,883 Albertsons LLC, Term B-4 Loan....................... 5.50% 08/25/21 511,857
515,022 BJ's Wholesale Club, Inc., New 2013 (November)
Replacement Loan (First Lien).................... 4.50% 09/26/19 504,078
--------------
1,015,935
--------------
FOOD PRODUCTS - 1.3%
1,000,000 New HB Acquisition LLC, Term B Loan (Second Lien)... 8.50% 08/03/23 993,750
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 0.5%
360,260 Sage Products Holdings III LLC, Term Loan B......... 4.25% 12/13/19 357,335
--------------
HEALTH CARE PROVIDERS & SERVICES - 1.8%
324,385 CareCore National LLC, Term Loan.................... 5.50% 03/05/21 285,459
63,819 CHS/Community Health Systems, Inc.,
2021 Term H Loan................................. 4.00% 01/27/21 62,693
248,750 Curo Health Services Holdings, Inc., Term B Loan
(First Lien)..................................... 6.50% 02/07/22 247,663
676,500 Healogics, Inc. (CDRH Parent, Inc.),
Initial Term Loan (First Lien)................... 5.25% 07/01/21 527,670
81,670 Heartland Dental Care LLC, Incremental Term Loan.... 5.50% 12/21/18 79,220
225,000 U.S. Renal Care, Inc., Term Loan B,
Initial Term Loan................................ 5.25% 12/31/22 223,312
--------------
1,426,017
--------------
HEALTH CARE TECHNOLOGY - 0.2%
124,396 Healthport Technologies LLC (CT Technologies
Intermediate Holdings, Inc.), Initial Term
Loan............................................. 5.25% 12/01/21 122,323
--------------
HOTELS, RESTAURANTS & LEISURE - 6.5%
742,514 Amaya Holdings B.V., Initial Term B Loan
(First Lien)..................................... 5.00% 08/01/21 710,727
641,875 Caesars Growth Partners LLC, Term B Loan
(First Lien)..................................... 6.25% 05/08/21 572,874
460,737 CityCenter Holdings LLC, Term B Loan................ 4.25% 10/16/20 457,397
162,872 Extended Stay America (ESH Hospitality, Inc.),
Term Loan........................................ 5.00% 06/24/19 163,483
418,612 Focus Brands, Inc., Refinancing Term Loan
(First Lien)..................................... 4.25% 02/21/18 417,042
496,250 Norwegian Cruise Lines (NCL Corp.), Term B Loan..... 4.00% 11/19/21 493,977
321,817 Planet Fitness Holdings LLC, Term Loan.............. 4.75% 03/31/21 317,794
643,500 Portillo's Holdings LLC, Term B Loan (First Lien)... 4.75% 08/02/21 620,978
750,000 Portillo's Holdings LLC, Second Lien Term Loan...... 8.00% 08/01/22 712,500
212,143 Red Lobster Management LLC, Initial Term Loan
(First Lien)..................................... 6.25% 07/28/21 211,258
232,416 ROC Finance LLC, Funded Term B Loan................. 5.00% 06/20/19 218,108
91,081 Station Casinos, Inc., B Term Loan.................. 4.25% 03/02/20 90,330
--------------
4,986,468
--------------
INSURANCE - 0.7%
94,987 Amwins Group LLC, Term Loan......................... 5.25% 09/06/19 95,058
245,555 Confie Seguros Holding II Co., Term B Loan
(First Lien)..................................... 5.75% 11/09/18 245,555
220,500 USI, Inc. (Compass Investors, Inc.),
Initial Term Loan................................ 4.25% 12/27/19 215,539
--------------
556,152
--------------
See Notes to Financial Statements Page 9
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
IT SERVICES - 0.6%
$ 370,313 Interactive Data Corp., Term Loan................... 4.75% 05/02/21 $ 369,424
132,402 Sungard Availability Services Capital, Inc., Term
Loan B........................................... 6.00% 03/29/19 112,674
--------------
482,098
--------------
LIFE SCIENCES TOOLS & SERVICES - 0.9%
426,750 InVentiv Health, Inc., Term B-4 Loan................ 7.75% 05/15/18 423,549
259,350 Pharmaceutical Product Development, Inc.
(Jaguar Holding Company II), Initial Term Loan... 4.25% 08/18/22 252,218
--------------
675,767
--------------
MACHINERY - 0.4%
297,750 Douglas Dynamics LLC, Term Loan B................... 5.25% 12/02/21 295,517
--------------
MEDIA - 1.3%
496,231 Formula One (Delta 2 Lux S.A.R.L.),
Facility B3 (USD)................................ 4.75% 07/30/21 482,739
181,188 Media General, Inc., Term Loan B.................... 4.00% 07/31/20 179,829
96,250 Mergermarket USA, Inc., Initial Term Loan........... 4.50% 02/04/21 93,122
245,963 WME IMG Worldwide, Inc., Term Loan (First Lien)..... 5.25% 05/06/21 243,810
--------------
999,500
--------------
OIL, GAS & CONSUMABLE FUELS - 0.0%
100,000 American Energy Marcellus Holdings LLC, Initial Loan
(First Lien)..................................... 5.25% 08/04/20 33,600
--------------
PHARMACEUTICALS - 0.9%
397,125 Akorn, Inc., Loan................................... 5.50% 04/16/21 379,751
195,348 Patheon, Inc. (JLL/Delta Dutch Newco B.V.),
Initial Dollar Term Loan......................... 4.25% 03/11/21 188,878
99,250 Valeant Pharmaceuticals International, Inc.,
Series F-1 Tranche B Term Loan................... 4.00% 04/01/22 93,568
--------------
662,197
--------------
PROFESSIONAL SERVICES - 0.9%
124,372 Advantage Sales & Marketing, Inc., Initial Term Loan
(First Lien)..................................... 4.25% 07/23/21 120,244
204,193 Information Resources, Inc., Term Loan.............. 4.75% 09/30/20 204,108
344,750 TransUnion LLC, 2015 Term B-2 Loan.................. 3.50% 04/09/21 335,614
--------------
659,966
--------------
REAL ESTATE INVESTMENT TRUSTS - 0.2%
174,563 Communication Sales & Leasing, Inc., Term Loan...... 5.00% 10/24/22 161,034
--------------
ROAD & RAIL - 0.3%
43,735 Kenan Advantage Group, Inc., Term Loan B-2.......... 4.00% 07/31/22 43,407
137,116 Kenan Advantage Group, Inc., Term Loan B1........... 4.00% 07/31/22 136,088
19,149 Kenan Advantage Group, Inc., Delayed Draw Term 1
Loan (d)......................................... 1.50% (e) 07/31/22 19,005
--------------
198,500
--------------
SOFTWARE - 0.8%
100,000 Blue Coat Systems, Inc., Initial Term Loan.......... 4.50% 05/20/22 97,063
473,889 BMC Software Finance, Inc., Initial US Term Loan.... 5.00% 09/10/20 409,715
114,383 Triple Point Technologies, Inc., Term Loan
(First Lien)..................................... 5.25% 07/10/20 77,208
--------------
583,986
--------------
SPECIALTY RETAIL - 1.1%
490,022 Neiman Marcus Group, Inc., The, Other Term Loan..... 4.25% 10/25/20 457,661
223,492 PetSmart, Inc., Tranche B-1 Loan.................... 4.25% 03/11/22 219,282
169,924 Serta Simmons Holdings LLC, Term Loan B............. 4.25% 10/01/19 168,809
--------------
845,752
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 0.3%
$ 201,661 Dell, Inc., Term B-2 Loan........................... 4.00% 04/29/20 $ 200,473
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS........................................ 19,485,007
(Cost $20,320,996) --------------
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
$25 PAR PREFERRED SECURITIES - 3.9%
BANKS - 1.0%
31,500 PNC Financial Services Group, Inc., Series Q........ 5.38% (f) 803,250
--------------
CAPITAL MARKETS - 1.0%
29,300 Goldman Sachs Group, Inc............................ 5.95% (f) 752,717
--------------
CONSUMER FINANCE - 1.4%
42,800 Discover Financial Services, Series B............... 6.50% (f) 1,119,220
--------------
MARINE - 0.5%
14,700 Seaspan Corp., Series D............................. 7.95% (f) 357,063
--------------
TOTAL $25 PAR PREFERRED SECURITIES............................................... 3,032,250
(Cost $2,894,797) --------------
$50 PAR PREFERRED SECURITIES - 0.7%
REAL ESTATE INVESTMENT TRUSTS - 0.7%
10,000 Weyerhaeuser Co., Series A.......................... 6.38% 07/01/16 529,900
(Cost $541,216) --------------
$100 PAR PREFERRED SECURITIES - 0.8%
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.8%
6,000 Frontier Communications Corp., Series A............. 11.13% 06/29/18 579,840
(Cost $601,831) --------------
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
INVESTMENT COMPANIES - 2.3%
CAPITAL MARKETS - 1.5%
5,700 SPDR S&P 500 ETF Trust........................................................... 1,189,533
--------------
OIL, GAS & CONSUMABLE FUELS - 0.8%
32,300 Kayne Anderson MLP Investment Co................................................. 588,829
--------------
TOTAL INVESTMENT COMPANIES....................................................... 1,778,362
(Cost $2,318,377) --------------
REAL ESTATE INVESTMENT TRUSTS - 3.8%
REAL ESTATE INVESTMENT TRUSTS - 3.8%
20,000 Blackstone Mortgage Trust, Inc., Class A......................................... 578,000
7,500 Crown Castle International Corp.................................................. 644,325
20,000 Hospitality Properties Trust..................................................... 555,400
20,000 Lamar Advertising Co., Class A................................................... 1,168,200
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS.............................................. 2,945,925
(Cost $2,792,509) --------------
TOTAL INVESTMENTS - 124.8%....................................................... 95,857,829
(Cost $100,162,917) (g) --------------
See Notes to Financial Statements Page 11
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2015
NUMBER OF
CONTRACTS DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.2%)
Abbvie, Inc. Call
130 @ $62.50 due December 2015....................................................... $ (2,600)
--------------
Apple, Inc. Call
25 @ 125.00 due December 2015....................................................... (650)
--------------
Cardinal Health, Inc. Call
50 @ 90.00 due December 2015....................................................... (1,750)
--------------
General Electric Co. Call
300 @ 31.00 due December 2015....................................................... (3,600)
--------------
General Motors Co. Call
275 @ 38.00 due December 2015....................................................... (3,850)
--------------
Honeywell International, Inc. Call
50 @ 105.00 due December 2015....................................................... (6,300)
--------------
Intel Corp. Call
200 @ 36.00 due December 2015....................................................... (3,200)
--------------
JPMorgan Chase & Co. Call
150 @ 70.00 due December 2015....................................................... (3,450)
--------------
L Brands, Inc. Call
50 @ 100.00 due December 2015...................................................... (2,600)
--------------
LyondellBasell Industries N.V. Call
40 @ 100.00 due December 2015...................................................... (3,200)
--------------
Microchip Technology, Inc. Call
100 @ 49.00 due December 2015....................................................... (8,100)
--------------
Medtronic PLC Call
100 @ 80.00 due December 2015....................................................... (2,400)
--------------
Microsoft Corp. Call
180 @ 55.00 due December 2015....................................................... (12,600)
--------------
Noble Corp. PLC Call
100 @ 15.00 due December 2015....................................................... (1,600)
--------------
Philip Morris International, Inc. Call
75 @ 87.50 due December 2015....................................................... (8,400)
--------------
S&P 500 Index Calls (h)
40 @ 2,120.00 due December 2015.................................................... (31,120)
80 @ 2,140.00 due December 2015.................................................... (24,800)
25 @ 2,160.00 due December 2015.................................................... (2,900)
--------------
(58,820)
--------------
TOTAL CALL OPTIONS WRITTEN....................................................... (123,120)
(Premiums received $224,113) --------------
OUTSTANDING LOAN - (27.1%)....................................................... (20,800,000)
NET OTHER ASSETS AND LIABILITIES - 2.5%.......................................... 1,882,846
--------------
NET ASSETS - 100.0%.............................................................. $ 76,817,555
==============
Page 12 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2015
-----------------------------
(a) All or a portion of these securities are available to serve as collateral
for the outstanding loan and call options written.
(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, 2015. 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.
(f) Perpetual maturity.
(g) Aggregate cost for federal income tax purposes is $100,229,933. As of
November 30, 2015, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$3,120,470 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$7,492,574.
(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,
2015 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 11/30/2015 PRICES INPUTS INPUTS
------------------------------------------------ -------------- ------------- ------------ ------------
Common Stocks*.................................. $ 63,329,053 $ 63,329,053 $ -- $ --
Master Limited Partnerships*.................... 3,212,472 3,212,472 -- --
Common Stocks - Business Development
Companies*................................... 965,020 965,020 -- --
Senior Floating-Rate Loan Interests*............ 19,485,007 -- 19,485,007 --
$25 Par Preferred Securities*................... 3,032,250 3,032,250 -- --
$50 Par Preferred Securities*................... 529,900 529,900 -- --
$100 Par Preferred Securities*.................. 579,840 579,840 -- --
Investment Companies*........................... 1,778,362 1,778,362 -- --
Real Estate Investment Trusts*.................. 2,945,925 2,945,925 -- --
-------------- ------------- ------------ ------------
Total Investments............................... $ 95,857,829 $ 76,372,822 $ 19,485,007 $ --
============== ============= ============ ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 11/30/2015 PRICES INPUTS INPUTS
------------------------------------------------ -------------- ------------- ------------ ------------
Call Options Written............................ $ (123,120) $ (123,120) $ -- $ --
============== ============= ============ ============
* 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, 2015.
See Notes to Financial Statements Page 13
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2015
ASSETS:
Investments, at value
(Cost $100,162,917).......................................................................... $ 95,857,829
Cash............................................................................................ 1,323,761
Receivables:
Investment securities sold................................................................... 581,923
Dividends.................................................................................... 234,008
Interest..................................................................................... 159,901
Dividend reclaims............................................................................ 440
Prepaid expenses................................................................................ 4,076
--------------
Total Assets................................................................................. 98,161,938
--------------
LIABILITIES:
Outstanding loan................................................................................ 20,800,000
Options written, at value (Premiums received $224,113).......................................... 123,120
Payables:
Investment securities purchased.............................................................. 222,750
Investment advisory fees..................................................................... 79,915
Audit and tax fees........................................................................... 53,500
Unfunded loan commitments.................................................................... 19,149
Administrative fees.......................................................................... 17,352
Printing fees................................................................................ 14,404
Interest and fees on loan.................................................................... 5,215
Trustees' fees and expenses.................................................................. 2,811
Transfer agent fees.......................................................................... 2,191
Custodian fees............................................................................... 2,140
Legal fees................................................................................... 1,065
Financial reporting fees..................................................................... 771
--------------
Total Liabilities............................................................................ 21,344,383
--------------
NET ASSETS...................................................................................... $ 76,817,555
==============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................. $ 135,726,740
Par value....................................................................................... 82,595
Accumulated net investment income (loss)........................................................ (66,655)
Accumulated net realized gain (loss) on investments and written options......................... (54,721,030)
Net unrealized appreciation (depreciation) on investments and written options................... (4,204,095)
--------------
NET ASSETS...................................................................................... $ 76,817,555
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................ $ 9.30
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)..... 8,259,517
==============
Page 14 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2015
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $22,311)........................................... $ 2,967,739
Interest........................................................................................ 1,152,069
Other........................................................................................... 15,842
--------------
Total investment income...................................................................... 4,135,650
--------------
EXPENSES:
Investment advisory fees........................................................................ 1,029,865
Interest and fees on loan....................................................................... 194,854
Administrative fees............................................................................. 109,924
Audit and tax fees.............................................................................. 57,672
Printing fees................................................................................... 38,282
Transfer agent fees............................................................................. 23,069
Trustees' fees and expenses..................................................................... 16,933
Custodian fees.................................................................................. 13,681
Financial reporting fees........................................................................ 9,250
Legal fees...................................................................................... 2,445
Other........................................................................................... 32,324
--------------
Total expenses............................................................................... 1,528,299
--------------
NET INVESTMENT INCOME (LOSS).................................................................... 2,607,351
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments.................................................................................. 755,174
Written options.............................................................................. 717,066
--------------
Net realized gain (loss)........................................................................ 1,472,240
--------------
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................. (5,984,448)
Written options.............................................................................. 140,793
--------------
Net change in unrealized appreciation (depreciation)............................................ (5,843,655)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)......................................................... (4,371,415)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ (1,764,064)
==============
See Notes to Financial Statements Page 15
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
11/30/2015 11/30/2014
------------ ------------
OPERATIONS:
Net investment income (loss)......................................................... $ 2,607,351 $ 2,617,161
Net realized gain (loss)............................................................. 1,472,240 11,026,076
Net change in unrealized appreciation (depreciation)................................. (5,843,655) (4,393,725)
Net increase from payment by the Sub-Advisor......................................... -- 3,729
------------ ------------
Net increase (decrease) in net assets resulting from operations...................... (1,764,064) 9,253,241
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................................ (4,292,340) (5,451,281)
Return of Capital.................................................................... (1,324,132) --
------------ ------------
Total distributions to shareholders.................................................. (5,616,472) (5,451,281)
------------ ------------
Total increase (decrease) in net assets.............................................. (7,380,536) 3,801,960
NET ASSETS:
Beginning of period.................................................................. 84,198,091 80,396,131
------------ ------------
End of period........................................................................ $ 76,817,555 $ 84,198,091
============ ============
Accumulated net investment income (loss) at end of period............................ $ (66,655) $ (61,469)
============ ============
COMMON SHARES:
Common Shares at end of period....................................................... 8,259,517 8,259,517
============ ============
Page 16 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.................... $ (1,764,064)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments...................................................... (55,590,406)
Sales, maturities and paydowns of investments................................. 59,692,481
Proceeds from written options................................................. 3,739,406
Amount paid to close written options.......................................... (2,947,002)
Return of capital and realized gain distributions received from investments... 461,202
Net amortization/accretion of premiums/discounts on investments............... (20,105)
Net realized gain/loss on investments and written options..................... (1,472,240)
Net change in unrealized appreciation/depreciation on investments
and written options........................................................ 5,843,655
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable............................................... (16,022)
Decrease in dividends receivable.............................................. 202,863
Increase in prepaid expenses.................................................. (290)
Increase in interest and fees on loan payable................................. 2,661
Decrease in investment advisory fees payable.................................. (8,327)
Decrease in legal fees payable................................................ (1,983)
Decrease in printing fees payable............................................. (136)
Decrease in administrative fees payable....................................... (5,357)
Decrease in custodian fees payable............................................ (1,936)
Decrease in transfer agent fees payable....................................... (2,183)
Decrease in Trustees' fees and expenses payable............................... (66)
Decrease in other liabilities................................................. (2,638)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES.............................................. $ 8,109,513
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............... (4,292,340)
Distributions to Common Shareholders from return of capital................... (1,324,132)
Net proceeds from borrowing................................................... 1,700,000
Repayment of borrowing........................................................ (4,400,000)
--------------
CASH USED IN FINANCING ACTIVITIES.................................................. (8,316,472)
--------------
Decrease in cash................................................................... (206,959)
Cash at beginning of period........................................................ 1,530,720
--------------
Cash at end of period.............................................................. $ 1,323,761
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest and fees.................................. $ 192,193
==============
See Notes to Financial Statements Page 17
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------
2015 2014 (a) 2013 (b) 2012 2011
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period......... $ 10.19 $ 9.73 $ 8.63 $ 9.20 $ 9.93
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................. 0.32 0.32 0.20 0.51 0.84 (c)
Net realized and unrealized gain (loss)...... (0.53) 0.80 1.53 (0.36) (0.56)
---------- ---------- ---------- ---------- ----------
Total from investment operations............. (0.21) 1.12 1.73 0.15 0.28
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................ (0.52) (0.66) (0.33) (0.51) (0.78)
Return of capital............................ (0.16) -- (0.30) (0.21) (0.24)
---------- ---------- ---------- ---------- ----------
Total distributions to Common Shareholders (0.68) (0.66) (0.63) (0.72) (1.02)
---------- ---------- ---------- ---------- ----------
Premiums from shares sold in Common Share
offering.................................. -- -- -- -- 0.01
---------- ---------- ---------- ---------- ----------
Net asset value, end of period............... $ 9.30 $ 10.19 $ 9.73 $ 8.63 $ 9.20
========== ========== ========== ========== ==========
Market value, end of period.................. $ 8.17 $ 9.19 $ 8.55 $ 7.69 $ 8.41
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (d).... (1.23)% 12.81% (e) 21.52% 2.24% (f) 2.81%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (d)....... (3.79)% 15.78% 19.84% (0.34)% (10.96)%
========== ========== ========== ========== ==========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)......... $ 76,818 $ 84,198 $ 80,396 $ 71,261 $ 75,980
Ratio of total expenses to average net
assets.................................... 1.90% 1.91% 1.52% 1.48% 1.60%
Ratio of total expenses to average net
assets excluding interest expense......... 1.65% 1.67% 1.50% 1.48% 1.60%
Ratio of net investment income (loss) to
average net assets........................ 3.24% 3.17% 2.18% 5.60% 8.42%
Portfolio turnover rate...................... 54% 112% 184% 790% 1,297%
INDEBTEDNESS:
Total loan outstanding (in 000's)............ $ 20,800 $ 23,500 $ 18,000 $ N/A $ N/A
Asset coverage per $1,000 of
indebtedness (g).......................... $ 4,693 $ 4,583 $ 5,466 $ N/A $ N/A
-----------------------------
(a) On February 21, 2014, the Fund's Board of Trustees approved an interim and
new sub-advisory agreement with Chartwell Investment Partners, Inc., which
became the Fund's sub-advisor on March 5, 2014, under the interim
sub-advisory agreement. On July 2, 2014, the shareholders voted to approve
the new sub-advisory agreement.
