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
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, 2014
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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, 2014
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, 2014
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, 2014
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"). This
report provides detailed information about the Fund, including a performance
review and the financial statements for the 12 months ended November 30, 2014. I
encourage you to read this document and discuss it with your financial advisor.
Although markets have seemed choppy over the past 12 months, the U.S. has shown
sustained growth over the period. In fact, the S&P 500(R) Index, as measured on
a total return basis, rose 16.86% in the time covered by this report. First
Trust Advisors L.P. ("First Trust") believes that staying invested in quality
products through different types of markets can benefit investors over the long
term.
First Trust is pleased to offer a variety of products that we believe could fit
the financial plans for many investors seeking long-term investment success. We
invite you to look at our investment products with your financial advisor to
determine if any of them might fit your financial goals. We believe that
regularly discussing your financial objectives and investment options with your
financial advisor can help keep you on track.
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, 2014 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FGB
Common Share Price $8.58
Common Share Net Asset Value ("NAV") $7.72
Premium (Discount) to NAV 11.14%
Net Assets Applicable to Common Shares $110,394,741
Current Quarterly Distribution per Common Share (1) $0.1725
Current Annualized Distribution per Common Share $0.6900
Current Distribution Rate on Closing Common Share Price (2) 8.04%
Current Distribution Rate on NAV (2) 8.94%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
11/13 $8.19 $8.61
8.04 8.41
7.74 8.28
7.88 8.40
12/13 7.91 8.42
7.80 8.43
7.88 8.47
7.93 8.54
7.98 8.50
1/14 7.97 8.40
7.90 8.39
8.07 8.63
8.11 8.55
2/14 8.06 8.48
7.83 8.26
7.76 8.26
7.79 8.27
3/14 7.70 8.19
7.69 8.18
7.58 8.02
7.71 8.11
4/14 7.63 8.12
7.61 8.02
7.54 7.83
7.61 7.92
7.71 7.94
5/14 7.67 7.99
7.71 8.05
7.61 8.08
7.63 8.11
6/14 7.95 8.42
7.90 8.32
7.91 8.28
7/14 8.33 8.33
8.44 8.05
8.20 8.13
8.76 8.22
8.71 8.08
8/14 8.85 8.22
8.58 8.19
8.77 8.12
8.60 7.91
9/14 8.17 7.85
8.05 7.73
7.86 7.52
7.96 7.63
8.19 7.72
10/14 8.13 7.86
8.13 7.87
8.22 7.87
8.58 7.67
11/14 8.58 7.72
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PERFORMANCE
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Average Annual Total Return
--------------------------------
Inception
1 Year Ended 5 Years Ended (5/25/2007)
11/30/2014 11/30/2014 to 11/30/2014
Fund Performance (3)
NAV -2.44% 14.52% -1.45%
Market Value 14.00% 19.24% 0.67%
Index Performance
Blended Benchmark(4) 2.68% 16.18% 3.08%
MSCI U.S. Investable Market Financials Index 11.71% 10.69% -4.19%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Ares Capital Corp. 9.3%
Golub Capital BDC, Inc. 6.8
PennantPark Investment Corp. 5.5
Hercules Technology Growth Capital, Inc. 5.4
TCP Capital Corp. 5.4
New Mountain Finance Corp. 5.3
THL Credit, Inc. 5.2
CYS Investments, Inc. 4.8
Medley Capital Corp. 4.5
Solar Capital Ltd. 4.1
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Total 56.3%
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% OF TOTAL
INDUSTRY INVESTMENTS
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Capital Markets 84.9%
Real Estate Investment Trusts (REITs) 11.1
Diversified Financial Services 3.6
IT Services 0.4
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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 83.5%
Common Stocks 14.3
Master Limited Partnerships 2.2
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Total 100.0%
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(1) Most recent distribution paid or declared through 11/30/2014. 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 11/30/2014. 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: 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%).
One of these indicies was 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
Russell 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, 2014
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 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
investment opportunity derived from the private markets. As of November 30,
2014, the Fund had over 80% of its assets invested in 35 BDCs.
