UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-22039
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First Trust Specialty Finance and Financial Opportunities Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: November 30
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Date of reporting period: November 30, 2016
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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 & FINANCIAL
OPPORTUNITIES FUND (FGB)
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ANNUAL REPORT
FOR THE YEAR ENDED
NOVEMBER 30, 2016
CONFLUENCE INVESTMENT MANAGEMENT FIRST TRUST
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TABLE OF CONTENTS
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
ANNUAL REPORT
NOVEMBER 30, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 8
Statement of Operations..................................................... 9
Statements of Changes in Net Assets......................................... 10
Statement of Cash Flows..................................................... 11
Financial Highlights........................................................ 12
Notes to Financial Statements............................................... 13
Report of Independent Registered Public Accounting Firm..................... 18
Additional Information...................................................... 19
Board of Trustees and Officers.............................................. 24
Privacy Policy.............................................................. 26
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 material
risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
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 material 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, 2016
Dear Shareholders:
Thank you for your investment in First Trust Specialty Finance and Financial
Opportunities Fund.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended November 30, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close June
30, 2016 at a combined market capitalization of $62 trillion. As of November 30,
2016, the S&P 500(R) Index was up 8.49% calendar year-to-date, according to
Bloomberg. From November 30, 2015 through November 30, 2016, the S&P 500(R)
Index was also in positive territory at 8.06%. The last few months had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy.
On November 8, Donald J. Trump was elected to become the 45th president in our
country's history. While no one has a crystal ball and the ability to predict
how his presidency will shape the United States (and the world), there is no
doubt that Trump's populist message resonated for many Americans. Trump's
message of improving lives for the "average" American, while reducing the size
and scope of the federal government, also likely won him millions of votes. Many
of Trump's supporters believe that with his background in business, he will make
policy changes that will help grow the economy and continue to spur stock
markets. As with all change and a new administration, only time will tell.
The current bull market (measuring from March 9, 2009 through November 30, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach 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, 2016 (UNAUDITED)
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PERFORMANCE
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Symbol on New York Stock Exchange FGB
Common Share Price $7.00
Common Share Net Asset Value ("NAV") $6.82
Premium (Discount) to NAV 2.64%
Net Assets Applicable to Common Shares $97,753,342
Current Quarterly Distribution per Common Share (1) $0.1750
Current Annualized Distribution per Common Share $0.7000
Current Distribution Rate on Closing Common Share Price (2) 10.00%
Current Distribution Rate on NAV (2) 10.26%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
11/15 $6.17 $6.54
6.19 6.48
5.96 5.95
5.59 6.03
5.81 6.27
12/15 5.57 6.07
5.66 5.95
5.00 5.42
5.02 5.52
1/16 5.43 5.59
5.15 5.52
4.92 5.24
5.20 5.42
2/16 5.15 5.45
5.66 5.81
5.61 5.91
5.99 6.13
3/16 5.92 6.13
6.20 6.34
5.89 6.29
6.00 6.35
6.04 6.38
4/16 6.14 6.42
6.20 6.24
6.25 6.28
6.02 6.06
5/16 6.28 6.19
6.16 6.24
6.09 6.22
5.99 6.22
6/16 6.05 6.33
6.15 6.55
6.27 6.60
6.33 6.68
6.54 6.86
7/16 6.85 6.90
6.88 6.89
7.13 6.90
7.33 6.98
8/16 6.95 6.83
7.18 6.94
6.94 6.79
6.80 6.75
7.01 6.86
9/16 6.95 6.83
6.87 6.80
6.85 6.76
6.77 6.79
10/16 6.95 6.78
6.52 6.48
7.00 6.85
7.00 6.93
6.83 6.85
11/16 7.00 6.82
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PERFORMANCE
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Average Annual Total Return
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Inception
1 Year Ended 5 Years Ended (5/25/07)
11/30/2016 11/30/2016 to 11/30/2016
Fund Performance (3)
NAV 16.39% 9.17% -0.24%
Market Value 26.63% 12.37% -0.45%
Index Performance
Blended Index(4) 14.51% 11.08% 3.55%
MSCI U.S. Investable Market Financials Index 14.01% 15.71% -1.96%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Ares Capital Corp. 11.2%
Golub Capital BDC, Inc. 7.8
TCP Capital Corp. 6.8
New Mountain Finance Corp. 6.6
THL Credit, Inc. 6.3
Hercules Capital, Inc. 5.7
Solar Capital Ltd. 5.1
CYS Investments, Inc. 5.1
Triangle Capital Corp. 5.0
Triplepoint Venture Growth BDC Corp. 4.8
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Total 64.4%
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% OF TOTAL
INDUSTRY INVESTMENTS
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Capital Markets 89.2%
Mortgage Real Estate Investment Trusts (REITs) 9.4
Diversified Financial Services 1.4
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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 89.2%
Real Estate Investment Trusts 9.4
Master Limited Partnerships 1.4
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Total 100.0%
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(1) Most recent distribution paid or declared through 11/30/2016. 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 11/30/2016. 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 of
less than one year. Past performance is not indicative of future results.
(4) Blended index 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 index 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
index was changed. From 2007-2009, the blended index 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 index 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, 2016 (UNAUDITED)
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
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,
2016, the Fund had over 85% of its assets invested in 28 BDCs.
Over the course of the Fund's fiscal year, which ended November 30, 2016, the
BDC industry delivered solid returns through both income as well as capital
appreciation. The strong performance was a welcome turnaround for BDC investors.
