FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND

 

120 East Liberty Drive, Suite 400

Wheaton, IL 60187

(630) 765-8000

 

IMPORTANT SHAREHOLDER INFORMATION

 

We are pleased to enclose a notice, combined proxy statement/prospectus (the “Proxy Statement/Prospectus”), and proxy card(s) for a special meeting of shareholders (the “Special Meeting”) relating to First Trust Specialty Finance and Financial Opportunities Fund, a Massachusetts business trust (the “Acquired Fund”). The Special Meeting is scheduled to be held at the offices of the Acquired Fund’s investment adviser, First Trust Advisors L.P., located at 120 East Liberty Drive, Suite 400, Wheaton, IL 60187 on February 20, 2024, at 1:00 p.m. Central Time, to vote on the approval of a proposed Agreement and Plan of Reorganization for the Acquired Fund, which contemplates the reorganization of the Acquired Fund with and into abrdn Total Dynamic Dividend Fund (the “Acquiring Fund”), a Delaware statutory trust (the “Reorganization”). The Acquiring Fund as it would exist after the Reorganization is referred to as the “Combined Fund.”

 

After careful consideration, the Board of Trustees of the Acquired Fund believes that the Reorganization is in the best interest of shareholders and therefore recommends that you vote “FOR” the proposal. The Acquired Fund and the Acquiring Fund are managed by different investment advisers. The Reorganization is anticipated to provide shareholders of the Acquired Fund with, among other things, exposure to a similar investment objective but substantially different principal investment strategies and principal risks as the Acquired Fund invests in a portfolio of specialty finance and other financial companies while the Acquiring Fund invests generally in equity securities, as discussed in the enclosed Proxy Statement/Prospectus; a net total annual operating expense ratio (net of fee waivers and excluding interest expense) for the Combined Fund that is expected to be lower than that of the Acquired Fund; and access to the Acquiring Fund’s investment adviser’s and its affiliates’ asset management business, including its commitment to the closed-end fund business, and its investment management experience.

 

It is expected that shareholders of the Acquired Fund will not recognize any gain or loss for federal income tax purposes as a result of the exchange of their shares in the Acquired Fund for shares of the Acquiring Fund in connection with the Reorganization (except with respect to cash received in lieu of fractional shares). The Reorganization proposal is described in more detail, and a comparison of the strategies, expenses and certain other features of the Acquired Fund and the Acquiring Fund is included, in the enclosed Proxy Statement/Prospectus. We encourage you to review this information carefully.

 

As a shareholder of record as of the close of business on October 23, 2023, the record date, you are entitled to notice of, and to vote at, the Special Meeting, therefore we are asking that you please take the time to cast your vote prior to the February 20, 2024 Special Meeting. If you do not vote, you may receive a phone call from the Acquired Fund’s proxy solicitor, EQ Fund Solutions LLC.

 

We appreciate your participation in this important Special Meeting.

 

Sincerely,

 

James A. Bowen

Chairman of the Board of Trustees, First Trust Specialty Finance and Financial Opportunities Fund

 

It is important that your shares be represented at the Special Meeting. In order to avoid delay and to ensure that your shares are represented, please vote as promptly as possible. You may vote easily and quickly by mail, by telephone or via the Internet. You may also vote in person by attending the Special Meeting (subject to certain requirements). To vote by mail, please complete and mail your proxy card in the enclosed envelope. To vote by telephone or via the Internet, please follow the instructions on the proxy card. If you need any assistance or have any questions regarding the proposal or how to vote your shares, please call the Acquired Fund’s proxy solicitor, EQ Fund Solutions, LLC, at (866) 796-7172 weekdays from 9:00 a.m. to 10:00 p.m. Eastern Time.

 

 

FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND

 

120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(630) 765-8000

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

 

TO BE HELD February 20, 2024

 

Notice is hereby given that a special meeting of shareholders (with any postponements or adjournments, the “Special Meeting”) of First Trust Specialty Finance and Financial Opportunities Fund (the “Acquired Fund”), a Massachusetts business trust, is scheduled to be held at the offices of the Acquired Fund’s investment adviser, First Trust Advisors L.P., located at 120 East Liberty Drive, Suite 400, Wheaton, IL 60187, on February 20, 2024, at 1:00 p.m. Central Time. At the Special Meeting, shareholders will be asked to consider and to vote on the below proposal (the “Proposal”).

 

To approve an Agreement and Plan of Reorganization providing for the transfer of all of the assets of the Acquired Fund to abrdn Total Dynamic Dividend Fund (the “Acquiring Fund”) (each a “Fund” and collectively, the “Funds”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares) and the assumption by the Acquiring Fund of all liabilities of the Acquired Fund and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of the Acquired Fund and complete liquidation of the Acquired Fund (the “Reorganization”)

 

Shareholders will also be asked to transact such other business as may properly come before the Special Meeting.

 

Shareholders of record as of the close of business on October 23, 2023, the record date (the “Record Date”), are entitled to notice of, and to vote at, the Special Meeting.

 

The Reorganization is intended to be treated as a tax-free reorganization for US federal income tax purposes.

 

Whether or not you are planning to attend the Special Meeting, please vote prior to the Special Meeting on February 20, 2024. Voting is quick and easy. Voting by proxy will not prevent you from voting your shares at the Special Meeting. You may revoke your proxy at any time before the Special Meeting by (i) written notice delivered to the Secretary of the Acquired Fund prior to the exercise of the proxy; (ii) execution of a subsequent proxy; or (iii) attending and voting at the Special Meeting. If you hold shares through a broker, bank or other nominee, you must follow the instructions you receive from your nominee in order to revoke your voting instructions.

 

Please contact EQ Fund Solutions LLC (“EQ”) at (866) 796-7172 with any questions regarding access to the Special Meeting, and an EQ representative will contact you to answer your questions. Whether or not you plan to participate in the Special Meeting, we urge you to vote and submit your vote in advance of the Special Meeting.

 

By order of the Board of Trustees of the Acquired Fund,

 

W. Scott Jardine, Esq. 

Secretary, First Trust Specialty Finance and Financial Opportunities Fund

 

Important Notice Regarding Internet Availability of Proxy Materials for the Special Meeting to be Held on February 20, 2024:

 

The Proxy Statement/Prospectus, the Notice of the Special Meeting, any accompanying materials and any amendments or supplements to the foregoing materials that are required to be furnished to shareholders are available to you on the Internet at https://www.ftportfolios.com/LoadContent/gohdcqj3gy4y.

i 

 

It is important that your shares be represented at the Special Meeting. In order to avoid delay and to ensure that your shares are represented, please vote as promptly as possible. You may vote easily and quickly by mail, by telephone or via the Internet. You may also vote in person by attending the Special Meeting (subject to certain requirements). To vote by mail, please complete and mail your proxy card in the enclosed envelope. To vote by telephone or via the Internet, please follow the instructions on the proxy card. If you need any assistance or have any questions regarding the Proposal or how to vote your shares, please call the Acquired Fund’s proxy solicitor, EQ Fund Solutions, LLC, at (866) 796-7172 weekdays from 9:00 a.m. to 10:00 p.m. Eastern Time.

ii 

 

QUESTIONS & ANSWERS

 

The following is a summary of more complete information appearing later in the attached combined proxy statement/prospectus (the “Proxy Statement/Prospectus”) or incorporated by reference into the Proxy Statement/Prospectus. You should carefully read the entire Proxy Statement/Prospectus, including the Agreement and Plan of Reorganization (the “Reorganization Agreement”), a form of which is attached as Appendix A thereto, because it contains details that are not in the Questions & Answers.

 

Q:

Why is a shareholder meeting being held?

 

A:

The shareholders of First Trust Specialty Finance and Financial Opportunities Fund (the “Acquired Fund”), a Massachusetts business trust, are being asked to approve a Reorganization Agreement providing for the transfer of all of the assets of their Fund to abrdn Total Dynamic Dividend Fund (the “Acquiring Fund”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund) and the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of the Acquired Fund and complete liquidation of the Acquired Fund (the “Reorganization”). It is currently expected that the Reorganization will occur in the first quarter of 2024.

 

As summarized below and described more fully in the Proxy Statement/Prospectus, the Acquired Fund and the Acquiring Fund (each, a “Fund” and collectively, the “Funds”) are each a closed-end management investment company with a similar investment objective but substantially different principal investment strategies and principal risks as the Acquired Fund invests in a portfolio of specialty finance and other financial companies while the Acquiring Fund invests generally in equity securities. Please see below and “Comparison of the Funds” in the Proxy Statement/Prospectus for additional information. The Acquiring Fund would be the accounting and performance survivor of the Reorganization. The Acquiring Fund as it would exist after the Reorganization is referred to as the “Combined Fund.”

 

Q

Why is the Reorganization being proposed?

 

A

On October 23, 2023, First Trust Advisors L.P. (“First Trust”), abrdn Inc. and, for the purposes specified therein, abrdn plc. entered into a separate agreement (the “Purchase Agreement”) pursuant to which abrdn Inc. will acquire certain assets related to First Trust’s business of providing investment management services with respect to the assets of the Acquired Fund and certain other registered investment companies (the “Business”) if the Reorganization is approved, and upon satisfaction or waiver of certain other conditions. More specifically, under the Purchase Agreement, First Trust has agreed to transfer to abrdn Inc., for a cash payment at the closing of the Asset Transfer (as defined below) and subject to certain exceptions, (i) all right, title and interest of First Trust in and to the books and records relating to the Business of the Acquired Fund, and (ii) the goodwill of the Business (the “Asset Transfer”).”

 

The Funds are not a party to the Purchase Agreement; however, the completion of the Asset Transfer is subject to certain conditions, including shareholder approval of the Reorganization described in the Proxy Statement/Prospectus for the Reorganization to proceed. Therefore, if Acquired Fund shareholders do not approve the Reorganization or if the other conditions in the Purchase Agreement are not satisfied or waived, then the Asset Transfer may not be completed, and the Purchase Agreement may be terminated with respect to the Acquired Fund.

 

Q:

Why is the Reorganization being recommended by the Board of Trustees of the Acquired Fund?

 

A:

The Board of Trustees of the Acquired Fund (the “Acquired Fund Board”) has determined that the Reorganization is in the best interests of the shareholders of the Acquired Fund. In reaching its decision to approve the Reorganization, the Acquired Fund Board considered alternatives to the Reorganization, including continuing to operate the Acquired Fund as a separate fund, and determined to recommend that shareholders approve the Reorganization.

 

Please see “Background and Reasons for the Proposed Reorganization” in the Proxy Statement/Prospectus for additional information on the Acquired Fund Board’s considerations relating to the Reorganization.

i 

 

Q:

What happens if the Proposal is not approved by the shareholders?