The Fund's fiscal year, which ended November 30, 2014, was a tumultuous one for
the BDC industry. The period began with volatility caused by rising interest
rates, but as the 2014 calendar year got underway, rates began to settle down
and decline. This set the stage for a good environment for BDCs and most stocks
performed reasonably well in the early part of 2014. However, conditions changed
dramatically when Standard & Poor's and Russell Investments, two important
equity index providers, decided to exclude BDCs from their benchmarks. The
decision ultimately led to a significant volume of BDC selling, particularly
from passive fund managers, which pressured BDC valuations lower. And although
the index revision was completed by the end of June, the residual effect
seemingly carried forward well into the latter part of the year.
How might the index exclusion continue to affect the BDC industry? In our
opinion, the BDC industry lost significant equity participation from passive
funds. Thus, as capital flows into the U.S. equity markets, BDCs will no longer
benefit from a pro rata participation from passive index fund managers.
Furthermore, active fund managers will have a greater disincentive to own BDCs,
which will not be part of their respective benchmarks. Altogether, this
indicates a narrower band of fund managers that may be invested in BDCs in the
near to intermediate timeframes.
On the other hand, the BDC industry continues to grow in both number and size.
Despite the headwinds from the index exclusion, the industry once again had a
year where more BDCs entered the public arena. Included in this list are
TriplePoint Venture Growth, TPG Specialty Lending, Alcentra Capital and FS
Investment. In addition, many existing BDCs were able to raise both equity and
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
ANNUAL REPORT
NOVEMBER 30, 2014
debt capital. Accordingly, the industry had a contraction in the depth of
potential shareholders, while at the same time expanding its size and scope.
This 'two steps up, one step back' kind of progress is part of the challenge of
investing in an industry that is still maturing and evolving. It can present
some attractive opportunities, but it also increases risk and volatility.
And if we dig a little more deeply into the industry, we can see the
up-and-back-down dynamic manifest itself in many other ways. For example, a
common criticism for the BDC industry is related to managerial fees charged to
shareholders. Base management fees are often considered too high, while
incentive fees are often collected even when performance is poor. Some BDCs that
have been around for a few years, including Ares, Golub and THL Credit, have fee
structures that help address the criticism. For a while, these companies were
exceptions to the industry standard. But over the past couple years, almost all
of the new BDC IPOs have improved fee structures. And one existing BDC, Horizon
Technology, amended its fee arrangement to better align its incentive fee with
shareholder returns. We believe this kind of change will help to advance the
industry in a positive manner. We are hopeful that other legacy BDCs recognize
the importance of the change and revisit their own managerial fee structures.
While the progress related to fees is positive, we continue to witness
counterproductive decisions related to capital management. Certain BDCs,
including Prospect Capital, Fifth Street and Full Circle, raised equity capital
over the last year that allowed managers to charge larger fees, while failing to
improve earnings, dividends or book value on a per share basis. And many other
BDCs raised equity with only nominal prospects of having it really benefit
shareholders. This kind of behavior diminishes the credibility of the industry
and perpetuates skepticism that BDC managers habitually line their own pockets,
regardless of whether shareholders benefit.
Against this backdrop, we believe it is prudent to focus on companies where
management teams have not only delivered solid investment performance, but have
also properly aligned their incentives with those of shareholders. This approach
creates a BDC portfolio allocation that differs significantly from a passive
index exposure. It is our belief that this profile creates a better return/risk
tradeoff, one that positions the Fund to pursue its income and capital
appreciation objectives as the BDC industry evolves.
As of the end of its fiscal year, the Fund had approximately 10% of its assets
invested in mortgage REITS, with an emphasis on Agency MBS exposure. And during
the period, this industry delivered a high level of returns, which included both
income and capital appreciation. Although we believe this allocation plays a
constructive role, we limit the Fund's allocation because the nature of the
income from this industry is highly variable.
