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 811-22039
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First Trust Specialty Finance and Financial Opportunities Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: November 30
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Date of reporting period: November 30, 2013
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
SPECIALTY FINANCE
AND FINANCIAL
OPPORTUNITIES FUND
(FGB)
ANNUAL REPORT
FOR THE YEAR ENDED
NOVEMBER 30, 2013
CONFLUENCE
FIRST TRUST INVESTMENT MANAGEMENT
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TABLE OF CONTENTS
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
(FGB)
ANNUAL REPORT
NOVEMBER 30, 2013
Shareholder Letter........................................................... 1
At A Glance.................................................................. 2
Portfolio Commentary......................................................... 3
Portfolio of Investments..................................................... 6
Statement of Assets and Liabilities.......................................... 9
Statement of Operations...................................................... 10
Statements of Changes in Net Assets.......................................... 11
Statement of Cash Flows...................................................... 12
Financial Highlights......................................................... 13
Notes to Financial Statements................................................ 14
Report of Independent Registered Public Accounting Firm...................... 19
Additional Information....................................................... 20
Board of Trustees and Officers............................................... 25
Privacy Policy............................................................... 27
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 Confluence Investment Management LLC
("Confluence" 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 Specialty Finance and Financial Opportunities 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's
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Confluence are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
(FGB) ANNUAL LETTER FROM THE CHAIRMAN AND CEO
NOVEMBER 30, 2013
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust Specialty Finance and Financial Opportunities Fund (the "Fund").
As a shareholder, twice a year you receive a detailed report about your
investment, including portfolio commentary from the Fund's management team, a
performance analysis and a market and Fund outlook. Additionally, First Trust
Advisors L.P. ("First Trust") compiles the Fund's financial statements for you
to review. These reports are intended to keep you up-to-date on your investment,
and I encourage you to read this document and discuss it with your financial
advisor.
As you are probably aware, the twelve months covered by this report saw both
challenging economic and political issues in the U.S. However, the period was
still positive for the markets. In fact, the S&P 500 Index, as measured on a
total return basis, rose 30.30% during the twelve months ended November 30,
2013. Of course, past performance can never be an indicator of future
performance, but First Trust believes that staying invested in quality products
through up and down markets and having a long-term horizon can help investors as
they work toward their financial goals.
First Trust continues to offer a variety of products that we believe could fit
the financial plans for many investors seeking long-term investment success.
Your advisor can tell you about the other investments First Trust offers that
might fit your financial goals. We encourage you to discuss those goals with
your advisor regularly so that he or she can help keep you on track and help you
choose investments that match your goals.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
"AT A GLANCE"
AS OF NOVEMBER 30, 2013 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FGB
Common Share Price $8.19
Common Share Net Asset Value ("NAV") $8.61
Premium (Discount) to NAV (4.88)%
Net Assets Applicable to Common Shares $123,081,120
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) 8.30%
Current Distribution Rate on NAV (2) 7.90%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
11/12 $8.06 $7.82
7.95 7.74
7.75 7.75
7.75 8.05
12/12 7.86 7.91
8.24 8.31
8.45 8.38
8.37 8.36
1/13 8.51 8.37
8.44 8.52
8.63 8.47
8.94 8.59
2/13 8.37 8.42
8.42 8.46
8.56 8.54
8.77 8.64
3/13 8.73 8.56
8.43 8.40
8.35 8.40
8.20 8.27
4/13 8.71 8.63
8.67 8.67
8.50 8.67
8.68 8.74
8.42 8.49
5/13 8.38 8.26
8.38 8.24
8.32 8.23
8.31 8.05
6/13 8.33 8.21
8.25 8.15
8.36 8.41
8.51 8.52
7/13 8.89 8.42
8.39 8.39
8.29 8.20
8.15 8.00
8.05 7.97
8/13 8.42 7.87
8.22 7.96
8.31 8.13
8.18 8.18
9/13 8.20 8.25
8.02 8.16
8.00 8.27
8.18 8.40
10/13 8.35 8.56
8.19 8.32
8.29 8.36
8.07 8.53
8.03 8.48
11/13 8.19 8.61
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PERFORMANCE
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Average Annual Total Return
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Inception
1 Year Ended 5 Years Ended (5/25/2007)
11/30/2013 11/30/2013 to 11/30/2013
Fund Performance (3)
NAV 18.91% 25.79% -1.30%
Market Value 10.03% 32.65% -2.75%
Index Performance
Blended Benchmark(4) 16.94% 23.91% 3.28%
MSCI U.S. Investable Market Financials Index 32.81% 10.95% -6.46%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Ares Capital Corp. 9.9%
Golub Capital BDC, Inc. 7.4
PennantPark Investment Corp. 5.9
THL Credit, Inc. 5.9
Hercules Technology Growth Capital, Inc. 5.4
Medley Capital Corp. 5.3
Solar Senior Capital Ltd. 4.6
TCP Capital Corp. 4.3
New Mountain Finance Corp. 3.7
Triangle Capital Corp. 3.6
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Total 56.0%
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% OF TOTAL
INDUSTRY INVESTMENTS
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Capital Markets 88.5%
Real Estate Investment Trusts (REITs) 8.4
Diversified Financial Services 3.1
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Total 100.0%
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Common Stocks - Business Development Companies 85.6%
Common Stocks 11.3
Master Limited Partnerships 2.7
Exchange-Traded Funds 0.4
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Total 100.0%
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(1) Most recent distribution paid or declared through 11/30/2013. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 11/30/2013. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
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) Blended benchmark consists of the following (Source: Bloomberg):
Wells Fargo BDC Index (70%), FTSE NAREIT Mortgage REIT Index (20%)
and S&P SmallCap Financials Index (10%).
From 2009-2012, the blended benchmark consisted of the following:
Red Rocks Global Listed Private Equity Index (70%), FTSE NAREIT
Mortgage REIT Index (20%) and S&P SmallCap Financials Index (10%).
Certain of these indices were discontinued during 2012, therefore the
blended benchmark was changed. From 2007-2009, the blended benchmark
consisted of the following:
Red Rocks Listed Private Equity Index (40%), FTSE NAREIT Mortgage
REIT Index (20%), FTSE NAREIT Hybrid REIT Index (20%), Merrill Lynch
Preferred Stock Hybrid Securities Index (10%) and Rusell 2000
Financial Services Index (10%).
Certain of these indices were discontinued during 2009, therefore the
blended benchmark was changed.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
ANNUAL REPORT
NOVEMBER 30, 2013
SUB-ADVISOR
Confluence Investment Management LLC, a registered investment advisor
("Confluence" or the "Sub-Advisor"), located in St. Louis, Missouri, serves as
the Sub-Advisor to First Trust Specialty Finance and Financial Opportunities
Fund ("FGB" or the "Fund"). The investment professionals at Confluence have over
80 years of aggregate portfolio management experience. Confluence professionals
have invested in a wide range of specialty finance and other financial company
securities during various market cycles, working to provide attractive
risk-adjusted returns to clients.
CONFLUENCE PORTFOLIO MANAGEMENT TEAM
MARK KELLER, CFA
CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER
DAVID MIYAZAKI, CFA
SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
DANIEL WINTER, CFA
SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
The primary investment objective of the First Trust Specialty Finance and
Financial Opportunities Fund is to seek a high level of current income. As a
secondary objective, the Fund seeks an attractive total return. The Fund pursues
its investment objectives by investing at least 80% of its managed assets in a
portfolio of securities of specialty finance and other financial companies that
the Fund's Sub-Advisor believes offer attractive opportunities for income and
capital appreciation. There can be no assurance that the Fund's investment
objectives will be achieved. The Fund may not be appropriate for all investors.