 

A: Completion of the Reorganization requires the approval of the Reorganization Agreement by the Acquired Fund shareholders. If the Reorganization Agreement is not approved by shareholders of the Acquired Fund, then the Acquired Fund will continue to operate as a separate fund in the manner in which it is currently managed.

 

Q:

How will the fees and expenses of the Combined Fund compare to those of the Acquired Fund?

 

A:

The contractual advisory fee of the Acquired Fund is 1.00% of the Acquired Fund’s Managed Assets. “Managed Assets,” for the purpose of this calculation, means the average daily gross asset value of the Acquired Fund (including assets attributable to the Acquired Fund’s Preferred Shares (as such term is defined in the Acquired Fund’s prospectus), if any, and the principal amount of borrowings, if any), minus the sum of the Acquired Fund’s accrued and unpaid dividends on any outstanding Preferred Shares and accrued liabilities (other than the principal amount of any borrowings incurred, commercial paper or notes issued by the Acquired Fund).

 

The contractual advisory fee of the Combined Fund will be 1.00% of the Combined Fund’s average daily Managed Assets. “Managed Assets” is defined as total assets of the Combined Fund, including any form of investment leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other similar preference securities,(iii) the reinvestment of collateral received for securities loaned in accordance with the Combined Fund’s investment objectives and policies, and/or (iv) any other means.

 

Following the consummation of the Reorganization, the total annual operating expense ratio of the Combined Fund is expected to be lower than the current total annual operating expense ratio of the Acquired Fund.

 

  The gross total annual operating expense ratios, including interest expense, of the Acquired Fund and the Acquiring Fund, and, following the consummation of the Reorganization, the gross total annual operating expense ratio, including interest expense, of the Combined Fund is expected to be as follows:

 

Current Expense
Ratio of
Acquired Fund*
   Current Expense
Ratio of the
Acquiring
Fund**
   Pro Forma
Combined
Fund**
 
 2.71%   1.32%   1.31%

 

  The net total annual operating expense ratios, including interest expense, of the Acquired Fund and the Acquiring Fund and, following the consummation of the Reorganization, the net total annual operating expense ratio, including interest expense, of the Combined Fund is expected to be as follows:

 

Current Expense
Ratio of
Acquired Fund*†
   Current Expense
Ratio of the
Acquiring
Fund**
   Pro Forma
Combined
Fund**†
 
 2.71%   1.25%   1.25%

 

 

The net total annual operating expense ratios, including interest expense, in this table of the Acquiring Fund and Combined Fund reflect reimbursement of advisory fees waived and other expenses reimbursed from abrdn Investments Limited (“aIL”), which can be recouped under certain circumstances by aIL.

 

* As of the Acquired Fund’s most recent semi-annual period ended May 31, 2023, based on average daily net assets.

** Information for the Acquiring Fund and Combined Fund is as of the semi-annual period ended April 30, 2023.

† The net total annual operating expense ratio, excluding interest expense, of the Acquired Fund is 1.59%. The net total operating expense ratio, excluding interest expense, of the Acquiring Fund is 1.14%. Following the consummation of the Reorganization, the net total annual operating expense ratio, excluding interest expense, of the Combined Fund is expected to be 1.14%.

 

The pro forma information for the Combined Fund is as of April 30, 2023. The net total annual operating expense ratio excluding interest expense of the Acquiring Fund and the pro forma Combined Fund reflect the application of the 1.14% expense limitation, described below. Pro forma Combined Fund fees and expenses are estimated in good faith and are hypothetical. There can be no assurance that future expenses will not increase or that any estimated expense savings will be realized.

 

aIL, the investment adviser of the Acquiring Fund, has entered into a written contract (the “Amended and Restated Expense Limitation Agreement”) with the Acquiring Fund that is effective through June 30, 2024. In connection with the Reorganization, the Amended and Restated Expense Limitation Agreement shall be extended through one year from the date of the closing of the Reorganization, or June 30, 2025, whichever is later. The Amended and Restated Expense Limitation Agreement limits the total ordinary operating expenses of the Acquiring Fund and following the consummation of the Reorganization, the Combined Fund (excluding any leverage costs, interest, taxes, brokerage commissions, and any non-routine expenses), from exceeding 1.14% of the average daily net assets of the Fund on an annualized basis.

 

aIL may request and receive reimbursement from the Acquiring Fund or Combined Fund, as applicable, of the advisory fees waived and other expenses reimbursed pursuant to the Amended and Restated Expense Limitation Agreement as of a date not more than three years after the date when aIL limited the fees or reimbursed the expenses; provided that the following requirements are met: the reimbursements do not cause the Fund to exceed the lesser of the applicable expense limitation in the contract at the time the fees were limited or expenses are paid or the applicable expense limitation in effect at the time the expenses are being recouped by aIL, and the payment of such reimbursement is approved by the Board of the Fund on a quarterly basis. Except as provided for in the Amended and Restated Expense Limitation Agreement, reimbursement of amounts previously waived or assumed by aIL is not permitted.

ii 

 

  Please see “Fees and Expenses” and “Management of the Funds” in the Proxy Statement/Prospectus for additional information.
   
Q:

How different are the Funds?

 

A:

As summarized below and set forth more fully in the Proxy Statement/Prospectus, there are some substantial differences between the Acquired Fund and the Acquiring Fund. In particular, they have different investment advisers. First Trust is the investment adviser of the Acquired Fund, and Confluence Investment Management LLC (“CIM”) is the investment sub-adviser of the Acquired Fund. aIL is the investment adviser of the Acquiring Fund.

 

Each Fund is a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Acquired Fund is a Massachusetts business trust and a diversified closed-end management investment company. The Acquiring Fund is a Delaware statutory trust and a diversified closed-end management investment company. Each Fund’s common shares are listed on the New York Stock Exchange.

 

The Funds have similar investment objectives but substantially different principal investment strategies and principal risks as the Acquired Fund invests in a portfolio of specialty finance and other financial companies while the Acquiring Fund invests generally in equity securities.

 

The Acquired Fund’s primary investment objective is to seek a high level of current income. As a secondary objective, the Acquired Fund seeks an attractive total return. The Acquiring Fund’s principal investment objective is to seek high current dividend income with a secondary objective of long-term growth of capital.

 

As set forth more fully in the Proxy Statement/Prospectus, the Acquired Fund concentrates its investments in “specialty finance companies,” which generally are companies that provide financing to borrowers with capital needs that are different relative to traditional borrowers, who typically utilize commercial banks or public debt markets to meet their financing needs, whereas the Acquiring Fund invests in a broad range of equity investments throughout the world. The Acquired Fund invests, under normal market conditions, at least 80% of its Managed Assets (as defined below) in a portfolio of securities of specialty finance and other financial companies that CIM believes offer attractive opportunities for income and capital appreciation. For the Acquired Fund, “Managed Assets” means the total asset value of the Fund minus the sum of its liabilities, other than the principal amount of borrowings. The Acquiring Fund invests at least 80% of its net assets plus amounts borrowed for investment purposes in equity securities, primarily common stocks, issued by domestic and foreign companies whose equity securities are readily traded on an established U.S. or foreign securities market and pay dividends.

 

The Acquired Fund and Acquiring Fund both currently use leverage. The Acquired Fund engages in leverage through borrowing from a committed facility agreement to seek to enhance the level of its current distributions to common shareholders. The Acquiring Fund and Combined Fund intend to use leverage through borrowing from a credit facility. The Acquiring Fund is permitted to engage in other transactions, such as reverse repurchase agreements and issuance of debt securities or preferred securities, which have the effect of leverage, but currently has no intention to do so. The Acquiring Fund may use leverage in an aggregate amount up to 33-1/3% of its total assets. The Funds’ strategies relating to their use of leverage, if any, may not be successful, and the Funds’ use of leverage will cause the Funds’ NAV to be more volatile than it would otherwise be. There can be no guarantee that the Combined Fund will leverage its assets or, to the extent the Combined Fund utilizes leverage, what percentage of its assets, within regulatory limits, such leverage will represent. Depending on market conditions, the Combined Fund’s portfolio management team may choose not to use any leverage. Although the use of leverage by a Fund may create an opportunity for increased after-tax total return for the common shares, it also increases market exposure, results in additional risks and can magnify the effect of any losses.

 

The Acquiring Fund is subject to the control share acquisition statute (the “Control Share Statute”) contained in Subchapter III of the Delaware Statutory Trust Act (the “DSTA”), which became automatically applicable to listed closed-end funds, such as the Acquiring Fund. The Acquired Fund is not subject to this type of limitation as Massachusetts does not currently have a control share statute applicable to Massachusetts business trusts. Please see “Rights of Fund Shareholders” in the Proxy Statement/Prospectus for additional information.

 

Please see “Comparison of the Funds” in the Proxy Statement/Prospectus for additional information.

   
Q:

How will the Reorganization be effected?

 

A:

Assuming Acquired Fund shareholders approve the Reorganization, the Acquired Fund will transfer all of its assets to the Acquiring Fund in exchange for common shares of the Acquiring Fund (although shareholders may receive cash for fractional shares of the Acquiring Fund), and the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund. Following the Reorganization, the Acquired Fund will be dissolved and terminated in accordance with its Declaration of Trust, Amended, Restated By-Laws and the 1940 Act.

iii 

 

 

Following the Reorganization, you, as an Acquired Fund shareholder, will become a shareholder of the Combined Fund. Holders of common shares of the Acquired Fund will receive newly issued common shares of the Acquiring Fund, no par value per share, the aggregate net asset value (“NAV”) (not the market value) of which will equal the aggregate NAV (not the market value) of the common shares of the Acquired Fund you held immediately prior to the Reorganization (although shareholders may receive cash for fractional shares of the Acquiring Fund).

 

Based on each Fund’s NAV as of September 29, 2023, the exchange ratio at which common shares of the Acquired Fund would have converted to common shares of the Combined Fund is 0.4548 (i.e., assuming the Reorganization was consummated following the market close on September 29, 2023). An Acquired Fund shareholder would have received 0.4548 shares of the Combined Fund for each Acquired Fund share held.

   
Q:

How will the Reorganization affect the value of my investment?

 

A:

At the closing of the Reorganization, the Reorganization Agreement sets forth that the Acquired Fund assets will be valued in accordance with the Acquired Fund’s valuation procedures as approved by the Board of Trustees of the Acquired Fund. Upon the consummation of the Reorganization, the assets transferred to the Acquiring Fund will be valued pursuant to the Acquiring Fund’s valuation procedures as approved by the Board of Trustees of the Acquiring Fund.