The balance of the Fund was invested opportunistically in companies that may
contribute to income, or have the potential to help grow the Fund's net asset
value ("NAV").
PERFORMANCE ANALYSIS
TWELVE MONTHS
ENDED 11/30/14
FGB Market Value Total Return 14.00%
FGB NAV Total Return -2.44%
Blended Benchmark* 2.68%
* Components of the blended benchmark: Wells Fargo BDC Index (70%); FTSE/NAREIT
Mortgage REIT Index (20%); S&P SmallCap Financials Index (10%).
The Fund's market value total return1 of 14.00% was higher than the Fund's NAV
total return of -2.44% as the Fund's common share price relative to its NAV
changed from a discount to a premium. 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. In addition, the
Fund's allocation is usually different relative to the static weights of its
blended benchmark, which may also cause significant performance variations.
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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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
ANNUAL REPORT
NOVEMBER 30, 2014
During the year, a large majority of BDCs experienced declining valuations. But
despite the decline in stock prices, most BDCs were able to distribute
significant levels of income. This income was constructive in that it helped
moderate some of the increase in volatility. The Fund's own performance in many
ways reflected the trends of the BDC industry; its NAV declined as BDC
valuations fell, but its income was generally stable. This stable profile
allowed the Fund to increase its own distribution in August.
The allocation to MBS REITs was very constructive through the year. Income
distributions remained at high levels and valuations began to improve, resulting
in unusually high returns from some of the Fund's positions. We believe MBS
REITs provided a complementary allocation to BDCs and helped to position the
Fund to pursue both income and capital appreciation objectives.
The Fund uses leverage because we believe that, over time, leverage provides
opportunities for additional income and total return for common shareholders.
However, the use of leverage can also expose common shareholders to additional
volatility. For example, if the prices of securities held by the Fund decline,
the negative impact of valuation changes on Common Share NAV and common
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. During the fiscal year ended November 30,
2014, leverage had a negative impact on the Fund's capital appreciation, but a
positive impact on income. The blended index does not utilize leverage.
OUTLOOK
We've noted that the BDC industry is growing and moving forward with many
positive changes. But progress seldom takes place in a single direction, and the
BDC industry's evolution certainly confirms this dynamic. The index exclusion
was a step back, while inequitable management fees and capital mismanagement
continue as ongoing challenges that offset some of the improvements provided by
some newer BDCs.
Unfortunately, this year's steps backward outnumbered the steps forward,
resulting in a general decline in valuations. But because BDC fundamentals
remain in good condition, we believe many companies are positioned to continue
distributing a significant amount of income through dividends. Furthermore, we
believe the industry is likely to resume a positive trend in its evolution,
particularly as well-run companies distance themselves from the poor performers.
It is for this reason the Fund's BDC allocation is oriented toward high-quality
BDCs.
We continue to believe BDCs provide a unique way for investors to participate in
opportunities derived from the private debt and equity markets. Although
publicly traded BDCs may perform like the broader equity market over shorter
timeframes, the private market return/risk profile is often quite differentiated
relative to the public markets for long-term, patient investors. Therefore, we
believe a BDC exposure can play a constructive role as part of a diversified
portfolio, particularly where income is an objective.