(b) On June 9, 2013, the Fund's Board of Trustees approved an interim and 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.
(c) Based on average shares outstanding.
(d) 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.
(e) The Fund received a payment from the sub-advisor in the amount of $3,729.
The payment from the sub-advisor represents less than $0.01 per share and
had no effect on the Fund's total return.
(f) The Fund received a payment from the former sub-advisor in the amount of
$12,651. The payment from the former sub-advisor represents less than
$0.01 per share and had no effect on the Fund's total return.
(g) 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.
Page 18 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015
1. ORGANIZATION
First Trust Dividend and 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
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").
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 Investment Partners, LLC ("Sub-Advisor" or
"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 Advisors L.P. ("First Trust" or the
"Advisor") believes offer the potential for attractive income and/or capital
appreciation. The Fund's portfolio consists of two components: (1) the "Equity
Component," which consists 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." Chartwell manages the Equity Component
of the Fund's portfolio and First Trust manages the Senior Loan/High Yield Debt
Component of the Fund's portfolio. 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 ("REITs"), Master
Limited Partnerships ("MLPs") 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 with strike prices and expiration dates that are collectively
intended to provide risk/reward characteristics that are consistent with the
Fund's investment objectives. 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.
On September 15, 2015, the Fund commenced a Share Repurchase Program. The
program will continue until the earlier of (i) the repurchase of 412,976 common
shares, or (ii) six months from implementation of the Fund's Share Repurchase
Program. The Fund did not repurchase any of its shares during the period. The
Fund expects to continue to evaluate whether to repurchase its outstanding
shares until the earlier of (i) the repurchase of an additional 412,976 common
shares, or (ii) March 15, 2016.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The 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 Fund's NAV per Common Share is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
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 absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e. a regulated market) and are primarily obtained from third-party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third-party pricing service or are
determined by the Pricing Committee of the Fund's investment advisor, First
Trust in accordance with valuation procedures adopted by the Fund's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015
Common stocks, MLPs and other securities listed on any national or foreign
exchange (excluding the Nasdaq(R) Stock Market LLC ("Nasdaq") and the
London Stock Exchange Alternative Investment Market ("AIM")) are valued at
the last sale price on the exchange on which they are principally traded
or, for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Exchange-traded options contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded options contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price. Over-the-counter options contracts are fair
valued at the mean of their most recent bid and asked price, if available,
and otherwise at their closing bid price.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's 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. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or 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.
Foreign securities traded outside the United States are generally valued as of
the time their trading is complete, which is usually different from the close of
the NYSE. Occasionally, events affecting the value of such securities may occur
between such times and the close of the NYSE that will not always be reflected
in the computation of the value of such securities. If events affecting the
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015
value of such securities occur during such period, these securities will be
valued at their fair value according to procedures adopted by the Fund's Board
of Trustees (see above). For certain foreign equity securities, a third party
pricing service may be utilized to determine fair value. All securities and
other assets of the Fund initially expressed in foreign currencies will be
converted to U.S. dollars using exchange rates in effect at the time of
valuation.
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 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 fair 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. If the pricing service cannot or
does not provide a value according to procedures adopted by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act. 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;
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 methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of November 30, 2015, 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. 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
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015
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.
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.
The Fund may hold the securities of REITs. Distributions from such investments
may be comprised of return of capital, capital gains and income. The actual
character of amounts received during the year is not known until after the
REIT's fiscal year end. The Fund records the character of distributions received
from REITs during the year based on estimates available. The characterization of
distributions received by the Fund may be subsequently revised based on
information received from the REITs after their tax reporting periods conclude.
For the year ended November 30, 2015, distributions of $461,202 received from
investments have been reclassified as return of capital and realized gain. The
cost basis of applicable investments 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
$19,149 as of November 30, 2015.
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.
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015
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, 2015, 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
$1,679,803, an increase in accumulated net realized gain (loss) on investments
of $276,367 and a decrease to paid-in capital of $1,956,170.
The tax character of distributions paid during the fiscal years ended November
30, 2015 and 2014 was as follows:
Distributions paid from: 2015 2014
Ordinary income.............................. $ 4,292,340 $ 5,451,281
Capital gain................................. -- --
Return of capital............................ 1,324,132 --
As of November 30, 2015 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......... (54,491,015)
Net unrealized appreciation (depreciation)... (4,338,903)
--------------
Total accumulated earnings (losses).......... (58,829,918)
Other........................................ (161,862)
Paid-in capital.............................. 135,809,335
--------------
Net assets................................... $ 76,817,555
==============
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, maybe
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward for
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, 2015, the Fund
utilized pre-enactment capital loss carryforwards in the amount of $1,895,683
for federal income tax purposes. At November 30, 2015, the Fund had
pre-enactment capital losses for federal income tax purposes of $54,491,015
expiring as follows:
EXPIRATION DATE AMOUNT
November 30, 2016 $30,255,638
November 30, 2017 17,263,318
November 30, 2018 5,877,626
November 30, 2019 1,094,433
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 2012, 2013,
2014 and 2015 remain open to federal and state audit. As of November 30, 2015,
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.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Chartwell serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
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.
During the year ended November 30, 2014, the Fund received a payment from the
Sub-Advisor of $3,729 in connection with trade errors.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon
Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual fee
that varies based on whether the Fund is a closed-end or other actively managed
fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairman of the Audit
Committee, and Governance Committee and the Valuation Committee are paid annual
fees to serve in such capacities, with such compensation allocated pro rata
among each fund in the First Trust Fund Complex based on net assets. Trustees
are reimbursed for travel and out-of-pocket expenses in connection with all
meetings. The Lead Independent Trustee and Committee Chairmen 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, 2015 were $54,010,181 and $58,956,417, respectively.
For the fiscal year ended November 30, 2015, written option activity was as
follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-----------------------------------------------------------------------------
Options outstanding at November 30, 2014... 870 $ 148,775
Options Written............................ 26,110 3,739,406
Options Closed............................. (8,680) (2,705,810)
Options Exercised.......................... (3,162) (178,856)
Options Expired............................ (13,168) (779,402)
--------- -----------
Options outstanding at November 30, 2015... 1,970 $ 224,113
========= ===========
The following table presents the type of derivative held by the Fund at November
30, 2015, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------- ----------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
--------------- ---------------- ----------------------- -------------- ------------------------- --------------
Written Options Equity Risk -- -- Options written, at value $123,120
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the fiscal year
ended November 30, 2015, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
---------------------------------------------------------------------------
EQUITY RISK EXPOSURE
Net realized gain (loss) on written options $ 717,066
Net change in unrealized appreciation (depreciation) on
written options 140,793
The Fund does not have the right to offset financial assets and financial
liabilities related to option contracts on the Statement of Assets and
Liabilities.
5. BORROWINGS
The Fund previously entered into a committed facility agreement with Bank of
America Merrill Lynch that had a maximum commitment amount of $25,000,000. The
borrowing rate under the facility was equal to the 1-month LIBOR plus 70 basis
points. In addition, under the facility, the Fund paid 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 line of credit terminated on
December 18, 2014. Effective December 15, 2014, the Fund entered into a credit
agreement with Pershing LLC that has a maximum commitment amount of $27,000,000.
The borrowing rate under the facility is equal to the 1-month LIBOR plus 70
basis points. The average amount outstanding for the year ended November 30,
2015, was $22,395,068, with a weighted average interest rate of 0.88%. As of
November 30, 2015, the Fund had outstanding borrowings of $20,800,000 under this
committed facility agreement. The high and low annual interest rates for the
year ended November 30, 2015, were 0.92% and 0.82%, respectively. The interest
rate at November 30, 2015, was 0.91%.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
At a meeting on December 7, 2015, the Board accepted Mr. Bradley's resignation
from his position as the President and Chief Executive Officer of the Fund,
effective December 31, 2015. At the same meeting, the Board elected Mr. Dykas,
formerly Chief Financial Officer and Treasurer of the Fund, to serve as the
President and Chief Executive Officer and Mr. Swade, formerly an Assistant
Treasurer of the Fund, to serve as the Treasurer, Chief Financial Officer and
Chief Accounting Officer of the Fund.
On December 16, 2015, TriState Capital Holdings, Inc. ("TriState"), the parent
of Chartwell, announced that it had entered into an agreement to acquire The
Killen Group, which is an investment manager and advisor to The Berwyn Funds. In
the announcement, TriState indicated that The Killen Group will become part of
Chartwell, but will work independently and will not be involved with the
portfolio management and other services that Chartwell provides to the Fund. The
transaction is expected to close in the second quarter of 2016, subject to
customary regulatory and closing conditions.
Effective January 1, 2016, the fixed annual retainer paid to the Independent
Trustees will be allocated equally among each fund in the First Trust Fund
Complex and will no longer be allocated pro rata based on each fund's net
assets.
On January 11, 2016, the Fund declared a dividend of $0.17 per share to Common
Shareholders of record on January 26, 2016, payable January 29, 2016.
Page 25
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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, 2015, 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 audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of November 30, 2015 by correspondence with the Fund's
custodian, brokers and agent banks; when replies were not received from brokers
and agent banks, we performed other auditing procedures. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Dividend and Income Fund, as of November 30, 2015, 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 25, 2016
Page 26
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015 (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 27
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q's
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, 2015, 25.05% qualified for the
corporate dividends received deduction available to corporate shareholders.
The Fund hereby designates as qualified dividend income 31.17% of the ordinary
income distributions for the year ended November 30, 2015.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 29, 2015, 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 Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund, First Trust High Income Long/Short
Fund, First Trust Energy Infrastructure Fund, First Trust New Opportunities MLP
and Energy Fund, First Trust MLP and Energy Income Fund and First Trust
Intermediate Duration Preferred & Income Fund was held on April 20, 2015 (the
"Annual Meeting"). At the Annual Meeting, Richard E. Erickson and Thomas R.
Kadlec were elected by the Common Shareholders of the First Trust MLP and Energy
Income Fund as Class II Trustees for a three-year term expiring at the Fund's
annual meeting of shareholders in 2018. The number of votes cast in favor of Mr.
Erickson was 37,202,858, the number of votes against Mr. Erickson was 962,178,
and the number of broker non-votes was 7,274,418. The number of votes cast in
favor of Mr. Kadlec was 37,237,695, the number of votes against Mr. Kadlec was
927,341, and the number of broker non-votes was 7,274,418. James A. Bowen, Niel
B. Nielson and Robert F. Keith are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
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
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015 (UNAUDITED)
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 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 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.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. Although the resale, or
secondary market for Senior Loans is growing, it is currently limited. There is
no organized exchange or board of trade on which Senior Loans are traded.
Instead, the secondary market for Senior Loans is an unregulated inter-dealer or
inter-bank resale market. In addition, Senior Loans in which the Fund invests
may require the consent of the borrower and/or agent prior to the settlement of
the sale or assignment. These consent requirements can delay or impede the
Fund's ability to settle the sale of Senior Loans. If the economy experiences a
sudden downturn, or if the market for the Senior Loans in which the Fund invests
becomes distressed, the Fund may have difficulty disposing of Senior Loans if it
needs cash to repay debt, to pay dividends, to pay expenses or to take advantage
of new investment opportunities.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015 (UNAUDITED)
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND INVESTMENT
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Dividend and Income Fund (the "Fund"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Chartwell
Investment Partners, Inc. (the "Sub-Advisor"), at a meeting held on June 16,
2015. The Board determined that the continuation of the Agreements 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.
To reach this determination, 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. At meetings held on April 20, 2015 and June 16, 2015, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor (including the relevant personnel
responsible for these services and their experience); the advisory and
sub-advisory fees for the Fund as compared to fees charged to other clients of
the Advisor and the Sub-Advisor and as compared to fees charged to a peer group
of funds selected by Management Practice, Inc. ("MPI"), an independent source
(the "MPI Peer Group"); expenses of the Fund as compared to expense ratios of
the funds in the MPI Peer Group; performance information for the Fund; 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 and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. The
Board reviewed initial materials with the Advisor at a special meeting held on
April 20, 2015, at which the Independent Trustees and their counsel met
separately to discuss the information provided by the Advisor and the
Sub-Advisor. Following the April meeting, independent legal counsel on behalf of
the Independent Trustees requested certain clarifications and supplements to the
materials provided, and those were considered at an executive session of the
Independent Trustees and independent legal counsel held prior to the June 16,
2015 meeting, as well as at the meeting. The Board applied its business judgment
to determine whether the arrangements between the Fund and the Advisor and among
the Fund, the Advisor and the Sub-Advisor are reasonable business arrangements
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 and the Sub-Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
With respect to the Advisory Agreement, 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 considered the significant asset
growth of the First Trust Fund Complex and the Advisor's concomitant investment
in infrastructure and personnel dedicated to the First Trust funds. The Board
also considered the services provided to the Fund by the Advisor's Leveraged
Finance Investment Team in connection with the management of the senior
loan/high yield debt portfolio for the Fund, noting the presentation by the
senior portfolio manager of the Leveraged Finance Investment Team at the April
20, 2015 meeting. With respect to the Sub-Advisory Agreement, the Board noted
the background and experience of the Sub-Advisor's portfolio management team.
The Board reviewed the materials provided by the Sub-Advisor and considered the
services that the Sub-Advisor provides to the Fund, including the Sub-Advisor's
day-to-day management of the Fund's equity investments and covered call program.
In light of the information presented and the considerations made, the Board
concluded that the nature, extent and quality of services provided to the Fund
by the Advisor and the Sub-Advisor under the Agreements have been and are
expected to remain satisfactory and that the Sub-Advisor, under the oversight of
the Advisor, has managed the Fund consistent with its investment objectives and
policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. 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 another closed-end fund sub-advised by the Sub-Advisor and
certain separately managed accounts that may have investment objectives and
policies similar to the Fund's. The Board noted that the Advisor charges the
same advisory fee rate to the Fund and the other closed-end fund sub-advised by
the Sub-Advisor and a lower advisory fee rate to the separately managed
accounts. The Board noted the Advisor's statement that the nature of the
services provided to the separately managed accounts is not comparable to those
provided to the Fund. The Board considered the sub-advisory fee and how it
relates to the Fund's overall advisory fee structure and noted that the
sub-advisory fee is paid by the Advisor from its advisory fee. The Board also
considered information provided by the Sub-Advisor as to the fees it charges to
other clients, noting that the Sub-Advisor does not charge a lower advisory or
sub-advisory fee to any client for which it provides comparable services. The
Board also noted that the Advisor retains the entire advisory fee on the portion
of the Fund's assets allocated to the senior loan/high yield debt portfolio
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015 (UNAUDITED)
managed by the Advisor's Leveraged Finance Investment Team. In addition, the
Board reviewed data prepared by MPI showing the advisory fee and expense ratio
of the Fund as compared to the advisory fees and expense ratios of the MPI Peer
Group. 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) none of the peer funds employ an
advisor/sub-advisor management structure; (iii) peer funds may use different
amounts and types of leverage with different costs associated with them, or may
use no leverage; and (iv) all of the peer funds are larger than the Fund (most
significantly so), which causes the Fund's fixed expenses to be higher on a
percentage basis as compared to the larger peer funds. The Board took these
limitations into account in considering the peer data. In reviewing the peer
data, the Board noted that the Fund's advisory fee, based on average net assets,
was above the median of the MPI 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. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also reviewed
data prepared by MPI comparing the Fund's performance for periods ended December
31, 2014 to the performance of the MPI Peer Group and to three benchmark
indexes, one of which was a blended benchmark index. In reviewing the Fund's
performance as compared to the performance of the MPI Peer Group, the Board took
into account the limitations described above with respect to creating a relevant
peer group for the Fund. The Board also considered data from MPI on the Fund's
annual distribution rate as of December 31, 2014 as compared to the MPI Peer
Group and the Fund's leverage costs versus the leverage costs of applicable
funds in the MPI Peer Group. The Board considered information provided by the
Advisor on the Fund's leverage as well, including that leverage was accretive to
the Fund's total return in 2014. In addition, the Board compared the Fund's
premium/discount over the past eight quarters to the average and median
premium/discount over the same period of a peer group selected by the Advisor,
as well as data on the average premium/discount for 2014 for the funds in the
MPI Peer Group, and considered factors that may impact a fund's
premium/discount.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board noted that the Advisor has made and continues to make significant
investments 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, 2014, as well as product-line
profitability data for the same period, as set forth in the materials provided
to the Board. The Board noted the inherent limitations in the profitability
analysis, and concluded that the pre-tax profits estimated to have been realized
by the Advisor in connection with the management of the Fund were not
unreasonable. 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.
The Board considered the Sub-Advisor's representation that assets in the Fund
have not grown considerably, so further economies of scale have not been
achieved and the sub-advisory rate continues to be appropriate. The Board
considered that the sub-advisory fee rate was negotiated at arm's length between
the Advisor and the Sub-Advisor, an unaffiliated third party. The Board also
considered data provided by the Sub-Advisor as to the profitability of the Sub
Advisory Agreement to the Sub-Advisor. The Board noted the inherent limitations
in the profitability analysis and concluded that the profitability analysis for
the Advisor was more relevant, although the estimated profitability of the Sub
Advisory Agreement appeared to be not unreasonable in light of the services
provided to the Fund. The Board considered fall-out benefits that may be
realized by the Sub-Advisor from its relationship with the Fund, including that
the Sub-Advisor may enter into 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 continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 31
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015 (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; 120 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 E. 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 120 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 E. Liberty Drive, o Since Fund (May 2007 to March 2010), ADM Investor Inc., ADM
Suite 400 Inception Services, Inc. (Futures Commission Investor Services
Wheaton, IL 60187 Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 120 Director of
c/o First Trust Advisors L.P. Enterprises (Financial and Management Trust Company
120 E. Liberty Drive, o Since Fund Consulting) of Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 120 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 E. Liberty Drive, o Since Fund Harapan Educational Foundation (Education Transport Inc.
Suite 400 Inception Products and Services); President and (May 2003 to
Wheaton, IL 60187 Chief Executive Officer (June 2012 to May 2014)
D.O.B.: 03/54 Present), Servant Interactive LLC
(Educational Products and Services);
President and Chief Executive Officer
(June 2012 to September 2014), Dew d
Learning LLC (Educational Products an
Services); President (June 2002 to June
2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee o Three-Year Term Chief Executive Officer (December 2010 120 None
and Chairman of the Board to Present) President (until December
120 E. 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 CEO of First Trust Advisors L.P., investment advisor of the Trust.
(2) Currently, James A. Bowen and Niel B. Nielson, as Class III Trustees, are
serving as trustees until the Fund's 2016 annual meeting of shareholders.
Robert F. Keith, as a Class I Trustee, is serving as a trustee until the
Fund's 2017 annual meeting of shareholders. Richard E. Erickson and Thomas
R. Kadlec, as Class II Trustees, are serving as trustees until the Fund's
2018 annual meeting of shareholders.
Page 32
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015 (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), First
Suite 400 Accounting Officer o Since January 2012 Trust Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
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 General Counsel, BondWave LLC (Software
Wheaton, IL 60187 Inception Development Company/Investment Advisor);
D.O.B.: 05/60 Secretary, 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 2012), First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Inception 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 33
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
NOVEMBER 30, 2015 (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 34
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, LLC
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
$49,000 for the fiscal year ended November 30, 2014 and $49,000 for the fiscal
year ended November 30, 2015.
(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, 2014 and $0 for the
fiscal year ended November 30, 2015.
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, 2014 and $0 for
the fiscal year ended November 30, 2015.