 

Q:

At what prices have common shares of the Acquired Fund and common shares of the Acquiring Fund historically traded?

 

A:

Common shares of each Fund have from time to time traded below their NAVs. As of September 29, 2023, the Acquired Fund common shares were trading at a 15.75% discount to its NAV, and the Acquiring Fund common shares were trading at a 13.99% discount to its NAV. There can be no assurance that, after the Reorganization, common shares of the Combined Fund will trade at, above or below NAV. The market value of the common shares of the Combined Fund may be more or less than the market value of the common shares of either the Acquiring Fund or the Acquired Fund prior to the Reorganization.

 

To the extent the Acquired Fund is trading at a discount to its NAV and the Acquiring Fund is trading at a premium to its NAV at the time of the Reorganization, Acquired Fund shareholders would have the potential for an economic benefit. To the extent the Acquired Fund is trading at a premium to its NAV and the Acquiring Fund is trading at a discount to its NAV at the time of the Reorganization, the Acquired Fund shareholders would lose the economic benefit. There can be no assurance that, after the Reorganization, common shares of the Combined Fund will trade at, above or below NAV. The market value of the common shares of the Combined Fund may be less than the market value of the common shares of the Acquiring Fund prior to the Reorganization. Additionally, among other potential consequences of the Reorganization, portfolio transitioning due to the Reorganization may result in capital gains or losses, which may have federal income tax consequences for shareholders of the Acquired Fund and the Combined Fund.

 

Please see “Share Price Data” in the Proxy Statement/Prospectus for additional information.

 

Q:

Will the Reorganization impact Fund distributions to shareholders?

 

A:

The Acquired Fund currently pays a quarterly distribution of $0.0825 per share; based on the market price and NAV as of September 29, 2023, the Acquired Fund’s annualized distribution rate is 9.79% and 8.25%, respectively. The Acquiring Fund currently pays a monthly distribution rate of $0.0575 per share; based on the market price and NAV as of September 29, 2023, the Acquiring Fund’s annualized distribution rate is 7.8% and 9.1%, respectively. The Combined Fund expects to pay a monthly distribution of $0.100 per share and would have the same distribution yield as the Acquiring Fund.

iv 

 

 

Prior to the closing of the Reorganization, the Acquired Fund expects to declare a distribution to its shareholders that, together with all previous distributions, will have the effect of distributing to its shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid) and net realized capital gains, if any, through the date of the Reorganization’s closing. All or a portion of such distribution may be taxable to the Acquired Fund’s shareholders for US federal income tax purposes.

 

The Combined Fund intends to make its first distribution to shareholders in the month immediately following the Reorganization. In addition, the Combined Fund expects to follow the same frequency of payments as the Acquiring Fund and make monthly distributions to shareholders.

 

Q:

Who will manage the Combined Fund’s portfolio?

 

A: The Combined Fund will be advised by aIL, the Acquiring Fund’s current adviser. Furthermore, the Acquiring Fund’s current portfolio management team will be primarily responsible for the day-to-day management of the Combined Fund’s portfolio.
   
Q:

Will there be any significant portfolio transitioning in connection with the Reorganization?

 

A:

The Acquired Fund will be required to pay back its outstanding leverage in connection with the closing of the Reorganization (the “Closing Date”). It is anticipated that approximately 13% of the Acquired Fund’s holdings will be sold by the Acquired Fund before the closing of the Reorganization in order to pay back its outstanding leverage. This portfolio transition may take a significant amount of time and result in the Acquired Fund holding large amounts of uninvested cash prior to the Closing Date, and there may be times when the Acquired Fund is not fully invested in accordance with its investment objective and strategies during this transition period, which may cause the Acquired Fund to forgo any appreciation in value of portfolio investments, if any. This may impact the Acquired Fund’s performance. As of September 21, 2023, the expected commissions, spread related and stamp duties/taxes costs to de-lever the portfolio would be approximately $69,000 (or 0.12% of the Acquired Fund’s NAV as of September 21, 2023) or $0.005 per share. This breaks down across commissions costs of roughly $5,885, spread related costs for international securities of approximately $62,930 and stamp duties/taxes of $185. To the extent the Acquired Fund has holdings in France, Spain and/or Italy, such countries may impose an additional foreign transfer tax on the transfer of such securities to the Acquiring Fund. These taxes are in addition to the transaction costs disclosed above and would be borne by the Combined Fund. The foregoing estimates are subject to change depending on the composition of Acquired Fund’s portfolio and market circumstances at the time any sales are made.

 

Following the Reorganization, the Combined Fund expects to realign its portfolio in a manner consistent with its investment strategies and policies, which will be the same as the Acquiring Fund’s strategies and policies. The Combined Fund may not be invested consistent with its investment strategies or aIL’s investment approach while such realignment occurs. The realignment is anticipated to take approximately two weeks following the closing of the Reorganization, based on current market conditions and assuming that the Acquired Fund’s holdings are the same as of September 21, 2023. Sales and purchases of less liquid securities could take longer. Based on the Acquired Fund’s holdings as of September 21, 2023, the Combined Fund expects to sell approximately 97% of the Acquired Fund’s portfolio following the closing of the Reorganization. If the Reorganization was completed on September 21, 2023, the expected cost to sell 97% of the Acquired Fund’s holdings following the closing of the Reorganization, which is estimated to equal 5.5% of the Combined Fund’s portfolio, would be approximately $523,000 (or 0.05% of the estimated NAV of the Combined Fund as of September 21, 2023) or $0.004 per share of the Combined Fund. To the extent there are any transaction costs (including brokerage commissions, transaction charges and related fees) associated with the sales and purchases made in connection with the Reorganization, these will be borne by the Acquired Fund with respect to the portfolio transitioning conducted before the Reorganization and borne by the Combined Fund with respect to the portfolio transitioning conducted after the Reorganization. The portfolio transitioning pre- and post-Reorganization may result in capital gains or losses, which may have federal income tax consequences for shareholders of the Acquired Fund and the Combined Fund.

v 

 

Q:

Will I have to pay any sales load or commission in connection with the Reorganization?

 

A:

No. You will pay no sales load or commission in connection with the Reorganization.

 

Q:

Who will pay for the costs associated with the Reorganization?

 

A:

aIL and its affiliates and First Trust and its affiliates will bear certain expenses, including portfolio transaction costs and certain taxes, incurred in connection with the Reorganization, except as otherwise disclosed in the proxy statements to Acquired Fund shareholders, whether or not the Reorganization is consummated. The expenses of the Reorganization expected to be borne by abrdn and First Trust are estimated to be approximately $446,000. To the extent there are any transaction costs (including brokerage commissions, transaction charges and related fees) associated with the sales and purchases of portfolio holdings made in connection with the Reorganization, these will be borne by the Acquired Fund with respect to the portfolio transitioning and de-levering conducted before the Reorganization and borne by the Combined Fund with respect to the portfolio transitioning conducted after the Reorganization. In addition, to the extent an Acquired Fund has holdings in France, Spain and/or Italy, such countries may impose an additional foreign transfer tax on the transfer of such securities to the Acquiring Fund. These taxes are in addition to the transaction costs disclosed above and would be borne by the Combined Fund.

 

Q:

Is the Reorganization expected to be taxable to the shareholders of the Acquired Fund?

 

A:

It is expected that shareholders of the Acquired Fund will not recognize any gain or loss for federal income tax purposes as a result of the exchange of their shares in the Acquired Fund for shares of the Acquiring Fund pursuant to the Reorganization Agreement (except with respect to cash received in lieu of fractional shares of the Acquiring Fund).

 

As a condition to the Acquired Fund’s obligation to consummate the Reorganization, the Acquired Fund and the Acquiring Fund will receive an opinion from legal counsel to the effect that, on the basis of the existing provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current administrative rules and court decisions, the transactions contemplated by the Reorganization Agreement constitute a tax-free reorganization for federal income tax purposes (except with respect to cash received in lieu of fractional shares of the Acquiring Fund). Despite this opinion, there can be no assurances that the U.S. Internal Revenue Service will deem the exchanges to be tax-free.

 

The portfolio transitioning discussed above may result in capital gains or losses, which may have federal income tax consequences.

 

The pre-Reorganization portfolio transitioning noted above will result in a net capital gain or loss depending on the securities sold. It is anticipated that the pre-Reorganization portfolio transitioning will result in the realization of $824,192 or $0.057 per share in capital gains based on Acquired Fund holdings as of September 21, 2023. However, it is anticipated that this would be offset by the Fund’s capital loss carryforwards. Prior to the closing date of the Reorganization, the Acquired Fund will be required to declare a distribution to its shareholders that, together with all previous distributions, will have the effect of distributing to the Acquired Fund’s shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid), if any, through the closing date (whether or not the Acquired Fund is required to make an actual distribution of cash (which will be dependent on the amount and character of the Acquired Fund’s prior distributions)), all of its net capital gains, if any, through the Closing Date, and all of its net tax-exempt interest income, if any, through the Closing Date. Such a distribution may be taxable to the Acquired Fund’s shareholders for U.S. federal income tax purposes depending on each shareholder’s individual tax situation, which cannot be determined by abrdn or First Trust. The actual tax consequences as a result of the sale of securities in advance of the Reorganization are dependent on the portfolio composition of the Acquired Fund at the time such sales are made and market conditions.

   
 

In addition, following the Reorganization, the Combined Fund may generate net capital gains or losses as a result of the portfolio realignment discussed further above. For example, if the Reorganization was completed on September 21, 2023, it is estimated that approximately $6,866,343, or $0.061 per share, in capital losses would have resulted from portfolio transitioning in the Combined Fund following the Reorganization.

 

The actual tax consequences as a result of portfolio repositioning after the closing of the Reorganization are dependent on the portfolio composition of the Acquired Fund at the time of closing and market conditions. Any net capital gain resulting from the realignment coupled with the results of the Acquiring Fund’s normal operations during the tax year following the close of the Reorganization would be distributed to the shareholder base of the Combined Fund post-Reorganization in connection with the annual distribution requirements under US federal tax laws.

 

vi 

 

Q:

How does the Acquired Fund Board suggest that I vote?

 

A:

The Acquired Fund Board recommends that you vote “FOR” the Proposal.

 

Q:

How do I vote my proxy?