Page 5
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2014
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 101.3%
CAPITAL MARKETS - 99.2%
204,200 American Capital Ltd. (a)........................................................ $ 3,060,958
10,000 American Capital Senior Floating Ltd............................................. 133,900
462,408 Apollo Investment Corp. (b)...................................................... 3,810,242
755,971 Ares Capital Corp. (b)........................................................... 12,435,723
91,900 BlackRock Kelso Capital Corp..................................................... 825,262
72,057 CM Finance, Inc.................................................................. 914,403
44,000 FS Investment Corp. (b).......................................................... 458,040
200,000 Gladstone Capital Corp........................................................... 1,848,000
183,333 Gladstone Investment Corp. (b)................................................... 1,351,164
512,017 Golub Capital BDC, Inc. (b)...................................................... 9,093,422
8,699 Harvest Capital Credit Corp...................................................... 107,868
463,198 Hercules Technology Growth Capital, Inc. (b)..................................... 7,290,737
210,161 Horizon Technology Finance Corp. (b)............................................. 2,952,762
340,472 KCAP Financial, Inc. (b)......................................................... 2,669,300
38,798 Main Street Capital Corp. (b).................................................... 1,259,771
93,086 MCG Capital Corp................................................................. 339,764
250,353 Medallion Financial Corp. (b).................................................... 2,501,026
545,561 Medley Capital Corp. (b)......................................................... 6,088,461
16,000 Monroe Capital Corp.............................................................. 231,360
200,496 MVC Capital, Inc. (b)............................................................ 2,215,481
473,664 New Mountain Finance Corp. (b)................................................... 7,147,590
142,084 OFS Capital Corp. (b)............................................................ 1,740,529
146,012 PennantPark Floating Rate Capital Ltd. (b)....................................... 2,071,910
667,112 PennantPark Investment Corp. (b)................................................. 7,398,272
14,936 Saratoga Investment Corp......................................................... 225,534
295,709 Solar Capital Ltd. (b)........................................................... 5,435,131
53,031 Solar Senior Capital Ltd. (b).................................................... 811,374
142,062 Stellus Capital Investment Corp. (b)............................................. 1,946,249
422,728 TCP Capital Corp. (b)............................................................ 7,211,740
521,618 THL Credit, Inc. (b)............................................................. 6,968,817
104,903 TICC Capital Corp................................................................ 911,607
245,548 Triangle Capital Corp. (b)....................................................... 5,271,916
188,752 TriplePoint Venture Growth BDC Corp. (b)......................................... 2,731,241
--------------
109,459,554
--------------
DIVERSIFIED FINANCIAL SERVICES - 1.6%
99,063 TPG Specialty Lending, Inc. (b).................................................. 1,768,275
--------------
IT SERVICES - 0.5%
40,000 Newtek Business Services Corp. (a)............................................... 571,200
--------------
TOTAL COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES............................. 111,799,029
(Cost $109,831,112) --------------
Page 6 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2014
SHARES/
UNITS DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
COMMON STOCKS - 17.3%
CAPITAL MARKETS - 1.3%
73,767 Safeguard Scientifics, Inc. (a).................................................. $ 1,433,293
--------------
REAL ESTATE INVESTMENT TRUSTS - 13.5%
367,500 Annaly Capital Management, Inc. (b).............................................. 4,233,600
20,000 Ares Commercial Real Estate Corp................................................. 239,000
20,000 Capstead Mortgage Corp........................................................... 260,200
696,880 CYS Investments, Inc. (b)........................................................ 6,432,202
194,282 Hatteras Financial Corp. (b)..................................................... 3,722,443
--------------
14,887,445
--------------
REGULATED INVESTMENT COMPANY - 2.5%
122,000 Stonecastle Financial Corp. (b).................................................. 2,775,500
--------------
TOTAL COMMON STOCKS.............................................................. 19,096,238
--------------
(Cost 22,908,004)
MASTER LIMITED PARTNERSHIPS - 2.7%
DIVERSIFIED FINANCIAL SERVICES - 2.7%
171,200 Compass Diversified Holdings (b)................................................. 2,970,320
--------------
TOTAL MASTER LIMITED PARTNERSHIPS................................................ 2,970,320
(Cost $453,611) --------------
TOTAL INVESTMENTS - 121.3%....................................................... 133,865,587
(Cost $133,192,727) (c)
OUTSTANDING LOAN - (22.7%)....................................................... (25,000,000)
NET OTHER ASSETS AND LIABILITIES - 1.4%.......................................... 1,529,154
--------------
NET ASSETS - 100.0%.............................................................. $ 110,394,741
==============
(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 is $136,589,898. As of
November 30, 2014, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$13,398,832 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$16,123,143.