(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, 2014 and $4,500 for the fiscal year ended
November 30, 2015. These fees were for tax consultation and tax return
preparation.
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, 2014 and $0 for the
fiscal year ended November 30, 2015.
(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, 2014 and
$3,000 for the fiscal year ended November 30, 2015. The fees in 2015 were for a
conversion of the fund accounting system for the Fund.
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, 2014 and $0 for the fiscal year ended November 30, 2015.
(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, 2014, were $4,500 for the registrant and $43,500 for the
registrant's investment adviser, and for the fiscal year ended November 30,
2015, were $7,500 for the registrant and $12,500 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
o ADOPTED APRIL 11, 1997
o AS AMENDED FEBRUARY, 2015
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.
o 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.
o PROXY VOTING GUIDELINES
Generally, Chartwell votes all proxies in accordance with the following
guidelines provided by Institutional Shareholder Services (ISS). 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.
1. ROUTINE/MISCELLANEOUS
ADJOURN MEETING
Generally vote AGAINST proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the
proposal.
Vote FOR proposals that relate specifically to soliciting votes for a merger or
transaction if supporting that merger or transaction. Vote AGAINST proposals if
the wording is too vague or if the proposal includes "other business".
AMEND QUORUM REQUIREMENTS
Vote AGAINST proposals to reduce quorum requirements for shareholder meetings
below a majority of the shares outstanding unless there are compelling reasons
to support the proposal.
AMEND MINOR BYLAWS
Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or
corrections).
CHANGE COMPANY NAME
Vote FOR proposals to change the corporate name unless there is compelling
evidence that the change would adversely impact shareholder value.
CHANGE DATE, TIME OR LOCATION OF ANNUAL MEETING
Vote FOR management proposals to change the date, time or location of the annual
meeting unless the proposed change is unreasonable.
Vote AGAINST shareholder proposals to change the date, time or location of the
annual meeting unless the current scheduling or location is unreasonable.
OTHER BUSINESS
Vote AGAINST proposals to approve other business when it appears as voting item.
AUDIT-RELATED
AUDITOR INDEMNIFICATION AND LIMITATION OF LIABILITY
Vote CASE-BY-CASE on the issue of auditor indemnification and limitation of
liability. Factors to be assessed include, but are not limited to:
o The terms of the auditor agreement - the degree to which these
agreements impact shareholders' rights;
o The motivation and rationale for establishing the agreements;
o The quality of disclosure; and
o The company's historical practices in the audit area.
VOTE AGAINST or WITHHOLD from members of an audit committee in situations where
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.
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 that 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
Tax compliance and preparation include the preparation of original and amended
tax returns and refund claims, and tax payment planning. All other services in
the tax category, such as tax advice, planning or consulting should be added to
"Other" fees. If the breakout of tax fees cannot be determined, add all tax fees
to "Other" fees.
In circumstances where "Other" fees include fees related to significant one-time
capital structure events (such as initial public offerings, bankruptcy emergence
and spin-offs) and the company makes public disclosure of the amount and nature
of those fees that are an exception to the standard "non-audit fee" category,
then such fees may be excluded from the non-audit fees considered in determining
the ratio of non-audit to audit/audit-related fees/tax compliance and
preparation for purposes of determining whether non-audit fees are excessive.
SHAREHOLDER PROPOSALS LIMITING NON-AUDIT SERVICES
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
SHAREHOLDER PROPOSALS ON AUDIT FIRM ROTATION
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account:
o The tenure of the audit firm;
o The length of rotation specified in the proposal;
o Any significant audit-related issues at the company;
o The number of Audit Committee meetings held each year;
o The number of financial experts serving on the committee; and
o Whether the company has a periodic renewal process where the auditor
is evaluated for both audit quality and competitive price.
2. BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Four fundamental principles apply when determining votes on director nominees:
1. ACCOUNTABILITY: Boards should be sufficiently accountable to
shareholders, including through transparency of the company's
governance practices and regular board elections, by the provision
of sufficient information for shareholders to be able to assess
directors and board composition, and through the ability of
shareholders to remove directors.
2. RESPONSIVENESS: Directors should respond to investor input, such as
that expressed through significant opposition to management
proposals, significant support for shareholder proposals (whether
binding or non-binding), and tender offers where a majority of
shares are tendered.
3. COMPOSITION: Companies should ensure that directors add value to the
board through their specific skills and expertise and by having
sufficient time and commitment to serve effectively. Boards should
be of a size appropriate to accommodate diversity, expertise and
independence, while ensuring active and collaborative participation
by all members.
4. INDEPENDENCE: Boards should be sufficiently independent from
management (and significant shareholders) so as to ensure that they
are able and motivated to effectively supervise management's
performance for the benefit of all shareholders, including in
setting and monitoring the executive compensation programs that
support that strategy. The chair of the board should ideally be an
independent director, and all boards should have an independent
leadership position or a similar role in order to help provide
appropriate counterbalance to executive management, as well as
having sufficiently independent committees that focus on key
governance concerns such as audit, compensation and nomination of
directors.
GENERALLY VOTE FOR DIRECTOR NOMINEES, EXCEPT UNDER THE FOLLOWING CIRCUMSTANCES:
1. ACCOUNTABILITY
Vote AGAINST(1) OR WITHHOLD from the entire board of directors (except new
nominees(2), who should be considered CASE-BY-CASE), for the following:
Problematic Takeover Defenses:
CLASSIFIED BOARD STRUCTURE:
1.1 The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for
election. All appropriate nominees (except new) may be held
accountable;
DIRECTOR PERFORMANCE EVALUATION:
1.2 The board lacks accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is
measured by one- and three-year total shareholder returns in the
bottom half of a company's four-digit GICS industry group (Russell
3000 companies only). Take into consideration the company's
five-year total shareholder return and five-year operational
metrics. Problematic provisions include but are not limited to:
o A classified board structure;
-----------------------------
1 In general, companies with a plurality vote standard use "Withhold" as the
valid contrary vote option in director elections; companies with a
majority vote standard use "Against". However, it will vary by company and
the proxy must be checked to determine the valid contrary vote option for
the particular company.
2 A "new nominee" is any current nominee who has not already been elected by
shareholders and who joined the board after the problematic action in
question transpired. If ISS cannot determine whether the nominee joined
the board before or after the problematic action transpired, the nominee
will be considered a "new nominee" if he or she joined the board within
the 12 months prior to the upcoming shareholder meeting.
o A supermajority vote requirement;
o Either a plurality vote standard in uncontested director
elections or a majority vote standard 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 AGAINST OR WITHHOLD every year until this feature is
removed;
1.4 The board adopts a poison pill with a term of more than 12 months
("long-term pill"), or renews any existing pill, including any
"short-term" pill (12 months or less), without shareholder approval.
A commitment or policy that puts a newly-adopted pill to a binding
shareholder vote may potentially offset an adverse vote
recommendation. Review such companies with classified boards every
year, and such companies with annually-elected boards at least once
every three years, and vote AGAINST or WITHHOLD votes from all
nominees if the company still maintains a non-shareholder-approved
poison pill; or
1.5 The board makes a material adverse change to an existing poison pill
without shareholder approval.
Vote CASE-BY-CASE on all nominees if:
1.6 The board adopts a poison pill with a term of 12 months or less
("short-term pill") without shareholder approval, taking into
account the following factors:
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 WITTHOLD from the members of the Audit Committee if:
1.7 The non-audit fees paid to the auditor are excessive (see discussion
under "Auditor Ratification");
1.8 The company receives an adverse opinion on the company's financial
statements from its auditor; or
1.9 There is persuasive evidence that the audit committee entered into
an inappropriate indemnification agreement with its auditor that
limits the ability of the company or its shareholders to pursue
legitimate legal recourse against the audit firm.
Vote CASE-BY-CASE on members of the Audit Committee and potentially the full
board if:
1.10 Poor accounting practices are identified that rise to the level of
serious concern, such as: fraud; misapplication of GAAP; and
material weaknesses identified in Section 404 disclosures. Examine
the severity, breadth, chronological sequence and duration, as well
as the company's efforts at remediation or corrective actions, in
determining whether WITHHOLD/AGAINST votes are warranted.
Problematic Compensation Practices/Pay for Performance Misalignment
In the absence of an Advisory Vote on Executive Compensation ballot item or, in
egregious situations, vote AGAINST OR WITHHOLD from the members of the
Compensation Committee and potentially the full board if:
1.11 There is a significant misalignment between CEO pay and company
performance (pay for performance);
1.12 The company maintains significant problematic pay practices;
1.13 The board exhibits a significant level of poor communication and
responsiveness to shareholders;
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: The company's
response, including:
1.16 The company's previous say-on-pay 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.
Unilateral/Bylaw/Charter Amendments
1.17 Generally vote AGAINST or WITHHOLD from directors individually,
committee members or the entire board (except new nominees, who
should be considered CASE-BY-CASE) if the board amends the company's
bylaws or charter without shareholder approval in a manner that
materially diminishes shareholders' rights or that could adversely
impact shareholders, considering the following factors, as
applicable:
o The board's rationale for adopting the bylaw/charter amendment
without shareholder ratification;
o Disclosure by the company of any significant engagement with
shareholders regarding the amendment;
o The level of impairment of shareholders' rights caused by the
board's unilateral amendment to the bylaws/charter;
o The board's track record with regard to unilateral board
action on bylaw/charter amendments or other entrenchment
provisions;
o The company's ownership structure;
o The company's existing governance provisions;
o Whether the amendment was made prior to or in connection with
the company's initial public offering;
o The timing of the board's amendment to the bylaws/charter in
connection with a significant business development;
o Other factors, as deemed appropriate, that may be relevant to
determine the impact of the amendment on shareholders.
Governance Failures
Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors
individually, committee members or the entire board, due to:
1.18 Material failures of governance, stewardship, risk oversight(3), or
fiduciary responsibilities at the company;
1.19 Failure to replace management as appropriate; or
1.20 Egregious actions related to a director's service on other boards
that raise substantial doubt about his or her ability to effectively
oversee management and serve the best interests of shareholders at
any company.
2. RESPONSIVENESS
Vote CASE-BY-CASE on individual directors, committee members, or the entire
board of directors as appropriate if:
2.1 The board failed to act on a shareholder proposal that received the
support of a majority of the shares outstanding the previous year;
o Disclosed outreach efforts by the board to shareholders in the
wake of the vote;
o Rationale provided in the proxy statement for the level of
implementation;
o The subject matter of the proposal;
o The level of support for and opposition to the resolution in
past meetings;
o Actions taken by the board in response to the majority vote
and its engagement with shareholders;
o The continuation of the underlying issue as a voting item on
the ballot (as either shareholder or management proposals);
and
o Other factors as appropriate.
2.2 The board failed to act on takeover offers where the majority of
shares are tendered;
2.3 At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company
has failed to address the issue(s) that caused the high
withhold/against vote;
2.4 The board implements an advisory vote on executive compensation on a less
frequent basis than the frequency that received the majority, of the
votes cast at the most recent shareholder meeting at which shareholders
voted on the say-on-pay frequency;
2.5 The board implements an advisory vote on executive compensation on a less
frequent basis than the frequency that received a plurality, but not a
majority, of the votes cast at the most recent shareholder meeting at
which shareholders voted on the say-on-pay frequency, taking into
account:
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) Examples of failure of risk oversight include, but are not limited to:
bribery; large or serial fines or sanctions from regulatory bodies;
significant Adverse legal judgments or settlements; hedging of company
stock; or significant pledging of company stock.
3. COMPOSITION
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS:
3.1 Generally vote AGAINST or WITHHOLD from directors (except new
nominees, who should be considered CASE-BY-CASE(4) who attend less
than 75 percent of the aggregate of their board and committee
meetings for the period for which they served, unless an acceptable
reason for absences is disclosed in the proxy or another SEC filing.
Acceptable reasons for director absences are generally limited to
the following:
o Medical issues/illness;
o Family emergencies; and
o Missing only one meeting (when the total of all meetings is
three or fewer).
3.2 If the proxy disclosure is unclear and insufficient to determine
whether a director attended at least 75 percent of the aggregate of
his/her board and committee meetings during his/her period of
service, vote AGAINST or WITHHOLD from the director(s) in question;
OVERBOARDED DIRECTORS:
Vote AGAINST or WITHHOLD from individual directors who:
3.3 Sit on more than six public company boards; or
3.4 Are CEOs of public companies who sit on the boards of more than two
public companies besides their own - WITHHOLD only at their outside
boards(5).
4. INDEPENDENCE
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the Categorization of Directors) when:
4.1 The inside or affiliated outside director serves on any of the three
key committees: audit, compensation or nominating;
4.2 The company lacks an audit, compensation or nominating committee so
that the full board functions as that committee;
4.3 The company lacks a formal nominating committee, even if the board
attests that the independent directors fulfill the functions of such
a committee; or
4.4 Independent directors make up less than a majority of the directors.
-----------------------------
4 For new nominees only, schedule conflicts due to commitments made prior to
their appointment to the board are considered if disclosed in the proxy or
another SEC filing.
5 Although all of a CEO's subsidiary boards will be counted as separate
boards, ISS will not recommend a withhold vote from the CEO of a parent
company board or any of the controlled (>50 percent ownership)
subsidiaries of that parent, but will do so at subsidiaries that are less
than 50 percent controlled and boards outside the parent/subsidiary
relationships.
2015 ISS CLASSIFICATION OF DIRECTORS
1. INSIDE DIRECTOR (I)
1.1. Current employee((1)) of the company or one of its affiliate(2).
1.2 Beneficial owner of more than 50 percent of the company's voting
power (this may be aggregated if voting power is distributed among
more than one member of a group).
1.3 Director named in the Summary Compensation Table (excluding former
interim officers).
2. AFFILIATED OUTSIDE DIRECTOR (AO)
Board Attestation
2.1. Board attestation that an outside director is not independent.
Former CEO/Interim Officer
2.2. Former CEO of the company (3)(4).
2.3. Former CEO of an acquired company within the past five years (4).
2.4. Former interim officer if the service was longer than 18 months. If
the service was between 12 and 18 months, an assessment of the
interim CEO's employment agreement will be made (5); Non-CEO
Executives
2.5. Former officer (1) of the company, an affiliateii or an acquired
firm within the past five years.
2.6. Officer(1), former parent or predecessor firm at the time the
company was sold or split off from the parent/ predecessor within
the past five years.
2.7. Officer(1), former officer, or general or limited partner of a joint
venture or partnership with the company. Family Members
2.8. Immediate family member(6) of a current or former officer(1) of the
company or its affiliate(2) within the last five years.
2.9. Immediate family member(6) of a current employee of company or its
affiliates(2) where additional factors raise concern (which may
include, but are not limited to, the following: a director related
to numerous employees; the company or its affiliates employ
relatives of numerous board members; or a non-Section 16 officer in
a key strategic role). Transactional, Professional, Financial, and
Charitable Relationships
2.10. Currently provides (or an immediate family member(6) provides)
professional services(7) to the company, to an Affiliate(2) of the
company or an individual officer of the company or one of its
affiliates in excess of $10,000 per year.
2.11. Is (or an immediate family member (6) is) a partner in, or a
controlling shareholder or an employee of, an organization which
provides professional services(7) to the company, to an affiliate(2)
of the company, or an individual officer of the company or one of
its affiliates in excess of $10,000 per year.
2.12. Has (or an immediate family member(6) has) any material
transactional relationship(8) with the company or its Affiliate(2)
(excluding investments in the company through a private placement).
2.13. Is (or an immediate family member(6) is) a partner in, or a
controlling shareholder or an executive officer of, an organization
which has any material transactional relationship(8) with the
company or its affiliate(2) (excluding investments in the company
through a private placement).
2.14. Is (or an immediate family member(6) is) a trustee, director, or
employee of a charitable or non-profit organization that receives
material grants or endowments(8) from the company or its
affiliate(2).
Other Relationships
2.15. Party to a voting agreement(9) to vote in line with management on
proposals being brought to shareholder vote.
2.16. Has (or an immediate family member(6) has) an interlocking
relationship as defined by the SEC involving members of the board of
directors or its Compensation Committee(10).
2.17. Founder(11) of the company but not currently an employee.
2.18. Any material(12) relationship with the company.
3. INDEPENDENT OUTSIDE DIRECTOR (IO)
3.1. No material(12) connection to the company other than a board seat.
FOOTNOTES:
(1) The definition of officer will generally follow that of a "Section 16
officer" (officers subject to Section 16 of the Securities and Exchange Act of
1934) and includes the chief executive, operating, financial, legal, technology
and accounting officers of a company (including the president, treasurer,
secretary, controller or any vice president in charge of a principal business
unit, division or policy function). Current interim officers are included in
this category. For private companies, the equivalent positions are applicable. A
non-employee director serving as an officer due to statutory requirements (e.g.
corporate secretary) will be classified as an Affiliated Outsider under 2.18:
"Any material relationship with the company". However, if the company provides
explicit disclosure that the director is not receiving additional compensation
in excess of $10,000 per year for serving in that capacity, then the director
will be classified as an Independent Outsider.
(2) "Affiliate includes a subsidiary, sibling company or parent company. ISS
uses 50 percent control ownership by the parent company as the standard for
applying its affiliate designation.
(3) Includes any former CEO of the company prior to the company's initial public
offering (IPO).
(4) When there is a former CEO of a special purpose acquisition company (SPAC)
serving on the board of an acquired company, ISS will generally classify such
directors as independent unless determined otherwise, taking into account the
following factors: the applicable listing standards determination of such
director's independence; any operating ties to the firm; and the existence of
any other conflicting relationships or related party transactions.
(5) ISS will look at the terms of the interim officer's employment contract to
determine if it contains severance pay, long-term health and pension benefits or
other such standard provisions typically contained in contracts of permanent,
non-temporary CEOs. ISS will also consider if a formal search process was
underway for a full-time officer at the time.
(6) "Immediate family member" follows the SEC's definition of such and covers
spouses, parents, children, step-parents, step-children, siblings, in-laws, and
any person (other than a tenant or employee) sharing the household of any
director, nominee for director, nominee for director, executive officer or
significant shareholder of the company.
(7) Professional services can be characterized as advisory in nature, generally
involve access to sensitive company information or to strategic decision making
and typically have a commission- or fee-based payment structure. Professional
services generally include, but are not limited to the following: investment
banking/financial advisory services; commercial banking (beyond deposit
services); investment services; insurance services; accounting/audit services;
consulting services; marketing services; legal services; property management
services; realtor services; lobbying services; executive search services; and IT
consulting services. The following would generally be considered transactional
relationships and not professional services: deposit services, IT tech support
services; educational services and construction services. The case of
participation in a banking syndicate by a non-lead bank should be considered a
transactional (and hence subject to the associated materiality test) rather than
a professional relationship. "Of Counsel" relationships are only considered
immaterial if the individual does not receive any form of compensation (in
excess of $10,000 per year) from, or is a retired partner of the firm providing
the professional service. The case of a company providing a professional service
to one of its directors or to an entity with which one of its directors is
affiliated, will be considered a transactional rather than a professional
relationship. Insurance services and marketing services are assumed to be
professional services unless the company explains why such services are not
advisory.
(8) A material transactional relationship, including grants to non-profit
organizations, exists if the company makes annual payments to or receives annual
payments from another entity exceeding the greater of $200,000 or 5 percent of
the recipient's gross revenues, in the case of a company which follows NASDAQ
listing standards; or the greater of $1,000,000 or 2 percent of the recipient's
gross revenues, in the case of a company which follows NYSE/AMEX listing
standards. In the case of a company which follows neither of the preceding
standards, ISS will apply the NASDAQ-based materiality test. (The recipient is
the party receiving the financial proceeds from the transaction.)
(9) Dissident directors who are parties to a voting agreement pursuant to a
settlement arrangement will generally be classified as independent unless
determined otherwise, taking into account the following factors: the terms of
the agreement; the duration of the standstill provision in the agreement; the
limitations and requirements of actions that are agreed upon; if the dissident
director nominee(s) is subject to the standstill; and if there are any
conflicting relationships or related party transactions.
(10) Interlocks include: executive officers serving as directors on each other's
compensation or similar committees (or, in the absence of such a committee, on
the board); or executive officers sitting on each other's boards and at least
one serves on the other's compensation or similar committees (or, in the absence
of such a committee, on the board).
(11) The operating involvement of the founder with the company will be
considered. Little to no operating involvement may cause ISS to deem the founder
as an independent outsider.
(12) For purposes of ISS's director independence classification, "material" will
be defined as a standard of relationship (financial, personal or otherwise) that
a reasonable person might conclude could potentially influence one's objectivity
in the boardroom in a manner that would have a meaningful impact on an
individual's ability to satisfy requisite fiduciary standards on behalf of
shareholders.
