First Trust Series Funds
First Trust Closed End Funds
First Trust Exchange-Traded Funds
March 17, 2017
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Filings for First Trust Series Funds with 10/31/16 Year Ends, First
Trust Closed End Funds with 12/31/15, 5/31/16, 10/31/16 and 11/30/16
Year Ends and First Trust Exchange-Traded Funds with 9/30/16 and
10/31/16 Year Ends
Ladies/Gentlemen:
On February 10, 2017, First Trust Advisors L.P. ("FTA") received oral
comments from Mr. David Manion of the Division of Investment Management Office
of Disclosure and Review of the Securities and Exchange Commission (the
"Commission") with respect to the Commission's review of the Trust filings
listed above. In connection with the Commission's comments, we hereby provide
the following responses:
1. The Commission noted that certain sectors in the Portfolio of
Investments ("POI") of the October 31, 2016 shareholder report for First Trust
AQA(R) Equity Fund ("AQA") and First Trust SSI Strategic Convertible Securities
ETF ("FCVT") were in excess of 25%. The Commission asked FTA to consider
enhancing the prospectus disclosure regarding sector concentration for funds
with significant sector exposure.
Although FTA does not believe it is required, FTA will consider additional
sector concentration disclosure in the prospectus for funds expected to be
highly concentrated in specific sectors.
2. The Commission recommended enhancing the Management Discussion of Fund
Performance ("MDFP") for First Trust/Aberdeen Global Opportunity Income Fund
("FAM") to discuss the impact of derivatives on performance.
FTA will consider the Commission's recommendation to enhance the MDFP in
future shareholder reports as it relates to the impact of derivatives on
performance.
3. The Commission noted that in the December 31, 2015, shareholder report
for First Trust/Aberdeen Emerging Opportunity Fund ("FEO") the MDFP referenced
Jeronimo Martins as a Polish company, however, in the POI Jeronimo Martins was
listed as a Portuguese company.
Jeronimo Martins is incorporated in Portugal, which is why it is listed as
such in the POI. However, Jeronimo Martins has significant business operations
in Poland, so in the context of the MDFP, the reference to Poland is accurate.
4. The Commission noted that the portfolio turnover rate increased
significantly in First Trust Indxx Global Natural Resources Income ETF ("FTRI")
and First Trust Indxx Global Agriculture ETF ("FTAG") within the Financial
Highlights of the September 30, 2016, shareholder report. The Commission
recommended that going forward any significant change in portfolio turnover
and/or impact to performance be discussed in the MDFP.
FTA will footnote the reason for the change in the portfolio turnover rate
on the Financial Highlights page going forward for the referenced funds and will
consider discussing a significant change in the portfolio turnover rate in
future MDFPs.
5. The Commission noted that the Class I performance of AQA was lower than
the Class A performance of AQA as listed in the October 31, 2016 Financial
Highlights, but that the expense ratio of Class A was higher than Class I.
During the year, a subscription was incorrectly booked to Class A of AQA
that should have been booked to Class I. When the trade was cancelled, Class A
realized a gain resulting in the Class A performance exceeding the performance
of Class I. There was a loss to Class I when the subscription trade was
corrected, but that loss was reimbursed to that class by the sub-advisor.
6. The Commission questioned why there was a "Due to investment advisor"
balance on the Statement of Assets and Liabilities in the October 31, 2016, AQA
shareholder report since the Statement of Operations included a line item for
fees waived and expenses reimbursed by the investment advisor.
AQA's first year of operation was 2016. Therefore, AQA used estimates to
accrue for certain expense accounts assuming a certain asset level and FTA
reimbursed AQA in reliance on those estimates. Due to the smaller size of AQA,
actual expenses were lower than the estimates. AQA had been over accrued for
certain expense accounts meaning that FTA reimbursed more expenses than
necessary throughout the fiscal year. When the over accrual was discovered, a
payable for the over accrual was set up to reimburse FTA.
7. The Commission inquired whether or not the acquisition of the
Brookfield Investment Management Inc. ("Brookfield") team responsible for the
portfolio management of the First Trust Mortgage Income Fund ("FMY") also
impacted First Trust Strategic High Income Fund II ("FHY").
The acquisition of the Brookfield team responsible for portfolio
management of FMY by Schroeder Investment Management North America Inc. did not
impact the portfolio management of FHY, as the FMY portfolio management team
managed mortgage backed and government securities. FHY's portfolio is a high
yield portfolio managed by a different Brookfield portfolio management team.
8. The Commission suggested that both receivables and payables be listed
separately when a fund holds when issued and delayed delivery securities.