See Notes to Financial Statements Page 7
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2014
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of November 30,
2014 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 11/30/2014 PRICES INPUTS INPUT
----------------------------------------------------- ------------ ------------ ------------ ------------
Common Stocks - Business Development Companies*...... $111,799,029 $111,799,029 $ -- $ --
Common Stocks*....................................... 19,096,238 19,096,238 -- --
Master Limited Partnerships*......................... 2,970,320 2,970,320 -- --
------------ ------------ ------------ ------------
Total Investments.................................... $133,865,587 $133,865,587 $ -- $ --
============ ============ ============ ============
* See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at November 30, 2014.
Page 8 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2014
ASSETS:
Investments, at value
(Cost $133,192,727)........................................................................ $ 133,865,587
Cash........................................................................................... 3,727,537
Foreign currency (Cost $26).................................................................... 22
Receivables:
Investment securities sold................................................................. 401,735
Dividends.................................................................................. 339,670
Interest................................................................................... 24
Prepaid expenses............................................................................... 4,145
--------------
Total Assets............................................................................ 138,338,720
--------------
LIABILITIES:
Outstanding loan............................................................................... 25,000,000
Payables:
Distributions payable...................................................................... 2,465,873
Securities purchased payable............................................................... 255,750
Investment advisory fees................................................................... 112,423
Audit and tax fees......................................................................... 47,200
Administrative fees........................................................................ 21,360
Printing fees.............................................................................. 18,964
Custodian fees............................................................................. 5,957
Transfer agent fees........................................................................ 5,478
Legal fees................................................................................. 3,693
Interest and fees on loan.................................................................. 2,957
Trustees' fees and expenses................................................................ 2,951
Financial reporting fees................................................................... 771
Other liabilities.............................................................................. 602
--------------
Total Liabilities....................................................................... 27,943,979
--------------
NET ASSETS..................................................................................... $ 110,394,741
==============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 265,907,984
Par value...................................................................................... 142,950
Accumulated net investment income (loss)....................................................... (3,486,515)
Accumulated net realized gain (loss) on investments............................................ (152,842,534)
Net unrealized appreciation (depreciation) on investments and
foreign currency translation............................................................... 672,856
--------------
NET ASSETS..................................................................................... $ 110,394,741
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 7.72
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 14,294,917
==============
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, 2014
INVESTMENT INCOME:
Dividends ..................................................................................... $ 11,289,646
Interest....................................................................................... 191
Other.......................................................................................... 20,139
--------------
Total investment income..................................................................... 11,309,976
--------------
EXPENSES:
Investment advisory fees....................................................................... 1,414,557
Interest and fees on loan...................................................................... 216,832
Administrative fees............................................................................ 127,603
Printing fees.................................................................................. 61,417
Audit and tax fees............................................................................. 47,779
Transfer agent fees............................................................................ 34,406
Custodian fees................................................................................. 17,805
Trustees' fees and expenses.................................................................... 17,490
Financial reporting fees....................................................................... 9,250
Legal fees..................................................................................... 8,144
Other.......................................................................................... 37,311
--------------
Total expenses.............................................................................. 1,992,594
--------------
NET INVESTMENT INCOME (LOSS)................................................................... 9,317,382
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments........................................................ (6,664,362)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. (5,583,754)
Foreign currency transactions............................................................... (3)
--------------
Net change in unrealized appreciation (depreciation)........................................... (5,583,757)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (12,248,119)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ (2,930,737)