In recent years, valuations were often pressured lower, in part from the
exclusion of BDCs from Russell and S&P equity indices in 2014, but also from a
widening of spreads in the high-yield bond market in 2015. Fortunately, BDC
fundamentals generally held up well during these challenges and as these
companies delivered attractive returns to shareholders in 2016, their valuations
began to improve.
Operating fundamentals were not the only drivers of valuation improvements. In
our annual report last year, we mentioned the emergence of activist investors,
who brought a message of the need to improve the fee arrangement between BDC
managers and shareholders. As long-time investors, we welcomed the dialogue. The
activists were not able to accomplish all their goals, but several BDCs did
adjust their fee structures in ways that should improve shareholder returns. A
more overt action involving activists was Ares Capital's announcement to acquire
American Capital, one of the oldest and largest BDCs in the industry. We believe
improving fee structures and the consolidation of BDCs with discounted
valuations are trends that can be additive to overall industry valuations.
As it is in every industry, some companies strayed from the broad trend. Several
BDCs lowered their dividends during the year. The reasons ranged from a high
level of credit losses, to unsustainably high payouts, to a general decline in
portfolio yield. The first two points reflect poor management, but the third
point is noteworthy. BDC managers do not control the general level of interest
rates, but they are affected by the fluctuations. Thus, when interest rates
decline and remain low, the income from a BDC loan portfolio will tend to
decline, all things held constant. In this situation, lowering the dividend may
be a more appropriate decision when compared to increasing portfolio risk, just
to maintain an existing level of income and dividend payments. Unfortunately,
most of the recent dividend cuts were a result of credit losses and
unsustainable payouts.
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, 2016 (UNAUDITED)
Although mortgage-backed securities real estate investment trusts ("MBS REITs")
remained a smaller allocation, they performed very well in the fiscal year. The
industry was able to navigate the tighter Fed policy and an increase in interest
rates, delivering significant income distributions in a low rate environment.
The industry did experience some consolidation as Hatteras Financial was
acquired by Annaly Capital. Both of these MBS REITs were held in the Fund.
PERFORMANCE ANALYSIS
12 MONTHS
TOTAL RETURN
ENDED 11/30/16
FGB Market Value 26.63%
FGB NAV 16.39%
Blended Index* 14.51%
* Components of the Blended Index: Wells Fargo BDC Index (70%); FTSE NAREIT
Mortgage REIT Index (20%); S&P SmallCap Financials Index (10%). Source:
Bloomberg.
The Fund's market value total return of 26.63% was higher than the Fund's net
asset value ("NAV") total return of 16.39%, as the Fund's common share price
relative to its NAV changed from a discount to a premium. The total return of
both the Fund and its NAV were higher than the blended benchmark. 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.
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 Common Share returns during periods when the prices of
securities held by the Fund generally are rising. For the 12-month period ended
November 30, 2016, leverage had a positive impact on the Fund's performance.
The Fund's top positions include BDCs we consider to have high quality
management teams. These managers have strong track records of performance. Their
returns are attractive, particularly when viewed through the risk they take, and
we believe their incentives are generally well-aligned with those of
shareholders. Many of these top positions performed well, providing both income
as well as capital appreciation during the Fund's fiscal year.
MBS REITs performed very well, providing attractive returns to the Fund. These
financial companies command high dividend yields and began the year with
discounted valuations. And similar to BDCs, as they delivered attractive returns
to shareholders through dividend distributions, their valuations improved. We
believe MBS REITs can continue to play a constructive role in the Fund, but we
limit the exposure because the variable nature of their income could potentially
create variability in the Fund's own income.
MARKET AND FUND OUTLOOK
BDCs continue to demonstrate both resilience and differentiated performance
relative to other companies in the financial sector. We witnessed the durability
of many BDCs during the financial crisis and since then BDCs have weathered the
sovereign debt crises in Europe, the downgrade of Treasuries, the collapse of
oil prices, the Brexit vote (where citizens in the UK voted to leave the
European Union) and changing political tides in the U.S. Through these
challenges, BDCs were able to execute their business and deliver returns from
middle market lending in the U.S. Their loan portfolios have provided a unique
return/risk profile, one characterized with a different default, yield and
return profile relative to what is available from the traditional fixed-income
markets. This performance has provided investors diversification to their
broader portfolios, alongside high levels of current income in a low interest
rate environment.
A common concern we often field from BDC investors is related to how BDCs may
perform in a rising interest rate environment. Our view is that it is important
with this question to also consider how and why rates may be changing. For
example, if rates rise because the economy and businesses are growing faster,
BDCs could actually benefit, as they may lend to healthier borrowers at
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, 2016 (UNAUDITED)
higher rates. On the other hand, if rates decline because of an economic
recession, BDCs may face rising defaults and lower rates for lending.
Accordingly, we believe the performance of BDCs in changing interest rates is
nuanced, and dependent upon many factors beyond just direction. As the industry
stands today, we believe gradually rising interest rates can be constructive for
BDCs. Many hold a meaningful proportion of loans that mature within a couple
years. If rates were to rise, these maturing loans could be reinvested at higher
rates. In addition, many BDCs have a significant allocation to floating-rate
loans, with coupons that can increase as short-term rates move higher.
As we look forward, we believe BDCs can continue to make important contributions
to investor portfolios. Activist investors have nudged several management teams
toward more equitable fee arrangements and we expect the focus on shareholders
to continue to grow. We also expect several new BDCs to enter the public arena
in coming quarters. If these BDCs emerge with a strong shareholder focus, we
believe the industry can grow not just bigger, but also better.
With regard to MBS REITs, we intend to maintain a limited allocation. Although
this industry performed very well over the past year, their valuations remain
relatively low and we expect business conditions to remain constructive for
these companies. Still, we continue to temper the exposure, in order to limit
the Fund's exposure to variable income distributions.