MARKET RECAP
FGB is a financial sector fund with a particular focus on a niche called
business development companies ("BDCs"). BDCs lend to and invest in private
companies, oftentimes working with those not large enough to efficiently access
the public markets. Each BDC has a unique profile, determined by its respective
management team. Some specialize in particular industries, while others apply a
more generalized approach and maintain a diversified portfolio. Both approaches
can work effectively and offer shareholders a unique and differentiated return
opportunity derived from the private markets. As of November 30, 2013, the Fund
had over 80% of its assets invested in 33 BDCs.
The Fund's fiscal year, which ended November 30, 2013, was a very constructive
period for financial stocks. The MSCI U.S. Investable Market Financials Index,
which provides a broad measure of performance for U.S. financial stocks, had a
total return of 32.81%. The financial sector has generally lagged other areas of
the equity market since the 2008 recession. But this year, financials were able
to extend progress made in the previous year, helped by very low default rates
and improving regulatory clarity.
BDCs are financial stocks but are very different relative to most other
companies in the sector. The amount of debt they utilize is much lower and they
distribute almost all their earnings, creating a high dividend yield profile.
Accordingly, they often perform much differently than many financials. This
year, the BDC industry delivered solid returns, but at a level generally below
that of the broader financial sector. In part, the lower relative performance
likely reflected a moderation in returns, after outperforming in several
previous years. The rise in interest rates may also have played a role, as many
dividend-paying stocks faced headwinds after the Federal Reserve announced
potential changes to its quantitative easing policy in the spring.
The operating fundamentals for the BDC industry were very stable. Problem loans
and default rates remained at low levels, while borrowing costs declined and
equity capital was available. Industry growth also remained intact. Several new
BDCs had initial public offerings and many existing BDCs were able to increase
in size. These encouraging developments were partially offset by high levels of
repayments and refinancing in BDC loan portfolios. In many instances, BDCs had
to make new loans at lower rates.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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With declining yields in their portfolios, some BDCs experienced lower levels of
overall income. And so, while the health and growth of the overall industry
progressed on a positive trend, there were significant differences in
performance at the individual company level. Some BDCs were able to maintain and
grow their dividends, while others struggled to earn their dividends and in some
cases had to reduce dividends.
The Fund invests in a wide spectrum of BDCs, but its focus has long emphasized
high quality BDCs, led by management teams with track records of prudent loan
underwriting and sensible capital allocation. And though their order has changed
a bit, the Fund's top five positions remained in the same companies throughout
the year. Ares Capital Corp., Golub Capital BDC, Inc., PennantPark Investment
Corp., Medley Capital Corp. and THL Credit, Inc. together formed the foundation
of the portfolio. These high quality BDCs contributed to the Fund's cashflow and
income, enabling the Board to increase the dividend for the fourth consecutive
year. The Fund's meaningful and growing dividend played a constructive role for
investors seeking yield in a low interest-rate environment.
The Fund also has investments in some lower quality BDCs, whose managers have
struggled to earn and deliver attractive returns on capital. Some of these BDCs
are on the mend, while others are still in the midst of challenges. But when
these companies are purchased and utilized with an adequate valuation discount,
they can form an attractive return/risk profile and play a constructive role in
the portfolio. We utilize these discounts, but temper the exposure in order to
maintain an overall profile weighted toward high quality.
Another portfolio allocation has involved Agency Mortgage-Backed Securities
(MBS) REITs. These companies faced substantial headwinds throughout the year,
particularly after the Fed announced potential changes to its bond buying policy
in May. Although the environment has been volatile, rising interest rates may
help form a higher return environment for these companies. Their yield profile
remained quite high and this allocation was additive to the Fund's ability to
earn and distribute income. Still, we limit this allocation because of the
industry's high level of volatility and the variable nature of its dividends.
The balance of the Fund's investments are in companies positioned to help pursue
both income and growth objectives. At times, some of the positions in this
allocation may be in stocks with small or non-existent dividends. However, we
believe these companies are well-positioned to grow their earnings and help the
Fund compound its NAV. The Fund realized some attractive gains this year from
this allocation and was also able to establish some new positions. Over time,
this allocation may rise and fall depending upon the opportunities we identify
and overall market conditions.
PERFORMANCE ANALYSIS
TWELVE MONTHS
ENDED 11/30/13
FGB Market Value Total Return 10.03%
FGB NAV Total Return 18.91%
Blended Benchmark* 16.94%
* Components of the blended benchmark: Wells Fargo BDC Index (70%); FTSE/NAREIT
Mortgage REIT Index (20%); S&P SmallCap Financials Index (10%).
Source: Bloomberg, BNY Mellon
The Fund's market value total return1 of 10.03% was below the Fund's NAV total
return of 18.91%, as the Fund's common share price premium to NAV changed to a
discount, moving from +2.80% to -4.88%. The Fund's NAV total return was close to
the blended benchmark performance, which came in at 16.94%. It is important to
note that because FGB is unique in its focus on BDCs, it often performs in a
much different manner than most benchmarks, including its own blended benchmark.
The Fund uses leverage because we believe that, over time, leverage provides
opportunities for additional income and total return for shareholders. However,
the use of leverage can also expose shareholders to additional volatility. For
example, as the prices of securities held by the Fund decline, the negative
impact of valuation changes on NAV and shareholder total return is magnified by
the use of leverage. Conversely, leverage may enhance returns during periods
when the prices of securities held by the Fund generally are rising. Leverage
had a positive impact on the performance of the Fund over this reporting period.
The benchmark does not utilize leverage.
1 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.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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OUTLOOK
In recent decades, Fed policy has principally involved very short-term interest
rates. But after the 2008 recession, the Fed opted to manipulate longer-term
rates as well, with the intention of stimulating economic growth. In May 2013,
the Fed announced it was considering a withdrawal of this policy, a maneuver
called "tapering." As longer-term interest rates rose, it became evident that
Fed policy had been affecting asset classes, including dividend-paying stocks.
The market adjustments to changing Fed policy have involved bouts of acute price
changes, both up and down, increasing investor stress levels. But volatility can
also present opportunities, ones that involve the chance to invest at discounted
valuations. For the Fund, these opportunities will involve many BDCs, most in
the high quality bucket, but some outside of it. This approach has positioned
the Fund to grow its income distributions as well as its NAV.
In a period of sustained low interest rates, growing income has been a
significant challenge. But the combination of active portfolio management, a
focus on high-quality companies, prudent leverage and a growing and
fundamentally strong BDC industry have positioned the Fund to deliver stable and
growing dividends. Nevertheless, the low rate environment remains a challenge,
and there can be no assurance the Fund can continue to grow its dividend. On the
upside, as the Fed advances its policy tapering, we look forward to a period
when the market, as opposed to the U.S. central bank, sets longer term interest
rates. We believe this environment should be a constructive one for the Fund to
deliver income and capital appreciation, derived from a differentiated
alternative asset class.