*****
OTHER BOARD-RELATED PROPOSALS
AGE/TERM LIMITS
Vote AGAINST management and shareholder proposals to limit the tenure of outside
directors through mandatory retirement ages.
Vote AGAINST management proposals to limit the tenure of outside directors
through term limits. However, scrutinize boards where the average tenure of all
directors exceeds 15 years for independence from management and for sufficient
turnover to ensure that new perspectives are being added to the board.
BOARD SIZE
Vote FOR proposals seeking to fix the board size or designate a range for the
board size.
Vote AGAINST proposals that give management the ability to alter the size of the
board outside of a specified range without shareholder approval.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote AGAINST proposals to classify (stagger) the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
CEO SUCCESSION PLANNING
Generally vote FOR proposals seeking disclosure on a CEO succession planning
policy, considering at a minimum, the following factors:
o The reasonableness/scope of the request; and
o The company's existing disclosure on its current CEO succession
planning process.
CUMULATIVE VOTING
Generally vote AGAINST proposals to eliminate cumulative voting, unless:
o The company has proxy access, thereby allowing shareholders to
nominate directors to the company's ballot; and
o The company has adopted a majority vote standard with a carve-out
for plurality voting in situations where there are more nominees
than seats, and a director resignation policy to address failed
elections.
Vote FOR proposals for cumulative voting at controlled companies (insider voting
power > 50%).
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Vote CASE-BY-CASE on proposals on director and officer indemnification and
liability protection using Delaware law as the standard.
Vote AGAINST proposals that would:
o Eliminate entirely directors' and officers' liability for monetary
damages for violating the duty of care.
o Expand coverage beyond just legal expenses to liability for acts,
such as negligence, that are more serious violations of fiduciary
obligation than mere carelessness.
o Expand the scope of indemnification to provide for mandatory
indemnification of company officials in connection with acts that
previously the company was permitted to provide indemnification for,
at the discretion of the company's board (i.e., "permissive
indemnification"), but that previously the company was not required
to indemnify.
Vote FOR only those proposals providing such expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if both of the following
apply:
o If the director was found to have acted in good faith and in a
manner that he reasonably believed was in the best interests of the
company; and
o If only the director's legal expenses would be covered.
ESTABLISH/AMEND NOMINEE QUALIFICATIONS
Vote CASE-BY-CASE on proposals that establish or amend director qualifications.
Votes should be based on how reasonable the criteria are and to what degree they
may preclude dissident nominees from joining the board.
Vote CASE-BY-CASE on shareholder resolutions seeking a director nominee
candidate who possesses a particular subject matter expertise, considering:
o The company's board committee structure, existing subject matter
expertise and board nomination provisions relative to that of its
peers;
o The company's existing board and management oversight mechanisms
regarding the issue for which board oversight is sought;
o The company's disclosure and performance relating to the issue for
which board oversight is sought and any significant related
controversies; and
o The scope and structure of the proposal.
ESTABLISH OTHER BOARD COMMITTEE PROPOSALS
Generally vote AGAINST shareholder proposals to establish a new board committee,
as such proposals seek a specific oversight mechanism/structure that potentially
limits a company's flexibility to determine an appropriate oversight mechanism
for itself. However, the following factors will be considered:
o Existing oversight mechanisms (including current committee
structure) regarding the issue for which board oversight is sought;
o Level of disclosure regarding the issue for which board oversight is
sought;
o Company performance related to the issue for which board oversight
is sought;
o Board committee structure compared to that of other companies in its
industry sector; and/or
o The scope and structure of the proposal.
FILLING VACANCIES/REMOVAL OF DIRECTORS
Vote AGAINST proposals that provide that directors may be removed only for
cause.
Vote FOR proposals to restore shareholders' ability to remove directors with or
without cause.
Vote AGAINST proposals that provide that only continuing directors may elect
replacements to fill board vacancies.
Vote FOR proposals that permit shareholders to elect directors to fill board
vacancies. INDEPENDENT CHAIR (SEPARATE CHAIR/CEO)
Generally vote FOR shareholder proposals requiring that the chairman's position
be filled by an independent director, taking into consideration the following:
o The scope of the proposal;
o The company's current board leadership structure;
o The company's governance structure and practices;
o Company performance; and
o Any other relevant factors that may be applicable
Regarding the scope of the proposal, consider whether the proposal is precatory
or binding and whether the proposal is seeking an immediate change in the
chairman role or the policy can be implemented at the next CEO transition.
Under the review of the company's board leadership structure, ISS may support
the proposal under the following scenarios absent a compelling rationale: the
presence of an executive or non-independent chair in addition to the CEO; a
recent recombination of the role of CEO and chair; and/or departure from a
structure with an independent chair. ISS will also consider any recent
transitions in board leadership and the effect such transitions may have on
independent board leadership as well as the designation of a lead director role.
When considering the governance structure, ISS will consider the overall
independence of the board, the independence of key committees, the establishment
of governance guidelines, board tenure and its relationship to CEO tenure, and
any other factors that may be relevant. Any concerns about a company's
governance structure will weigh in favor of support for the proposal.
When considering the governance structure, ISS will consider the overall
independence of the board, the independence of key committees, the establishment
of governance guidelines, board tenure and its relationship to CEO tenure, and
any other factors that may be relevant. Any concerns about a company's
governance structure will weigh in favor of support for the proposal.
The review of the company's governance practices may include, but is not limited
to poor compensation practices, material failures of governance and risk
oversight, related-party transactions or other issues putting director
independence at risk, corporate or management scandals, and actions by
management or the board with potential or realized negative impact on
shareholders. Any such practices may suggest a need for more independent
oversight at the company thus warranting support of the proposal.
ISS' performance assessment will generally consider one-, three, and five-year
TSR compared to the company's peers and the market as a whole. While poor
performance will weigh in favor of the adoption of an independent chair policy,
strong performance over the long term will be considered a mitigating factor
when determining whether the proposed leadership change warrants support.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF INDEPENDENT COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold by
ISS's definition of independent outsider. (See Categorization of Directors.)
Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.
MAJORITY VOTE STANDARD FOR THE ELECTION OF DIRECTORS
Generally vote FOR management proposals to adopt a majority of votes cast
standard for directors in uncontested elections. Vote AGAINST if no carve-out
for a plurality vote standard in contested elections is included.
Generally vote FOR precatory and binding shareholder resolutions requesting that
the board change the company's bylaws to stipulate that directors need to be
elected with an affirmative majority of votes cast, provided it does not
conflict with the state law where the company is incorporated. Binding
resolutions need to allow for a carve-out for a plurality vote standard when
there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
known as a director resignation policy) that will provide guidelines so that the
company will promptly address the situation of a shareholder director.
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 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.
REQUIRE MORE NOMINEES THAN OPEN SEATS
Vote AGAINST shareholder proposals that would require a company to nominate more
candidates than the number of open board seats.
SHAREHOLDER ENGAGEMENT POLICY (SHAREHOLDER ADVISORY COMMITTEE)
Generally vote FOR shareholder proposals requesting that the board establish an
internal mechanism/ process, which may include a committee, in order to improve
communications between directors and shareholders, unless the company has the
following features, as appropriate:
o Established a communication structure that goes beyond the exchange
requirements to facilitate the exchange of information between
shareholders and members of the board;
o Effectively disclosed information with respect to this structure to
its shareholders;
o Company has not ignored majority-supported shareholder proposals or
a majority withhold vote on a director nominee; and
o The company has an independent chairman or a lead director,
according to ISS's definition. This individual must be made
available for periodic consultation and direct communication with
major shareholders.
PROXY CONTESTS - 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.
When the addition of shareholder nominees to the management card ("proxy access
nominees") results in a number of nominees on the management card which exceeds
the number of seats available for election, vote CASE BY CASE considering the
same factors listed above.
VOTE-NO CAMPAIGNS
In cases where companies are targeted in connection with public "vote no"
campaigns, evaluate director nominees under the existing governance policies for
voting on director nominees in uncontested elections. Take into consideration
the arguments submitted by shareholders and other publicly available
information.
3. SHAREHOLDER RIGHTS & DEFENSES
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS
Vote CASE-BY-CASE on advance notice proposals, giving support to those proposals
which allow shareholders to submit proposals/nominations as close to the meeting
date as reasonably possible and within the broadest window possible, recognizing
the need to allow sufficient notice for company, regulatory and shareholder
review.
To be reasonable, the company's deadline for shareholder notice of a
proposal/nomination must not be more than 60 days prior to the meeting, with a
submittal window of at least 30 days prior to the deadline. The submitted window
is the period under which a shareholder must file his proposal/nominations prior
to the deadline.
In general, support additional efforts by companies to ensure full disclosure in
regard to a proponent's economic and voting position in the company so long as
the informational requirements are reasonable and aimed at providing
shareholders with the necessary information to review such proposals.
AMEND BYLAWS WITHOUT SHAREHOLDER CONSENT
Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
Vote FOR proposals giving the board the ability to amend the bylaws in addition
to shareholders.
CONTROL SHARE ACQUISITION PROVISIONS
Control share acquisition statutes function by denying shares their voting
rights when they contribute to ownership in excess of certain thresholds. Voting
rights for those shares exceeding ownership limits may only be restored by
approval of either a majority or supermajority of disinterested shares. Thus,
control share acquisition statutes effectively require a hostile bidder to put
its offer to a shareholder vote or risk voting disenfranchisement if the bidder
continues buying up a large block of shares.
Vote FOR proposals to opt out of control share acquisition statutes unless doing
so would enable the completion of a takeover that would be detrimental to
shareholders.
Vote AGAINST proposals to amend the charter to include control share acquisition
provisions.
Vote FOR proposals to restore voting rights to the control shares.
CONTROL SHARE CASH-OUT PROVISIONS
Control share cash-out statutes give dissident shareholders the right to
"cash-out" of their position in a company at the expense of the shareholder who
has taken a control position. In other words, when an investor crosses a preset
threshold level, remaining shareholders are given the right to sell their shares
to the acquirer, who must buy them at the highest acquiring price.
Vote FOR proposals to opt out of control share cash-out statutes.
DISGORGEMENT PROVISIONS
Disgorgement provisions require an acquirer or potential acquirer of more than a
certain percentage of a company's stock to disgorge, or pay back, to the company
any profits realized from the sale of that company's stock purchased 24 months
before achieving control status. All sales of company stock by the acquirer
occurring within a certain period of time (between 18 months and 24 months)
prior to the investor's gaining control status are subject to these
recapture-of-profits provisions.
Vote FOR proposals to opt out of state disgorgement provisions.
FAIR PRICE PROVISIONS
Vote CASE-BY-CASE on proposals to adopt fair price provisions (provisions that
stipulate that an acquirer must pay the same price to acquire all shares as it
paid to acquire the control shares), evaluating factors such as the vote
required to approve the proposed acquisition, the vote required to repeal the
fair price provision, and the mechanism for determining the fair price.
Generally, vote AGAINST fair price provisions with shareholder vote requirements
greater than a majority of disinterested shares.
FREEZE-OUT PROVISIONS
Vote FOR proposals to opt out of state freeze-out provisions. Freeze-out
provisions force an investor who surpasses a certain ownership threshold in a
company to wait a specified period of time before gaining control of the
company.
GREENMAIL
Greenmail payments are targeted share repurchases by management of company stock
from individuals or groups seeking control of the company. Since only the
hostile party receives payment, usually at a substantial premium over the market
value of its shares, the practice discriminates against all other shareholders.
Vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or
otherwise restrict a company's ability to make greenmail payments.
Vote CASE-BY-CASE on anti-greenmail proposals when they are bundled with other
charter or bylaw amendments.
LITIGATION RIGHTS (INCLUDING EXCLUSIVE VENUE AND FEE SHIFTING BYLAW PROVISIONS)
Bylaw provisions impacting shareholders' ability to bring suit against the
company may include exclusive venue provisions, which provide that the state of
incorporation shall be the sole venue for certain types of litigation expenses
of the defendant corporation.
Vote CASE-BY-CASE on bylaws which impact shareholders' litigation rights, taking
into account such factors as:
o The company's stated rationale for adopting such a provision;
o Disclosure of past harm from shareholder lawsuits in which
plaintiffs were unsuccessful or shareholder lawsuits outside the
jurisdiction of incorporation;
o The breadth of application of the bylaw, including the types of
lawsuits to which it would apply and the definition of key terms;
and
o Governance features such as shareholders' ability to repeal the
provision at a later date (including the vote standard applied when
shareholders attempt to amend the bylaws) and their ability to hold
directors accountable through annual director elections and a
majority vote standard in uncontested elections.
Generally vote AGAINST bylaws that mandate fee-shifting whenever plaintiffs are
not completely successful on the merits (i.e., in cases where the plaintiffs are
partially successful).
Unilateral adoption by the board of bylaw provisions which affect shareholders'
litigation rights will be evaluated under ISS' policy on Unilateral
Bylaw/Charter Amendments.
NET OPERATING LOSS (NOL) PROTECTIVE AMENDMENTS
Vote AGAINST proposals to adopt a protective amendment for the stated purpose of
protecting a company's net operating losses (NOL) if the effective term of the
protective amendment would exceed the shorter of three years and the exhaustion
of the NOL.
Vote CASE-BY-CASE, considering the following factors, for management proposals
to adopt an NOL protective amendment that would remain in effect for the shorter
of three years (or less) and the exhaustion of the NOL:
o The ownership threshold (NOL protective amendments generally
prohibit stock ownership transfers that would result in a new
5-percent holder or increase the stock ownership percentage of an
existing 5-percent holder);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision or commitment to
cause expiration of the protective amendment upon exhaustion or
expiration of the NOL);
o The company's existing governance structure including: board
independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic concerns;
and
o Any other factors that may be applicable.
POISON PILLS (SHAREHOLDER RIGHTS PLANS)
SHAREHOLDER PROPOSALS TO PUT PILL TO A VOTE AND/OR ADOPT A PILL POLICY
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it UNLESS the company has: (1) A
shareholder-approved poison pill in place, or (2) The company has adopted a
policy concerning the adoption of a pill in the future specifying that the board
will only adopt a shareholder rights plan if either:
o Shareholders have approved the adoption of the plan; or
o The board, in its exercise of its fiduciary responsibilities,
determines that it is in the best interest of shareholders under the
circumstances to adopt a pill without the delay in adoption that
would result from seeking stockholder approval (i.e., the "fiduciary
out" provision). A poison pill adopted under this fiduciary out will
be put to a shareholder ratification vote within 12 months of
adoption or expire. If the pill is not approved by a majority of the
votes cast on this issue, the plan will immediately terminate.
If the shareholder proposal calls for a time period of less than 12 months for
shareholder ratification after adoption, vote FOR the proposal, but add the
caveat that a vote within 12 months would be considered sufficient
implementation.
MANAGEMENT PROPOSALS TO RATIFY A 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 limits 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.
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 (NOL) if the term of the pill would
exceed the shorter of three years (or less) 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 percent);
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.
PROXY VOTING DISCLOSURE, CONFIDENTIALITY, AND TABULATION
Vote CASE-BY-CASE on proposals regarding proxy voting mechanics, taking into
consideration whether implementation of the proposal is likely to enhance or
protect shareholder rights. Specific issues covered under the policy include,
but are not limited to, confidential voting of individual proxies and ballots,
confidentiality of running vote tallies, and the treatment of abstentions and/or
broker non-votes in the company's vote-counting methodology.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE BY CASE on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote FOR the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
Generally vote FOR shareholder proposals calling for the reimbursement of
reasonable costs incurred in connection with nominating one or more candidates
in a contested election where the following apply:
o The election of fewer than 50% of the directors to be elected is
contested in the election;
o One or more of the dissident's candidates is elected;
o Shareholders are not permitted to cumulate their votes for
directors; and
o The election occurred, and the expenses were incurred after the
adoption of this bylaw.
REINCORPORATION PROPOSALS
Management or shareholder proposals to change a company's state of incorporation
should be evaluated CASE-BY-CASE, giving consideration to both financial and
corporate governance concerns including the following:
o Reasons for reincorporation;
o Comparison of company's governance practices and provisions prior to
and following the reincorporation; and
o Comparison of corporation laws of original state and destination
state.
Vote FOR reincorporation when the economic factors outweigh any neutral or
negative governance changes.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Generally vote AGAINST management and shareholder proposals to restrict or
prohibit shareholders' ability to take action 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(6) 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.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote AGAINST management or shareholder proposals to restrict or prohibit
shareholders' ability to call special meetings.
Generally vote FOR management or shareholder proposals that provide shareholders
with the ability to call special meetings taking into account the following
factors:
o Shareholders' current right to call special meetings;
o Minimum ownership threshold necessary to call special meetings (10%
preferred);
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.
STAKEHOLDER PROVISIONS
Vote AGAINST proposals that ask the board to consider non-shareholder
constituencies or other non-financial effects when evaluating a merger or
business combination.
-----------------------------
6 "Unfettered" means 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.
STATE ANTITAKEOVER STATUTES
Vote CASE-BY-CASE on proposals to opt in or out of state takeover statutes
(including fair price provisions, stakeholder laws, poison pill endorsements,
severance pay and labor contract provisions, and anti-greenmail provisions).
SUPERMAJORITY VOTE REQUIREMENTS
Vote AGAINST proposals to require a supermajority shareholder vote.
VOTE FOR management or shareholder proposals to reduce supermajority vote
requirements. However, for companies with shareholder(s) who have significant
ownership levels, vote CASE-BY-CASE, taking into account:
o Ownership structure;
o Quorum requirements; and
o Vote requirements.
4. CAPITAL/RESTRUCTURING
CAPITAL
ADJUSTMENTS TO PAR VALUE OF COMMON STOCK
Vote FOR management proposals to reduce the par value of common stock unless the
action is being taken to facilitate an anti-takeover device or some other
negative corporate governance action.
Vote FOR management proposals to eliminate par value.
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
that 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 purposes of
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 through an
allowable cap calculated by ISS (typically 100 percent of
existing authorized shares) that reflects the company's need
for shares and total shareholder returns.
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.
ISSUE STOCK FOR USE WITH RIGHTS PLAN
Vote AGAINST proposals that increase authorized common stock for the explicit
purpose of implementing a non-shareholder-approved shareholder rights plan
(poison pill).
PREEMPTIVE RIGHTS
Vote CASE-BY-CASE on shareholder proposals that seek preemptive rights, taking
into consideration:
o The size of the company;
o The shareholder base; and
o The liquidity of the stock.
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
through an allowable cap generated 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.
RECAPITALIZATION PLANS
Vote CASE-BY-CASE on recapitalizations (reclassifications of securities) taking
into account the following:
o More simplified capital structure;
o Enhanced liquidity;
o Fairness of conversion terms;
o Impact on voting power and dividends; (3d right arrow) Reasons for
the reclassification;
o Conflicts of interest; and
o Other alternatives considered.
REVERSE STOCK SPLITS
Vote FOR management proposals to implement a reverse stock split when the number
of authorized shares will be proportionately reduced.
Vote AGAINST proposals when there is not a proportionate reduction of authorized
shares, unless:
o A stock exchange has provided notice to the company of a potential
delisting; or
o The effective increase in authorized shares is equal to or less than
the allowable increase calculated in accordance with ISS's Common
Stock Authorization policy.
SHARE REPURCHASE PROGRAMS
Vote FOR management proposals to institute open-market share repurchase plans in
which all shareholders may participate on equal terms.
STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS
Vote FOR management proposals to increase the common share authorization for a
stock split or share dividend, provided that the increase in authorized shares
is equal to or less than the allowable increase calculated in accordance with
ISS's Common Stock Authorization policy.
TRACKING STOCK
Vote CASE-BY-CASE on the creation of tracking stock, weighing the strategic
value of the transaction against such factors as:
o Adverse governance changes;
o Excessive increases in authorized capital stock;
o Unfair method of distribution;
o Diminution of voting rights;
o Adverse conversion features;
o Negative impact on stock option plans; and
o Alternatives such as spin-off.
RESTRUCTURING
APPRAISAL RIGHTS
Vote FOR proposals to restore or provide shareholders with rights of appraisal.
ASSET PURCHASES
Vote CASE BY CASE on asset purchase proposals, considering the following
factors:
o Purchase price;
o Fairness opinion;
o Financial and strategic benefits;
o How the deal was negotiated;
o Conflicts of interest; (3d right arrow) Other alternatives for the
business;
o Non-completion risk.
ASSET SALES
Vote CASE BY CASE on asset sales, considering the following factors:
o Impact on the balance sheet/working capital;
o Potential elimination of diseconomies;
o Anticipated financial and operating benefits;
o Anticipated use of funds;
o Value received for the asset;
o Fairness opinion;
o How the deal was negotiated;
o Conflicts of interest.