It is our pleasure to manage FGB. The Fund's unique focus on BDCs presents
shareholders an opportunity to invest in companies that are part of a growing
and evolving industry, one that a delivers a differentiated return profile from
the private debt and equity markets.
Page 5
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2016
SHARES/UNITS DESCRIPTION VALUE
------------ -------------------------------------------------------------------------------- --------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 111.0%
CAPITAL MARKETS - 111.0%
134,877 Alcentra Capital Corp. (a)...................................................... $ 1,580,758
551,102 Apollo Investment Corp. (a)..................................................... 3,394,788
847,412 Ares Capital Corp. (a).......................................................... 13,592,488
103,900 BlackRock Capital Investment Corp. (a).......................................... 769,899
15,000 Capitala Finance Corp........................................................... 186,750
120,340 CM Finance, Inc. (a)............................................................ 1,179,332
310,300 FS Investment Corp. (a)......................................................... 3,149,545
142,533 Gladstone Investment Corp....................................................... 1,160,219
53,063 Goldman Sachs BDC, Inc. (a)..................................................... 1,220,980
514,730 Golub Capital BDC, Inc. (a)..................................................... 9,496,769
16,699 Harvest Capital Credit Corp..................................................... 214,415
504,598 Hercules Capital, Inc. (a)...................................................... 6,892,809
340,472 KCAP Financial, Inc............................................................. 1,348,269
49,107 Main Street Capital Corp. (a)................................................... 1,788,477
83,353 Medallion Financial Corp........................................................ 271,731
586,714 Medley Capital Corp. (a)........................................................ 4,593,971
565,164 New Mountain Finance Corp. (a).................................................. 8,025,329
152,084 OFS Capital Corp. (a)........................................................... 1,948,196
82,645 PennantPark Floating Rate Capital Ltd. (a)...................................... 1,144,633
745,081 PennantPark Investment Corp. (a)................................................ 5,543,403
307,809 Solar Capital Ltd. (a).......................................................... 6,233,132
25,000 Solar Senior Capital Ltd........................................................ 413,250
233,313 Stellus Capital Investment Corp. (a)............................................ 2,769,425
491,863 TCP Capital Corp. (a)........................................................... 8,307,566
737,618 THL Credit, Inc. (a)............................................................ 7,604,842
206,751 TPG Specialty Lending, Inc. (a)................................................. 3,789,746
316,594 Triangle Capital Corp. (a)...................................................... 6,050,111
473,845 TriplePoint Venture Growth BDC Corp. (a)........................................ 5,837,770
TOTAL COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES............................ 108,508,603
(Cost $112,225,002)
REAL ESTATE INVESTMENT TRUSTS - 11.8%
MORTGAGE REAL ESTATE INVESTMENT TRUSTS - 11.8%
407,782 Annaly Capital Management, Inc. (a)............................................. 4,167,532
108,500 Capstead Mortgage Corp. (a)..................................................... 1,121,890
771,880 CYS Investments, Inc. (a)....................................................... 6,205,915
TOTAL REAL ESTATE INVESTMENT TRUSTS............................................. 11,495,337
(Cost $16,008,080)
MASTER LIMITED PARTNERSHIPS - 1.7%
DIVERSIFIED FINANCIAL SERVICES - 1.7%
88,200 Compass Diversified Holdings.................................................... 1,662,570
(Cost $177,147)
TOTAL INVESTMENTS - 124.5%...................................................... 121,666,510
(Cost $128,410,229) (b)
OUTSTANDING LOAN - (25.6%)...................................................... (25,000,000)
NET OTHER ASSETS AND LIABILITIES - 1.1%......................................... 1,086,832
NET ASSETS - 100.0%............................................................. $ 97,753,342
Page 6 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2016
-----------------------------
(a) All or a portion of this security serves as collateral on the outstanding
loan.
(b) Aggregate cost for financial reporting purposes is $131,579,002. As of
November 30, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$8,331,607 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$18,244,099.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of November 30,
2016 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
11/30/2016 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Common Stocks - Business Development Companies*........ $108,508,603 $108,508,603 $ -- $ --
Real Estate Investment Trusts*......................... 11,495,337 11,495,337 -- --
Master Limited Partnerships*........................... 1,662,570 1,662,570 -- --
------------ ------------ ------------ ------------
Total Investments...................................... $121,666,510 $121,666,510 $ -- $ --
============ ============ ============ ============
* 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, 2016.