If a fund holds when issued and/or delayed delivery securities, FTA will
consider disclosing when issued and/or delayed delivery balances separately on
the Statement of Assets and Liabilities.
9. The Commission noted that in the First Trust Exchange Traded Fund II
shareholder report as of September 30, 2016, "Foreign capital gains tax" was
included with expenses on the Statement of Operations. The Commission referenced
Accounting Standards Codification ("ASC") 946-225-45-4 for presentation of this
line item.
Going forward FTA will present "Foreign capital gains tax" in the realized
gain/loss section of the Statement of Operations.
10. The Commission noted that there was no discussion of the accounting
treatment for organization and offering costs in the October 31, 2016, AQA
shareholder report.
The AQA organizational and offering costs were paid by FTA, therefore, no
discussion of these costs was included in the shareholder report.
11. The Commission noted that in the May 31, 2016, First Trust Senior
Floating Rate Income Fund II ("FCT") shareholder report, the Level 3 sensitivity
analysis was not included, per ASC 820. This ASC requires disclosure of the
quantitative and qualitative inputs used to determine why securities are listed
as Level 3.
The Level 3 sensitivity analysis is not applicable to the Level 3 senior
loan valuations in FCT as a third-party pricing service provided the prices for
these Level 3 senior loans. Per Accounting Standards Update 2011-04, a reporting
entity is not required to create quantitative information to comply with this
disclosure requirement if quantitative unobservable inputs are not developed by
the reporting entity when measuring fair value (for example, when a reporting
entity uses prices from prior transactions or third-party pricing information
without adjustment).
12. The Commission indicated that the First Trust Dynamic Europe Equity
Income Fund ("FDEU") Form N-CSR filed March 7, 2016, reflected dates of February
xx, 2016 on the signature page of the form.
FTA amended the FDEU Form N-CSR filing on March 10, 2017 to correct
typographical errors relating to the dates on the signature page.
13. The Commission suggested FTA present additional expense ratios and
other supplemental data in the footnotes to the Financial Highlights section of
the shareholder report as described in the instructions to Form N-2, Item
4.1(i).
FTA includes the required ratios, as well as additional expense ratios and
other supplemental data in a table within the Financial Highlights rather than
in a footnote as FTA feels this presentation is clearer for the reader.
14. The Commission noted that First Trust Short Duration High Income Fund
("SDHI") had a line item in its October 31, 2016, Statement of Operations for
"Other income." The Commission inquired as to what "Other income" consisted of
and suggested disclosing those components and how they are accounted for in the
Significant Accounting Policies footnote.
The "Other income" in SDHI consisted of various fees associated with term
loans and represented 0.15% of total income. Going forward, if "Other income"
becomes more material in SDHI, or any other fund, FTA will add disclosure
regarding its components and its accounting treatment.
15. The Commission inquired if inverse floating rate securities held by
FMY in the October 31, 2016 shareholder report were purchased in the "open
market." If not purchased in the "open market," the Commission noted that
inverse floating rate securities should be considered financing transactions per
ASC 860.
The inverse floating rate securities held by FMY were purchased through a
broker on the open market.
16. The Commission noted that FMY terminated the reverse repurchase
agreements positions in FMY. The Commission inquired why restricted cash was
pledged as collateral for reverse repurchase agreements as shown in the October
31, 2016, FMY shareholder report if no reverse repurchase agreements were held
by FMY.
The restricted cash pledged as collateral at the counterparty for the
reverse repurchase agreements had not been returned to FMY's custodian as of
October 31, 2016. The restricted cash pledged as collateral for reverse
repurchase agreements was returned to FMY's custodian by the counterparty on
December 2, 2016.
17. The Commission questioned if the investments sold short within First
Trust High Income Long/Short Fund ("FSD") October 31, 2016, shareholder report
should be classified as financing activities instead of operating activities,
which would mean a change in the disclosure in the Statement of Cash Flows, as
well as triggering other financing disclosures.
For FSD, FTA makes a distinction between "pure" borrowings, which are
disclosed as financing activities and investments sold short, which are utilized
as part of the fund's investment strategy and are disclosed with the fund's
Portfolio of Investments. Consistent with this view, FTA includes investments
sold short under operating activities in the statement of cash flows. This
presentation is also consistent with other industry participants that have
long/short funds within their complex.
Should you have any questions, or if we have incorrectly characterized the
Commission's comments, please do not hesitate to contact the undersigned
directly at (630) 517-7665.
Sincerely,
FIRST TRUST SERIES FUNDS
FIRST TRUST CLOSED END FUNDS
FIRST TRUST EXCHANGE-TRADED FUNDS
By /S/ JAMES M. DYKAS
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James M. Dykas
President and Chief Executive Officer