BUNDLED PROPOSALS
Vote CASE BY CASE on bundled or "conditional" proxy proposals. In the case of
items that are conditioned upon each other, examine the benefits and costs of
the packaged items. In instances when the joint effect of the conditioned items
is not in shareholders' best interests, vote AGAINST the proposals. If the
combined effect is positive, support such proposals.
CONVERSION OF SECURITIES
Vote CASE BY CASE on proposals regarding conversion of securities. When
evaluating these proposals, the investor should review the dilution to existing
shareholders, the conversion price relative to market value, financial issues,
control issues, termination penalties, and conflicts of interest.
Vote FOR the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction is
not approved.
CORPORATE REORGANIZATION/DEBT RESTRUCTURING/PREPACKAGED BANKRUPTCY PLANS/REVERSE
LEVERAGED BUYOUTS/WRAP PLANS
Vote CASE-BY-CASE on proposals to increase common and/or preferred shares and to
issue shares as part of a debt restructuring plan, after evaluating:
o Dilution to existing shareholders' positions;
o Terms of the offer - discount/premium in purchase to investor,
including any fairness opinion; termination penalties; exit
strategy;
o Financial issues - company's financial situation; degree of need for
capital; use of proceeds; effect of the financing on the company's
cost of capital;
o Management's efforts to pursue other alternatives;
o Control issues - change in management; change in control, guaranteed
board and committee seats; standstill provisions; voting agreements;
veto power over certain corporate actions; and
o Conflicts of interest - arm's length transaction, managerial
incentives.
Vote FOR the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved.
FORMATION OF HOLDING COMPANY
Vote CASE-BY-CASE on proposals regarding the formation of a holding company,
taking into consideration the following:
o The reasons for the change;
o Any financial or tax benefits;
o Regulatory benefits;
o Increases in capital structure; and
o Changes to the articles of incorporation or bylaws of the company.
Absent compelling financial reasons to recommend the transaction, vote AGAINST
the formation of a holding company if the transaction would include either of
the following:
o Increases in common or preferred stock in excess of the allowable
maximum (see discussion under "Capital"); or
o Adverse changes in shareholder rights.
GOING PRIVATE AND GOING DARK TRANSACTIONS (LBOS AND MINORITY SQUEEZE-OUTS)
Vote CASE-BY-CASE on going private transactions, taking into account the
following:
o Offer price/premium;
o Fairness opinion;
o How the deal was negotiated;
o Conflicts of interest;
o Other alternatives/offers considered; and
o Non-completion risk.
Vote CASE-BY-CASE on "going dark" transactions, determining whether the
transaction enhances shareholder value by taking into consideration:
o Whether the company has attained benefits from being publicly-traded
(examination of trading volume, liquidity and market research of the
stock);
o Balanced interests of continuing vs. cashed-out shareholders, taking
into account the following:
o Are all shareholders able to participate in the transaction?
o Will there be a liquid market for remaining shareholders
following the transaction?
o Does the company have strong corporate governance?
o Will insiders reap the gains of control following the proposed
transactions?
o Does the state of incorporation have laws requiring continued
reporting that may benefit shareholders?
JOINT VENTURES
Vote CASE-BY-CASE on proposals to form joint ventures, taking into account the
following:
o Percentage of assets/business contributed;
o Percentage ownership;
o Financial and strategic benefits;
o Governance structure;
o Conflicts of interest;
o Other alternatives; and
o Noncompletion risk.
LIQUIDATIONS
Vote CASE-BY-CASE on liquidations, taking into account the following:
o Management's efforts to pursue other alternatives;
o Appraisal value of assets; and
o The compensation plan for executives managing the liquidation.
Vote FOR the liquidation if the company will file for bankruptcy if the proposal
is not approved.
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.
PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES
Vote CASE-BY-CASE on proposals regarding private placements, warrants and
convertible debentures taking into consideration:
o Dilution to existing shareholders' position: the amount and timing
of shareholder ownership dilution should be weighed against the
needs and proposed shareholder benefits of the capital infusion.
Although newly-issued common stock, absent preemptive rights, is
typically dilutive to existing shareholders, share price
appreciation is often the necessary event to trigger the exercise of
"out of the money" warrants and convertible debt. In these instances
from a value standpoint, the negative impact of dilution is
mitigated by the increase in the company's stock price that must
occur to trigger the dilutive event.
o Terms of the offer (discount/premium in purchase price to investor,
including any fairness opinion, conversion features, termination
penalties, exit strategy):
o The terms of the offer should be weighed against the
alternatives of the company and in light of company's
financial condition. Ideally, the conversion price for
convertible debt and the exercise price for warrants should be
at a premium to the then prevailing stock price at the time of
private placement.
o When evaluating the magnitude of a private placement discount
or premium, consider factors that influence the discount or
premium, such as liquidity, due diligence costs, control and
monitoring costs, capital scarcity, information asymmetry and
anticipation of future performance.
o Financial issues:
o The company's financial condition;
o Degree of need for capital;
o Use of proceeds;
o Effect of the financing on the company's cost of capital;
o Current and proposed cash burn rate;
o Going concern viability and the state of the capital and
credit markets.
o Management's efforts to pursue alternatives and whether the company
engaged in a process to evaluate alternatives: a fair, unconstrained
process helps to ensure the best price for shareholders. Financing
alternatives can include joint ventures, partnership, merger or sale
of part or all of the company.
o Control issues:
o Change in management;
o Change in control;
o Guaranteed board and committee seats;
o Standstill provisions;
o Voting agreements;
o Veto power over certain corporate actions; and
o Minority versus majority ownership and corresponding minority
discount or majority control premium.
o Conflicts of interest:
o Conflicts of interest should be viewed from the perspective of
the company and the investor.
o Were the terms of the transaction negotiated at arm's length?
Are managerial incentives aligned with shareholder interests?
o Market reaction:
o The market's response to the proposed deal. A negative market
reaction is a cause for concern. Market reaction may be
addressed by analyzing the one day impact on the unaffected
stock price.
Vote FOR the private placement or FOR the issuance of warrants and/or
convertible debentures in a private placement if it is expected that the company
will file for bankruptcy if the transaction is not approved.
REORGANIZATION/RESTRUCTURING PLAN (BANKRUPTCY)
Vote CASE-BY-CASE on proposals to common shareholders on bankruptcy plans of
reorganization, considering the following factors including, but not limited to:
o Estimated value and financial prospects of the reorganized company;
o Percentage ownership of current shareholders in the reorganized
company;
o Whether shareholders are adequately represented in the
reorganization process (particularly through the existence of an
Official Equity Committee);
o The cause of the bankruptcy filing, and the extent to which the plan
of reorganization addresses the cause(s);
o Existence of a superior alternative to the plan of reorganization;
and
o Governance of the reorganized company.
SPECIAL PURPOSE ACQUISITION CORPORATIONS (SPACS)
Vote on a CASE-BY-CASE basis on SPAC mergers and acquisitions taking into
account the following:
o Valuation - Is the value being paid by the SPAC reasonable? SPACs
generally lack an independent fairness opinion and the financials on
the target may be limited. Compare the conversion price with the
intrinsic value of the target company provided in the fairness
opinion. Also, evaluate the proportionate value of the combined
entity attributable to the SPAC IPO shareholders versus the
pre-merger value of SPAC. Additionally, a private company discount
may be applied to the target, if it is a private entity.
o Market reaction - How has the market responded to the proposed deal?
A negative market reaction may be a cause for concern. Market
reaction may be addressed by analyzing the one-day impact on the
unaffected stock price.
o Deal timing - A main drive for most transactions is that the SPAC
charter typically requires the deal to be complete within 18 to 24
months, or the SPAC is to be liquidated. Evaluate the valuation,
market reaction and potential conflicts of interest for deals that
are announced close to the liquidation date.
o Negotiations and process - What was the process undertaken to
identify potential target companies within specified industry or
location specified in charter? Consider the background of the
sponsors.
o Conflicts of interest - How are sponsors benefiting from the
transaction compared to IPO shareholders? Potential conflicts could
arise if a fairness opinion is issued by the insiders to qualify the
deal rather than a third party, or if management is encouraged to
pay a higher price for the target because of an 80% rule (the
charter requires that the fair market value of the target is at
least equal to 80% of net assets of the SPAC). Also, there may be a
sense of urgency by the management team of the SPAC to close the
deal since its charter typically requires a transaction to be
completed within the 18-24 month timeframe.
o Voting agreements - Are the sponsors entering into any voting
agreements/tender offers with shareholders who are likely to vote
AGAINST the proposed merger or exercise conversion rights?
o Governance - What is the impact of having the SPAC CEO or founder on
key committees following the proposed merger?
SPINOFFS
Vote CASE-BY-CASE on spin-offs, considering:
o Tax and regulatory advantages;
o Planned use of the sale proceeds;
o Valuation of spin-off;
o Fairness opinion;
o Benefits to the parent company;
o Conflicts of interest;
o Managerial incentives;
o Corporate governance changes;
o Changes in the capital structure.
VALUE MAXIMIZATION SHAREHOLDER PROPOSALS
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value
by:
o Hiring a financial advisor to explore strategic alternatives;
o Selling the company; or
o Liquidating the company and distributing the proceeds to
shareholders.
These proposals should be evaluated based on the following factors:
o Prolonged poor performance with no turnaround in sight;
o Signs of entrenched board and management (such as the adoption of
takeover defenses);
o Strategic plan in place for improving value;
o Likelihood of receiving reasonable value in a sale or dissolution;
and
o The company actively exploring its strategic options, including
retaining a financial advisor.
5. 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 (MANAGEMENT
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.
PRIMARY EVALUATION FACTORS FOR EXECUTIVE PAY
PAY FOR PERFORMANCE EVALUATION
ISS annually conducts a pay-for-performance analysis to identify strong or
satisfactory alignment between pay and performance over a sustained period. With
respect to companies in the Russell 3000 or Russell 3000E Indices(7), this
analysis considers the following:
o Peer Group(8) Alignment:
o The degree of alignment between the company's TSR rank and the
CEO's annualized total pay rank within a peer group, as
measured over a three-year period;
o The multiple of the CEO's total pay relative to the peer group
median.
o Absolute Alignment(9): the absolute alignment between the trend in
CEO pay and company TSR over the prior five fiscal years - i.e., the
difference between the trend in annual pay changes and the trend in
annualized TSR during the period.
If the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of non-Russell 3000 index
companies, misaligned pay and performance are otherwise suggested, our analysis
may include any of the following qualitative factors if they are relevant to the
analysis 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 overall ratio of performance-based 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 FY or anomalous equity grant practices (e.g., bi-annual
awards);
o Realizable pay(10) compared to grant pay; 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.
-----------------------------
7 The Russell 3000E Index includes approximately 4,000 of the largest U. S.
equity securities.
8 The revised peer group is generally comprised of 14-24 companies that are
selected using market cap, revenue (or assets for certain financial
firms), GICS Industry group, and company's selected peers' GICS industry
group, with size constraints, via a process designed to select peers that
are comparable to the subject company in terms of revenue/assets and
industry, and also within a market cap bucket that is reflective of the
company's. For Oil, Gas & Consumable Fuels companies, market cap is the
only size determinant.
9 Only Russell 3000 companies are subject to the Absolute Alignment
analysis.
10 ISS research reports include realizable pay for S&P1500 companies.
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 or common 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 date 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 repricing backdated options, or 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.
COMPENSATION COMMITTEE COMMUNICATIONS AND RESPONSIVENESS
Consider the following factors CASE-BY-CASE when evaluating ballot items related
to executive pay on the board's responsiveness to investor input and engagement
on compensation issues:
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 ("SAY WHEN 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 Golden Parachute proposals, including consideration of
existing change-in-control arrangements maintained with named executive officers
rather than focusing primarily on new or extended arrangements.
Features that may result in an AGAINST recommendation include one or more of the
following, depending on the number, magnitude and/or timing of issue(s):
o Single- or modified-single-trigger cash severance;
o Single-trigger acceleration of unvested equity awards;
o Excessive cash severance (>3x base salary and bonus);
o Excise tax gross-ups triggered and payable (as opposed to a
provision to provide excise tax gross-ups);
o Excessive golden parachute payments (on an absolute basis or as a
percentage of transaction equity value); or
o Recent amendments that incorporate any problematic features (such as
those above) or recent actions (such as extraordinary equity grants)
that may make packages so attractive as to influence merger
agreements that may not be in the best interests of shareholders; or
o The company's assertion that a proposed transaction is conditioned
on shareholder approval of the golden parachute advisory vote.
Recent amendment(s) that incorporate problematic features will tend to carry
more weight on the overall analysis. However, the presence of multiple legacy
problematic features will also be closely scrutinized.
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 certain equity-based compensation plans(11) depending on a
combination of certain plan features and equity grant practices, where positive
factors may counterbalance negative factors, and vice versa, as evaluated using
an "equity plan scorecard" (EPSC) approach with three pillars:
o PLAN COST: The total estimated cost of the company's equity plans
relative to industry/market cap peers, measured by the company's
estimated Shareholder Value Transfer (SVT) in relation to peers and
considering both:
o SVT based on new shares requested plus shares remaining for
future grants, plus outstanding unvested/unexercised grants;
and
o SVT based only on new shares requested plus shares remaining
for future grants.
o PLAN FEATURES:
o Automatic single-triggered award vesting upon a change in
control (CIC);
o Discretionary vesting authority;
o Liberal share recycling on various award types;
o Lack of minimum vesting period for grants made under the plan.
o GRANT PRACTICES:
o The company's three-year burn rate relative to its
industry/market cap peers;
o Vesting requirements in most recent CEO equity grants (3-year
look-back);
o The estimated duration of the plan (based on the sum of shares
remaining available and the new shares requested, divided by
the average annual shares granted in the prior three years);
o The proportion of the CEO's most recent equity grants/awards
subject to performance conditions;
o Whether the company maintains a claw-back policy;
o Whether the company has established post exercise/vesting
share-holding requirements.
Generally vote AGAINST the plan proposal if the combination of above factors
indicates that the plan is not, overall, in shareholders' interests, or if any
of the following egregious factors apply:
o Awards may vest in connection with a liberal change-of-control
definition;
o The plan would permit repricing or cash buyout of underwater options
without shareholder approval (either by expressly permitting it -
for NYSE and NASDAQ listed companies - or by not prohibiting it when
the company has a history of repricing - for non-listed companies);
o The plan is a vehicle for problematic pay practices or a significant
pay-for-performance disconnect under certain circumstances; or
o Any other plan features are determined to have a significant
negative impact on shareholder interests.
-----------------------------
11 Proposals evaluated under the EPSC policy generally include those to
approve or amend (1) stock option plans for employees and/or employees and
directors, (2) restricted stock plans for employees and/or employees and
directors, and (3) omnibus stock incentive plans for employees and/or
employees and directors.
PLAN COST
Generally vote AGAINST equity plans if the cost is unreasonable. For
non-employee director plans, vote FOR the plan if certain factors are met (see
Director Compensation section).
SHAREHOLDER VALUE TRANSFER
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT),
which is measured using a binomial option pricing model that assesses the amount
of shareholders' equity flowing out of the company to employees and directors.
SVT is expressed as both a dollar amount and as a percentage of market value,
and includes the new shares proposed, shares available under existing plans, and
shares granted but unexercised (using two measures, in the case of plans subject
to the Equity Plan Scorecard evaluation, as noted above). All award types are
valued. For omnibus plans, unless limitations are placed on the most expensive
types of awards (for example, full value awards), the assumption is made that
all awards to be granted will be the most expensive types. See discussion of
specific types of awards.
Except for proposals subject to Equity Plan Scorecard evaluation, Shareholder
Value Transfer is reasonable if it falls below a company-specific benchmark. The
benchmark is determined as follows: The top quartile performers in each industry
group (using the Global Industry Classification Standard: GICS) are identified.
Benchmark SVT levels for each industry are established based on these top
performers' historic SVT. The benchmark industry SVT level is then adjusted
upwards or downwards for the specific company by plugging the company-specific
performance measures, size and cash compensation into the industry cap equations
to arrive at the company's benchmark.(12)
GRANT PRACTICES
THREE-YEAR BURN RATE
Burn rate benchmarks (utilized in Equity Plan Scorecard evaluations) are
calculated as the greater of: (1) the mean ((micro)) plus one standard deviation
(o) of the company's GICS group segmented by S&P 500, Russell 3000 index (less
the S&P500) and non-Russell 3000 index; and (2) two percent of weighted common
shares outstanding. In addition, year-over-year burn-rate benchmark changes will
be limited to a maximum of two (2) percentage plus or minus the prior year's
burn-rate benchmark.
-----------------------------
12 For plans evaluated under the Equity Plan Scorecard policy, the company's
SVT benchmark is considered along with other factors.