See Notes to Financial Statements Page 7
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2016
ASSETS:
Investments, at value
(Cost $128,410,229)........................................................................ $ 121,666,510
Cash........................................................................................... 3,582,342
Foreign currency (Cost $26).................................................................... 19
Receivables:
Dividends.................................................................................. 350,137
Prepaid expenses............................................................................... 2,512
--------------
Total Assets............................................................................... 125,601,520
--------------
LIABILITIES:
Outstanding loan............................................................................... 25,000,000
Payables:
Distributions payable...................................................................... 2,507,710
Investment securities purchased............................................................ 113,482
Investment advisory fees................................................................... 99,540
Audit and tax fees......................................................................... 48,390
Interest and fees on loan.................................................................. 29,710
Printing fees.............................................................................. 19,544
Custodian fees............................................................................. 7,491
Transfer agent fees........................................................................ 5,328
Administrative fees........................................................................ 4,712
Trustees' fees and expenses................................................................ 2,885
Legal fees................................................................................. 1,616
Financial reporting fees................................................................... 771
Other liabilities.............................................................................. 6,999
--------------
Total Liabilities.......................................................................... 27,848,178
--------------
NET ASSETS..................................................................................... $ 97,753,342
==============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 196,983,149
Par value...................................................................................... 143,298
Accumulated net investment income (loss)....................................................... (3,245,648)
Accumulated net realized gain (loss) on investments............................................ (89,383,731)
Net unrealized appreciation (depreciation) on investments and foreign currency translation..... (6,743,726)
--------------
NET ASSETS..................................................................................... $ 97,753,342
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 6.82
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 14,329,772
==============
Page 8 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2016
INVESTMENT INCOME:
Dividends ..................................................................................... $ 11,151,558
Interest....................................................................................... 227
--------------
Total investment income..................................................................... 11,151,785
--------------
EXPENSES:
Investment advisory fees....................................................................... 1,157,648
Interest and fees on loan...................................................................... 298,845
Printing fees.................................................................................. 52,294
Administrative fees............................................................................ 50,752
Audit and tax fees............................................................................. 49,580
Transfer agent fees............................................................................ 34,226
Custodian fees................................................................................. 17,750
Trustees' fees and expenses.................................................................... 17,479
Financial reporting fees....................................................................... 9,250
Legal fees..................................................................................... 4,446
At the market offering costs (a)............................................................... (34,747)
Other.......................................................................................... 36,800
--------------
Total expenses.............................................................................. 1,694,323
--------------
NET INVESTMENT INCOME (LOSS)................................................................... 9,457,462
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments........................................................ (1,192,427)
Net change in unrealized appreciation (depreciation) on investments and foreign
currency translation........................................................................ 5,801,458
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 4,609,031
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 14,066,493
==============
-----------------------------
(a) See Note 6 in the Notes to Financial Statements.
See Notes to Financial Statements Page 9
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
11/30/2016 11/30/2015
------------ ------------
OPERATIONS:
Net investment income (loss)........................................................ $ 9,457,462 $ 9,190,935
Net realized gain (loss)............................................................ (1,192,427) (2,962,120)
Net increase from payment by the sub-advisor........................................ -- 15
Net change in unrealized appreciation (depreciation)................................ 5,801,458 (13,218,040)
------------ ------------
Net increase (decrease) in net assets resulting from operations..................... 14,066,493 (6,989,210)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (9,412,940) (9,481,362)
Return of capital................................................................... (614,219) (468,182)
------------ ------------
Total distributions to shareholders................................................. (10,027,159) (9,949,544)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares sold through at the market offerings.................... -- 125,208
Proceeds from Common Shares reinvested.............................................. 55,487 77,326
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions........... 55,487 202,534
------------ ------------
Total increase (decrease) in net assets............................................. 4,094,821 (16,736,220)
NET ASSETS:
Beginning of period................................................................. 93,658,521 110,394,741
------------ ------------
End of period....................................................................... $ 97,753,342 $ 93,658,521
============ ============
Accumulated net investment income (loss) at end of period........................... $ (3,245,648) $ (3,493,234)
============ ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period................................................ 14,321,269 14,294,917
Common Shares sold through at the market offerings.................................. -- 16,400
Common Shares issued as reinvestment under the Dividend Reinvestment Plan........... 8,503 9,952
------------ ------------
Common Shares at end of period...................................................... 14,329,772 14,321,269
============ ============
Page 10 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ................... $ 14,066,493
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by operating activities:
Purchases of investments...................................................... (15,590,062)
Sales, maturities and paydowns of investments................................. 15,310,484
Return of capital and realized gain distributions received from investments... 1,161,900
Net realized gain/loss on investments......................................... 1,192,427
Net change in unrealized appreciation/depreciation on investments............. (5,801,458)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in dividends receivable.............................................. 17,322
Decrease in prepaid expenses.................................................. 31,130
Increase in interest and fees on loan payable................................. 29,710
Increase in investment advisory fees payable.................................. 3,663
Increase in audit and tax fees payable........................................ 1,190
Increase in legal fees payable................................................ 234
Increase in printing fees payable............................................. 478
Increase in administrative fees payable....................................... 53
Increase in custodian fees payable............................................ 4,308
Increase in transfer agent fees payable....................................... 2,566