 

A:

You may vote in any one of four ways:

 

•   by mail, by sending the enclosed proxy card, signed and dated, in the enclosed envelope;

 

•   by phone, by following the instructions set forth on your proxy card;

 

•   via the Internet, by following the instructions set forth on your proxy card; or

 

•  in person, by attending the Special Meeting. Please note that shareholders who intend to attend the Special Meeting will need to provide valid identification and, if they hold shares through a bank, broker or other nominee, satisfactory proof of ownership of shares, such as a voting instruction form (or a copy thereof) or a letter from their bank, broker or other nominee or broker’s statement indicating ownership as of October 23, 2023 (the “Record Date”), to be admitted to the Special Meeting.

 

Broker-dealer firms holding shares in “street name” for the benefit of their customers and clients may request voting instructions from such customers and clients. You are encouraged to contact your broker-dealer and record your voting instructions.

 

Q:

Whom do I contact for further information?

 

A: If you need any assistance or have any questions regarding the Proposal or how to vote your shares, please call EQ Fund Solutions, LLC, the Acquired Fund’s proxy solicitor, at (866) 796-7172 weekdays from 9:00 a.m. to 10:00 p.m. Eastern Time.  
 

It is important that your shares be represented at the Special Meeting. In order to avoid delay and to ensure that your shares are represented, please vote as promptly as possible.

vii 

 

 

PROXY STATEMENT FOR

 

FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND

 

120 East Liberty Drive, Suite 400
Wheaton, IL 60187

 

PROSPECTUS FOR

 

ABRDN TOTAL DYNAMIC INCOME FUND
1900 Market Street, Suite 200
Philadelphia, PA 19103
(215) 405-5700

 

December 18, 2023

 

This combined proxy statement/prospectus (the “Proxy Statement/Prospectus”) is furnished to you as a common shareholder of the First Trust Specialty Finance and Financial Opportunities Fund (the “Acquired Fund”), a Massachusetts business trust and a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). A special meeting (with any postponements or adjournments, the “Special Meeting”) of shareholders of the Acquired Fund is scheduled to be held at the offices of the Acquired Fund’s investment adviser, First Trust Advisors L.P. (“First Trust”), located at 120 East Liberty Drive, Suite 400, Wheaton, IL 60187, on February 20, 2024, at 1:00 p.m. Central Time. At the Special Meeting, shareholders will be asked to consider and to vote on the below proposal (the “Proposal”). If you are unable to attend the Special Meeting, the Board of Trustees of the Acquired Fund (the “Board”) requests that you vote your shares by completing and returning the enclosed proxy card or by recording your voting instructions by telephone or via the Internet. The approximate mailing date of this Proxy Statement/Prospectus is December 26, 2023.

 

To approve an Agreement and Plan of Reorganization providing for the transfer of all of the assets of the Acquired Fund to abrdn Total Dynamic Dividend Fund (the “Acquiring Fund”) (each, a “Fund” and collectively, the “Funds”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund) and the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of the Acquired Fund and complete liquidation of the Acquired Fund (the “Reorganization”)

 

Shareholders of record as of the close of business on October 23, 2023, the record date (the “Record Date”), are entitled to notice of and to vote at the Special Meeting.

 

Shareholders of the Acquired Fund are being asked to consider and vote on an Agreement and Plan of Reorganization (the “Reorganization Agreement”) pursuant to which the Reorganization would be accomplished. The aggregate net asset value (“NAV”) (not the market value) of Acquiring Fund common shares received by the shareholders of the Acquired Fund in the Reorganization would equal the aggregate NAV (not the market value) of the Acquired Fund common shares held immediately prior to the Reorganization (although shareholders may receive cash for fractional shares, which may be taxable).

 

At the closing of the Reorganization, the Reorganization Agreement sets forth that the Acquired Fund assets will be valued in accordance with the Acquired Fund’s valuation procedures as approved by the Board of the Acquired Fund. Upon the consummation of the Reorganization, the assets transferred to the Acquiring Fund will be valued pursuant to the Acquiring Fund’s valuation procedures as approved by the Board of Trustees of the Acquiring Fund.

1

 

 

There are some differences between the Acquired Fund and the Acquiring Fund. In particular, they have different investment advisers. First Trust Advisors L.P. (previously defined as “First Trust”) is the investment adviser of the Acquired Fund and Confluence Investment Management LLC (“CIM”) is the investment sub-adviser of the Acquired Fund, and abrdn Investments Limited (“aIL”) is the investment adviser of the Acquiring Fund. The Funds have similar investment objectives but substantially different principal investment strategies and principal risks. The Acquired Fund invests in a portfolio of specialty finance and other financial companies while the Acquiring Fund invests generally in equity securities, as discussed below.

 

Each Fund is a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Acquired Fund is a Massachusetts business trust and a diversified closed-end management investment company. The Acquiring Fund is a Delaware statutory trust and a diversified closed-end management investment company. Each Fund’s common shares are listed on the New York Stock Exchange.

 

The Acquired Fund’s primary investment objective is to seek a high level of current income. As a secondary objective, the Acquired Fund seeks an attractive total return. The Acquiring Fund’s principal investment objective is to seek high current dividend income with a secondary objective of long-term growth of capital.

 

The common shares of the Acquiring Fund are listed on the New York Stock Exchange (the “NYSE”) under the ticker symbol “AOD” and will continue to be so listed following the Reorganization. The common shares of the Acquired Fund are listed on the NYSE under the ticker symbol “FGB” and would be delisted from the NYSE following the Reorganization. Shareholder reports, proxy statements and other information concerning Funds can be inspected at the NYSE.

 

The following documents have been filed with the Securities and Exchange Commission (“SEC”):

 

 

the Statement of Additional Information, dated December 18, 2023, relating to this Proxy Statement/Prospectus which is incorporated into this Proxy Statement/Prospectus by reference;

 

 

the Semi-Annual Report to shareholders of the Acquired Fund for the fiscal period ended May 31, 2023 (Investment Company Act File No. 811-22039; Accession No. 0001445546-23-004856);

 

 

the Annual Report to shareholders of the Acquired Fund for the fiscal period ended November 30, 2022 (Investment Company Act File No. 811-22039; Accession No. 0001445546-23-001041);

 

 

the Semi-Annual Report to shareholders of the Acquiring Fund for the fiscal period ended April 30, 2023 (Investment Company Act File No. 811-21980; Accession No. 0001104659-23-079593); and

 

 

the Annual Report to shareholders of the Acquiring Fund for the fiscal period ended October 31, 2022 (Investment Company Act File No. 811-21980; Accession No. 0001104659-23-002182).

 

Additionally, copies of the foregoing and any more recent reports filed after the date hereof may be obtained without charge:

 

for the Acquiring Fund:

 

By Phone:   (800) 522-5465
By Mail:   abrdn Total Dynamic Dividend Fund
    c/o abrdn Investments Limited
1900 Market Street, Suite 200
    Philadelphia, PA 19103
By Internet:   www.abrdnaod.com

2

 

for the Acquired Fund:

 

By Phone:   (630) 765-8000
By Mail:   First Trust Specialty Finance and Financial Opportunities Fund
    120 East Liberty Drive, Suite 400
    Wheaton, IL 60187
By Internet:   https://www.ftportfolios.com  

 

The Funds are subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and, in accordance therewith, file reports, proxy statements, proxy materials and other information with the SEC. You also may view or obtain the foregoing documents from the SEC:

 

By e-mail:   publicinfo@sec.gov (duplicating fee required)
By Internet:   www.sec.gov

 

This Proxy Statement/Prospectus serves as a prospectus of the Acquiring Fund. This Proxy Statement/Prospectus sets forth concisely the information that shareholders of the Acquired Fund should know before voting on the Proposal. Please read it carefully and retain it for future reference. No person has been authorized to give any information or make any representation not contained in this Proxy Statement/Prospectus and, if so given or made, such information or representation must not be relied upon as having been authorized. This Proxy Statement/Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation.

 

THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

3

 

TABLE OF CONTENTS

 

PROPOSAL1
  
COMPARISON OF THE FUNDS 8
   
MANAGEMENT OF THE FUNDS 31
   
AGREEMENT BETWEEN FIRST TRUST AND ABRDN INC. 34
   
ADDITIONAL INFORMATION ABOUT THE COMMON SHARES OF THE FUNDS 36
   
NET ASSET VALUE OF COMMON SHARES 39
   
DIVIDEND REINVESTMENT AND OPTIONAL CASH PURCHASE PLAN 40
   
ANTI-TAKEOVER AND CERTAIN PROVISIONS OF THE ACQUIRING FUND’S AGREEMENT AND DECLARATION OF TRUST AND BY-LAWS 41
   
APPRAISAL RIGHTS 42
   
FINANCIAL HIGHLIGHTS 43
   
INFORMATION ABOUT THE REORGANIZATION 47
   
TERMS OF THE REORGANIZATION AGREEMENT 47
   
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION 49
   
VOTING INFORMATION AND REQUIREMENTS 51
   
SHAREHOLDER INFORMATION 53
   
SHAREHOLDER PROPOSALS 53
   
SOLICITATION OF PROXIES 54
   
OTHER BUSINESS 54
   
APPENDIX A - Form of Agreement and Plan of Reorganization A-1
   

 4

 

PROPOSAL

 

To approve a Reorganization Agreement providing for the transfer of all of the assets of the Acquired Fund to the Acquiring Fund in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund) and the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of the Acquired Fund and complete liquidation of the Acquired Fund.

 

Synopsis

 

The Board of each Fund, including the Trustees who are not “interested persons” of each Fund (as defined in the 1940 Act) (the “Independent Trustees”), has approved the Reorganization Agreement. The Acquiring Fund as it would exist after the Reorganization is referred to as the “Combined Fund.”

 

Subject to approval of the Reorganization Agreement by the shareholders of the Acquired Fund, the Reorganization Agreement provides for:

 

the transfer of all of the assets of the Acquired Fund to the Acquiring Fund, in exchange solely for shares of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund);

 

the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund;

 

the distribution of common shares of the Acquiring Fund to the shareholders of the Acquired Fund; and

 

the complete liquidation of the Acquired Fund.

 

It is expected that the Reorganization will occur in the first quarter of 2024.

 

At the closing of the Reorganization, the Reorganization Agreement sets forth that the Acquired Fund assets will be valued in accordance with the Acquired Fund’s valuation procedures as approved by the Board of the Acquired Fund. Upon the consummation of the Reorganization, the assets transferred to the Acquiring Fund will be valued pursuant to the Acquiring Fund’s valuation procedures as approved by the Board of Trustees of the Acquiring Fund.