Page 5
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2013
SHARES DESCRIPTION VALUE
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COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 102.4%
CAPITAL MARKETS - 102.4%
139,032 American Capital Ltd. (a) (b) ............................................... $ 2,127,190
445,108 Apollo Investment Corp. (b) ................................................. 4,014,874
789,552 Ares Capital Corp. (b) ...................................................... 14,511,966
214,420 BlackRock Kelso Capital Corp. (b) ........................................... 2,120,614
6,964 Fidus Investment Corp........................................................ 151,188
79,094 Fifth Street Finance Corp. (b) .............................................. 756,139
147,536 Full Circle Capital Corp. (b) ............................................... 1,138,978
371,716 Gladstone Capital Corp. (b) ................................................. 3,627,948
183,333 Gladstone Investment Corp. (b) .............................................. 1,391,498
578,740 Golub Capital BDC, Inc. (b) ................................................. 10,886,099
8,699 Harvest Capital Credit Corp.................................................. 128,571
463,198 Hercules Technology Growth Capital, Inc. (b) ................................ 7,906,790
222,697 Horizon Technology Finance Corp. (b) ........................................ 3,162,297
303,369 KCAP Financial, Inc. (b) .................................................... 2,551,333
38,798 Main Street Capital Corp. (b) ............................................... 1,278,394
444,100 MCG Capital Corp. (b) ....................................................... 2,136,121
250,353 Medallion Financial Corp. (b) ............................................... 4,441,262
545,561 Medley Capital Corp. (b) .................................................... 7,817,889
5,000 Monroe Capital Corp.......................................................... 64,650
244,496 MVC Capital, Inc. (b) ....................................................... 3,550,082
359,392 New Mountain Finance Corp. (b) .............................................. 5,416,037
333,937 NGP Capital Resources Co. (b) ............................................... 2,598,030
129,943 OFS Capital Corp. (b) ....................................................... 1,506,039
177,965 PennantPark Floating Rate Capital Ltd. (b) .................................. 2,463,036
718,973 PennantPark Investment Corp. (b) ............................................ 8,749,901
14,085 Saratoga Investment Corp..................................................... 220,008
290,709 Solar Capital Ltd. (b) ...................................................... 6,729,913
55,050 Solar Senior Capital Ltd. (b) ............................................... 1,002,461
125,026 Stellus Capital Investment Corp. (b) ........................................ 1,930,401
368,495 TCP Capital Corp. (b) ....................................................... 6,374,964
509,618 THL Credit, Inc. (b) ........................................................ 8,648,218
124,337 TICC Capital Corp. (b) ...................................................... 1,344,083
176,601 Triangle Capital Corp. (b) .................................................. 5,255,646
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TOTAL COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES ........................ 126,002,620
(Cost $117,177,163) --------------
COMMON STOCKS - 13.5%
CAPITAL MARKETS - 3.4%
75,467 Safeguard Scientifics, Inc. (a) ............................................. 1,407,460
110,000 Stonecastle Financial Corp................................................... 2,759,900
--------------
4,167,360
--------------
REAL ESTATE INVESTMENT TRUSTS - 10.1%
354,500 Annaly Capital Management, Inc. (b) ......................................... 3,601,720
20,000 Ares Commercial Real Estate Corp............................................. 262,400
652,880 CYS Investments, Inc. (b) ................................................... 5,223,040
20,000 Gladstone Commercial Corp.................................................... 359,800
Page 6 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
SHARES/
UNITS DESCRIPTION VALUE
----------- ----------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
176,282 Hatteras Financial Corp. (b) ................................................ $ 2,945,672
--------------
12,392,632
--------------
TOTAL COMMON STOCKS ......................................................... 16,559,992
(Cost $22,355,779) --------------
MASTER LIMITED PARTNERSHIPS - 3.2%
DIVERSIFIED FINANCIAL SERVICES - 3.2%
209,105 Compass Diversified Holdings (b) ............................................ 3,991,814
--------------
TOTAL MASTER LIMITED PARTNERSHIPS ........................................... 3,991,814
(Cost $843,306) --------------
EXCHANGE-TRADED FUNDS - 0.5%
DIVERSIFIED FINANCIAL SERVICES - 0.5%
15,000 SPDR Barclays High Yield Bond ETF ........................................... 611,250
--------------
TOTAL EXCHANGE-TRADED FUNDS ................................................. 611,250
(Cost $532,814) --------------
TOTAL INVESTMENTS - 119.6% .................................................. 147,165,676
(Cost $140,909,062) (c)
OUTSTANDING LOAN - (20.3%) .................................................. (25,000,000)
NET OTHER ASSETS AND LIABILITIES - 0.7% ..................................... 915,444
--------------
NET ASSETS - 100.0% ......................................................... $ 123,081,120
==============
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(a) Non-income producing security.
(b) All or a portion of this security serves as collateral on the
outstanding loan.
(c) Aggregate cost for financial reporting purposes, which approximates
the aggregate cost for federal income tax purposes is $143,654,535.
As of November 30, 2013, the aggregate gross unrealized appreciation
for all securities in which there was an excess of value over tax
cost was $25,857,431 and the aggregate gross unrealized depreciation
for all securities in which there was an excess of tax cost over
value was $22,346,290.
See Notes to Financial Statements Page 7
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2013
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of November 30,
2013 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 11/30/2013 PRICES INPUTS INPUT
----------------------------------------------------- ------------ ------------ ------------ ------------
Common Stocks - Business Development
Companies*........................................ $126,002,620 $126,002,620 $ -- $ --
Common Stocks*....................................... 16,559,992 16,559,992 -- --
Master Limited Partnerships*......................... 3,991,814 3,991,814 -- --
Exchange-Traded Funds *.............................. 611,250 611,250 -- --
------------ ------------ ------------ ------------
Total Investments.................................... $147,165,676 $147,165,676 $ -- $ --
============ ============ ============ ============
* 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 values. As of
November 30, 2013, the Fund transferred common stock valued at $422,529 from
Level 2 to Level 1 of the fair value hierarchy. The common stock that
transferred from Level 2 to Level 1 did so because it was previously priced at a
discount to the last sale price, but the discount has been eliminated and it is
now being priced at the last sale price, which is received daily from an
independent third party pricing service.
Page 8 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2013
ASSETS:
Investments, at value
(Cost $140,909,062) ......................................................................... $ 147,165,676
Cash........................................................................................... 3,258,379
Foreign currency (Cost $25) ................................................................... 24
Receivables:
Dividends.................................................................................. 304,846
Prepaid expenses 4,892
--------------
Total Assets............................................................................. 150,733,817
--------------
LIABILITIES:
Outstanding loan .............................................................................. 25,000,000
Payables:
Distributions payable...................................................................... 2,429,443
Investment advisory fees................................................................... 119,507
Audit and tax fees......................................................................... 47,200
Printing fees.............................................................................. 18,894
Custodian fees............................................................................. 11,461
Administrative fees........................................................................ 11,303
Legal fees................................................................................. 4,917
Trustees' fees and expenses................................................................ 3,587
Transfer agent fees........................................................................ 2,898
Interest and fees on loan.................................................................. 2,400
Financial reporting fees................................................................... 771
Other liabilities ............................................................................. 316
--------------
Total Liabilities........................................................................ 27,652,697
--------------
NET ASSETS $ 123,081,120
==============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................... $ 266,207,409
Par value ..................................................................................... 142,909
Accumulated net investment income (loss) ...................................................... (3,165,620)
Accumulated net realized gain (loss) on investments ........................................... (146,360,191)
Net unrealized appreciation (depreciation) on investments and foreign currency translation .... 6,256,613
--------------
NET ASSETS .................................................................................... $ 123,081,120
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .......................... $ 8.61
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 14,290,840
==============
See Notes to Financial Statements Page 9
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2013
INVESTMENT INCOME:
Dividends ..................................................................................... $ 10,962,194
Interest....................................................................................... 1,016
Other.......................................................................................... 4,752
--------------
Total investment income..................................................................... 10,967,962
--------------
EXPENSES:
Investment advisory fees....................................................................... 1,426,132
Interest and fees on loan...................................................................... 264,487
Administrative fees............................................................................ 128,617
Printing fees.................................................................................. 61,134
Audit and tax fees............................................................................. 48,483
Transfer agent fees............................................................................ 33,208