Increase in Trustees' fees and expenses payable............................... 40
Increase in other liabilities payable......................................... 6,999
Decrease in offering cost payable............................................. (63,461)
---------------
CASH PROVIDED BY OPERATING ACTIVITIES.............................................. $ 10,374,016
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested........................................ 55,487
Distributions to Common Shareholders from net investment income............... (9,411,452)
Distributions to Common Shareholders from return of capital................... (614,219)
---------------
CASH USED IN FINANCING ACTIVITIES.................................................. (9,970,184)
---------------
Increase in cash................................................................... 403,832
Cash and foreign currency at beginning of period................................... 3,178,529
---------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD......................................... $ 3,582,361
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees.................................. $ 269,135
===============
See Notes to Financial Statements Page 11
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------
2016 2015 2014 2013 2012
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period............. $ 6.54 $ 7.72 $ 8.61 $ 7.85 $ 6.98
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)..................... 0.66 0.64 0.65 0.62 0.59
Net realized and unrealized gain (loss).......... 0.32 (1.12) (a) (0.85) 0.81 0.93
---------- ---------- ---------- ---------- ----------
Total from investment operations................. 0.98 (0.48) (0.20) 1.43 1.52
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income............................ (0.66) (0.67) (0.66) (0.67) (0.65)
Return of capital................................ (0.04) (0.03) (0.03) -- (0.00) (b)
---------- ---------- ---------- ---------- ----------
Total distributions to Common Shareholders....... (0.70) (0.70) (0.69) (0.67) (0.65)
---------- ---------- ---------- ---------- ----------
Premium from shares sold in at the
market offering................................ -- 0.00 (b) -- -- --
========== ========== ========== ========== ==========
Net asset value, end of period................... $ 6.82 $ 6.54 $ 7.72 $ 8.61 $ 7.85
========== ========== ========== ========== ==========
Market value, end of period...................... $ 7.00 $ 6.17 $ 8.58 $ 8.19 $ 8.07
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (c)........ 16.39% (6.25)% (a) (2.44)% 18.91% 22.48%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (c)........... 26.63% (20.42)% 14.00% 10.03% 41.76%
========== ========== ========== ========== ==========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).............. $ 97,753 $ 93,659 $ 110,395 $ 123,081 $ 112,133
Ratio of total expenses to average net assets..... 1.87% 1.85% 1.71% 1.73% 1.83%
Ratio of total expenses to average net assets
excluding interest expense...................... 1.54% 1.63% 1.52% 1.50% 1.55%
Ratio of net investment income (loss) to average
net assets...................................... 10.42% 9.14% 8.00% 7.51% 7.81%
Portfolio turnover rate........................... 13% 10% 14% 13% 18%
INDEBTEDNESS:
Total loan outstanding (in 000's)................. $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 23,000
Asset coverage per $1,000 of indebtedness (d)..... $ 4,910 $ 4,746 $ 5,416 $ 5,923 $ 5,875
-----------------------------
(a) The Fund received a reimbursement from the Sub-Advisor in the amount of
$15 in connection with a trade error, which represents less than $0.01 per
share. Since the Sub-Advisor reimbursed the Fund, there was no effect on
the total return.
(b) Amount represents less than $0.01 per share.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(d) 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.
Page 12 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016
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 (the "SEC") under the Investment Company Act
of 1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol
"FGB" on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks attractive total return as a secondary objective. Under
normal market conditions, the Fund invests at least 80% of its Managed Assets in
a portfolio of securities of specialty finance and other financial companies
that Confluence Investment Management LLC ("Confluence" or the "Sub-Advisor")
believes offer attractive opportunities for income and capital appreciation.
Under normal market conditions, the Fund concentrates its investments in
securities of companies within industries in the financial sector. "Managed
Assets" means the total asset value of the Fund minus the sum of the Fund's
liabilities other than the principal amount of borrowings. There can be no
assurance that the Fund will achieve its investment objectives. The Fund may not
be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services - Investment Companies."
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. Foreign securities are
priced using data reflecting the earlier closing of the principal markets for
those securities. The NAV per Common Share is calculated by dividing the value
of all assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses, dividends declared but unpaid, and any
borrowings of the Fund) by the total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale price 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, real estate investment trusts ("REITs"), master limited
partnerships ("MLPs") and other equity securities listed on any national
or foreign exchange (excluding the Nasdaq Stock Market LLC ("Nasdaq") and
the London Stock Exchange Alternative Investment Market ("AIM")) are
valued at the last sale price on the exchange on which they are
principally traded or, for Nasdaq and AIM securities, the official closing
price. Securities traded on 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 (the "1933 Act"), for which a third-party 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 third-party 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 13
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party 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 methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of November 30, 2016, 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
shares of exchange-traded funds ("ETFs"). The Fund records the character of
distributions received from the BDCs during the year based on estimates
available. The tax character of distributions received from these securities may
vary when reported by the issuer after their tax reporting periods conclude.
The Fund also holds shares of REITs. Distributions from such investments may be
comprised of return of capital, capital gains and income. The actual character
of amounts received during the year is not known until after the REIT's fiscal
year end. The Fund records the character of distributions received from 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.
For the year ended November 30, 2016, distributions of $1,161,900 received from
investments have been reclassified as return of capital and realized gain. The
cost basis of applicable investments 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 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016
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, 2016, primarily as a result
of the expiration of pre-enactment net capital loses, prior year tax character
of REIT and BDC distributions, have been reclassified at year end to reflect an
increase in accumulated net investment income (loss) by $203,064, an increase in
accumulated net realized gain (loss) on investments by $62,495,142 and a
decrease to paid-in-capital of $62,698,206.
The tax character of distributions paid during the fiscal years ended November
30, 2016 and 2015 was as follows:
Distributions paid from: 2016 2015
Ordinary income................................ $ 9,411,452 $ 9,441,013
Return of capital.............................. 614,219 468,182
As of November 30, 2016, 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........... (86,952,896)
Net unrealized appreciation (depreciation)..... (9,912,499)
-------------
Total accumulated earnings (losses)............ (96,865,395)
Other.......................................... (2,507,710)
Paid-in capital................................ 197,126,447
-------------
Net assets..................................... $ 97,753,342
=============
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 and 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, 2016, the Fund had capital loss carryforwards
for federal income tax purposes of $86,952,896, expiring as follows:
EXPIRATION DATE AMOUNT
November 30, 2017 $ 55,647,845
November 30, 2018 14,556,882
November 30, 2019 5,452,015
Non-expiring 11,296,154
At the taxable year ended November 30, 2016, $62,747,095 of the Fund's capital
loss carryforward expired.
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, 2016, the Fund
incurred no such net ordinary or capital losses.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2013, 2014,
2015 and 2016 remain open to federal and state audit. As of November 30, 2016,
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.
Page 15
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016
E. EXPENSES
The Fund will pay all expenses directly related to its operations.
F. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
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. During the year
ended November 30, 2015, the Fund received reimbursements from the Sub-Advisor
of $15 in connection with a trade error.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon
Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each Fund's 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.
Independent 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, 2016, were $15,682,965 and
$15,254,708, 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 days' prior notice. The interest rate under the BNP Facility
is equal to the 1-month LIBOR plus 70 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, 2016 was
$25,000,000, with a weighted average interest rate of 1.16%. As of November 30,
2016, 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, 2016 were
1.31% and 0.94%, respectively, and the interest rate at November 30, 2016 was
1.31%.
Page 16
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016
6. COMMON SHARE OFFERINGS
On February 23, 2015, the Fund and the Advisor entered into a sales agreement
with JonesTrading Institutional Services, LLC ("JonesTrading") whereby the Fund
may offer and sell up to 1,400,000 Common Shares from time to time through
JonesTrading as agent for the offer and sale of the Common Shares. Sales of
Common Shares pursuant to the sales agreement may be made in negotiated
transactions or transactions that are deemed to be "at the market" as defined in
Rule 415 under the 1933 Act, 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. The Fund intends to
use the net proceeds from the sale of the Common Shares in accordance with its
investment objectives and policies. Sales of Common Shares made under the sales
agreement will be made pursuant to a "shelf" registration statement on Form N-2
(the "Registration Statement") that will require the Fund to obtain
effectiveness from the SEC on an annual basis. The Registration Statement has
not been effective since August 2015, and therefore Common Shares have not been
offered under the sales agreement since that time. Any future sales of Common
Shares under the sales agreement will be made pursuant to an effective
Registration Statement. Transactions related to offerings under such sales
agreements are as follows:
NET PROCEEDS
COMMON NET NET ASSET RECEIVED IN
SHARES PROCEEDS VALUE OF EXCESS OF NET
SOLD RECEIVED SHARES SOLD ASSET VALUE
----------- ----------- ----------- -------------
Year ended 11/30/16 -- $ -- $ -- $ --
Year ended 11/30/15 16,400 125,208 124,110 1,098
Additionally, offering costs of $123,300 related to this offering were recorded
as a prepaid asset were being amortized to expense by the Fund on a straight
line basis over a one year period. During the year ended November 30, 2016, it
was determined that actual offering costs were less than the estimated offering
costs by $63,461. Therefore, offering costs were reduced by that amount in the
year ended November 30, 2016, as reflected in the "At the market offering costs"
line item on the Statement of Operations.
7. 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.
8. 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.
9. 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 was
the following subsequent event:
Effective December 7, 2016, the BNP Facility was amended and the interest rate
increased from 1-month LIBOR plus 70 basis points to 1-month LIBOR plus 100
basis points.
Page 17
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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, 2016, and the related
statements of operations and cash flows for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of November 30, 2016 by correspondence with the Fund's
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Specialty Finance and Financial Opportunities Fund, as of November 30,
2016, the results of its operations and its cash flows for the year then ended,
the changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
January 24, 2017
Page 18
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ADDITIONAL INFORMATION
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016 (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 19
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Qs
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.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust High Income Long/Short Fund, First Trust Energy Infrastructure
Fund, First Trust MLP and Energy Income Fund, First Trust Intermediate Duration
Preferred & Income Fund and First Trust New Opportunities MLP & Energy Fund was
held on April 22, 2016 (the "Annual Meeting"). At the Annual Meeting, James A.
Bowen and Niel B. Nielson were elected by the Common Shareholders of the First
Trust Specialty Finance and Financial Opportunities Fund as Class III Trustees
for a three-year term expiring at the Fund's annual meeting of shareholders in
2019. The number of votes cast in favor of Mr. Bowen was 12,286,519, the number
of votes against was 342,353 and the number of broker non-votes was 1,692,397.
The number of votes cast in favor of Mr. Nielson was 12,264,723, the number of
votes against was 364,149 and the number of broker non-votes was 1,692,397.
Richard E. Erickson, Thomas R. Kadlec and Robert F. Keith are the other current
and continuing Trustees.
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 26, 2016, 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.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended November 30, 2016, none qualified for the
corporate dividends received deduction available to corporate shareholders.
None of the ordinary income distributions for the year ended November 30, 2016,
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
Page 20
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016 (UNAUDITED)
Economic events affecting the issuers occur. When the advisor or sub-advisor
determines that it is temporarily unable to follow the fund's investment
strategy or that it is impractical to do so (such as when a market disruption
event has occurred and trading in the securities is extremely limited or
absent), the fund may take temporary defensive positions.
FINANCIAL SECTOR CONCENTRATION RISK: Under normal market conditions, the Fund
will invest at least 80% of its 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.
INCOME RISK: The income common shareholders receive from the Fund is based
primarily on the dividends and interest it earns from its investments, which can
vary widely over the short and long-term. If prevailing market interest rates
drop, distribution rates of the Fund's portfolio holdings of preferred
securities and debt securities may decline which then may adversely affect the
Fund's distributions on its common shares as well. The Fund's income also would
likely be adversely affected when prevailing short-term interest rates increase
and the Fund is utilizing leverage.
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.
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016 (UNAUDITED)
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, unanimously
approved the continuation of the Investment Management Agreement (the "Advisory
Agreement") between the Fund and First Trust Advisors L.P. (the "Advisor") and
the Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together
with the Advisory Agreement, the "Agreements") among the Fund, the Advisor and
Confluence Investment Management LLC (the "Sub-Advisor") for a one year period
ending June 30, 2017 at a meeting held on June 13, 2016. The Board determined
that the continuation of the Agreements is in the best interests of the Fund in
light of the extent and quality of the services provided and such other matters
as the Board considered to be relevant in the exercise of its reasonable
business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 22, 2016 and June 13, 2016, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor to the Fund (including the relevant
personnel responsible for these services and their experience); the advisory fee
rate payable by the Fund and the sub-advisory fees for the Fund as compared to
fees charged to a peer group of funds compiled by Management Practice, Inc.