2015 BURN RATE BENCHMARKS
S&P500
---------- ----------------------------- ---------- ---------- ------------
STANDARD INDUSTRY
GICS DESCRIPTION MEAN DEVIATION BENCHMARK*
---------- ----------------------------- ---------- ---------- ------------
10 Energy 1.19% 0.56% 2.00%*
---------- ----------------------------- ---------- ---------- ------------
15 Materials 1.25% 0.71% 2.00%*
---------- ----------------------------- ---------- ---------- ------------
20 Industrials 1.44% 0.69% 2.13%
---------- ----------------------------- ---------- ---------- ------------
25 Consumer Discretionary 1.66% 0.84% 2.50%
---------- ----------------------------- ---------- ---------- ------------
30 Consumer Staples 1.42% 0.69% 2.11%
---------- ----------------------------- ---------- ---------- ------------
35 Health Care 1.99% 0.83% 2.82%
---------- ----------------------------- ---------- ---------- ------------
40 Financials 1.79% 1.46% 3.25%
---------- ----------------------------- ---------- ---------- ------------
45 Information Technology 3.24% 1.49% 4.73%
---------- ----------------------------- ---------- ---------- ------------
50 Telecommunication Services 0.95% 0.33% 2.00%*
---------- ----------------------------- ---------- ---------- ------------
55 Utilities 0.82% 0.38% 2.00%*
---------- ----------------------------- ---------- ---------- ------------
RUSSELL 3000 (EXCLUDING THE S&P500)
---------- ------------------------------ --------- ---------- ------------
STANDARD INDUSTRY
GICS DESCRIPTION MEAN DEVIATION BENCHMARK*
---------- ------------------------------ --------- ---------- ------------
1010 Energy 2.55% 2.48% 5.03%
---------- ------------------------------ --------- ---------- ------------
1510 Materials 1.60% 1.31% 2.91%
---------- ------------------------------ --------- ---------- ------------
2010 Capital Goods 1.93% 1.22% 3.15%
---------- ------------------------------ --------- ---------- ------------
2020 Commercial & Professional 2.86% 1.70% 4.56%
Services
---------- ------------------------------ --------- ---------- ------------
2030 Transportation 1.84% 2.07% 3.91%
---------- ------------------------------ --------- ---------- ------------
2510 Automobiles & Components 2.02% 1.35% 3.37%
---------- ------------------------------ --------- ---------- ------------
2520 Consumer Durables & Apparel 2.32% 1.57% 3.89%
---------- ------------------------------ --------- ---------- ------------
2530 Consumer Services 2.58% 1.63% 4.21%
---------- ------------------------------ --------- ---------- ------------
2540 Media 2.65% 2.52% 5.17%
---------- ------------------------------ --------- ---------- ------------
2550 Retailing 2.65% 1.81% 4.46%
---------- ------------------------------ --------- ---------- ------------
3010,
3020, Consumer Staples 1.73% 1.42% 3.15%
3030
---------- ------------------------------ --------- ---------- ------------
3510 Health Care Equipment & 3.28% 1.85% 5.13%
Services
---------- ------------------------------ --------- ---------- ------------
3520 Pharmaceuticals & 3.78% 2.21% 5.99%
Biotechnology
---------- ------------------------------ --------- ---------- ------------
4010 Banks 1.67% 1.67% 3.34%
---------- ------------------------------ --------- ---------- ------------
4020 Diversified Financials 4.56% 4.43% 8.99%
---------- ------------------------------ --------- ---------- ------------
4030 Insurance 2.04% 1.80% 3.84%
---------- ------------------------------ --------- ---------- ------------
4040 Real Estate 1.40% 1.31% 2.71%
---------- ------------------------------ --------- ---------- ------------
4510 Software & Services 4.97% 2.91% 7.88%
---------- ------------------------------ --------- ---------- ------------
4520 Technology Hardware & 3.65% 2.20% 5.85%
Equipment
---------- ------------------------------ --------- ---------- ------------
4530 Semiconductor Equipment 4.75% 2.15% 6.90%
---------- ------------------------------ --------- ---------- ------------
5010 Telecommunication Services 3.03% 1.51% 4.54%
---------- ------------------------------ --------- ---------- ------------
5510 Utilities 0.84% 0.54% 2.00%*
---------- ------------------------------ --------- ---------- ------------
NON-RUSSELL 3000
--------- ----------------------------- ------- ---------- -------------
STANDARD INDUSTRY
GICS DESCRIPTION MEAN DEVIATION BENCHMARK*
--------- ----------------------------- ------- ---------- -------------
1010 Energy 2.51% 3.72% 6.23%
--------- ----------------------------- ------- ---------- -------------
1510 Materials 3.09% 3.89% 6.98%
--------- ----------------------------- ------- ---------- -------------
2010 Capital Goods 3.54% 3.96% 7.50%
--------- ----------------------------- ------- ---------- -------------
2020 Commercial & Professional 3.88% 3.64% 7.52%
Services
--------- ----------------------------- ------- ---------- -------------
2030 Transportation 1.73% 2.14% 3.87%
--------- ----------------------------- ------- ---------- -------------
2510 Automobiles & Components 2.19% 2.02% 4.21%
--------- ----------------------------- ------- ---------- -------------
2520 Consumer Durables & Apparel 2.83% 3.05% 5.88%
--------- ----------------------------- ------- ---------- -------------
2530 Consumer Services 2.71% 3.00% 5.71%
--------- ----------------------------- ------- ---------- -------------
2540 Media 2.70% 2.49% 5.19%
--------- ----------------------------- ------- ---------- -------------
2550 Retailing 3.79% 2.72% 6.51%
--------- ----------------------------- ------- ---------- -------------
3010,
3020, Consumer Staples 2.36% 2.96% 5.32%
3030
--------- ----------------------------- ------- ---------- -------------
3510 Health Care Equipment & 4.56% 3.91% 8.47%
Services
--------- ----------------------------- ------- ---------- -------------
3520 Pharmaceuticals & 4.86% 3.86% 8.72%
Biotechnology
--------- ----------------------------- ------- ---------- -------------
4010 Banks 1.20% 1.80% 3.00%
--------- ----------------------------- ------- ---------- -------------
4020 Diversified Financials 2.28% 4.11% 6.39%
--------- ----------------------------- ------- ---------- -------------
4030 Insurance 1.06% 1.68% 2.74%
--------- ----------------------------- ------- ---------- -------------
4040 Real Estate 0.93% 1.44% 2.37%
--------- ----------------------------- ------- ---------- -------------
4510 Software & Services 4.62% 3.70% 8.32%
--------- ----------------------------- ------- ---------- -------------
4520 Technology Hardware & 4.07% 3.91% 7.98%
Equipment
--------- ----------------------------- ------- ---------- -------------
4530 Semiconductor Equipment 4.44% 4.26% 8.70%
--------- ----------------------------- ------- ---------- -------------
5010 Telecommunication Services 3.67% 3.66% 7.33%
--------- ----------------------------- ------- ---------- -------------
5510 Utilities 1.81% 2.21% 4.02%
--------- ----------------------------- ------- ---------- -------------
* The Benchmark is generally the Mean + Standard Deviation, subject to
minimum benchmark of 2%. In addition, year-over-year burn rate benchmark
changes are limited to a maximum of two (2) percentage points plus or
minus the prior year'
A premium (multiplier) is applied on full value awards for the past three fiscal
years. The guideline for applying the premium is as follows:
--------------------------------------- ---------------------------------------------------
Stock Price Volatility MULTIPLIER
--------------------------------------- ---------------------------------------------------
54.6% and higher 1 full-value award will count as 1.5 option shares
--------------------------------------- ---------------------------------------------------
36.1% or higher and less than 54.6% 1 full-value aware will count as 2.0 option shares
--------------------------------------- ---------------------------------------------------
24.9% or higher and less than 36.1% 1 full-value award will count as 2.5 option shares
--------------------------------------- ---------------------------------------------------
16.5% or higher and less than 24.9% 1 full-value award will count as 3.0 option shares
--------------------------------------- ---------------------------------------------------
7.9% or higher and less than 16.5% 1 full-value award will count as 3.5 option shares
--------------------------------------- ---------------------------------------------------
Less than 7.9% 1 full-value award will count as 4.0 option shares
--------------------------------------- ---------------------------------------------------
EGREGIOUS FACTORS
LIBERAL CHANGE-IN-CONTROL DEFINITION
Generally vote AGAINST equity plans if the plan has a liberal definition of
change-in-control, and the equity awards could vest upon such liberal definition
of change-in-control, even though an actual change in control may not occur.
Examples of such a definition include, but are not limited to, announcement or
commencement of a tender offer, provisions for acceleration upon a "potential"
takeover, shareholder approval of a merger or other transactions, or similar
language.
REPRICING PROVISIONS
Vote AGAINST plans that expressly permit the repricing or exchange of underwater
stock options/ stock appreciate rights (SARs) without prior shareholder
approval. "Repricing" includes the ability to do any of the following:
o Amend the terms of outstanding options or SARs to reduce the
exercise price of such outstanding options or SARs;
o Cancel outstanding options or SARs in exchange for options or SARs
with an exercise price that is less than the exercise price of the
original options or SARs.
Also, vote AGAINST or WITHHOLD from members of the Compensation Committee who
approved and/or implemented a repricing or an option/SAR exchange program, by
buying out underwater options/ SARs for stock, cash or other consideration or
canceling underwater options/SARs and regranting options/SARs with a lower
exercise price, without prior shareholder approval, even if such repricings are
allowed in their equity plan.
Vote AGAINST plans if the company has a history of repricing without shareholder
approval, and the applicable listing standards would not preclude them from
doing so.
PROBLEMATIC PAY PRACTICES OR SIGNIFICANT PAY-FOR-PERFORMANCE DISCONNECT
If the equity plan on the ballot is a vehicle for problematic pay practices,
vote AGAINST the plan.
If a significant portion of the CEO's misaligned pay is attributed to
non-performance-based equity awards, and there is an equity plan on the ballot
with the CEO as one of the participants, ISS may recommend a vote AGAINST the
equity plan. Considerations in voting against the equity plan may include, but
are not limited to:
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 level.
SPECIFIC TREATMENT OF CERTAIN AWARD TYPES IN EQUITY PLAN EVALUATIONS:
DIVIDEND EQUIVALENT RIGHTS
Options that have Dividend Equivalent Rights (DERs) associated with them will
have a higher calculated award value than those without DERs under the binomial
model based on the value of these dividend streams. The higher value will be
applied to new shares, shares available under existing plans, and shares awarded
but not exercised per the plan specifications. DERs transfer more shareholder
equity to employees and non-employee directors, and this cost should be
captured.
OPERATING PARTNERSHIP (OP) UNITS IN EQUITY PLAN ANALYSIS OF REAL ESTATE
INVESTMENT TRUSTS (REITS)
For Real Estate Investment Trusts (REITS), include the
common shares issuable upon conversion of outstanding Operating Partnership (OP)
units in the share count for the purposes of determining: (1) market
capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares
outstanding in the burn rate analysis.
401(K) EMPLOYEE BENEFIT PLANS
Vote FOR proposals to implement a 401(k) savings plan for employees.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)
Vote FOR proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive
(more than five percent of outstanding shares).
EMPLOYEE STOCK PURCHASE PLANS--QUALIFIED PLANS
Vote CASE-BY-CASE on qualified employee stock purchase plans. Vote FOR employee
stock purchase plans where all of the following apply:
o Purchase price is at least 85 percent of fair market value;
o Offering period is 27 months or less; and
o The number of shares allocated to the plan is ten percent or less of
the outstanding shares.
Vote AGAINST qualified employee stock purchase plans where any of the following
apply:
o Purchase price is less than 85 percent of fair market value; or
o Offering period is greater than 27 months; or
o The number of shares allocated to the plan is more than ten percent
of the outstanding shares.
EMPLOYEE STOCK PURCHASE PLANS--NON-QUALIFIED PLANS
Vote CASE-BY-CASE on nonqualified employee stock purchase plans. Vote FOR
nonqualified employee stock purchase plans with all of the following features:
o Broad-based participation (i.e., all employees of the company with
the exclusion of individuals with 5 percent or more of beneficial
ownership of the company);
o Limits on employee contribution, which may be a fixed dollar amount
or expressed as a percent of base salary;
o Company matching contribution up to 25 percent of employee's
contribution, which is effectively a discount of 20 percent from
market value;
o No discount on the stock price on the date of purchase since there
is a company matching contribution.
Vote AGAINST nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution
exceeds 25 percent of employee's contribution, evaluate the cost of the plan
against its allowable cap.
INCENTIVE BONUS PLANS AND TAX DEDUCTIBILITY PROPOSALS (OBRA-RELATED COMPENSATION
PROPOSALS)
Generally vote FOR proposals to approve or amend executive incentive bonus plans
if the proposal:
o Is only to include administrative features;
o Places a cap on the annual grants any one participant may receive to
comply with the provisions of Section 162(m);
o Adds performance goals to existing compensation plans to comply with
the provisions of Section 162(m) unless they are clearly
inappropriate; or
o Covers cash or cash and stock bonus plans that are submitted to
shareholders for the purpose of exempting compensation from taxes
under the provisions of Section 162(m) if no increase in shares is
requested.
Vote AGAINST such proposals if:
o The compensation committee does not fully consist of independent
outsiders, per ISS' Categorization of Directors; or
o The plan or proposal contains excessive problematic provisions.
Vote CASE-BY-CASE on such proposals if:
o In addition to seeking 162(m) tax treatment, the amendment may cause
the transfer of additional shareholder value to employees (e.g., by
requesting additional shares, extending the option term or expanding
the pool of plan participants). Evaluate the Shareholder Value
Transfer in comparison with the company's allowable cap; or
o A company is presenting the plan to shareholders for Section 162(m)
favorable tax treatment for the first time after the company's
initial public offering (IPO). Perform a full standard as
applicable.
OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS
Vote CASE-BY-CASE on management proposals seeking approval to exchange/reprice
options taking into consideration:
o Historic trading patterns--the stock price should not be so volatile
that the options are likely to be back "in the money" over the near
term;
o Rationale for the repricing--was the stock price decline beyond
management's control?
o Is this a value-for-value exchange?
o Are surrendered stock options added back to the plan reserve?
o Options vesting--does the new option vest immediately, or is there a
black-out period?
o Term of the option--the term should remain the same as that of the
replaced option;
o Exercise price--should be set at fair market or a premium to market;
o Participants--executive officers and directors should be excluded.
If the surrendered options are added back to the equity plans for re-issuance,
then take into consideration the company's total cost of equity plans and its
three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale and
timing of the repricing proposal. The proposal should clearly articulate why the
board is choosing to conduct an exchange program at this point in time.
Repricing underwater options after a recent precipitous drop in the company's
stock price demonstrates poor timing. Repricing after a recent decline in stock
price triggers additional scrutiny and a potential AGAINST vote on the proposal.
At a minimum, the decline should not have happened within the past year. Also,
consider the terms of the surrendered options, such as the grant date, exercise
price and vesting schedule. Grant dates of surrendered options should be far
enough back (two to three years) so as not to suggest that repricings are being
done to take advantage of short-term downward price movements. Similarly, the
exercise price of surrendered options should be above the 52-week high for the
stock price.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
STOCK PLANS IN LIEU OF CASH
Vote CASE-BY-CASE on plans which provide participants with the option of taking
all or a portion of their cash compensation in the form of stock.
Vote FOR non-employee director only equity plans which provide a
dollar-for-dollar cash-for-stock exchange.
Vote CASE-BY-CASE on plans which do not provide a dollar-for-dollar cash for
stock exchange. In cases where the exchange is not dollar-for-dollar, the
request for new or additional shares for such equity program will be considered
using the binomial option pricing model. In an effort to capture the total cost
of total compensation, ISS will not make any adjustments to carve out the
in-lieu-of-cash compensation.
TRANSFER STOCK OPTIONS (TSO) PROGRAMS
One-time Transfers: Vote AGAINST or WITHHOLD votes from compensation committee
members if they fail to submit one-time transfers to shareholders for approval.
Vote CASE-BY-CASE on one-time transfers. Vote FOR if:
o Executive officers and non-employee directors are excluded from
participating;
o Stock options are purchased by third-party financial institutions at
a discount to their fair value using option pricing models such as
Black-Scholes or a Binomial Option Valuation or other appropriate
financial models;
o There is a two-year minimum holding period for sale proceeds (cash
or stock) for all participants.
Additionally, management should provide a clear explanation of why options are
being transferred to a third-party institution and whether the events leading up
to a decline in stock price were beyond management's control. A review of the
company's historic stock price volatility should indicate if the options are
likely to be back "in-the-money" over the near term.
Ongoing TSO program: Vote AGAINST equity plan proposals if the details of
ongoing TSO programs are not provided to shareholders. Since TSOs will be one of
the award types under a stock plan, the ongoing TSO program, structure and
mechanics must be disclosed to shareholders. The specific criteria to be
considered in evaluating these proposals include, but are not limited, to the
following:
o Eligibility;
o Vesting;
o Bid-price;
o Term of options;
o Cost of the program and impact of the TSOs on company's total option
expense;
o Option repricing policy.
Amendments to existing plans that allow for introduction of transferability of
stock options should make clear that only options granted post-amendment shall
be transferable.
DIRECTOR COMPENSATION
EQUITY PLANS FOR NON-EMPLOYEE DIRECTORS
Vote CASE-BY-CASE on compensation plans for non-employee directors, based on the
cost of the plans against the company's allowable cap.
On occasion, director stock plans that set aside a relatively small number of
shares when combined with employee or executive stock compensation plans will
exceed the allowable cap. Vote for the plan if ALL of the following qualitative
factors in the board's compensation are met and disclosed in the proxy
statement:
o Director stock ownership guidelines with a minimum of three times
the annual cash retainer;
o Vesting schedule or mandatory holding/deferral period:
- A minimum vesting of three years for stock options or
restricted stock; or
- Deferred stock payable at the end of a three-year deferral
period.
o Mix between cash and equity:
- A balanced mix of cash and equity, for example 40% cash/60%
equity or 50% cash/50% equity; or
- If the mix is heavier on the equity component, the vesting
schedule or deferral period should be more stringent, with the
lesser of five years or the term of directorship.
o No retirement/benefits and perquisites provided to non-employee
directors; and
o Detailed disclosure provided on cash and equity compensation
delivered to each non-employee director for the most recent fiscal
year in a table. The column headers for the table may include the
following: name of each non-employee director, annual retainer,
board meeting fees, committee retainer, committee-meeting fees, and
equity grants.
NON-EMPLOYEE DIRECTOR RETIREMENT PLANS
Vote AGAINST retirement plans for non-employee directors. Vote FOR shareholder
proposals to eliminate retirement plans for non-employee directors.
SHAREHOLDER PROPOSALS ON COMPENSATION
ADOPT ANTI-HEDGING/PLEDGING/SPECULATIVE INVESTMENTS POLICY
Generally vote FOR proposals seeking a policy that prohibits named executive
officers from engaging in derivative or speculative transactions involving
company stock, including hedging, holding stock in a margin account, or pledging
stock as collateral for a loan. However, the company's existing policies
regarding responsible use of company stock will be considered.
BONUS BANKING/BONUS BANKING "PLUS"
Vote CASE-BY-CASE on proposals seeking deferral of a portion of annual bonus
pay, with ultimate payout linked to sustained results for the performance
metrics on which the bonus was earned (whether for the named executive officers
or a wider group of employees), taking into account the following factors:
o The company's past practices regarding equity and cash compensation;
o Whether the company has a holding period or stock ownership
requirements in place, such as a meaningful retention ratio (at
least 50 percent for full tenure); and
o Whether the company has a rigorous claw-back policy in place.
COMPENSATION CONSULTANTS--DISCLOSURE OF BOARD OR COMPANY'S UTILIZATION
Generally vote FOR shareholder proposals seeking disclosure regarding the
Company, Board, or Compensation Committee's use of compensation consultants,
such as company name, business relationship(s) and fees paid.
DISCLOSURE/SETTING LEVELS OR TYPES OF COMPENSATION FOR EXECUTIVES AND DIRECTORS
Generally vote FOR shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is
relevant to shareholders' needs, would not put the company at a competitive
disadvantage relative to its industry, and is not unduly burdensome to the
company.
Vote AGAINST shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation.
Vote AGAINST shareholder proposals seeking to eliminate stock options or any
other equity grants to employees or directors.
Vote AGAINST shareholder proposals requiring director fees be paid in stock
only.
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board.
Vote CASE-BY-CASE on all other shareholder proposals regarding executive and
director pay, taking into account company performance, pay level versus peers,
pay level versus industry, and long-term corporate outlook.
GOLDEN COFFINS/EXECUTIVE DEATH BENEFITS
Generally vote FOR proposals calling for companies to adopt a policy of
obtaining shareholder approval for any future agreements and corporate policies
that could oblige the company to make payments or awards following the death of
a senior executive in the form of unearned salary or bonuses, accelerated
vesting or the continuation in force of unvested equity grants, perquisites and
other payments or awards made in lieu of compensation. This would not apply to
any benefit programs or equity plan proposals for which the broad-based employee
population is eligible.
HOLD EQUITY PAST RETIREMENT OR FOR A SIGNIFICANT PERIOD OF TIME
Vote CASE-BY-CASE on shareholder proposals asking companies to adopt policies
requiring senior executive officers to retain all or a significant portion of
the shares acquired through compensation plans, either:
o While employed and/or for two years following the termination of
their employment; or
o For a substantial period following the lapse of all other vesting
requirements for the award ("lock-up period"), with ratable release
of a portion of the shares annually during the lock-up period.
The following factors will be taken into account:
o Whether the company has any holding period, retention ratio or
officer ownership requirements in place. These should consist of:
- Rigorous stock ownership guidelines;
- A holding period requirement coupled with a significant
long-term ownership requirement; or
- A meaningful retention ratio.
o Actual officer stock ownership and the degree to which it meets or
exceeds the proponent's suggested holding period/retention ratio or
the company's own stock ownership or retention requirements;
o Post termination holding requirement policies or any policies aimed
at mitigating risk taking by senior executives;
o Problematic pay practices, current and past, which may promote a
short-term versus a long-term focus.
A rigorous stock ownership guideline should be at least 10x base salary for the
CEO, with the multiple declining for other executives. A meaningful retention
ratio should constitute at least 50 percent of the stock received from equity
awards (on a net proceeds basis) held on a long-term basis, such as the
executive's tenure with the company or even a few years past the executive's
termination with the company.
Vote CASE-BY-CASE on shareholder proposals asking companies to adopt policies
requiring Named Executive Officers to retain 75% of the shares acquired through
compensation plans while employed and/ or for two years following the
termination of their employment, and to report to shareholders regarding this
policy. The following factors will be taken into account:
o Whether the company has any holding period, retention ratio or
officer ownership requirements in place. These should consist of:
- Rigorous stock ownership guidelines, or
- A holding period requirement coupled with a significant
long-term ownership requirement, or
- A meaningful retention ratio,
o Actual officer stock ownership and the degree to which it meets or
exceeds the proponent's suggested holding period/retention ratio or
the company's own stock ownership or retention requirements.
o Problematic pay practices, current and past, which may promote a
short-term versus a long-term focus.
A rigorous stock ownership guideline should be at least 10x base salary for the
CEO, with the multiple declining for other executives. A meaningful retention
ratio should constitute at least 50 percent of the stock received from equity
awards (on a net proceeds basis) held on a long-term basis, such as the
executive's tenure with the company or even a few years past the executive's
termination with the company.
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While ISS favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
NON-DEDUCTIBLE COMPENSATION
Generally vote FOR proposals seeking disclosure of the extent to which the
company paid non-deductible compensation to senior executives due to Internal
Revenue Code Section 162(m), while considering the company's existing disclosure
practices.
PAY DISPARITY
Generally vote AGAINST proposals calling for an analysis of the pay disparity
between corporate executives and other non-executive employees.