Trustees' fees and expenses.................................................................... 20,085
Custodian fees................................................................................. 17,404
Legal fees..................................................................................... 11,849
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 30,176
--------------
Total expenses.............................................................................. 2,050,825
--------------
NET INVESTMENT INCOME (LOSS)................................................................... 8,917,137
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments........................................................ 473,424
--------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 11,028,362
Foreign currency translation................................................................ (1)
--------------
Net change in unrealized appreciation (depreciation)........................................... 11,028,361
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 11,501,785
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 20,418,922
==============
Page 10 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
11/30/2013 11/30/2012
------------- -------------
OPERATIONS:
Net investment income (loss)....................................................... $ 8,917,137 $ 8,436,796
Net realized gain (loss)........................................................... 473,424 (1,016,616)
Net change in unrealized appreciation (depreciation)............................... 11,028,361 14,269,307
------------- -------------
Net increase (decrease) in net assets resulting from operations.................... 20,418,922 21,716,487
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (9,571,582) (9,258,175)
Return of capital.................................................................. -- (22,689)
------------- -------------
Total distributions to shareholders................................................ (9,571,582) (9,280,864)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested ............................................ 100,813 --
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions.......... 100,813 --
------------- -------------
Total increase (decrease) in net assets............................................ 10,948,153 12,435,623
NET ASSETS:
Beginning of period................................................................ 112,132,967 99,697,344
------------- -------------
End of period...................................................................... $ 123,081,120 $ 112,132,967
============= =============
Accumulated net investment income (loss) at end of period.......................... $ (3,165,620) $ (2,799,790)
============= =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 14,278,252 14,278,252
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... 12,588 --
------------- -------------
Common Shares at end of period..................................................... 14,290,840 14,278,252
============= =============
See Notes to Financial Statements Page 11
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.......... $ 20,418,922
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used in operating activities:
Purchases of investments............................................ (22,586,022)
Sales, maturities and paydowns of investments....................... 19,508,959
Return of capital received from investments in MLPs ................ 311,328
Net realized gain/loss on investments............................... (473,424)
Net change in unrealized appreciation/depreciation on investments... (11,028,362)
CHANGES IN ASSETS AND LIABILITIES:
Increase in dividends receivable.................................... (29,584)
Decrease in prepaid expenses........................................ 844
Increase in interest and fees on loan payable....................... 887
Increase in investment advisory fees payable........................ 8,843
Decrease in legal fees payable...................................... (289)
Decrease in printing fees payable................................... (840)
Increase in administrative fees payable............................. 1,623
Increase in custodian fees payable.................................. 8,768
Decrease in transfer agent fees payable............................. (2,993)
Increase in Trustees' fees and expenses payable..................... 84
Decrease in other liabilities....................................... (2,779)
---------------
CASH PROVIDED BY OPERATING ACTIVITIES.................................... $ 6,135,965
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested.............................. 100,813
Distributions to Common Shareholders from net investment income..... (9,498,051)
Issuances of loan................................................... 2,000,000
---------------
CASH USED IN FINANCING ACTIVITIES........................................ (7,397,238)
---------------
Decrease in cash......................................................... (1,261,273)
Cash and foreign currency at beginning of period......................... 4,519,676
---------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD............................... $ 3,258,403
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees........................ $ 263,600
===============
Page 12 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
11/30/2013 11/30/2012 11/30/2011 11/30/2010 11/30/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period ........... $ 7.85 $ 6.98 $ 7.69 $ 5.98 $ 4.51
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.62 0.59 0.66 0.56 0.65
Net realized and unrealized gain (loss) ........ 0.81 0.93 (0.74) 1.76 1.43
---------- ---------- ---------- ---------- ----------
Total from investment operations ............... 1.43 1.52 (0.08) 2.32 2.08
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.67) (0.65) (0.63) (0.59) (0.55)
Return of capital .............................. -- (0.00) (c) (0.00) (c) (0.02) (0.06)
---------- ---------- ---------- ---------- ----------
Total distributions to Common Shareholders ..... (0.67) (0.65) (0.63) (0.61) (0.61)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period ................. $ 8.61 $ 7.85 $ 6.98 $ 7.69 $ 5.98
========== ========== ========== ========== ==========
Market value, end of period .................... $ 8.19 $ 8.07 $ 6.20 $ 7.50 $ 5.43
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (a) ...... 18.91% 22.48% (1.01)% 40.04% 56.00%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (a) ......... 10.03% 41.76% (9.84)% 50.41% 94.18%
========== ========== ========== ========== ==========
--------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 123,081 $ 112,133 $ 99,697 $ 109,861 $ 85,069
Ratio of total expenses to average net assets... 1.73% 1.83% 1.85% 1.83% 2.29%
Ratio of total expenses to average net assets
excluding interest expense ................... 1.50% 1.55% 1.58% 1.58% 1.94%
Ratio of net investment income (loss) to average
net assets ................................... 7.51% 7.81% 8.32% 7.93% 13.36%
Portfolio turnover rate ........................ 13% 18% 11% 24% 20%
INDEBTEDNESS:
Total loan outstanding (in 000's) .............. $ 25,000 $ 23,000 $ 20,000 $ 18,000 $ 14,350
Asset coverage per $1,000 of indebtedness (b)... $ 5,923 $ 5,875 $ 5,985 $ 7,103 $ 6,928
--------------------
(a) 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.
(b) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
outstanding in 000's.
(c) Amount represents less than $0.01 per share.
See Notes to Financial Statements Page 13
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013
1. ORGANIZATION
First Trust Specialty Finance and Financial Opportunities Fund (the "Fund") is a
non-diversified, closed-end management investment company organized as a
Massachusetts business trust on March 20, 2007, and is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FGB
on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks attractive total return as a secondary objective. Under
normal market conditions, the Fund invests at least 80% of its Managed Assets in
a portfolio of securities of specialty finance and other financial companies
that Confluence Investment Management LLC ("Confluence" or the "Sub-Advisor")
believes offer attractive opportunities for income and capital appreciation.
Under normal market conditions, the Fund concentrates its investments in
securities of companies within industries in the financial sector. "Managed
Assets" means 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 will achieve its investment objectives. The Fund may not
be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. Domestic debt securities
and foreign securities are priced using data reflecting the earlier closing of
the principal markets for those securities. The NAV per Common Share is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid, and any borrowings of the Fund) by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value, or in absence of market
value with respect to any portfolio securities, at fair value in accordance with
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with provisions of the 1940 Act. Market quotations and prices used to value the
Fund's investments are primarily obtained from third party pricing services. The
Fund's securities will be valued as follows:
Common stocks, master limited partnerships ("MLPs") and other securities
listed on any national or foreign exchange (excluding the NASDAQ(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 one or 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 valued at the mean of
the bid and asked prices, if available, and otherwise at their closing bid
price.
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate at fair value. These securities generally include, but are not limited
to, restricted securities (securities which may not be publicly sold without
registration under the Securities Act of 1933, as amended) for which a pricing
service is unable to provide a market price; securities whose trading has been
formally suspended; a security whose market price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
"fair value." As a general principle, the current "fair value" of a security
would appear to be the amount which the owner might reasonably expect to receive
for the security upon its current sale. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from current market
quotations or official closing prices on the applicable exchange. A variety of
factors may be considered in determining the fair value of such securities,
including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
Page 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013
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.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of November 30, 2013, is
included with the Fund's Portfolio of Investments.
B. 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, if any, is
recorded daily on the accrual basis, including the amortization of premiums and
accretion of discounts.
The Fund holds shares of business development companies ("BDCs") and may hold
exchange-traded funds ("ETFs"). The tax character of distributions received from
these securities may vary when reported by the issuer after their tax reporting
periods conclude.
The Fund may also hold real estate investment trusts ("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 the REITs during the year based on estimates
available. The REIT's characterization of distributions received by the Fund may
be subsequently revised based on information received from the REITs after their
tax reporting periods conclude.