("MPI"), an independent source (the "MPI Peer Group"), and as compared to fees
charged to other clients of the Advisor and the Sub-Advisor; expenses of the
Fund as compared to expense ratios of the funds in the MPI Peer Group;
performance information for the Fund; the nature of expenses incurred in
providing services to the Fund and the potential for economies of scale, if any;
financial data on the Advisor and the Sub-Advisor; any fall out benefits to the
Advisor and the Sub-Advisor; and information on the Advisor's and the
Sub-Advisor's compliance programs. The Board reviewed initial materials with the
Advisor at a special meeting held on April 22, 2016, prior to which the
Independent Trustees and their counsel met separately to discuss the information
provided by the Advisor and the Sub-Advisor. Following the April meeting,
independent legal counsel on behalf of the Independent Trustees requested
certain clarifications and supplements to the materials provided, and the
information provided in response to those requests was considered at an
executive session of the Independent Trustees and independent legal counsel held
prior to the June 13, 2016 meeting, as well as at the meeting held that day. 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 continue to be reasonable business arrangements from the Fund's
perspective as well as from the perspective of shareholders. The Board
determined that, given the totality of the information provided with respect to
the Agreements, the Board had received sufficient information to renew the
Agreements. The Board considered that shareholders chose to invest or remain
invested in the Fund knowing that the Advisor and the Sub-Advisor manage the
Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of the services provided by the Advisor and the Sub-Advisor under the
Agreements. With respect to the Advisory Agreement, the Board considered that
the Advisor is responsible for the overall management and administration of the
Fund and reviewed all of the services provided by the Advisor to the Fund,
including the oversight of the Sub-Advisor, as well as the background and
experience of the persons responsible for such services. In reviewing the
services provided, the Board noted the compliance program that had been
developed by the Advisor and considered that it includes a robust program for
monitoring the Advisor's, the Sub-Advisor's and the Fund's compliance with the
1940 Act, as well as the Fund's compliance with its investment objectives and
policies. In addition, as part of the Board's consideration of the Advisor's
services, the Advisor, in its written materials and at the April 22, 2016
meeting, described to the Board the scope of its ongoing investment in
additional infrastructure and personnel to maintain and improve the quality of
services provided to the Fund and the other funds in the First Trust Fund
Complex. With respect to the Sub-Advisory Agreement, in addition to the written
materials provided by the Sub-Advisor, at the June 13, 2016 meeting, the Board
also received a presentation from representatives of the Sub-Advisor, including
two of the portfolio managers, discussing the services that the Sub-Advisor
provides to the Fund and how the Sub-Advisor manages the Fund's investments. In
considering the Sub-Advisor's management of the Fund, the Board noted the
background and experience of the Sub-Advisor's portfolio management team. In
light of the information presented and the considerations made, the Board
concluded that the nature, extent and quality of the 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 fee rates payable under the
Agreements for the services provided. The Board noted that the sub-advisory fee
is paid by the Advisor from its advisory fee. The Board received and reviewed
information showing the advisory fee rates and expense ratios of the peer funds
in the MPI Peer Group, as well as advisory fee rates charged by the Advisor and
the Sub-Advisor to other fund and non-fund clients, as applicable. With respect
to the MPI Peer Group, the Board discussed with representatives of the Advisor
the limitations in creating a relevant peer group for the Fund, including that
(i) the Fund is unique in its composition, which makes assembling peers with
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016 (UNAUDITED)
similar strategies and asset mix difficult; (ii) peer funds may use different
amounts and types of leverage with different costs associated with them or may
use no leverage; (iii) none of the peer funds employs an advisor/sub-advisor
management structure with an unaffiliated sub-advisor; and (iv) most 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, and some peer
funds are part of a larger fund complex that may allow for additional economies
of scale. The Board took these limitations into account in considering the peer
data, and noted that the advisory fee rate payable by the Fund, based on average
net assets, was above the median of the MPI Peer Group (not all of which are
closed-end funds). With respect to fees charged to other clients, the Board
considered differences between the Fund and other clients that limited their
comparability. In considering the advisory fee rate overall, the Board also
considered the Advisor's statement that it seeks to meet investor needs through
innovative and value-added investment solutions and the Advisor's description of
its long-term commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor and Sub-Advisor for the Fund. The Board determined that this process
continues to be effective for reviewing the Fund's performance. The Board
received and reviewed information comparing the Fund's performance for periods
ended December 31, 2015 to the performance of the MPI Peer Group and to two
benchmark indexes, one of which was a blended benchmark index. In reviewing the
Fund's performance as compared to the performance of the MPI Peer Group, the
Board took into account the limitations described above with respect to creating
a relevant peer group for the Fund. Based on the information provided on net
asset value performance, the Board noted that the Fund underperformed the MPI
Peer Group average for the one-, three- and five-year periods ended December 31,
2015. The Board also noted that the Fund underperformed the benchmark indexes
for the same periods. In addition, the Board considered information provided by
the Advisor on the impact of leverage on the Fund's returns. The Board also
received information on the Fund's annual distribution rate as of December 31,
2015 and the Fund's average trading discount during 2015 and comparable
information for the peer group.