 

The Acquired Fund will be required to pay back its outstanding leverage in connection with the closing of the Reorganization. It is anticipated that approximately 13% of the Acquired Fund’s holdings will be sold by the Acquired Fund before the closing of the Reorganization in order to pay back its outstanding leverage. This portfolio transition may take a significant amount of time and result in the Acquired Fund holding large amounts of uninvested cash prior to the Closing Date, and there may be times when the Acquired Fund is not fully invested in accordance with its investment objective and strategies during this transition period, which may cause the Acquired Fund to forgo any appreciation in value of portfolio investments, if any. This may impact the Acquired Fund’s performance. As of September 21, 2023, the expected commissions, spread related and stamp duties/taxes costs to de-lever the portfolio would be approximately $69,000 (or 0.12% of the Acquired Fund’s NAV as of September 21, 2023) or $0.005 per share. This breaks down across commissions costs of roughly $5,885, spread related costs for international securities of approximately $62,930 and stamp duties/taxes of $185. To the extent the Acquired Fund has holdings in France, Spain and/or Italy, such countries may impose an additional foreign transfer tax on the transfer of sech securities to the Acquiring Fund. These taxes are in addition to the transaction costs disclosed above and would be borne by the Combined Fund. The foregoing estimates are subject to change depending on the composition of Acquired Fund’s portfolio and market circumstances at the time any sales are made.

 

The portfolio de-leveraging discussed above may result in capital gains or losses, which may have federal income tax consequences for shareholders of the Acquired Fund. 

 1

 

Following the Reorganization, the Combined Fund expects to realign its portfolio in a manner consistent with its investment strategies and policies, which will be the same as the Acquiring Fund’s strategies and policies. The Combined Fund may not be invested consistent with its investment strategies or aIL’s investment approach while such realignment occurs. The realignment is anticipated to take approximately two weeks following the closing of the Reorganization, based on current market conditions and assuming that the Acquired Fund’s holdings are the same as on September 21, 2023. Sales and purchases of less liquid securities could take longer.

 

Based on the Acquired Fund’s holdings as of September 21, 2023, the Combined Fund expects to sell approximately 97% of the Acquired Fund’s portfolio following the closing of the Reorganization. If the Reorganization was completed on September 21, 2023, the expected cost to sell 97% of the Acquired Fund’s holdings following the closing of the Reorganization, which is estimated to equal 5.5% of the Combined Fund’s portfolio, would be approximately $523,000 (or 0.05% of the estimated NAV of the Combined Fund as of September 21, 2023) or $0.004 per share of the Combined Fund. To the extent there are any transaction costs (including brokerage commissions, transaction charges and related fees) associated with the sales and purchases made in connection with the Reorganization, these will be borne by the Acquired Fund with respect to the portfolio transitioning conducted before the Reorganization and borne by the Combined Fund with respect to the portfolio transitioning conducted after the Reorganization. The portfolio transitioning pre- and post-Reorganization may result in capital gains or losses, which may have federal income tax consequences for shareholders of the Acquired Fund and the Combined Fund.

 

The pre-Reorganization transactions noted above will result in a net capital gain or loss depending on the securities sold. It is anticipated that the pre-Reorganization portfolio transitioning will result in the realization of $824,192 or $0.057 per share in capital gains based on Acquired Fund holdings as of September 21, 2023. However, it is anticipated that this would be offset by the Fund’s capital loss carryforwards. Prior to the closing date of the Reorganization, the Acquired Fund will be required to declare a distribution to its shareholders that, together with all previous distributions, will have the effect of distributing to the Acquired Fund’s shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid), if any, through the closing date (whether or not the Acquired Fund is required to make an actual distribution of cash (which will be dependent on the amount and character of the Acquired Fund’s prior distributions)), all of its net capital gains, if any, through the Closing Date, and all of its net tax-exempt interest income, if any, through the Closing Date. Such a distribution may be taxable to the Acquired Fund’s shareholders for U.S. federal income tax purposes depending on each shareholder’s individual tax situation, which cannot be determined by abrdn or First Trust. The actual tax consequences as a result of the sale of securities in advance of the Reorganization are dependent on the portfolio composition of the Acquired Fund at the time such sales are made and market conditions.

  

In addition, following the Reorganization, the Combined Fund may generate net capital gains or losses as a result of the portfolio realignment discussed further above. For example, if the Reorganization was completed on September 21, 2023, it is estimated that approximately $6,866,343, or $0.061 per share, in capital losses would have resulted from portfolio transitioning in the Combined Fund following the Reorganization.

 

The actual tax consequences as a result of portfolio repositioning after the closing of the Reorganization are dependent on the portfolio composition of the Acquired Fund at the time of closing and market conditions. Any net capital gain resulting from the realignment coupled with the results of the Acquiring Fund’s normal operations during the tax year following the close of the Reorganization would be distributed to the shareholder base of the Combined Fund post-Reorganization in connection with the annual distribution requirements under US federal tax laws.

 

The Acquired Fund’s primary investment objective is to seek a high level of current income. As a secondary objective, the Acquired Fund seeks an attractive total return. The Acquiring Fund’s principal investment objective is to seek high current dividend income with a secondary objective of long-term growth of capital.

 

The Acquired Fund invests, under normal market conditions, at least 80% of its Managed Assets (as defined below) in a portfolio of securities of specialty finance and other financial companies that CIM believes offer attractive opportunities for income and capital appreciation. “Managed Assets” means the total asset value of the Fund minus the sum of its liabilities, other than the principal amount of borrowings.

 

As set forth more fully below, the Acquired Fund concentrates its investments in “specialty finance companies,” whereas the Acquiring Fund invests in a broad range of equity investments throughout the world. The Acquiring Fund invests at least 80% of its net assets plus amounts borrowed for investment purposes in equity securities, primarily common stocks, issued by domestic and foreign companies whose equity securities are readily traded on an established U.S. or foreign securities market and pay dividends. The Acquired Fund does not have any restrictions or prohibitions on investments in the securities of non-U.S. issuers. Although it is not the Acquiring Fund’s current intent, the Acquiring Fund may invest up to 100% of its total assets in the securities of non-U.S. issuers and is not restricted on how much may be invested in the issuers of any single country, provided the Acquiring Fund limits its investments in countries that are considered emerging markets to no more than 35% of the Acquiring Fund’s total assets at any one time. Under normal circumstances, however, the Acquiring Fund invests 35-80% of its total assets in the securities of non-U.S. issuers and among the securities of issuers located in approximately 10 to 30 countries. 

 2

 

The Acquired Fund and Acquiring Fund both currently use leverage. The Acquired Fund engages in leverage through borrowing from a committed facility agreement to seek to enhance the level of its current distributions to common shareholders. The Acquiring Fund intends to use leverage through borrowing from a credit facility. The Acquiring Fund is permitted to engage in other transactions, such as reverse repurchase agreements and issuance of debt securities or preferred securities, which have the effect of leverage, but currently has no intention to do so. The Acquiring Fund may use leverage in an aggregate amount up to 33-1/3% of its total assets. The Funds’ strategies relating to their use of leverage, if any, may not be successful, and the Funds’ use of leverage will cause the Funds’ NAV to be more volatile than it would otherwise be. There can be no guarantee that the Combined Fund will leverage its assets or, to the extent the Combined Fund utilizes leverage, what percentage of its assets, within regulatory limits, such leverage will represent. Depending on market conditions, the Acquiring Fund’s portfolio management team may choose not to use any leverage. Although the use of leverage by a Fund may create an opportunity for increased after-tax total return for the common shares, it also increases market exposure, results in additional risks and can magnify the effect of any losses.

 

It is expected that shareholders of the Acquired Fund will not recognize any gain or loss for federal income tax purposes as a result of the exchange of their shares in the Acquired Fund for shares of the Acquiring Fund pursuant to the Reorganization Agreement (except with respect to cash received in lieu of fractional shares of the Acquiring Fund). There can be no assurance that the U.S. Internal Revenue Service (“IRS”) will deem the exchanges to be tax-free. You should consult your tax adviser regarding the effect, if any, of the Reorganization in light of your individual circumstances. You should also consult your tax adviser about other state and local tax consequences of the Reorganization, if any, because the information about tax consequences in this document relates to the federal income tax consequences of the Reorganization only. For further information about the federal income tax consequences of the Reorganization, see “Material Federal Income Tax Consequences” below.

 

As a condition to the closing of the Reorganization, the Acquired Fund and the Acquiring Fund will receive an opinion from the Acquiring Fund’s counsel Dechert LLP (based on certain facts, assumptions and representations) to the effect that, on the basis of the existing provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current administrative rules and court decisions, the transactions contemplated by the Reorganization Agreement constitute a tax-free reorganization within the meaning of section 368(a) of the Code (except with respect to cash received in lieu of fractional shares of the Acquiring Fund). Despite this opinion, there can be no assurances that the IRS will deem the exchanges to be tax-free.

 

The portfolio transitioning discussed above may result in capital gains or losses, which may have federal income tax consequences.

 

Prior to the date of the Reorganization’s closing, the Acquired Fund may declare one or more distributions to its shareholders that, together with all previous distributions, will have the effect of distributing to its shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid) and net realized capital gains, if any, through the date of the Reorganization’s closing.

 

Background and Reasons for the Proposed Reorganization

 

Board Consideration of the Reorganization

 

On October 23, 2023, the Board of Trustees (the “Board”) of the Acquired Fund approved the Reorganization of the Acquired Fund into the Acquiring Fund. For the reasons discussed below, the Board determined that the proposed Reorganization would be in the overall best interests of the Acquired Fund.

 

The Board considered the Reorganization over the course of meetings held in September and October 2023. At those meetings, First Trust discussed with the Board its reasons for proposing the Reorganization. First Trust stated that it had conducted an evaluation of strategic alternatives for the Acquired Fund in light of certain factors, including, among others, the Acquired Fund’s discount levels. First Trust reviewed its evaluation of the strategic alternatives considered for the Acquired Fund, including maintaining the status quo, liquidation, conversion to an open-end fund, reorganization with an affiliated fund and reorganization with a third-party fund, and advised that, based on its evaluation, First Trust had determined that a reorganization with a third-party fund would be in the overall best interests of the Acquired Fund. First Trust reviewed its communications with abrdn Investments Limited (“AIL”), the investment adviser for AOD, and its affiliate, abrdn Inc. (“AI” and together with AIL, “abrdn”), and the due diligence it had conducted on abrdn, and informed the Board that First Trust was in the process of negotiating an agreement with AI, pursuant to which AI would acquire certain assets related to First Trust’s business of providing investment management services to the Acquired Fund and certain other closed-end funds in the First Trust Fund Complex (the “Purchase Transaction”) and that the Reorganization was being proposed as part of the Purchase Transaction. In connection with the meetings at which the Reorganization was discussed, First Trust and abrdn provided the Board with a variety of materials relating to the Reorganization and the Purchase Transaction, including the rationale for and expected benefits and costs of the Reorganization, comparative information about the Funds and information about the Purchase Transaction and abrdn. Based on all the information reviewed, First Trust expressed its belief that the Reorganization was the best option for existing shareholders of the Acquired Fund and that the Board should approve and recommend that shareholders of the Acquired Fund approve the Reorganization. First Trust highlighted that the Reorganization would allow existing shareholders of the Acquired Fund to remain in a closed-end fund that seeks to provide high current income, noting that, compared to the Acquired Fund , the Acquiring Fund trades at a similar discount, provides a similar above-market distribution rate, has a lower total expense ratio and offers better overall liquidity in light of its larger size and higher average daily trade volume. In addition, at the meetings, the Board received presentations from representatives of abrdn and was able to ask questions about the Reorganization, the Purchase Transaction, abrdn and the Acquiring Fund. In connection with the meetings and prior to approving the Reorganization, the Independent Trustees of the Acquired Fund met in private sessions and reviewed the information provided and discussed the proposed Reorganization with their independent legal counsel.