The Fund may also hold MLPs. For the year ended November 30, 2013, distributions
of $311,328 received from MLPs have been reclassified as return of capital.
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income of the Fund are declared and paid quarterly
or as the Board of Trustees may determine from time to time. Distributions of
any net realized capital gains earned by the Fund are distributed at least
annually. Distributions will automatically be reinvested into additional Common
Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Distributions from income and realized 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.
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013
Permanent differences incurred during the fiscal year ended November 30, 2013,
primarily as a result of the prior year tax character of REIT and BDC
distributions, have been reclassified at year end to reflect an increase in
accumulated net investment income (loss) by $288,615, an increase in accumulated
net realized gain (loss) on investments by $223,452 and a decrease to paid-in
capital of $512,067.
The tax character of distributions paid during the fiscal years ended November
30, 2013 and 2012 was as follows:
2013 2012
Distributions paid from:
Ordinary income............................... $ 9,571,582 $ 9,258,175
Return of capital............................. -- 22,689
As of November 30, 2013 the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................. $ 115,148
Undistributed capital gains................... --
-------------
Total undistributed earnings.................. 115,148
Accumulated capital and other losses.......... (144,466,043)
Net unrealized appreciation (depreciation).... 3,511,140
-------------
Total accumulated earnings (losses)........... (140,839,755)
Other ...................................... (2,429,443)
Paid-in capital............................... 266,350,318
-------------
Net assets.................................... $ 123,081,120
=============
D. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward up
to eight years and treated as short-term losses. As a transition rule, the Act
requires that post-enactment net capital losses be used before pre-enactment net
capital losses. During the taxable year ended November 30, 2013, the Fund
utilized post-enactment capital loss carryforwards in the amount of $621,207. At
November 30, 2013, the Fund had capital loss carryforwards for federal income
tax purposes of $144,147,189, expiring as follows:
EXPIRATION DATE AMOUNT
November 30, 2015 $ 5,166,354
November 30, 2016 62,747,095
November 30, 2017 55,647,845
November 30, 2018 14,556,882
November 30, 2019 5,452,015
Non-expiring 576,998
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended November 30, 2013, the Fund
incurred and elected to defer capital losses of $318,854.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2010, 2011,
2012 and 2013 remain open to federal and state audit. As of November 30, 2013,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
E. EXPENSES:
The Fund will pay all expenses directly related to its operations.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013
F. ACCOUNTING PRONOUNCEMENT:
In December 2011, the Financial Accounting Standards Board ("FASB") issued an
Accounting Standards Update No. 2011-11: "Disclosures about Offsetting Assets
and Liabilities" ("ASU 2011-11"). This disclosure requirement is intended to
help investors and other financial statement users better assess the effect or
potential effect of offsetting arrangements on a fund's financial position. ASU
2011-11 requires entities to disclose both gross and net information about both
instruments and transactions eligible for offset on the Statement of Assets and
Liabilities, and disclose instruments and transactions subject to master netting
or similar agreements. In addition, in January 2013, FASB issued Accounting
Standards Update No. 2013-1 "Clarifying the Scope of Offsetting Assets and
Liabilities" ("ASU 2013-1"), specifying which transactions are subject to
offsetting disclosures. The scope of the disclosure requirements is limited to
derivative instruments, repurchase agreements, and reverse repurchase
agreements, and securities borrowing and securities lending transactions. ASU
2011-11 and ASU 2013-1 are effective for financial statements with fiscal years
beginning on or after January 1, 2013, and interim periods within those fiscal
years. Management is currently evaluating the impact of the updated standards on
the Fund's financial statements, if any.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Confluence 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
portfolio management fee calculated at an annual rate of 0.50% of Managed Assets
that is paid by First Trust from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
Chairman will serve two-year terms until December 31, 2013, before rotating to
serve as Chairman of another Committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee 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, excluding short-term
investments, for the fiscal year ended November 30, 2013 were $21,511,974 and
$17,681,633 respectively.
5. CREDIT AGREEMENT
The Fund entered into a committed facility agreement (the "BNP Facility") with
BNP Paribas Prime Brokerage, Inc. ("BNP"), which currently has a maximum
commitment amount of $25,000,000. Absent certain events of default or failure to
maintain certain collateral requirements, BNP may not terminate the BNP Facility
except upon 180 calendar days prior notice. Effective October 21, 2013, the
interest rate under the BNP Facility is equal to the 1-month LIBOR plus 70 basis
points. Prior to October 21, 2013, the interest rate under the BNP Facility was
equal to the 3-month LIBOR plus 80 basis points. In addition, under the BNP
Facility, the Fund pays a commitment fee of 0.85% on the undrawn amount.
The average amount outstanding for the year ended November 30, 2013 was
$23,928,767, with a weighted average interest rate of 1.05%. As of November 30,
2013, the Fund had outstanding borrowings of $25,000,000 under the BNP Facility.
The high and low annual interest rates for the year ended November 30, 2013 were
1.11% and 0.86%, respectively, and the interest rate at November 30, 2013 was
0.86%.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013
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. FINANCIAL SECTOR CONCENTRATION RISK
Under normal market conditions, the Fund will invest at least 80% of its total
assets in securities of companies within industries in the financial sector. A
fund concentrated in a single industry or sector is likely to present more risks
than a fund that is broadly diversified over several industries or groups of
industries. Compared to the broad market, an individual sector may be more
strongly affected by changes in the economic climate, broad market shifts, moves
in a particular dominant stock, or regulatory changes. Specialty finance and
other financial companies in general are subject to extensive government
regulation, which may change frequently. The profitability of specialty finance
and other financial companies is largely dependent upon the availability and
cost of capital funds, and may fluctuate significantly in response to changes in
interest rates, as well as changes in general economic conditions. From time to
time, severe competition may also affect the profitability of specialty finance
and other financial companies. Financial companies can be highly dependent upon
access to capital markets and any impediments to such access, such as general
economic conditions or a negative perception in the capital markets of a
company's financial condition or prospects, could adversely affect its business.
Leasing companies can be negatively impacted by changes in tax laws which affect
the types of transactions in which such companies engage.
8. 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 no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST SPECIALTY FINANCE AND
FINANCIAL OPPORTUNITIES FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Specialty Finance and Financial Opportunities Fund (the "Fund"), including
the portfolio of investments, as of November 30, 2013, and the related
statements of operations and cash flows for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of November 30, 2013 by correspondence with the Fund's
custodian and brokers. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Specialty Finance and Financial Opportunities Fund, as of November 30,
2013, and the results of its operations and its cash flows for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
January 23, 2014
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ADDITIONAL INFORMATION
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 20
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended November 30, 2013, none qualified for the
corporate dividends received deduction available to corporate shareholders.
None of the ordinary income distributions for the year ended November 30, 2013,
are designated as qualified dividend income.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of May 14, 2013, he was not aware of any violation by the Fund of NYSE corporate
governance listing standards. In addition, the Fund's reports to the SEC on
Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's principal
executive officer and principal financial officer that relate to the Fund's
public disclosure in such reports and are required by Rule 30a-2 under the 1940
Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of First Trust
Energy Infrastructure Fund, Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, First Trust Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust Mortgage Income Fund, First Trust
Strategic High Income Fund II, First Trust/Aberdeen Emerging Opportunity Fund,
First Trust Specialty Finance and Financial Opportunities Fund, First Trust
Dividend and Income Fund (formerly known as First Trust Active Dividend and
Income Fund), and First Trust High Income Long/Short Fund was held on April 17,
2013 (the "Annual Meeting"). At the Annual Meeting, Trustees James A. Bowen and
Niel B. Nielson were elected by the Common Shareholders of the First Trust
Specialty Finance and Financial Opportunities Fund as Class III Trustees for
three-year terms expiring at the Fund's annual meeting of shareholders in 2016.