On the basis of all the information provided on the fees, expenses and
performance of the Fund and the ongoing oversight by the Board, the Board
concluded that the advisory and sub-advisory fees continue to be reasonable and
appropriate in light of the nature, extent and quality of the services provided
by the Advisor and the Sub-Advisor to the Fund under the Agreements.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. 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
considered the revenues and allocated costs (including the allocation
methodology) of the Advisor in serving as investment advisor to the Fund for the
twelve months ended December 31, 2015 and the estimated profitability level for
the Fund calculated by the Advisor based on such data, as well as complex-wide
and product-line profitability data for the same period. The Board noted the
inherent limitations in the profitability analysis, and concluded that, based on
the information provided, the Advisor's profitability level for the Fund was not
unreasonable. In addition, the Board considered fall-out benefits described by
the Advisor that may be realized from its relationship with the Fund, including
the Advisor's compensation for fund reporting services pursuant to a separate
Fund Reporting Services Agreement.
The Board considered 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
information 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. The Board considered fall-out
benefits that may be realized by the Sub-Advisor and one of its affiliates from
their relationship with the Fund, including that the Sub-Advisor may enter into
soft dollar and commission sharing arrangements, and considered a summary of
such arrangements. The Board noted the Sub-Advisor's statement that it benefits
from greater exposure to specialty finance companies.
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 23
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016 (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 PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND OF SERVICE (1) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 138 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 E. Liberty Drive, o Since Fund Limited Partnership; Member, Sportsmed
Suite 400 Inception LLC (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President, ADM Services, Inc. (Futures 138 Director of ADM
c/o First Trust Advisors L.P. Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President, Hibs Enterprises (Financial and 138 Director of Trust
c/o First Trust Advisors L.P. Management Consulting) Company of
120 E. Liberty Drive, o Since Fund 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 138 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 E. Liberty Drive, o Since Fund Harapan Educational Foundation (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(2), Trustee o Three Year Term Chief Executive Officer, First Trust 138 None
and Chairman of the Board Advisors L.P. and First Trust Portfolios
120 E. Liberty Drive, o Since Fund L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development Company)
Wheaton, IL 60187 and Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 Advisor)
-----------------------------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a Trustee
until the Fund's 2017 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as Trustees until
the Fund's 2018 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as Trustees until the Fund's
2019 annual meeting of shareholders.
(2) 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.
Page 24
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016 (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)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January
Suite 400 o Since January 2016 2011 to January 2016), Senior Vice President
Wheaton, IL 60187 (April 2007 to January 2016), First Trust
D.O.B.: 01/66 Advisors L.P. and First Trust Portfolios L.P.;
Chief Financial Officer, BondWave LLC
(Software Development Company) (January
2016 to Present) and Stonebridge Advisors LLC
(Investment Advisor) (January 2016 to Present)
Donald P. Swade Treasurer, Chief o Indefinite Term Senior Vice President (July 2016 to Present),
120 E. Liberty Drive, Financial Officer and Chief Vice President (April 2012 to July 2016), First
Suite 400 Accounting Officer o Since January 2016 Trust Advisors L.P. and First Trust Portfolios
Wheaton, IL 60187 L.P.; Vice President (September 2006 to April
D.O.B.: 08/72 2012), Guggenheim Funds Investment Advisors,
LLC/Claymore Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and
Suite 400 o Since Fund Inception General Counsel, BondWave LLC; Secretary
Wheaton, IL 60187 of Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July
Suite 400 o Since Fund Inception 2012), First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors
120 E. Liberty Drive, and Assistant Secretary L.P. and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since
D.O.B.: 12/66 January 2011
o Assistant Secretary
Since Inception
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 25
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
NOVEMBER 30, 2016 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 26
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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
St. 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
$65,500 for the fiscal year ended November 30, 2015 and $42,000 for the fiscal
year ended November 30, 2016.
(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, 2015 and $91.91 for the
fiscal year ended November 30, 2016. The 2016 audit-related fees are related to
the review of pricing committee procedures.
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, 2015 and $0 for
the fiscal year ended November 30, 2016.
(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, 2015 and $5,200 for the fiscal year ended
November 30, 2016. 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, 2015 and $0 for the
fiscal year ended November 30, 2016.
(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 $3,000 for the fiscal year ended November 30, 2015
and $0 for the fiscal year ended November 30, 2016. The 2015 audit-related fees
reflect fees for auditing data after migration to new fund accounting software.
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, 2015 and $0 for the fiscal year ended November 30, 2016.
(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, 2015, were $8,200 for the registrant and $12,500 for the
registrant's investment adviser, and for the fiscal year ended November 30, 2016
were $5,200 for the registrant and $13,000 for the registrant's investment
adviser.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The Registrant has a separately designated audit committee consisting of all the
independent trustees of the Registrant. The members of the audit committee are:
Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to shareholders
filed under Item 1 of this form.
(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 January 10, 2017
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 SENIOR 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 SENIOR 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, 2016
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 $132m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Pooled Investment Vehicles: 0 $0 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Accounts: 16,703 $4,822m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
2. David Miyazaki Registered Investment Companies: 1 $123m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Pooled Investment Vehicles: 0 $0 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Accounts: 536 $115m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
3. Daniel Winter Registered Investment Companies: 2 $132m 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Pooled Investment Vehicles: 0 $0 0 $0
----------------------- ------------------------------------- -------------- ------------- -------------- ----------------
Other Accounts: 16,072 $4,625m 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, 2016
The 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, Confluence's
portfolio managers are equity owners in Confluence, 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, 2016
Dollar Range of Registrant
Name 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/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: January 19, 2017
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: January 19, 2017
------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: January 19, 2017
------------------
* Print the name and title of each signing officer under his or her signature.