 

 3

 

 

Based upon all the information provided taken as a whole and the discussions at the meetings, the Board, including all of the Independent Trustees, approved the Reorganization, and determined that the Reorganization would be in the overall best interests of the Acquired Fund. Accordingly, the Board recommends that shareholders of the Acquired Fund approve the Reorganization.

 

In determining to approve the Reorganization and to recommend that shareholders of the Acquired Fund approve the Reorganization, the Board considered, among other things, the following factors:

 

·Compatibility of Investment Objectives and Policies; Closed-End Fund Structure. The Board noted that the Funds have similar primary investment objectives to seek to provide high current income, but that the Acquired Fund seeks an attractive total return as a secondary investment objective while the Acquiring Fund focuses on long-term growth of capital as a secondary investment objective. The Board considered differences between the Funds’ investment strategies, noting First Trust’s statement that, overall, the Acquiring Fund provides more diversified exposure to the global equity market with less concentration in the financial sector compared to the Acquired Fund. The Board considered that, unlike the Acquired Fund, the Acquiring Fund does not typically utilize leverage and that the Acquired Fund would need to eliminate its leverage prior to the closing of the Reorganization, which would require sales of portfolio securities and related transaction costs to the Acquired Fund. The Board also considered that substantially all of the Acquired Fund’s remaining portfolio would be repositioned post-Reorganization, resulting in transaction costs, which would be borne by the Acquiring Fund, including shareholders of the Acquired Fund who remain shareholders in the Acquiring Fund. In addition, the Board noted that both Funds are structured as closed-end investment companies and considered the advantages of such structure, including the ability to use leverage and hold less liquid and potentially higher yielding assets.

 

·Investment Capabilities and Financial Condition of abrdn. The Board considered information provided with respect to abrdn’s investment capabilities and products, including its closed-end fund business, noting abrdn’s statements that it has managed and operated closed-end funds for nearly four decades, that its registered closed-end fund business is the third largest globally and that it continues to view closed-end funds as a core area of growth for its business. The Board also considered information regarding abrdn’s financial strength and resources and the services it provides to the Acquiring Fund, noting abrdn’s representation that abrdn continues to review and provide the required resources to ensure high quality and professional management services to the Acquiring Fund. In addition, the Board considered other information regarding abrdn’s investment platform, including abrdn’s administration and investor support services, abrdn’s valuation process and abrdn’s risk management infrastructure. The Board also considered the presentations from representatives of abrdn at the meetings in September and October 2023. In evaluating the capabilities and resources of abrdn and the rationale for the Reorganization, the Board also considered First Trust’s assessment of abrdn. The Board noted that the reorganizations of three other closed-end funds in the First Trust Fund Complex into closed-end funds managed by abrdn are also contemplated by the Purchase Transaction.

 

 4

 

 

·Portfolio Management. The Board noted that, unlike the Acquired Fund, the Acquiring Fund does not employ an adviser/sub-adviser management structure and that its portfolio is managed directly by AIL. The Board considered the background and experience of the persons responsible for the management of the Acquiring Fund’s portfolio, including their tenure at abrdn and their experience managing closed-end funds, as well as information regarding investment support resources at abrdn that are utilized by the portfolio management team.

 

·The Acquiring Fund Board Governance. The Board considered information provided by abrdn regarding the governance structure of the Acquiring Fund’s Board, the compliance and risk program and the service providers rendering core services to the Acquiring Fund.

 

·Valuation of Portfolio Investments. The Board noted the information provided by abrdn regarding the valuation procedures used to value the Acquiring Fund’s investments and considered the uncertain impact on the value of an Acquired Fund shareholder’s investment immediately after the Reorganization as a result of differences in the Funds’ valuation procedures.

 

·Comparison of Fees and Expense Ratios; Expense Savings. The Board considered comparative expense information for the Funds, including comparisons between the current advisory fee rates and total expense ratios for the Funds and the estimated pro forma advisory fee rate and total expense ratio of the combined fund. The Board noted that the Acquiring Fund, like the Acquired Fund, has a stated advisory fee rate of 1.00% of managed assets, which would not change as a result of the Reorganization. The Board considered that AIL has contractually agreed to limit the Combined Fund’s total ordinary operating expenses (excluding any leverage expenses, interest, taxes, brokerage fees and non-routine expenses) to 1.14% of net assets and, in connection with the Reorganization, has proposed to extend this contractual expense limitation for 12 months from the closing of the Reorganization or to June 30, 2025, whichever is later. The Board considered that the estimated pro forma total expense ratio of the Acquiring Fund post-Reorganization of 1.14% of net assets (reflecting the impact of the current expense limitation) was lower than the total expense ratio of the Acquired Fund as of the end of its most recent semi-annual fiscal period of 1.59% of net assets (excluding leverage costs) and 2.71% of net assets (including leverage costs) and that shareholders of the Acquired Fund were expected to benefit from significant cost savings as a result of the Reorganization. The Board noted that the estimated pro forma total expense ratio for the Acquiring Fund post-Reorganization assumes that the Acquiring Fund does not employ leverage and considered that, although the Acquiring Fund does not typically use leverage, the Acquiring Fund currently uses leverage to a modest extent through borrowings and that leverage costs are not subject to the contractual expense limitation. The Board considered abrdn’s discussion of the Acquiring Fund’s tactical use of leverage, noting abrdn’s statements that the Acquiring Fund will use leverage through borrowing for investment purposes only when AIL believes that the potential return on additional investments acquired with the proceeds of leverage is likely to exceed the costs incurred in connection with the borrowings and that, depending on market conditions, the Acquiring Fund’s portfolio management team may choose not to use any leverage. The Board also noted the estimated pro forma total expense ratio for the Acquiring Fund post-Reorganization with the impact of current leverage expenses for the Acquiring Fund of 0.11%.

 

 5

 

 

·Fund Performance and Distribution Rates. The Board reviewed the performance of the Funds, noting that the Acquired Fund had outperformed the Acquiring Fund on a NAV basis for the one- and three-year periods ended September 30, 2023 while the Acquiring Fund had outperformed the Acquired Fund on a NAV basis for the five-year period ended September 30, 2023. In reviewing the Funds’ performance, the Board took into account the different investment strategies of the Funds, noting abrdn’s explanation that, in light of the Acquired Fund’s concentration in the financial sector, variability in the relative performance of the Funds was based on the performance of the financial sector compared to that of the broader equity markets. The Board also received information comparing the Funds’ distribution rates and noted that although the Acquiring Fund’s distribution rate on NAV of 7.29% as of the end of its most recent semi-annual fiscal period is lower than the Acquired Fund’s distribution rate on NAV of 9.40% as of the end of its most recent semi-annual fiscal period, distributions paid by the Acquiring Fund and the Acquired Fund over the past five fiscal years have been comprised of 2% and 17% return of capital, respectively, and the Acquiring Fund’s distribution rate is still meaningfully above market.

 

·Anticipated Tax-Free Reorganization; Other Tax Impact. The Board noted First Trust’s representation that the Reorganization will be structured with the intention that it qualify as a tax-free reorganization for federal income tax purposes and that each Fund will obtain an opinion of counsel substantially to this effect (based on certain factual representations and certain customary assumptions). In addition, the Board noted information indicating that the Acquired Fund’s capital loss carryforwards would offset projected realized gains relating to pre-Reorganization portfolio sales in connection with the elimination of leverage for the Acquired Fund and that post-Reorganization sales of the Acquired Fund’s portfolio securities were expected to result in capital losses.

 

·Potential for Improved Trading and Liquidity and Narrower Discounts. The Board considered the larger asset size and higher average daily trading volume of the Acquiring Fund as compared to the Acquired Fund and that shareholders of the Acquired Fund may benefit from becoming shareholders of a larger fund with higher trading volume, potentially resulting in improved liquidity and narrower bid-ask spreads. The Board noted abrdn’s expectation that a larger fund should provide improved scale and liquidity for shareholders with a larger free float and engender greater market visibility, analyst and media coverage attracting more buyers and increased trading of fund shares. The Board considered that, in general, the Funds’ shares have historically traded at similar discounts to NAV, although the Acquiring Fund’s shares had recently traded at a narrower discount than the Acquired Fund’s shares. The Board noted abrdn’s expectation that the combination of the Funds should provide improved liquidity and tradability creating improved potential for a narrower discount and lower discount volatility over time.

 

·Expenses of the Reorganization. The Board noted that the direct costs of the Reorganization, including legal costs and costs associated with proxy solicitation, would be borne by First Trust and abrdn. The Board noted the transaction costs to be borne by the Acquired Fund in connection with the elimination of leverage pre-Reorganization and the transaction costs to be borne by the Acquiring Fund (including shareholders of the Acquired Fund who remain in the Acquiring Fund) as a result of portfolio repositioning post-Reorganization and considered estimates of such costs.

 

 6

 

 

·Alternatives to the Reorganization. The Board noted First Trust’s discussion of alternatives to the Reorganization, including maintaining the status quo, liquidation, conversion to an open-end fund, reorganization with an affiliated fund and reorganization with a third-party fund, and First Trust’s recommendation that the Reorganization was the best option for existing shareholders of the Acquired Fund. As set forth herein, the Board noted the small size of the Acquired Fund and the potential benefits of being a shareholder in a larger fund; that the Reorganization is expected to qualify as a tax-free reorganization whereas a liquidation may result in a taxable event for shareholders; the benefits of a closed-end fund structure versus an open-end fund structure; and abrdn’s experience managing and operating closed-end funds. In addition, the Board noted that First Trust indicated that there were no similar strategy alternatives for a reorganization with an affiliated fund.