PAY FOR PERFORMANCE/PERFORMANCE-BASED AWARDS
Vote CASE-BY-CASE on shareholder proposals requesting that a significant amount
of future long-term incentive compensation awarded to senior executives shall be
performance-based and requesting that the board adopt and disclose challenging
performance metrics to shareholders, based on the following analytical steps:
o First, vote FOR shareholder proposals advocating the use of
performance-based equity awards, such as performance contingent
options or restricted stock, indexed options or premium-priced
options, unless the proposal is overly restrictive or if the company
has demonstrated that it is using a "substantial" portion of
performance-based awards for its top executives. Standard stock
options and performance-accelerated awards do not meet the criteria
to be considered as performance-based awards. Further,
premium-priced options should have a premium of at least 25 percent
and higher to be considered performance-based awards.
o Second, assess the rigor of the company's performance-based equity
program. If the bar set for the performance-based program is too low
based on the company's historical or peer group comparison,
generally vote FOR the proposal. Furthermore, if target performance
results in an above-target payout, vote FOR the shareholder proposal
due to program's poor design. If the company does not disclose the
performance metric of the performance-based equity program, vote FOR
the shareholder proposal regardless of the outcome of the first step
to the test.
In general, vote FOR the shareholder proposal if the company does not meet both
of the above two steps.
PAY FOR SUPERIOR PERFORMANCE
Vote CASE-BY-CASE on shareholder proposals that request the board establish a
pay-for-superior performance standard in the company's executive compensation
plan for senior executives. These proposals generally include the following
principles:
o Set compensation targets for the plan's annual and long-term
incentive pay components at or below the peer group median;
o Deliver a majority of the plan's target long-term compensation
through performance-vested, not simply time-vested, equity awards;
o Provide the strategic rationale and relative weightings of the
financial and non-financial performance metrics or criteria used in
the annual and performance-vested long-term incentive components of
the plan;
o Establish performance targets for each plan financial metric
relative to the performance of the company's peer companies;
o Limit payment under the annual and performance-vested long-term
incentive components of the plan to when the company's performance
on its selected financial performance metrics exceeds peer group
median performance.
Consider the following factors in evaluating this proposal:
o What aspects of the company's annual and long-term equity incentive
programs are performance driven?
o If the annual and long-term equity incentive programs are
performance driven, are the performance criteria and hurdle rates
disclosed to shareholders, or are they benchmarked against a
disclosed peer group?
o Can shareholders assess the correlation between pay and
performance-based on the current disclosure?
o What type of industry and stage of business cycle does the company
belong to?
PRE-ARRANGED TRADING PLANS (10B5-1 PLANS)
Generally vote FOR shareholder proposals calling for certain principles
regarding the use of prearranged trading plans (10b5-1 plans) for executives.
These principles include:
o Adoption, amendment or termination of a 10b5-1 Plan must be
disclosed within two business days in a Form 8-K;
o Amendment or early termination of a 10b5-1 Plan is allowed only
under extraordinary circumstances, as determined by the board;
o Ninety days must elapse between adoption or amendment of a 10b5-1
Plan and initial trading under the plan;
o Reports on Form 4 must identify transactions made pursuant to a
10b5-1 Plan;
o An executive may not trade in company stock outside the 10b5-1 Plan;
o Trades under a 10b5-1 Plan must be handled by a broker who does not
handle other securities transactions for the executive.
PROHIBIT CEOS FROM SERVING ON COMPENSATION COMMITTEES
Generally vote AGAINST proposals seeking a policy to prohibit any outside CEO
from serving on a company's compensation committee, unless the company has
demonstrated problematic pay practices that raise concerns about the performance
and compensation of the committee.
RECOUPMENT OF INCENTIVE OR STOCK COMPENSATION IN SPECIFIED CIRCUMSTANCES
Vote CASE-BY-CASE on proposals to recoup incentive cash or stock compensation
made to senior executives if it is later determined that the figures upon which
incentive compensation is earned turn out to have been in error, or if the
senior executive has breached company policy or has engaged in misconduct that
may be significantly detrimental to the company's financial position or
reputation, or if the senior executive failed to manage or monitor risks that
subsequently led to significant financial or reputational harm to the company.
Many companies have adopted policies that permit recoupment in cases where
fraud, misconduct or negligence significantly contributed to a restatement of
financial results that led to the awarding of unearned incentive compensation.
However, such policies may be narrow given that not all misconduct or negligence
may result in significant financial restatements. Misconduct, negligence or lack
of sufficient oversight by senior executives may lead to significant financial
loss or reputational damage that may have long-lasting impact.
In considering whether to support such shareholder proposals, ISS will take into
consideration the following factors:
o If the company has adopted a formal recoupment policy;
o The rigor of the recoupment policy focusing on how and under what
circumstances the company may recoup incentive or stock
compensation;
o Whether the company has chronic restatement history or material
financial problems;
o Whether the company's policy substantially addresses the concerns
raised by the proponent;
o Disclosure of recoupment of incentive or stock compensation from
senior executives or lack thereof; or
o Any other relevant factors.
SEVERANCE AGREEMENTS FOR EXECUTIVES/GOLDEN PARACHUTES
Vote FOR shareholder proposals requiring that golden parachutes or executive
severance agreements be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts.
Vote CASE-BY-CASE on proposals to ratify or cancel golden parachutes. An
acceptable parachute should include, but is not limited to, the following:
o The triggering mechanism should be beyond the control of management;
o The amount should not exceed three times base amount (defined as the
average annual taxable W-2 compensation during the five years prior
to the year in which the change of control occurs);
o Change-in-control payments should be double-triggered, i.e., (1)
after a change in control has taken place, and (2) termination of
the executive as a result of the change in control. Change in
control is defined as a change in the company ownership structure.
SHARE BUYBACK HOLDING PERIODS
Generally vote AGAINST shareholder proposals prohibiting executives from selling
shares of company stock during periods in which the company has announced that
it may or will be repurchasing shares of its stock. Vote FOR the proposal when
there is a pattern of abuse by executives exercising options or selling shares
during periods of share buybacks.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS)
Generally vote FOR shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the company's
executive pension plans do not contain excessive benefits beyond what is offered
under employee-wide plans.
Generally vote FOR shareholder proposals requesting to limit the executive
benefits provided under the company's supplemental executive retirement plan
(SERP) by limiting covered compensation to a senior executive's annual salary
and excluding of all incentive or bonus pay from the plan's definition of
covered compensation used to establish such benefits.
TAX GROSS-UP PROPOSALS
Generally vote FOR proposals calling for companies to adopt a policy of not
providing tax gross-up payments to executives, except in situations where
gross-ups are provided pursuant to a plan, policy, or arrangement applicable to
management employees of the company, such as a relocation or expatriate tax
equalization policy.
TERMINATION OF EMPLOYMENT PRIOR TO SEVERANCE PAYMENT AND ELIMINATING ACCELERATED
VESTING OF UNVESTED EQUITY
Vote CASE-BY-CASE on shareholder proposals seeking a policy requiring
termination of employment prior to severance payment and/or eliminating
accelerated vesting of unvested equity.
The following factors will be considered:
o The company's current treatment of equity in change-of-control
situations (i.e., is it double triggered, does it allow for the
assumption of equity by acquiring company, the treatment of
performance shares, etc.);
o Current employment agreements, including potential poor pay
practices such as gross-ups embedded in those agreements.
Generally vote FOR proposals seeking a policy that prohibits acceleration
of the vesting of equity awards to senior executives in the event of a
change in control (except for pro rata vesting considering the time
elapsed and attainment of any related performance goals between the award
date and the change in control).
6. SOCIAL/ENVIRONMENTAL ISSUES
GLOBAL APPROACH
Issues covered under the policy include a wide range of topics, including
consumer and product safety, environment and energy, labor standards and human
rights, workplace and board diversity, and corporate political issues. While a
variety of factors goes into each analysis, the overall principle guiding all
vote recommendations focuses on how the proposal may enhance or protect
shareholder value in either the short or long term.
Generally vote CASE-BY-CASE, taking into consideration whether implementation of
the proposal is likely to enhance or protect shareholder value, and in addition,
the following will also be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or government regulation;
o If the company has already responded in an appropriate and
sufficient manner to the issue(s) raised in the proposal;
o Whether the proposal's request is unduly burdensome (scope or
timeframe) or overly prescriptive;
o The company's approach compared with any industry standard practices
for addressing the issue(s) raised by the proposal;
o If the proposal requests increased disclosure or greater
transparency, whether or not reasonable and sufficient information
is currently available to shareholders from the company or from
other publicly available sources; and
o If the proposal requests increased disclosure or greater
transparency, whether or not implementation would reveal proprietary
or confidential information that could place the company at a
competitive disadvantage.
ANIMAL WELFARE
ANIMAL WELFARE POLICIES
Generally vote FOR proposals seeking a report on the company's animal welfare
standards unless:
o The company has already published a set of animal welfare standards
and monitors compliance;
o The company's standards are comparable to or better than those of
industry peers; and
o There are no recent, significant fines or litigation related to the
company's treatment of animals.
ANIMAL TESTING
Generally vote AGAINST proposals to phase out the use of animals in product
testing unless:
o The company is conducting animal testing programs that are
unnecessary or not required by regulation;
o The company is conducting animal testing when suitable alternatives
are accepted and used at industry peers; or
o There are recent, significant fines or litigation related to the
company's treatment of animals.
ANIMAL SLAUGHTER
Generally vote AGAINST proposals requesting the implementation of Controlled
Atmosphere Killing (CAK) methods at company and/or supplier operations unless
such methods are required by legislation or generally accepted as the industry
standard.
Vote CASE-BY-CASE on proposals requesting a report on the feasibility of
implementing CAK methods at company and/or supplier operations, considering the
availability of existing research conducted by the company or industry groups on
this topic and any fines or litigation related to current animal processing
procedures at the company.
CONSUMER ISSUES
GENETICALLY MODIFIED INGREDIENTS
Generally, vote AGAINST proposals requesting that a company voluntarily label
genetically engineered (GE) ingredients in its products. The labeling of
products with GE ingredients is best left to the appropriate regulatory
authorities.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of
labeling products containing GE ingredients, taking into account:
o The potential impact of such labeling on the company's business;
o The quality of the company's disclosure on GE product labeling,
related voluntary initiatives, and how this disclosure compares with
industry peer disclosure; and
o Company's current disclosure on the feasibility of GE product
labeling.
Generally vote AGAINST proposals seeking a report on the social, health and
environmental effects of genetically modified organisms (GMOs). Studies of this
sort are better undertaken by regulators and the scientific community.
Generally vote AGAINST proposals to completely phase out GE ingredients from the
company's products or proposals asking for reports outlining the steps necessary
to eliminate GE ingredients from the company's products. Such decisions are more
appropriately made by management with consideration of current regulations.
REPORTS ON POTENTIALLY CONTROVERSIAL BUSINESS/FINANCIAL PRACTICES
Vote CASE-BY-CASE on requests for reports on the company's potentially
controversial business or financial practices or products taking into account:
o Whether the company has adequately disclosed mechanisms in place to
prevent abuses;
o Whether the company has adequately disclosed the financial risks of
the products/practices in question;
o Whether the company has been subject to violations of related laws
or serious controversies; and
o Peer companies' policies/practices in this area.
PHARMACEUTICAL PRICING, ACCESS TO MEDICINES, AND PRESCRIPTION DRUG REIMPORTATION
Generally vote AGAINST proposals requesting that companies implement specific
price restraints on pharmaceutical products unless the company fails to adhere
to legislative guidelines or industry norms in its product pricing practices.
Vote CASE-BY-CASE on proposals requesting that the company report on its product
pricing or access to medicine policies, considering:
o The nature of the company's business and the potential for
reputational and market risk exposure;
o Existing disclosure of relevant policies;
o Deviation from established industry norms;
o Relevant company initiatives to provide research and/or products to
disadvantaged consumers;
o Whether the proposal focuses on specific products or geographic
regions; and
o The potential cost and scope of the requested report.
Generally vote FOR proposals requesting that a company report on the financial
and legal impact of its prescription drug reimportation policies unless such
information is already publicly disclosed.
Generally vote AGAINST proposals requesting that companies adopt specific
policies to encourage or constrain prescription drug reimportation. Such matters
are more appropriately the province of legislative activity and may place the
company at a competitive disadvantage relative to its peers.
PRODUCT SAFETY AND TOXIC/HAZARDOUS MATERIALS
Generally vote FOR proposals requesting the company to report on its policies,
initiatives/procedures and oversight mechanisms related to toxic/hazardous
materials or product safety in its supply chain, unless:
o The company already discloses similar information through existing
reports such as a Supplier Code of Conduct and/or a sustainability
report;
o The company has formally committed to the implementation of a
toxic/hazardous materials and/or product safety and supply chain
reporting and monitoring program based on industry norms or similar
standards within a specified time frame; and
o The company has not been recently involved in relevant significant
controversies, significant fines or litigation.
Vote CASE-BY-CASE on resolutions requesting that companies develop a feasibility
assessment to phase-out of certain toxic/hazardous materials or evaluate and
disclose the potential financial and legal risks associated with utilizing
certain chemicals, considering:
o The company's current level of disclosure regarding its product
safety policies, initiatives and oversight mechanisms;
o Current regulations in the markets in which the company operates;
and
o Recent significant controversies, litigation or fines stemming from
toxic/hazardous materials at the company.
Generally vote AGAINST resolutions requiring that a company reformulate its
products.
TOBACCO-RELATED PROPOSALS
Vote CASE-BY-CASE on resolutions regarding the advertisement of tobacco
products, considering:
o Recent related fines, controversies, or significant litigation;
o Whether the company complies with relevant laws and regulations on
the marketing of tobacco;
o Whether the company's advertising restrictions deviate from those of
industry peers;
o Whether the company entered into the Master Settlement Agreement,
which restricts marketing of tobacco to youth; and
o Whether restrictions on marketing to youth extend to foreign
countries.
Vote CASE-BY-CASE on proposals regarding second-hand smoke, considering:
o Whether the company complies with all laws and regulations;
o The degree that voluntary restrictions beyond those mandated by law
might hurt the company's competitiveness; and
o The risk of any health-related liabilities.
Generally vote AGAINST resolutions to cease production of tobacco-related
products, to avoid selling products to tobacco companies, to spin-off
tobacco-related businesses, or prohibit investment in tobacco equities. Such
business decisions are better left to company management or portfolio managers.
Generally vote AGAINST proposals regarding tobacco product warnings. Such
decisions are better left to public health authorities.
CLIMATE CHANGE
CLIMATE CHANGE/GREENHOUSE GAS (GHG) EMISSIONS
Generally vote FOR resolutions requesting that a company disclose information on
the impact of climate change on the company's operations and investments
considering:
o The company already provides current, publicly-available information
on the impacts that climate change may have on the company, as well
as associated policies and procedures to address such risks and/or
opportunities;
o The company's level of disclosure is comparable to that of industry
peers; and
o There are no significant controversies, fines, penalties or
litigation associated with the company's environmental performance.
Generally vote FOR proposals requesting a report on greenhouse gas (GHG)
emissions from company operations and/or products and operations, unless:
o The company already discloses current, publicly-available
information on the impacts that climate change may have on the
company as well as associated company policies and procedures to
address related risks and/or opportunities;
o The company's level of disclosure is comparable to that of industry
peers; and
o There are no significant controversies, fines, penalties or
litigation associated with the company's GHG emissions.
Vote CASE-BY-CASE on proposals that call for the adoption of GHG reduction goals
from products and operations, taking into account:
o Whether the company provides disclosure of year-over-year GHG
emissions performance data;
o Whether company disclosure lags behind industry peers;
o The company's actual GHG emissions performance;
o The company's current GHG emission policies, oversight mechanisms
and related initiatives; and
o Whether the company has been the subject of recent, significant
violations, fines, litigation or controversy related to GHG
emissions.
ENERGY EFFICIENCY
Generally vote FOR proposals requesting that a company report on its energy
efficiency policies, unless:
o The company complies with applicable energy efficiency regulations
and laws, and discloses its participation in energy efficiency
policies and programs, including disclosure of benchmark data,
targets, and performance measures; or
o The proponent requests adoption of specific energy efficiency goals
within specific timelines.
RENEWABLE ENERGY
Generally vote FOR requests for reports on the feasibility of developing
renewable energy resources unless the report would be duplicative of existing
disclosure or irrelevant to the company's line of business.
Generally vote AGAINST proposals requesting that the company invest in renewable
energy resources. Such decisions are best left to management's evaluation of the
feasibility and financial impact that such programs may have on the company.
DIVERSITY
BOARD DIVERSITY
Generally vote FOR requests for reports on the company's efforts to diversify
the board, unless:
o The gender and racial minority representation of the company's board
is reasonably inclusive in relation to companies of similar size and
business; and
o The board already reports on its nominating procedures and gender
and racial minority initiatives on the board and within the company.
Vote CASE-BY-CASE on proposals asking the company to increase the gender and
racial minority representation on its board, taking into account:
o The degree of existing gender and racial minority diversity on the
company's board and among its executive officers;
o The level of gender and racial minority representation that exists
at the company's industry peers;
o The company's established process for addressing gender and racial
minority board representation;
o Whether the proposal includes an overly prescriptive request to
amend nominating committee charter language;
o The independence of the company's nominating committee;
o The company uses an outside search firm to identify potential
director nominees; and
o Whether the company has had recent controversies, fines or
litigation regarding equal employment practices.
EQUALITY OF OPPORTUNITY
Generally vote FOR proposals requesting a company disclose its diversity
policies or initiatives, or proposals requesting disclosure of a company's
comprehensive workforce diversity data, including requests for EEO-1 data,
unless:
o The company publicly discloses equal opportunity policies and
initiatives in a comprehensive manner;
o The company already publicly discloses comprehensive workforce
diversity data; and
o The company has no recent EEO-related violations or litigation.
Generally vote AGAINST proposals seeking information on the diversity efforts of
suppliers and service providers. Such requests may pose a significant cost and
administrative burden on the company.
GENDER IDENTITY, SEXUAL ORIENTATION, AND DOMESTIC PARTNER BENEFITS
Generally vote FOR proposals seeking to amend a company's EEO statement or
diversity policies to prohibit discrimination based on sexual orientation and/or
gender identity, unless the change would be unduly burdensome.
Generally vote AGAINST proposals to extend company benefits to, or eliminate
benefits from domestic partners. Decisions regarding benefits should be left to
the discretion of the company.
ENVIRONMENT AND SUSTAINABILITY
FACILITY AND WORKPLACE SAFETY
Vote CASE-BY-CASE on requests for workplace safety reports, including reports on
accident risk reduction efforts, taking into account:
o The company's current level of disclosure of its workplace health
and safety performance data, health and safety management policies,
initiatives, and oversight mechanisms;
o The nature of the company's business, specifically regarding company
and employee exposure to health and safety risks;
o Recent significant controversies, fines or violations related to
workplace health and safety; and
o The company's workplace health and safety performance relative to
industry peers.
Vote CASE-BY-CASE on resolutions requesting that a company report on safety
and/or security risks associated with its operations and/or facilities,
considering:
o The company's compliance with applicable regulations and guidelines;
o The company's current level of disclosure regarding its security and
safety policies, procedures, and compliance monitoring; and
o The existence of recent, significant violations, fines or
controversy regarding the safety and security of the company's
operations and/or facilities.
GENERAL ENVIRONMENTAL PROPOSALS AND COMMUNITY IMPACT ASSESSMENTS
Vote CASE-BY-CASE on requests for reports on policies and/or the potential
(community) social and/or environmental impact of company operations,
considering:
o Current disclosure of applicable policies and risk assessment
report(s) and risk management procedures;
o The impact of regulatory non-compliance, litigation, remediation, or
reputational loss that may be associated with failure to manage the
company's operations in question, including the management of
relevant community and stakeholder relations;
o The nature, purpose, and scope of the company's operations in the
specific region(s);
o The degree to which company policies and procedures are consistent
with industry norms; and
o The scope of the resolution.
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.
OPERATIONS IN PROTECTED AREAS
Generally vote FOR requests for reports on potential environmental damage as a
result of company operations in protected regions, unless:
o Operations in the specified regions are not permitted by current
laws or regulations;
o The company does not currently have operations or plans to develop
operations in these protected regions; or
o The company's disclosure of its operations and environmental
policies in these regions is comparable to industry peers.
RECYCLING
Vote CASE-BY-CASE on proposals to report on an existing recycling program, or
adopt a new recycling program, taking into account:
o The nature of the company's business;
o The current level of disclosure of the company's existing related
programs;
o The timetable and methods of program implementation prescribed by
the proposal;
o The company's ability to address the issues raised in the proposal;
and
o How the company's recycling programs compare to similar programs of
its industry peers.
SUSTAINABILITY REPORTING
Generally vote FOR proposals requesting that a company report on its policies,
initiatives and oversight mechanisms related to social, economic and
environmental sustainability, unless:
o The company already discloses similar information through existing
reports or policies such as an environment, health and safety (EHS)
report; a comprehensive code of corporate conduct; and/or a
diversity report; or
o The company has formally committed to the implementation of a
reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified timeframe.