The number of votes cast in favor of Mr. Bowen was 12,745,015, the number of
votes against was 174,795 and the number of abstentions was 1,363,205. The
number of votes cast in favor of Mr. Nielson was 12,740,511, the number of votes
against was 179,299 and the number of abstentions was 1,363,205. Richard E.
Erickson, Thomas R. Kadlec 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.
BUSINESS DEVELOPMENT COMPANY ("BDC") RISK: Investments in closed-end funds that
elect to be treated as BDCs may be subject to a high degree of risk. BDCs
typically invest in small and medium-sized private and certain public companies
that may not have access to public equity markets or capital raising. As a
result, a BDC's portfolio could include a substantial amount of securities
purchased in private placements, and its portfolio may carry risks similar to
those of a private equity or venture capital fund. Securities that are not
publicly registered may be difficult to value and may be difficult to sell at a
price representative of their intrinsic value. Investments in BDCs are subject
to various risks, including management's ability to meet the BDC's investment
objective, and to manage the BDC's portfolio when the underlying securities are
redeemed or sold, during periods of market turmoil and as investors' perceptions
regarding a BDC or its underlying investments change. BDC shares are not
redeemable at the option of the BDC shareholder and, as with shares of other
closed-end funds, they may trade in the secondary market at a discount to their
NAV.
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
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013 (UNAUDITED)
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.
FINANCIAL SECTOR CONCENTRATION RISK: Under normal market conditions, the Fund
will invest at least 80% of its total assets in securities of companies within
industries in the financial sector. A fund concentrated in a single industry or
sector is likely to present more risks than a fund that is broadly diversified
over several industries or groups of industries. Compared to the broad market,
an individual sector may be more strongly affected by changes in the economic
climate, broad market shifts, moves in a particular dominant stock, or
regulatory changes. Specialty finance and other financial companies in general
are subject to extensive government regulation, which may change frequently. The
profitability of specialty finance and other financial companies is largely
dependent upon the availability and cost of capital funds, and may fluctuate
significantly in response to changes in interest rates, as well as changes in
general economic conditions. From time to time, severe competition may also
affect the profitability of specialty finance and other financial companies.
Financial companies can be highly dependent upon access to capital markets and
any impediments to such access, such as general economic conditions or a
negative perception in the capital markets of a company's financial condition or
prospects, could adversely affect its business. Leasing companies can be
negatively impacted by changes in tax laws which affect the types of
transactions in which such companies engage.
REIT, MORTAGE-RELATED AND ASSET-BACKED SECURITIES RISKS: Investing in REITs
involves certain unique risks in addition to investing in the real estate
industry in general. REITs are subject to interest rate risk (especially
mortgage REITs) and the risk of default by lessees or borrowers. An equity REIT
may be affected by changes in the value of the underlying properties owned by
the REIT. A mortgage REIT may be affected by the ability of the issuers of its
portfolio of mortgages to repay their obligations. REITs whose underlying assets
are concentrated in properties used by a particular industry are also subject to
risks associated with such industry. REITs may have limited financial resources,
their securities may trade less frequently and in a limited volume, and their
securities may be subject to more abrupt or erratic price movements than larger
company securities.
In addition to REITs, the Fund may invest in a variety of other mortgage-related
securities, including commercial mortgage securities and other mortgage-backed
instruments. Rising interest rates tend to extend the duration of
mortgage-related securities, making them more sensitive to changes in interest
rates, and may reduce the market value of the securities. In addition,
mortgage-related securities are subject to prepayment risk, the risk that
borrowers may pay off their mortgagees sooner than expected, particularly when
interest rates decline. This can reduce the Fund's returns because the Fund may
have to reinvest that money at lower prevailing interest rates.
The Fund's investments in other asset-backed securities are subject to risks
similar to those associated with mortgage-backed securities, as well as
additional risks associated with the nature of the assets and the servicing of
those assets.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. 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. If the Fund is not in compliance with certain credit facility
provisions, the Fund may not be permitted to declare dividends or other
distributions.
NON-DIVERSIFICATION RISK: Because the Fund is non-diversified, it is only
limited as to the percentage of its assets which may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. Because the Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence and to the financial conditions of the issuers in which it invests.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT AND SUB-ADVISORY AGREEMENT
The Board of Trustees of First Trust Specialty Finance and Financial
Opportunities Fund (the "Fund"), including the Independent Trustees, 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
Confluence Investment Management LLC (the "Sub-Advisor") at a meeting held on
June 10-11, 2013. 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. To
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013 (UNAUDITED)
assist the Board in its evaluation of the Agreements, the Independent Trustees
received a separate report from each of the Advisor and the Sub-Advisor in
advance of the Board meeting responding to a request for information from
counsel to the Independent Trustees. The reports, 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 by investment
advisors and sub-advisors to comparable funds; expenses of the Fund as compared
to expense ratios of comparable funds; the nature of expenses incurred in
providing services to the Fund and the potential for economies of scale, if any;
financial data on the Advisor 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. Following receipt of this information,
counsel to the Independent Trustees posed follow-up questions, and the
Independent Trustees and their counsel then met separately to discuss the
information provided by the Advisor and the Sub-Advisor, including the
supplemental responses. 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. The Board also
considered that the Agreements were approved by shareholders of the Fund at a
meeting held in January 2012.
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.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. 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. With respect to the Sub-Advisory Agreement,
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 investments. 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 does not
provide advisory services to other funds with investment objectives and policies
similar to the Fund's, but it does provide services to certain separately
managed accounts with investment objectives and policies similar to the Fund's.
The Board noted that the Advisor charges a lower advisory fee rate to the
separately managed accounts, as well as 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 fee to any
other client for which it provides comparable services. In addition, the Board
received data prepared by Lipper Inc. ("Lipper"), an independent source, showing
the advisory fees and expense ratios of the Fund as compared to the advisory
fees and expense ratios of a peer group selected by Lipper and similar data for
a separate peer group selected by the Advisor. The Board noted that the Lipper
and Advisor peer groups did not include any overlapping peer funds. The Board
discussed with representatives of the Advisor the limitations in creating a
relevant peer group for the Fund, including that (i) the Fund is unique in its
composition, which makes assembling peers with similar strategies and asset mix
difficult; (ii) peer funds may use different types of leverage which have
different costs associated with them or may use no leverage; (iii) most peer
funds do not employ an advisor/sub-advisor management structure; and (iv) many
of the peer funds are larger than the Fund, which causes the Fund's fixed
expenses to be higher on a percentage basis as compared to the larger peer
funds. The Board took these limitations into account in considering the peer
data. In reviewing the peer data, the Board noted that the Fund's contractual
advisory fee was equal to the median of both the Lipper and Advisor peer groups.
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 received
data prepared by Lipper comparing the Fund's performance to the Lipper peer
group, as well as to a larger peer universe and to two benchmarks, one of which
is a blended benchmark. In reviewing the Fund's performance as compared to the
performance of the Lipper peer group and Lipper peer universe, the Board took
into account the limitations described above with respect to creating a relevant
peer group for the Fund. The Board also considered the Fund's dividend yield as
of March 30, 2013 and an analysis prepared by the Advisor on the continued
benefits provided by the Fund's leverage. In addition, the Board compared the
Fund's premium/discount over the past eight quarters to the average and median
premium/discount of the Advisor peer group over the same period, noting that the
Fund's premium/discount was generally indicative of the asset class and market
events.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013 (UNAUDITED)
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 Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board noted the Advisor's statement that
economies of scale in providing services to the Fund are not available at
current asset levels. The Board determined that due to the Fund's closed-end
structure, the potential for realization of economies of scale as Fund assets
grow was not a material factor to be considered. The Board also considered the
costs of the services provided and profits realized by the Advisor from serving
as investment advisor to the Fund for the twelve months ended December 31, 2012,
as set forth in the materials provided to the Board. The Board noted the
inherent limitations in the profitability analysis, and considered that the
Advisor estimated that it provided services to the Fund at a loss in 2012. 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 that many of the Sub-Advisor's costs are fixed, allowing
for economies of scale with regard to certain costs. 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 profitability of the Sub-Advisory
Agreement appeared to be not excessive in light of the services provided to the
Fund. The Board considered fall-out benefits realized by the Sub-Advisor from
its relationship with the Fund, including the Sub-Advisor's statement that it
benefits from greater exposure to specialty finance companies. The Board noted
that the Sub-Advisor does not maintain any soft-dollar 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.