 

·Terms and Conditions of the Reorganization. The Board considered the terms and conditions of the Reorganization and whether the Reorganization would result in the dilution of the interests of existing shareholders of the Acquired Fund in light of the basis on which shares of the Acquiring Fund would be issued to shareholders of the Acquired Fund. The Board noted abrdn’s statement indicating that, although none of the reorganizations contemplated by the Purchase Transaction, including the Reorganization, is contingent upon any other reorganization, if the reorganizations are not approved, or if the other conditions in the Purchase Transaction agreement are not satisfied or waived, then the Purchase Transaction may not be completed, and the Purchase Transaction agreement and the Reorganization may be terminated.

 

In addition, the Board considered the Reorganization in light of the increased focus by activist investors on the First Trust Fund Complex closed-end fund suite and the significant costs that may be imposed on the Acquired Fund in connection with an activist campaign, including potential litigation costs. The Board considered that the Reorganization may have the additional benefit of reducing the likelihood of an activist campaign against the larger combined fund. The Board noted abrdn’s view that the Reorganization will help ensure the viability of the Funds for the benefit of long-term shareholders by addressing risks arising from lack of scale, primarily liquidity, marketability challenges and fund costs that lead to wider discounts over time giving investors a poorer outcome and resulting in increasing threats from activists. In evaluating the Reorganization, the Board also considered that First Trust will receive compensation from abrdn in connection with the Purchase Transaction.

 

Based upon on all of the foregoing considerations, the Board, in the exercise of its business judgment, approved the Reorganization, including the proposed Agreement and Plan of Reorganization and the Reorganization contemplated thereby, and determined that the Reorganization would be in the overall best interests of the Acquired Fund. No single factor was determinative in the Board’s analysis and all factors were taken as a whole. The Board, including the Independent Trustees, unanimously recommends that shareholders of the Acquired Fund approve the Reorganization.

 

 7

 

 

On October 23, 2023, First Trust, abrdn Inc. and, for the purposes specified therein, abrdn plc. entered into a separate agreement (the “Purchase Agreement”) pursuant to which abrdn will acquire certain assets related to First Trust’s business of providing investment management services relating to the assets of the Acquired Fund and certain other registered investment companies (the “Business”) if the Reorganization is approved, and upon satisfaction or waiver of certain other conditions. More specifically, under the Purchase Agreement, First Trust has agreed to transfer to abrdn Inc., for a cash payment at the closing of the Asset Transfer (as defined below) and subject to certain exceptions, (i) all right, title and interest of First Trust in and to the books and records relating to the Business and the Acquired Fund and (ii) all goodwill of the Business as a going concern (the “Asset Transfer”).

 

Vote Required for the Proposal

 

The Proposal will require the affirmative vote of a majority of the outstanding voting shares (as defined under the 1940 Act) of the Acquired Fund. The 1940 Act defines a majority of the outstanding voting shares as the lesser of either (i) at least 67% of the voting securities present at the Special Meeting, if at least 50% of such securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting shares. For additional information regarding voting requirements, see “Voting Information and Requirements.”

 

COMPARISON OF THE FUNDS

 

Investment Objectives

 

The Acquired Fund’s primary investment objective is to seek a high level of current income. As a secondary objective, the Acquired Fund seeks an attractive total return. The Acquiring Fund’s principal investment objective is to seek high current dividend income with a secondary objective of long-term growth of capital.

 

Both Funds’ investment objectives are considered fundamental and may not be changed without shareholder approval.

 

Principal Investment Strategies

 

The Funds have similar principal investment strategies, with some substantial differences. As further described below, the Acquired Fund concentrates its investments in “specialty finance companies,” whereas the Acquiring Fund invests in a broad range of equity investments throughout the world.

 

The Acquired Fund invests, under normal market conditions, at least 80% of its Managed Assets (as defined below) in a portfolio of securities of specialty finance and other financial companies that CIM believes offer attractive opportunities for income and capital appreciation. Under normal market conditions, the Acquired Fund will concentrate its investments in a group of industries in the financial sector, which is comprised of specialty finance companies, banks, savings institutions, brokerage firms, investment management companies, insurance companies, holding companies of the foregoing and companies that provide related services to such companies. The Acquired Fund will not invest more than 20% of its Managed Assets in master limited partnerships. “Managed Assets” means the total asset value of the Fund minus the sum of its liabilities, other than the principal amount of borrowings. 

 8

 

The Acquiring Fund invests at least 80% of its net assets plus amounts borrowed for investment purposes in equity securities, primarily common stocks, issued by domestic and foreign companies whose equity securities are readily traded on an established U.S. or foreign securities market and pay dividends.

 

The Acquired Fund does not have any restrictions or prohibitions on investments in the securities of non-U.S. issuers. Although it is not the Acquiring Fund’s current intent, the Acquiring Fund may invest up to 100% of its total assets in the securities of non-U.S. issuers and is not restricted on how much may be invested in the issuers of any single country, provided the Acquiring Fund limits its investments in countries that are considered emerging markets to no more than 35% of the Acquiring Fund’s total assets at any one time. Under normal circumstances, however, the Acquiring Fund invests 35-80% of its total assets in the securities of non-U.S. issuers and among the securities of issuers located in approximately 10 to 30 countries.

 

The Acquired Fund and Acquiring Fund both currently use leverage. The Acquired Fund engages in leverage through borrowing from a committed facility agreement to seek to enhance the level of its current distributions to common shareholders. The Acquiring Fund and the Combined Fund intend to use leverage through borrowing from a credit facility. The Acquiring Fund is permitted to engage in other transactions, such as reverse repurchase agreements and issuance of debt securities or preferred securities, which have the effect of leverage, but currently has no intention to do so. The Acquiring Fund may use leverage in an aggregate amount up to 33-1/3% of its total assets. The Funds’ strategies relating to their use of leverage, if any, may not be successful, and the Funds’ use of leverage will cause the Funds’ NAV to be more volatile than it would otherwise be. There can be no guarantee that the Combined Fund will leverage its assets or, to the extent the Combined Fund utilizes leverage, what percentage of its assets, within regulatory limits, such leverage will represent. Depending on market conditions, the Acquiring Fund’s portfolio management team may choose not to use any leverage. Although the use of leverage by a Fund may create an opportunity for increased after-tax total return for the common shares, it also increases market exposure, results in additional risks and can magnify the effect of any losses. Please see “Leverage” below for additional information regarding the Funds’ strategies with respect to use of leverage.

 

The following table shows the principal investment strategies of each Fund.

 

Acquired Fund Acquiring Fund

Under normal market conditions, the Fund seeks to achieve 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 CIM believes offer attractive opportunities for income and capital appreciation. Specialty finance companies are companies that provide financing to borrowers with capital needs that are different relative to traditional borrowers, who typically utilize commercial banks or public debt markets to meet their financing needs.

In addition, under normal market conditions:

•       The Fund will concentrate its investments in securities of companies within industries in the financial sector, which is comprised of specialty finance companies, banks, savings institutions, brokerage firms, investment management companies, insurance companies, holding companies of the foregoing and companies that provide related services to such companies.

•      The Fund will not invest more than 20% of its Managed Assets in master limited partnerships.

The Fund combines four research-driven investment strategies – growth, value, special dividends and dividend capture rotation – to maximize the amount of distributed dividend income and to identify companies globally with the potential for dividend increases and capital appreciation. The Fund uses a multi-cap, multi-sector, multi-style approach to invest in the securities of issuers of any capitalization level (small, mid or large) and in any sector of industry.

The Fund invests at least 80% of its net assets plus amounts borrowed for investment purposes in equity securities, primarily common stocks, issued by domestic and foreign companies whose equity securities are readily traded on an established U.S. or foreign securities market and pay dividends. The Board of Trustees may change this 80% policy on not less than 60 days' notice to shareholders. The Fund seeks to provide dividend income without regard to whether the dividends qualify for the reduced federal income tax rates applicable to qualified dividends under the Code. Although it is not the Fund's current intent, the Fund may invest up to 100% of its total assets in the securities of non-U.S. issuers and is not restricted on how much may be invested in the issuers of any single country, provided the Fund limits its investments in countries that are considered emerging markets to no more than 35% of the Fund's total assets at any one time. Under normal circumstances, however, the Fund invests 35-80% of its total assets in the securities of non-U.S. issuers and among the securities of issuers located in approximately 10 to 30 countries. Allocation of the Fund's assets to issuers outside of the U.S. and among countries outside of the U.S. is dependent on the economic outlook of those countries and the dividend yields available in their markets. aIL believes that this flexibility will allow it to continuously pursue high current dividend income in countries where aIL perceives the best opportunities to exist.

 9

 

Acquired Fund Acquiring Fund

The First Trust and CIM believe that specialty finance companies may be attractive for investors seeking high levels of current income as many specialty finance companies are “pass-through” entities in which the income of the company is treated as income to the shareholders (i.e., cash flow is not taxed at the entity level). One type of specialty finance company, BDCs, has emerged as a significant alternative to traditional capital providers, such as commercial banks and other financial institutions. BDCs are a type of closed-end fund regulated under the 1940 Act, whose shares are typically listed for trading on a U.S. securities exchange. BDCs typically invest in and lend to small and medium-sized private and certain public companies that may not have access to public equity markets for capital raising. Often times, the financing a BDC provides includes an equity-like investment such as warrants or conversion rights, creating an opportunity for the BDC to participate in capital appreciation in addition to the interest income earned through its debt investments. The interest earned by a BDC flows through to investors in the form of a dividend, normally without being taxed at the BDC entity level. Unlike corporations, BDCs are not taxed on income distributed to their shareholders provided they comply with the applicable requirements of the Internal Revenue Code of 1986. BDCs are unique in that at least 70% of their investments must be made in private and certain public U.S. businesses, and BDCs. are required to make available significant managerial assistance to their portfolio companies. The securities of BDCs, which are required to distribute substantially all of their income on an annual basis to investors in order to not be subject to entity level taxation, often offer a yield advantage over securities of other issuers, such as corporations, that are taxed on income at the entity level and are able to retain all of a portion of their income rather than distributing it to investors. The Fund invests primarily in BDC shares which are trading in the secondary market on a U.S. securities exchange but may, in certain circumstances, invest in an initial public offering of BDC shares or invest in certain debt instruments issued by BDCs. The Fund will indirectly bear its proportionate share of any management and other expense, and of any performance based or incentive fees, charged by the BDCs in which it invests, in addition to the expenses paid by the Fund. Other examples of specialty finance companies include categories of REITs providing commercial or residential mortgage financing or lease financing.