==============
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
11/30/2014 11/30/2013
------------ ------------
OPERATIONS:
Net investment income (loss)........................................................ $ 9,317,382 $ 8,917,137
Net realized gain (loss)............................................................ (6,664,362) 473,424
Net change in unrealized appreciation (depreciation)................................ (5,583,757) 11,028,361
------------ ------------
Net increase (decrease) in net assets resulting from operations..................... (2,930,737) 20,418,922
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (9,432,994) (9,571,582)
Return of capital................................................................... (356,935) --
------------ ------------
Total distributions to shareholders................................................. (9,789,929) (9,571,582)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested.............................................. 34,287 100,813
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions........... 34,287 100,813
------------ ------------
Total increase (decrease) in net assets............................................. (12,686,379) 10,948,153
NET ASSETS:
Beginning of period................................................................. 123,081,120 112,132,967
------------ ------------
End of period....................................................................... $110,394,741 $123,081,120
------------ ------------
Accumulated net investment income (loss) at end of period........................... $ (3,486,515) $ (3,165,620)
------------ ------------
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period................................................ 14,290,840 14,278,252
Common Shares issued as reinvestment under the Dividend Reinvestment Plan........... 4,077 12,588
------------ ------------
Common Shares at end of period...................................................... 14,294,917 14,290,840
============ ============
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, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations .......... $ (2,930,737)
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by operating activities:
Purchases of investments............................................. (18,981,424)
Sales, maturities and paydowns of investments........................ 19,613,661
Return of capital received from investments in MLPs.................. 273,751
Net realized gain/loss on investments................................ 6,664,362
Net change in unrealized appreciation/depreciation on investments.... 5,583,754
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable...................................... (24)
Increase in dividends receivable..................................... (34,824)
Decrease in prepaid expenses......................................... 747
Increase in interest and fees on loan payable........................ 557
Decrease in investment advisory fees payable......................... (7,084)
Decrease in legal fees payable....................................... (1,224)
Increase in printing fees payable.................................... 70
Increase in administrative fees payable.............................. 10,057
Decrease in custodian fees payable................................... (5,504)
Increase in transfer agent fees payable.............................. 2,580
Decrease in Trustees' fees and expenses payable...................... (636)
Increase in other liabilities payable................................ 286
---------------
CASH PROVIDED BY OPERATING ACTIVITIES..................................... $ 10,188,368
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income...... (9,362,277)
Distributions to Common Shareholders from return of capital.......... (356,935)
---------------
CASH USED IN FINANCING ACTIVITIES......................................... (9,719,212)
---------------
Increase in cash and foreign currency (a)................................. 469,156
Cash and foreign currency at beginning of period.......................... 3,258,403
---------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD................................ $ 3,727,559
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees......................... $ 216,275
===============
NON-CASH FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested.................................... $ 34,287
===============
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(3).
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
11/30/2014 11/30/2013 11/30/2012 11/30/2011 11/30/2010
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period ........... $ 8.61 $ 7.85 $ 6.98 $ 7.69 $ 5.98
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.65 0.62 0.59 0.66 0.56
Net realized and unrealized gain (loss) ........ (0.85) 0.81 0.93 (0.74) 1.76
---------- ---------- ---------- ---------- ----------
Total from investment operations ............... (0.20) 1.43 1.52 (0.08) 2.32
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.66) (0.67) (0.65) (0.63) (0.59)
Return of capital .............................. (0.03) -- (0.00) (a) (0.00) (a) (0.02)
---------- ---------- ---------- ---------- ----------
Total distributions to Common Shareholders ..... (0.69) (0.67) (0.65) (0.63) (0.61)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period ................. $ 7.72 $ 8.61 $ 7.85 $ 6.98 $ 7.69
========== ========== ========== ========== ==========
Market value, end of period .................... $ 8.58 $ 8.19 $ 8.07 $ 6.20 $ 7.50
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (b) ...... (2.44)% 18.91% 22.48% (1.01)% 40.04%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (b) ......... 14.00% 10.03% 41.76% (9.84)% 50.41%
========== ========== ========== ========== ==========
--------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 110,395 $ 123,081 $ 112,133 $ 99,697 $ 109,861
Ratio of total expenses to average net assets... 1.71% 1.73% 1.83% 1.85% 1.83%
Ratio of total expenses to average net assets
excluding interest expense ................... 1.52% 1.50% 1.55% 1.58% 1.58%
Ratio of net investment income (loss) to average
net assets ................................... 8.00% 7.51% 7.81% 8.32% 7.93%
Portfolio turnover rate ........................ 14% 13% 18% 11% 24%
INDEBTEDNESS:
Total loan outstanding (in 000's) .............. $ 25,000 $ 25,000 $ 23,000 $ 20,000 $ 18,000
Asset coverage per $1,000 of indebtedness (c)... $ 5,416 $ 5,923 $ 5,875 $ 5,985 $ 7,103
-----------------------------
(a) Amount represents less than $0.01 per share.