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE (2) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 105 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership; Member Sportsmed
Suite 400 Inception LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President (March 2010 to Present), Senior 105 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund (May 2007 to March 2010), ADM Services, Inc. and ADM
Suite 400 Inception Inc. (Futures Commission Merchant) Investor Services
Wheaton, IL 60187 International
D.O.B.: 11/57
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 105 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since June 2006 Consulting) Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term President and Chief Executive Officer (June 105 Director of
c/o First Trust Advisors L.P. 2012 to Present), Dew Learning LLC Covenant
120 East Liberty Drive, o Since Fund (Educational Products and Services); President Transport Inc.
Suite 400 Inception (June 2002 to June 2012), Covenant College
Wheaton, IL 60187
D.O.B.: 03/54
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee and o Three-Year Term Chief Executive Officer (December 2010 105 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund 2010), First Trust Advisors L.P. and First
Suite 400 Inception Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
(2) Currently, Robert F. Keith, as a Class I Trustee, is serving as a Trustee
until the Fund's 2014 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as Trustees until
the Fund's 2015 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as Trustees until the Fund's
2016 annual meeting of shareholders.
Page 25
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief Accounting President (April 2007 to January 2011), First
Suite 400 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. and Secretary and
Suite 400 o Since Fund Inception General Counsel, BondWave LLC (Software
Wheaton, IL 60187 Development Company/Investment Advisor);
D.O.B.: 05/60 Secretary of Stonebridge Advisors LLC
(Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July
Suite 400 o Since Fund Inception 2012), First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Assistant Secretary
Wheaton, IL 60187 Since Fund Inception
D.O.B.: 12/66
o Chief Compliance
Officer Since
January 2011
(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 26
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2013 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers 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 within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), 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, First Trust restricts access to
your nonpublic personal information to those First Trust employees 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 27
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
Confluence Investment Management LLC
20 Allen Avenue, Suite 300
Saint Louis, MO 63119
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
$42,000 for the fiscal year ended November 30, 2012 and $42,000 for the fiscal
year ended November 30, 2013.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years for assurance and related services by the principal
accountant that are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph (a) of
this Item were $0 for the fiscal year ended November 30, 2012 and $0 for the
fiscal year ended November 30, 2013.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0 for the fiscal year ended November 30, 2012 and $0 for
the fiscal year ended November 30, 2013.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $5,200
for the fiscal year ended November 30, 2012 and $5,200 for the fiscal year ended
November 30, 2013. These fees were for tax consultation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning to the registrant's
adviser were $0 for the fiscal year ended November 30, 2012 and $0 for the
fiscal year ended November 30, 2013.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for the fiscal year ended November 30, 2012 and
$0 for the fiscal year ended November 30, 2013.
All Other Fees (Investment Adviser) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal
accountant to the registrant's investment adviser, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year
ended November 30, 2012 and $0 for the fiscal year ended November 30, 2013.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the registrant and the registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the pre-approval
exceptions included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for the fiscal year
ended November 30, 2012, were $5,200 for the registrant and $4,120 for the
registrant's investment adviser, and for the fiscal year ended November 30,
2013, were $5,200 for the registrant and $3,000 for the registrant's investment
adviser.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The Registrant has a separately designated audit committee consisting of all the
independent trustees 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. INVESTMENTS.
(A) 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.
The Proxy Voting Policies are attached herewith.
CONFLUENCE INVESTMENT MANAGEMENT LLC
PROXY VOTING POLICIES AND PROCEDURES
1. INTRODUCTION
As a registered investment adviser, Confluence Investment Management LLC
("Confluence" or the "Adviser") has a fiduciary duty to act solely in the best
interests of its clients. If the client is a registered investment company under
the Investment Company Act of 1940 or the client requests Confluence to do so in
writing, the Adviser will vote proxy materials for its clients.
In cases where the client has delegated proxy voting responsibility and
authority to the Adviser, the Adviser has adopted and implemented the following
policies and procedures, which it believes are reasonably designed to ensure
that proxies are voted in the best interests of its clients. In pursuing this
policy, proxies should be voted in a manner that is intended to maximize value
to the client. In situations where Adviser accepts such delegation and agrees to
vote proxies, Adviser will do so in accordance with these Policies and
Procedures. The Adviser may delegate its responsibilities under these Policies
and Procedures to a third party, provided that no such delegation shall relieve
the Adviser of its responsibilities hereunder and the Adviser shall retain final
authority and fiduciary responsibility for such proxy voting.
2. GENERAL
a. In the event requests for proxies are received with respect to the voting
of equity securities on routine matters, such as election of directors or
approval of auditors, the proxies usually will be voted with management
unless the Adviser determines it has a conflict or the Adviser determines
there are other reasons not to vote with management. On non-routine
matters, such as amendments to governing instruments, proposals relating
to compensation and stock option and equity compensation plans, corporate
governance proposals and shareholder proposals, the Adviser will vote, or
abstain from voting if deemed appropriate, on a case by case basis in a
manner it believes to be in the best interest of the Company's
shareholders. In the event requests for proxies are received with respect
to debt securities, the Adviser will vote on a case by case basis in a
manner it believes to be in the best economic interest of the Company's
shareholders.
b. The Chief Compliance Officer or his/her designate is responsible for
monitoring Adviser's proxy voting actions and ensuring that (i) proxies
are received and forwarded to the appropriate decision makers; and (ii)
proxies are voted in a timely manner upon receipt of voting instructions.
The Adviser is not responsible for voting proxies it does not receive, but
will make reasonable efforts to obtain missing proxies.
c. The Chief Compliance Officer or his/her designate shall implement
procedures to identify and monitor potential conflicts of interest that
could affect the proxy voting process, including (i) significant client
relationships; (ii) other potential material business relationships; and
(iii) material personal and family relationships.
d. All decisions regarding proxy voting shall be determined by the Investment
Committee of the Adviser and shall be executed by the Chief Compliance
Officer or his/her designate. Every effort shall be made to consult with
the portfolio manager and/or analyst covering the security.
e. The Adviser may determine not to vote a particular proxy, if the costs and
burdens exceed the benefits of voting (e.g., when securities are subject
to loan or to share blocking restrictions).
3. REGISTERED INVESTMENT COMPANIES
In cases in which the client is a registered investment company under the
Investment Company Act of 1940, delegates proxy voting (e.g., where Confluence
acts as a sub-adviser of a closed-end fund) and required by law, Confluence will
vote such proxies in the same proportion as the vote of all other shareholders
of the fund (i.e. "echo vote" or 'mirror vote"), unless otherwise required by
law. When required by law, Confluence will also echo vote proxies of securities
in unaffiliated investment vehicles. For example, section 12(d)(1)(F) of the
Investment Company Act of 1940 requires echo voting of registered investment
companies that sub-advise or manage securities of other registered investment
companies.