WATER ISSUES
Vote CASE-BY-CASE on proposals requesting a company report on, or adopt a new
policy on, water-related risks and concerns, taking into account:
o The company's current disclosure of relevant policies, initiatives,
oversight mechanisms, and water usage metrics;
o Whether or not the company's existing water-related policies and
practices are consistent with relevant internationally recognized
standards and national/local regulations;
o The potential financial impact or risk to the company associated
with water-related concerns or issues; and
o Recent, significant company controversies, fines, or litigation
regarding water use by the company and its suppliers.
GENERAL CORPORATE ISSUES
CHARITABLE CONTRIBUTIONS
Vote AGAINST proposals restricting the company from making charitable
contributions. Charitable contributions are generally useful for assisting
worthwhile causes and for creating goodwill in the community. In the absence of
bad faith, self-dealing or gross negligence, management should determine which
contributions are in the best interests of the company.
DATA SECURITY, PRIVACY, AND INTERNET ISSUES
Vote CASE-BY-CASE on resolutions requesting the disclosure or implementation of
data security, privacy or information access and management policies and
procedures, considering:
o The level of disclosure of policies and procedures relating to data
security, privacy, freedom of speech, information access and
management and internet censorship;
o Engagement in dialogue with governments and/or relevant groups with
respect to data security, privacy or the free flow of information on
the Internet;
o The scope of business involvement and of investment in countries
whose governments censor or monitor the internet and other
telecommunications;
o Applicable market-specific laws or regulations that may be imposed
on the company; and
o Controversies, fines or litigation related to data security,
privacy, freedom of speech or internet censorship.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) COMPENSATION-RELATED PROPOSALS
Vote CASE-BY-CASE on proposals to Link, or report on linking, executive
compensation to sustainability (environmental and social) criteria considering:
o Whether the company has significant and persistent controversies or
violations regarding social and/or environmental issues;
o Whether the company has management systems and oversight mechanisms
in place regarding its social and environmental performance;
o The degree to which industry peers have incorporated similar
non-financial performance criteria in their executive compensation
practices; and
o The company's current level of disclosure regarding its
environmental and social performance.
HUMAN RIGHTS, LABOR ISSUES, AND INTERNATIONAL OPERATIONS
HUMAN RIGHTS PROPOSALS
Generally vote FOR proposals requesting a report on company supplier labor
and/or human rights standards and policies unless such information is already
publicly disclosed.
Vote CASE-BY-CASE on proposals to implement company or company supplier labor
and/or human rights standards and policies, considering:
o The degree to which existing relevant policies and practices are
disclosed;
o Whether or not existing relevant policies are consistent with
internationally recognized standards;
o Whether company facilities and those of its suppliers are monitored
and how;
o Company participation in fair labor organizations or other
internationally recognized human rights initiatives;
o Scope and nature of business conducted in markets known to have
higher risk of workplace labor/ human rights abuse;
o Recent, significant company controversies, fines or litigation
regarding human rights at the company or its suppliers;
o The scope of the request; and
o Deviation from industry sector peer company standards and practices.
Vote CASE-BY-CASE on proposals requesting that a company conduct an assessment
of the human rights risks in its operations or in its supply chain, or report on
its human rights risk assessment process, considering:
o The degree to which existing relevant policies and practices are
disclosed;
o Whether or not existing relevant policies are consistent with
internationally recognized standards;
o Whether company facilities and those of its suppliers are monitored
and how;
o Company participation in fair labor organizations or other
internationally recognized human rights initiatives;
o Scope and nature of business conducted in markets known to have
higher risk of workplace labor/ human rights abuse;
o Recent, significant company controversies, fines or litigation
regarding human rights at the company or its suppliers;
o The scope of the request; and
o Deviation from industry sector peer company standards and practices.
Vote CASE-BY-CASE on proposals requesting that a company conduct an assessment
of the human rights risks in its operations or in its supply chain, or report on
its human rights risk assessment process, considering:
o The degree to which existing relevant policies and practices are
disclosed, including information on the implementation of these
policies and any related oversight mechanisms;
o The company's industry and whether the company or its suppliers
operate in countries or areas where there is a history of human
rights concerns;
o Recent, significant controversies, fines or litigation regarding
human rights involving the company or its suppliers, and whether the
company has taken remedial steps; and
o Whether the proposal is unduly burdensome or overly prescriptive.
OPERATIONS IN HIGH RISK MARKETS
Vote CASE-BY-CASE on requests for a report on a company's potential financial
and reputational risks associated with operations in "high-risk" markets, such
as a terrorism-sponsoring state or politically/socially unstable region, taking
into account:
o The nature, purpose and scope of the operations and business
involved that could be affected by social or political disruption;
o Current disclosure of applicable risk assessment(s) and risk
management procedures;
o Compliance with U. S. sanctions and laws;
o Consideration of other international policies, standards, and laws;
and
o Whether the company has been recently involved in recent,
significant controversies, fines or litigation related to its
operation in "high risk" markets.
OUTSOURCING/OFFSHORING
Vote CASE-BY-CASE on proposals calling for companies to report on the risks
associated with outsourcing/plant closures, considering:
o Controversies surrounding operations in the relevant market(s);
o The value of the requested report to shareholders;
o The company's current level of disclosure of relevant information on
outsourcing and plant closure procedures; and
o The company's existing human rights standards relative to industry
peers.
WEAPONS AND MILITARY SALES
Vote AGAINST reports on foreign military sales or offsets. Such disclosures may
involve sensitive and confidential information. Moreover, companies must comply
with government controls and reporting on foreign military sales.
Generally vote AGAINST proposals asking a company to cease production or report
on the risks associated with the use of depleted uranium munitions or nuclear
weapons components and delivery systems, including disengaging from current and
proposed contracts. Such contracts are monitored by government agencies, serve
multiple military and non-military uses, and withdrawal from these contracts
could have a negative impact on the company's business.
POLITICAL ACTIVITIES
LOBBYING
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
(including direct, indirect, and grassroots lobbying) activities, policies, or
procedures, considering:
o The company's current disclosure of policies and management and
board oversight;
o The company's disclosure regarding trade associations or other
groups that it supports, or is a member of, that engage in lobbying
activities; and
o Recent, significant controversies, fines, or litigation regarding
the company's lobbying-related activities; and
o Recent significant controversies, fines or litigation regarding the
company's lobbying-related activities.
POLITICAL CONTRIBUTIONS
Generally vote FOR proposals requesting greater disclosure of a company's
political contributions and trade association spending policies and activities,
considering:
o The company's policies, and management and board oversight related
to its direct political contributions and payments to trade
associations or other groups that may be used for political
purposes;
o The company's disclosure regarding its support of, and participation
in, trade associations or other groups that may make political
contributions; 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 to publish in newspapers and other media a company's
political contributions. Such publications could present significant cost to the
company without providing commensurate value to shareholders.
POLITICAL TIES
Generally vote AGAINST proposals asking a 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 prohibit coercion.
Vote AGAINST proposals asking for a 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.
7. MUTUAL FUND PROXIES
ELECTION OF DIRECTORS
Vote CASE-BY-CASE on the election of directors and trustees, following the same
guidelines for uncontested directors for public company shareholder meetings.
However, mutual fund boards do not usually have compensation committees, so do
not withhold for the lack of this committee.
CONVERTING CLOSED-END FUND TO OPEN-END FUND
Vote CASE-BY-CASE on conversion proposals, considering the following factors:
o Past performance as a closed-end fund;
o Market in which the fund invests;
o Measures taken by the board to address the discount; and
o Past shareholder activism, board activity, and votes on related
proposals.
PROXY CONTESTS
Vote CASE-BY-CASE on proxy contests, considering the following factors:
o Past performance relative to its peers;
o Market in which fund invests;
o Measures taken by the board to address the issues;
o Past shareholder activism, board activity, and votes on related
proposals;
o Strategy of the incumbents versus the dissidents;
o Independence of directors;
o Experience and skills of director candidates;
o Governance profile of the company;
o Evidence of management entrenchment.
INVESTMENT ADVISORY AGREEMENTS
Vote CASE-BY-CASE on investment advisory agreements, considering the following
factors:
o Proposed and current fee schedules;
o Fund category/investment objective; o Performance benchmarks;
o Share price performance as compared to peers;
o Resulting fees relative to peers;
o Assignments (where the advisor undergoes a change of control).
APPROVING NEW CLASSES OR SERIES OF SHARES
Vote FOR the establishment of new classes or series of shares.
PREFERRED STOCK PROPOSALS
Vote CASE-BY-CASE on the authorization for or increase in preferred shares,
considering the following factors:
o Stated specific financing purpose;
o Possible dilution for common shares;
o Whether the shares can be used for antitakeover purposes;
1940 ACT POLICIES
Vote CASE-BY-CASE on policies under the Investment Advisor Act of 1940,
considering the following factors:
o Potential competitiveness;
o Regulatory developments;
o Current and potential returns; and
o Current and potential risk.
Generally vote FOR these amendments as long as the proposed changes do not
fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION
Vote CASE-BY-CASE on proposals to change a fundamental restriction to a
non-fundamental restriction, considering the following factors:
o The fund's target investments;
o The reasons given by the fund for the change; and
o The projected impact of the change on the portfolio.
CHANGE FUNDAMENTAL INVESTMENT OBJECTIVE TO NONFUNDAMENTAL
Vote AGAINST proposals to change a fund's fundamental investment objective to
non-fundamental.
NAME CHANGE PROPOSALS
Vote CASE-BY-CASE on name change proposals, considering the following factors:
o Political/economic changes in the target market;
o Consolidation in the target market; and
o Current asset composition.
CHANGE IN FUND'S SUBCLASSIFICATION
Vote CASE-BY-CASE on changes in a fund's sub-classification, considering the
following factors:
o Potential competitiveness;
o Current and potential returns;
o Risk of concentration;
o Consolidation in target industry.
BUSINESS DEVELOPMENT COMPANIES - AUTHORIZATION TO SELL SHARES OF COMMON STOCK AT
A PRICE BELOW NET ASSET VALUE
Vote FOR proposals authorizing the board to issue shares below Net Asset Value
(NAV) if:
o The proposal to allow share issuance below NAV has an expiration
date no more than one year from the date shareholders approve the
underlying proposal, as required under the Investment Company Act of
1940;
o The sale is deemed to be in the best interests of shareholders by
(1) a majority of the company's independent directors and (2) a
majority of the company's directors who have no financial interest
in the issuance; and
o The company has demonstrated responsible past use of share issuances
by either:
o Outperforming peers in its 8-digit GICS group as measured by one-
and three-year median TSRs; or
o Providing disclosure that its past share issuances were priced at
levels that resulted in only small or moderate discounts to NAV and
economic dilution to existing non-participating shareholders.
DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION
Vote CASE-BY-CASE on proposals to dispose of assets, to terminate or liquidate,
considering the following factors:
o Strategies employed to salvage the company;
o The fund's past performance;
o The terms of the liquidation.
CHANGES TO THE CHARTER DOCUMENT
Vote CASE-BY-CASE on changes to the charter document, considering the following
factors:
o The degree of change implied by the proposal;
o The efficiencies that could result;
o The state of incorporation;
o Regulatory standards and implications.
Vote AGAINST any of the following changes:
o Removal of shareholder approval requirement to reorganize or
terminate the trust or any of its series;
o Removal of shareholder approval requirement for amendments to the
new declaration of trust;
o Removal of shareholder approval requirement to amend the fund's
management contract, allowing the contract to be modified by the
investment manager and the trust management, as permitted by the
1940 Act;
o Allow the trustees to impose other fees in addition to sales charges
on investment in a fund, such as deferred sales charges and
redemption fees that may be imposed upon redemption of a fund's
shares;
o Removal of shareholder approval requirement to engage in and
terminate subadvisory arrangements;
o Removal of shareholder approval requirement to change the domicile
of the fund.
CHANGING THE DOMICILE OF A FUND
Vote CASE-BY-CASE on re-incorporations, considering the following factors:
o Regulations of both states;
o Required fundamental policies of both states;
o The increased flexibility available.
AUTHORIZING THE BOARD TO HIRE AND TERMINATE SUBADVISORS WITHOUT SHAREHOLDER
APPROVAL
Vote AGAINST proposals authorizing the board to hire/terminate subadvisors
without shareholder approval if the investment adviser currently employs only
subadviser.
DISTRIBUTION AGREEMENTS
Vote CASE-BY-CASE on distribution agreement proposals, considering the following
factors:
o Fees charged to comparably-sized funds with similar objectives;
o The proposed distributor's reputation and past performance;
o The competitiveness of the fund in the industry;
o The terms of the agreement.
MASTER-FEEDER STRUCTURE
Vote FOR the establishment of a master-feeder structure.
MERGERS
Vote CASE-BY-CASE on merger proposals, considering the following factors:
o Resulting fee structure;
o Performance of both funds;
o Continuity of management personnel;
o Changes in corporate governance and their impact on shareholder
rights.
SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS
ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT
Generally vote AGAINST shareholder proposals that mandate a specific minimum
amount of stock that directors must own in order to qualify as a director or to
remain on the board.
REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED
Vote CASE-BY-CASE on shareholder proposals to reimburse proxy solicitation
expenses. When supporting the dissidents, vote FOR the reimbursement of the
proxy solicitation expenses.
TERMINATE THE INVESTMENT ADVISOR
Vote CASE-BY-CASE on proposals to terminate the investment advisor, considering
the following factors:
o Performance of the fund's Net Asset Value (NAV);
o The fund's history of shareholder relations;
o The performance of other funds under the advisor's management.
8. FOREIGN PRIVATE ISSUERS LISTED ON U.S. EXCHANGES
Vote AGAINST (or withhold from) non-independent director nominees at companies
which fail to meet the following criteria: a majority-independent board, and the
presence of an audit, a compensation, and a nomination committee, each of which
is entirely composed of independent directors.
Where the design and disclosure levels of equity compensation plans are
comparable to those seen at U.S. companies, U.S. compensation policy will be
used to evaluate the compensation plan proposals. Otherwise, they, and all other
voting items, will be evaluated using the relevant ISS regional or market proxy
voting guidelines.
This document and the information contained in it, including without limitation
all text, data, graphs and charts (collectively, the "information") is the
property of Institutional Shareholder Services (ISS), its subsidiaries, or, in
some cases third party suppliers.
The information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve, or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the information assumes the entire risk of any use it may make or
permit to be made of the information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS,
NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS FOR A PARTICULAR
PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the information
for any direct, indirect, special, punitive, consequential (including lost
profits), or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
FIRST TRUST ADVISORS L.P.
PROXY VOTING GUIDELINES
First Trust Advisors L.P. (the "Adviser") serves as investment adviser
providing discretionary investment advisory services for separate managed
accounts, ERISA accounts and open- and closed-end investment companies (the
"Clients"). As part of these services, the Adviser may have responsibility for
proxy voting and related duties. In fulfilling these duties, the Adviser has
adopted the following policies and procedures:
1. It is the Adviser's policy to seek and to ensure that proxies are voted
on securities in a Client's account consistently and solely in the best economic
interests of the Client.
2. The Adviser shall be responsible for the oversight of Client proxy
voting processes and shall assign a senior member of its staff to be responsible
for this oversight.
3. The Adviser has engaged the services of Institutional Shareholder
Services, Inc. ("ISS") to make recommendations to the Adviser on the voting of
proxies related to securities held by Clients. ISS provides voting
recommendations based on established guidelines and practices. The Adviser has
adopted these ISS Proxy Voting Guidelines.
4. The Adviser shall review the ISS recommendations and generally will
vote proxies in accordance with such recommendations. Notwithstanding the
foregoing, the Adviser may not vote in accordance with the ISS recommendations
if the Adviser believes that the specific ISS recommendation is not in the best
interests of the Client. In addition, whenever a conflict of interest arises
between ISS and a company subject to a proxy vote, the Adviser will vote the
proxy without using the analyses of ISS and will consider the recommendation of
the company and what the Adviser believes to be in the best interests of the
Client. In addition, if the Adviser has actual knowledge of any other type of
material conflict of interest between itself and the respective Client with
respect to the voting of a proxy, the Adviser shall vote the applicable proxy in
accordance with the ISS recommendations to avoid such conflict of interest. With
respect to open- and closed-end funds and variable annuity sub-accounts, if
there is a conflict of interest between fund shareholders and FTA, the fund's
principal underwriter, or sub-adviser, if applicable, FTA will vote the proxy
based on the recommendations of ISS to avoid such conflict of interest.
5. If the Adviser manages the assets or pension fund of a company and any
of the Adviser's Clients hold any securities in that company, the Adviser will
vote proxies relating to such company's securities in accordance with the ISS
recommendations to avoid any conflict of interest.
6. If a Client requests the Adviser to follow specific voting guidelines
or additional guidelines, the Adviser shall review the request and follow such
guidelines, unless the Adviser determines that it is unable to follow such
guidelines. In such case, the Adviser shall inform the Client that it is not
able to follow the Client's request.
7. FTA will monitor changes to the ISS guidelines to determine that such
guidelines continue to result in a voting policy that is in the best interests
of Clients.
8. In certain circumstances, where FTA has determined that it is
consistent with the Client's best interest, FTA will not take steps to ensure
that proxies are voted on securities in the Client's accounts. The following are
circumstances where this may occur:
(a) Limited Value. Proxies will not be required to be voted on
securities in a Client's account if the value of the Client's economic
interest in the securities is indeterminable or insignificant (less than
$1,000). Proxies will also not be required to be voted for any securities
that are no longer held by the Client's account.
(b) Securities Lending Program. When securities are out on loan,
they are transferred into the borrower's name and are voted by the
borrower, in its discretion. In most cases, FTA will not take steps to see
that loaned securities are voted. However, where FTA determines that a
proxy vote, or other shareholder action, is materially important to the
Client's account, FTA will make a good faith effort to recall the security
for purposes of voting, understanding that in certain cases, the attempt
to recall the security may not be effective in time for voting deadlines
to be met.
(c) Unjustifiable Costs. In certain circumstances, after doing a
cost-benefit analysis, FTA may choose not to vote where the cost of voting
a Client's proxy would exceed any anticipated benefits to the Client of
the proxy proposal (e.g. foreign securities).
9. For certain open- or closed-end funds relying on Section 12(d)(1)(F) of
the 1940 Act, FTA will vote on proxies of securities of investment companies
held by such funds in the same proportion as all other holders of such
securities (i.e. mirror or echo voting) to the extent possible.
Adopted: September 15, 2003
Amended: December 10, 2007
Amended: September 21, 2009
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, 2015
PORTFOLIO MANAGEMENT TEAM
EQUITIES AND OPTIONS - CHARTWELL INVESTMENT PARTNERS, L.P.
Chartwell Investment Partners, LLC ("Chartwell"), a wholly owned subsidiary of
TriState Capital Holdings, Inc., is a research based equity and fixed-income
manager with a disciplined, team-oriented investment process. The Chartwell
Portfolio Management Team consists of the following:
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 18 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 30 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 Active Dividend Income Fund consists of two
portfolio managers with an average of 24 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 18 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 18 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, 2015
# of Accounts Total Assets
Managed for for which
Name of Total # of which Advisory Advisory Fee is
Portfolio Manager Accounts Total Fee is Based on Based on
or Team Member Type of Accounts Managed Assets Performance Performance
Douglas W. Kugler Registered Investment 1 $308.6 0 $0
Companies:
Other Pooled Investment 1 $.6 0 $0
Vehicles:
Other Accounts: 9 $276.8
Million 0 $0
Peter M. Schofield Registered Investment 2 $347.6 0 $0
Companies:
Other Pooled Investment 1 $.6 0 $0
Vehicles:
Other Accounts: 9 $276.8 0 $0
Million
William Housey Registered Investment $1.648
Companies: 4 Billion 0 $0
Other Pooled Investment
Vehicles: 2 $80 Million 0 $0
Other Accounts: 0 $0 0 $0
Scott Fries Registered Investment $1.648
Companies: 4 Billion 0 $0
Other Pooled Investment
Vehicles: 2 $80 Million 0 $0
Other Accounts: 0 $0 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 restricted list of all issuers for which the
Leveraged Finance Investment Team has material non-public information in its
possession and all transactions executed for a fund or account advised or
supervised by First Trust or FTP are compared daily against the restricted list.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF NOVEMBER 30, 2015.
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.
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.
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 accounts other than the Fund.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF NOVEMBER 30, 2015
Dollar Range of Registrant
Name Shares Beneficially Owned
Douglas W. Kugler $100,001-500,000
Peter M. Schofield $100,001-500,000
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/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: January 25, 2016
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: January 25, 2016
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: January 25, 2016
-------------------
* Print the name and title of each signing officer under his or her signature.