(b) 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.
(c) 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.
See Notes to Financial Statements Page 13
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2014
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 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. 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. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e. a regulated market) and are primarily obtained from third party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third party pricing service, or are
determined by the Pricing Committee of the Fund's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
Common stocks, master limited partnerships ("MLPs") and other equity
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 fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended, for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value). As a general
principle, the current fair value of a security would appear to be the amount
which the 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;
Page 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2014
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
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, 2014, 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, 2014, distributions
of $273,751 received from MLPs have been reclassified as return of capital. The
cost basis of applicable MLPs has been reduced accordingly.
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.
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2014
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.
Permanent differences incurred during the fiscal year ended November 30, 2014,
primarily as a result of the prior year tax character of REIT and BDC
distributions, have been reclassified at year end to reflect a decrease in
accumulated net investment income (loss) by $205,283, an increase in accumulated
net realized gain (loss) on investments by $182,019 and an increase to
paid-in-capital of $23,264.
The tax character of distributions paid during the fiscal years ended November
30, 2014 and 2013 was as follows:
2014 2013
Distributions paid from:
Ordinary income............................... $ 9,396,564 $ 9,571,582
Return of capital............................. 356,935 --
As of November 30, 2014 the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................. $ --
Undistributed capital gains................... --
-------------
Total undistributed earnings.................. --
Accumulated capital and other losses.......... (150,466,005)
Net unrealized appreciation (depreciation).... (2,724,315)
-------------
Total accumulated earnings (losses)........... (153,190,320)
Other......................................... (2,465,873)
Paid-in capital............................... 266,050,934
-------------
Net assets.................................... $ 110,394,741
=============
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. At November 30, 2014, the Fund had capital loss carryforwards
for federal income tax purposes of $149,316,975, 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 5,746,784
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, 2014, the Fund
incurred and elected to defer capital losses of $1,149,030.
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.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2014
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 2011, 2012,
2013 and 2014 remain open to federal and state audit. As of November 30, 2014,
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.
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 that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Fund 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, 2014, were $19,237,174 and
$18,980,335, respectively.
5. CREDIT AGREEMENT
The Fund has 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 day's prior notice. 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, 2014 was
$25,000,000, with a weighted average interest rate of 0.86%. As of November 30,
2014, 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, 2014 were
0.87% and 0.85%, respectively, and the interest rate at November 30, 2014 was
0.86%.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
Page 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, 2014
7. FINANCIAL SECTOR CONCENTRATION RISK
Under normal market conditions, the Fund will invest at least 80% of its Managed
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, other than the following:
The Fund intends to offer and sell Common Shares from time to time through an
agent for the offer and sale of Common Shares. Sales of Common Shares pursuant
to this authorization may be made in negotiated transactions or transactions
that are deemed to be "at the market" as defined in Rule 415 under the
Securities Act of 1933, as amended, including sales made directly on the NYSE or
sales made through a market maker other than on an exchange, at an offering
price equal to or in excess of the net asset value per share of the Fund's
Common Shares at the time such Common Shares are initially sold. A registration
statement has been filed with the Securities and Exchange Commission and the
sale of the Common Shares is expected to commence during the first quarter of
2015. The Fund intends to use the net proceeds from the sale of the Common
Shares in accordance with its investment objectives and policies.