4. CONFLICTS OF INTEREST
In the event an employee determines that the Adviser has a conflict of interest
due to, for example, a relationship with a company or an affiliate of a company,
or for any other reason which could influence the advice given, the employee
will advise the Chief Compliance Officer who will advise the Investment
Committee, and the Investment Committee will decide whether the Adviser should
either (1) disclose to the client the conflict to enable the client to evaluate
the advice in light of the conflict or (2) disclose to the client the conflict
and decline to provide the advice.
The Adviser shall use commercially reasonable efforts to determine whether a
potential conflict may exist, and a potential conflict shall be deemed to exist
only if one or more of the managers of the Adviser actually knew or should have
known of the conflict. The Adviser is sensitive to conflicts of interest that
may arise in the proxy decision-making process and has identified the following
potential conflicts of interest:
o A principal of the Adviser or any person involved in the proxy
decision-making process currently serves on the Board of the portfolio
company.
o An immediate family member of a principal of the Adviser or any person
involved in the proxy decision-making process currently serves as a
director or executive officer of the portfolio company.
o The Adviser, any fund managed by the Adviser, or any affiliate holds a
significant ownership interest in the portfolio company.
This list is not intended to be exclusive. All employees are obligated to
disclose any potential conflict to the Adviser's Chief Compliance Officer.
If a material conflict is identified, Adviser management may (i) disclose the
potential conflict to the client and obtain consent; or (ii) establish an
ethical wall or other informational barriers between the person(s) that are
involved in the conflict and the persons making the voting decisions.
5. RECORDKEEPING The Chief Compliance Officer or his/her designate is
responsible for maintaining the following records:
o proxy voting policies and procedures;
o proxy statements (provided, however, that the Adviser may rely on the
Securities and Exchange Commission's EDGAR system if the issuer filed its
proxy statements via EDGAR or may rely on a third party as long as the
third party has provided the Adviser with a copy of the proxy statement
promptly upon request);
o records of votes cast and abstentions; and
o any records prepared by the Adviser that were material to a proxy voting
decision or that memorialized a decision.
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
Investment decisions for the registrant are made by the Portfolio Management
Team of Confluence Investment Management LLC ("Confluence"). The members of the
Confluence Portfolio Management Team are responsible for portfolio management,
security selection, leverage management, trading, compliance, position
reconciliation, communication and reporting to the registrant's investment
adviser.
Information provided as of February 3, 2014
MARK A. KELLER, CFA - CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER
Mr. Keller has 32 years of investment experience with a focus on value-oriented
equity analysis and management. From 1994 to May 2008, he was the Chief
Investment Officer of Gallatin Asset Management, Inc., and its predecessor
organization, A.G. Edwards Asset Management, the investment management arm of
A.G. Edwards, Inc. From 1999 to 2008, Mr. Keller was Chairman of A.G. Edwards'
Investment Strategy Committee, which set investment policy and established asset
allocation models for the entire organization. Mr. Keller was a founding member
of the A.G. Edwards Investment Strategy Committee, on which he served for over
20 years, the last ten of which as Chairman of the Committee. Mr. Keller began
his career with A.G. Edwards in 1978, serving as an equity analyst for the
firm's Securities Research Department from 1979 to 1994. During his last five
years in Securities Research, Mr. Keller was Equity Strategist and manager of
the firm's Focus List. Mr. Keller was a Senior Vice President of A.G. Edwards &
Sons, Inc. and of Gallatin Asset Management, Inc., and was a member of the Board
of Directors of both companies. Mr. Keller received a Bachelor of Arts from
Wheaton College (Illinois) and is a CFA charterholder.
DAVID B. MIYAZAKI, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
Prior to joining Confluence in May 2008, Mr. Miyazaki served as a Portfolio
Manager and Analyst with Gallatin Asset Management, Inc., the investment
management arm of A.G. Edwards, Inc. Mr. Miyazaki was responsible for equity
investments in value-oriented separately managed accounts. He also co-managed
the A.G. Edwards' ETF-based asset allocation program. In addition to portfolio
management, Mr. Miyazaki served as a member of the A.G. Edwards' Investment
Strategy Committee. As a strategist, he was responsible for the firm's
quantitative asset allocation models, including its Cyclical Asset Allocation
program. Prior to joining A.G. Edwards in 1999, Mr. Miyazaki was a Portfolio
Manager at Koch Industries in Wichita, Kansas. His previous experience includes
working as an Investment Analyst at Prudential Capital Group in Dallas, Texas,
and as a Bond Trader at Barre & Company, also in Dallas. Mr. Miyazaki received a
Bachelor of Business Administration from Texas Christian University and is a CFA
charterholder.
DANIEL T.WINTER, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
Prior to joining Confluence in May 2008, Mr. Winter served as a Portfolio
Manager and Analyst with Gallatin Asset Management, Inc., the investment arm of
A.G. Edwards, Inc. While at Gallatin, Mr. Winter chaired the portfolio
management team responsible for the firm's six value-oriented equity strategies.
His responsibilities also included directing the strategy implementation and
trading execution for the equity portfolios. Mr. Winter also served as a
portfolio manager for the Cyclical Growth ETF Portfolio and the Cyclical Growth
and Income ETF Portfolio which were offered through variable annuities. He was
also a member of the firm's Allocation Advisor Committee which oversaw the A.G.
Edwards exchange-traded fund focused strategies. Prior to joining the firm's
Asset Management division in 1996, Mr. Winter served as a portfolio manager for
A.G. Edwards Trust Company. Mr. Winter earned a Bachelor of Arts in business
management from Eckerd College and a Master of Business Administration from
Saint Louis University. Mr. Winter is a CFA charterholder.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
Information provided as of November 30, 2013
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
No. of
Accounts Total Assets in
Total where Accounts where
Name of Portfolio No. of Advisory Fee Advisory Fee is
Manager or Accounts is Based on Based on
Team Member Type of Accounts Managed Total Assets Performance Performance
----------- ---------------- ------- ------------ ----------- -----------
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
1. Mark Keller Registered Investment Companies: 1 $150m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Pooled Investment Vehicles: 0 $0 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Accounts: 5,550 $1,736m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
2. David Miyazaki Registered Investment Companies: 1 $150m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Pooled Investment Vehicles: 0 $0 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Accounts: 5,550 $1,736m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
3. Daniel Winter Registered Investment Companies: 1 $150m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Pooled Investment Vehicles: 0 $0 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Accounts: 4,637 $1,529m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
POTENTIAL CONFLICTS OF INTERESTS
The Confluence Portfolio Management Team may purchase or sell in other accounts
the same securities that are purchased or sold for the registrant. If a
situation arises where the same securities are being purchased or sold in other
accounts and the registrant, the Portfolio Management Team's policy is to follow
a trade rotation to avoid simultaneous and competing buy or sell orders.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF NOVEMBER 30, 2013
The Fund's portfolio managers are compensated with an annual base salary and a
discretionary bonus based on Confluence's overall firm profits rather than
individual product line performance or profitability. In addition, the Firm's
portfolio managers are equity owners in the Firm, aligning their long-term
interests with the registrant's holders to strive to achieve superior investment
performance over an appropriate time period. This ensures that the portfolio
managers are incentivized to implement a consistent investment strategy for the
registrant without incurring undue risk.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of November 30, 2013
Name Dollar Range of Registrant Shares Beneficially
---- -----------------------------------------------
Owned
-----
Mark Keller $50,001 - $100,000
David Miyazaki $10,001 - $50,000
Daniel Winter $1 - $10,000
Brian Hansen $10,001 - $50,000
Joseph Hanzlik $10,001 - $50,000
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 trustees, 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 Specialty Finance and Financial Opportunities Fund
----------------------------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: January 22, 2014
---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: January 22, 2014
---------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: January 22, 2014
---------------------
* Print the name and title of each signing officer under his or her signature.