Page 18
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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, 2014, 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 periods presented. 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, 2014 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 the
First Trust Specialty Finance and Financial Opportunities Fund as of November
30, 2014, 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 periods presented, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
January 22, 2015
Page 19
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ADDITIONAL INFORMATION
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2014 (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, 2014 (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.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 28, 2014, 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, First Trust High Income Long/Short Fund, First Trust
MLP and Energy Income Fund, and First Trust Intermediate Duration Preferred &
Income Fund was held on April 23, 2014 (the "Annual Meeting"). At the Annual
Meeting, Trustee Robert F. Keith was elected by the Common Shareholders of the
First Trust Specialty Finance and Financial Opportunities Fund as Class I
Trustee for a three-year term expiring at the Fund's annual meeting of
shareholders in 2017. The number of votes cast in favor of Mr. Keith was
12,378,528, the number of votes against was 289,771 and the number of broker
non-votes was 1,622,541. Richard E. Erickson, Thomas R. Kadlec, Niel B. Nielson,
and James A. Bowen are the other current and continuing Trustees.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended November 30, 2014, none qualified for the
corporate dividends received deduction available to corporate shareholders.
None of the ordinary income distributions for the year ended November 30, 2014,
are designated as qualified dividend income.
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 economic
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2014 (UNAUDITED)
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 managed 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 8-9, 2014. 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
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2014 (UNAUDITED)
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the 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 2013.
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 31, 2014 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, 2014 (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, 2013,
as set forth in the materials provided to the Board. 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.
Page 24
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2014 (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; 114 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 114 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., ADM
Suite 400 Inception Inc. (Futures Commission Merchant) Investor Services
Wheaton, IL 60187 International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 114 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since Fund Consulting) Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 114 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Harapan Educational Foundation (Educational Transport, Inc.
Suite 400 Inception Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 2014) Servant Interactive LLC (Education
Products and Services); President and Chief
Executive Officer (June 2012 to September
2014), Dew Learning LLC (Educational
Products and Services); President (June 2002
to June 2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee and o Three-Year Term Chief Executive Officer (December 2010 114
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, 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. Robert F. Keith, as a Class I Trustee, is serving as a
Trustee until the Fund's 2017 annual meeting of shareholders.
Page 25
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2014 (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 Present), First Trust
Suite 400 Officer o Since January 2012 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 (May 2007 to Present),
120 E. Liberty Drive, and Assistant Secretary First Trust Advisors L.P. and First Trust Portfolios
Suite 400 o Assistant Secretary L.P.
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, 2014 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and consider your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis, to collect certain anonymous
information when you visit our website. These companies may use non-personally
identifiable information during your visits to this and other websites in order
to provide advertisements about goods and services likely to be of greater
interest to you. These companies typically use a cookie, third party web beacon
or pixel tags, to collect this information. To learn more about this behavioral
advertising practice, you can visit www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, 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, 2013 and $42,000 for the fiscal
year ended November 30, 2014.
(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, 2013 and $0 for the
fiscal year ended November 30, 2014.
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, 2013 and $0 for
the fiscal year ended November 30, 2014.
(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, 2013 and $5,200 for the fiscal year ended
November 30, 2014. 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, 2013 and $0 for the
fiscal year ended November 30, 2014.
(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, 2013 and
$0 for the fiscal year ended November 30, 2014.
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, 2013 and $0 for the fiscal year ended November 30, 2014.
(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, 2013, were $5,200 for the registrant and $3,000 for the
registrant's investment adviser, and for the fiscal year ended November 30,
2014, were $5,200 for the registrant and $43,500 for the registrant's investment
adviser.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
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.
(b) Not applicable.
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, 2015
MARK A. KELLER, CFA - CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER Mr.
Keller has over 30 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, 2014
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: 2 $142m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Pooled Investment Vehicles: 0 $0 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Accounts: 7,315 $2,547m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
2. David Miyazaki Registered Investment Companies: 2 $142m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Pooled Investment Vehicles: 0 $0 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Accounts: 7,315 $2,5476m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
3. Daniel Winter Registered Investment Companies: 2 $142m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Pooled Investment Vehicles: 0 $0 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Accounts: 6,611 $2,364m 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, 2014
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, 2014
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, 2015
---------------------
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, 2015
---------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: January 22, 2015
---------------------
* Print the name and title of each signing officer under his or her signature.