 

The Fund engages in the use of financial leverage to seek to enhance the level of its current distributions to common shareholders. The Fund may use financial leverage through the issuance of preferred shares of beneficial interest and/or borrowings by the Fund.

 

The Fund does not intend to enter into derivative transactions as a principal part of its investment strategy. However, the Fund may enter into derivative transactions to seek to manage the risks of the Fund’s portfolio securities or for other purposes to the extent CIM determines that the use of derivative transactions is consistent with the Fund’s investment objectives and policies and applicable regulatory requirements. Certain of the Fund’s derivative transactions, if any, may provide investment leverage to the Fund’s portfolio. To the extent the Fund enters into derivatives transactions, it will do so pursuant to Rule 18f-4 under the 1940 Act. Rule 18f-4 requires the Fund to implement certain policies and procedures designed to manage its derivatives risks, dependent upon the Fund’s level of exposure to derivative instruments. 

aIL believes that dividend paying stocks have the potential for superior total return performance, as compared to non-dividend paying stocks. aIL believes that global diversification may provide to investors in the Fund the benefit of generally higher dividend yields in some countries outside the United States.

 

The Fund invests in equity securities issued by U.S. issuers, and foreign issuers whose equity securities are readily traded on an established U.S. or foreign securities market, that pay dividends. The Fund screens the U.S. and foreign companies in which it considers investing using the same criteria, including, generally, high dividend yield, sufficiently liquid trading in an established market, and also its judgment that the issuer may have good prospects for earnings growth or may be undervalued. The equity securities in which the Fund invests include primarily common stocks. The Fund may, from time to time, also invest a portion of its assets in depositary receipts, preferred stocks, real estate investment trusts ("REITs"), master limited partnerships ("MLPs", exchange-traded funds ("ETFs") and securities convertible into or exchangeable for common stocks, such as convertible debt.

 

The Fund may from time to time engage in short sales of securities, for investment or for hedging purposes. Short sales are transactions in which the Fund sells a security it does not own. To complete the transaction, the Fund must borrow the security to make delivery to the buyer. The Fund is then obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. In the event that the Fund elects to pursue such a strategy, the Fund expects it would sell shares of portfolio securities short through a pair trade system, where it would maintain a long position in a basket of dividend-paying stocks and a short position in a security or securities replicating an index, which the Fund anticipates to be outperformed by the dividend-paying stocks it owns. The Fund may also sell short individual stocks that the Fund expects to underperform other stocks which the Fund holds. For hedging purposes, the Fund may purchase or sell short futures contracts on global equity indexes.

 

The Fund anticipates that it will generally not make a short sale if, after giving effect to such sale, the market value of all securities sold short by the Fund exceeds 20% of the value of its total assets.

 

 10

 

Acquired Fund Acquiring Fund
 

The Fund intends to use leverage through borrowing from a credit facility. The Fund is permitted to engage in other transactions, such as reverse repurchase agreements and issuance of debt securities or preferred securities, which have the effect of leverage, but currently has no intention to do so. aIL believes that the use of leverage may provide positive absolute return in the long term and potentially increased income and would thereby be beneficial to shareholders. The portfolio management team anticipates using leverage in an aggregate amount up to 33 1/3% of its total assets (including the amount obtained from leverage), under normal market conditions. The Fund's portfolio management team may use leverage opportunistically and seek to reduce the Fund's leverage usage during times of heightened market volatility. Depending on market conditions, the portfolio management team may choose not to use any leverage or may instead borrow up to 33 1/3% of the Fund's total assets. The Fund also may borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions, which otherwise might require untimely dispositions of Fund securities.

 

The Fund may, from time to time, take temporary defensive positions that are inconsistent with the Fund's principal investment strategies in attempting to respond to adverse market, economic, political or other conditions. During such times, the Fund may temporarily invest up to 100% of its assets in cash or cash equivalents, including money market instruments, prime commercial paper, repurchase agreements, Treasury bills and other short-term obligations of the U. S. Government, its agencies or instrumentalities. In these and in other cases, the Fund may not achieve its investment objectives.

 

Generally, securities are purchased or sold by the Fund on national securities exchanges and in the over-the-counter market. From time to time, securities may be purchased or sold in private transactions, including securities that are not publicly traded or that are otherwise illiquid. aIL does not expect investments in illiquid securities to comprise more than 10% of the Fund's total assets (determined at the time the investment is made).

 

aIL may invest the Fund's cash balances in any investments it deems appropriate, including, without limitation and as permitted under the 1940 Act, money market funds, repurchase agreements, U.S. Treasury and U.S. agency securities, municipal bonds and bank accounts. Any income earned from such investments is ordinarily reinvested by the Fund in accordance with its investment program. Many of the considerations entering into aIL's recommendations and the portfolio managers' decisions are subjective. 

 11

 

Acquired Fund Acquiring Fund
  Certain of the Fund's investment strategies may not qualify for the reduced federal income tax rates applicable to qualified dividend income under the Code. As a result, there can be no assurance as to what portion of the Fund's distributions will be designated as qualified dividend income. aIL considers and evaluates ESG factors as part of the investment analysis process for most long-term investments. aIL considers the most material potential ESG risks and opportunities impacting issuers, alongside other non-ESG factors. The relevance of ESG factors to the investment process varies across issuers and strategies. For instance, ESG factors may not be considered for securities that aIL intends to hold solely as part of the Fund’s dividend recapture strategy.

 

Distribution Information

 

The Acquired Fund currently pays a quarterly distribution of $0.0825 per share; based on the market price and NAV as of September 29, 2023, the Acquired Fund’s annualized distribution rate is 9.79% and 8.25%, respectively. The Acquiring Fund currently pays a monthly distribution rate of $0.0575 per share; based on the market price and NAV as of September 29, 2023, the Acquiring Fund’s annualized distribution rate is 7.8% and 9.1%, respectively. The Combined Fund expects to pay a monthly distribution of $0.100 per share and would have the same distribution yield as the Acquiring Fund.

 

The Combined Fund intends to make its first distribution to shareholders in the month immediately following the Reorganization. In addition, the Combined Fund expects to follow the same frequency of payments as the Acquiring Fund and make monthly distributions to shareholders.

 

Please see “Description of Common Shares to be Issued by the Acquiring Fund; Comparison to the Acquired Fund” below for additional information.

 

Leverage

 

The Acquired Fund and Acquiring Fund both currently use leverage. The Acquired Fund engages in leverage through borrowing from a committed facility agreement to seek to enhance the level of its current distributions to common shareholders. The Acquiring Fund intends to use leverage through borrowing from a credit facility. The Acquiring Fund is permitted to engage in other transactions, such as reverse repurchase agreements and issuance of debt securities or preferred securities, which have the effect of leverage, but currently has no intention to do so. The Acquiring Fund may use leverage in an aggregate amount up to 33-1/3% of its total assets.

 

The Funds’ strategies relating to their use of leverage, if any, may not be successful, and the Funds’ use of leverage will cause the Funds’ NAV to be more volatile than it would otherwise be. There can be no guarantee that the Combined Fund will leverage its assets or, to the extent the Combined Fund utilizes leverage, what percentage of its assets, within regulatory limits, such leverage will represent. Depending on market conditions, the Acquiring Fund’s portfolio management team may choose not to use any leverage. Although the use of leverage by a Fund may create an opportunity for increased after-tax total return for the common shares, it also increases market exposure, results in additional risks and can magnify the effect of any losses. Depending on market conditions, the Acquiring Fund’s portfolio management team may choose not to use any leverage. Although the use of leverage by a Fund may create an opportunity for increased after-tax total return for the common shares, it also increases market exposure, results in additional risks and can magnify the effect of any losses.

 

The Acquired Fund will be required to pay back its outstanding leverage in connection with the closing of the Reorganization. It is anticipated that approximately 13% of the Acquired Fund’s holdings will be sold by the Acquired Fund before the closing of the Reorganization in order to pay back its outstanding leverage. This portfolio transition may take a significant amount of time and result in the Acquired Fund holding large amounts of uninvested cash prior to the Closing Date, and there may be times when the Acquired Fund is not fully invested in accordance with its investment objective and strategies during this transition period, which may cause the Acquired Fund to forgo any appreciation in value of portfolio investments, if any. As of September 21, 2023, and assuming the sale of a pro rata slice of the portfolio, the expected commissions, spread related and stamp duties/taxes costs to de-lever the portfolio would be approximately $69,000 (or 0.12% of the Acquired Fund’s NAV as of September 21, 2023) or less than $0.005 per share. This breaks down across commissions costs of roughly $5,885, spread related costs for international securities of approximately $62,930 and stamp duties/taxes of $185. To the extent the Acquired Fund has holdings in France, Spain and/or Italy, such countries may impose an additional foreign transfer tax on the transfer of such securities to the Acquiring Fund. These taxes are in addition to the transaction costs disclosed above and would be borne by the Combined Fund. Portfolio transitioning after the Reorganization may result in capital gains or losses, which may have federal income tax consequences. For example, if the Reorganization only was completed on September 21, 2023, it is estimated that approximately $6,866,343, or $0.061 per share, in capital losses would have resulted from portfolio transitioning in the Combined Fund following the Reorganization. The foregoing estimates are subject to change depending on the composition of Acquired Fund’s portfolio and market circumstances at the time any sales are made.

 

The portfolio de-levering discussed above may result in capital gains or losses, which may have federal income tax consequences. It is anticipated that the pre-Reorganization portfolio transitioning will result in the realization of $824,192 or $0.057 per share in capital gains based on Acquired Fund holdings as of September 21, 2023. However, it is anticipated that this would be offset by the Fund’s capital loss carryforwards. The actual tax consequences as a result of portfolio repositioning are dependent on the portfolio composition of the Acquired Fund at the time and market conditions.

 12

 

 

As of September 29, 2023, the Acquired Fund had aggregate leverage from borrowings, and as of April 30, 2023, the Acquiring Fund had aggregate leverage from borrowings as a percentage of its total assets as follows:

 

    Leverage Ratio  
Acquired Fund    13.0 %
Acquiring Fund    6.13 %

 

If the Reorganization had occurred on April 30, 2023, the leverage ratio for the Combined Fund would have been as follows:

 

Pro Forma Combined Fund  
4.34 %

 

Portfolio Transitioning

 

Following the Reorganization, the Combined Fund expects to realign its portfolio in a manner consistent with its investment strategies and policies, which will be the same as the Acquiring Fund’s strategies and policies. The Combined Fund may not be invested consistent with its investment strategies or aIL’s investment approach while such realignment occurs. The realignment is anticipated to take approximately two weeks following the closing of the Reorganization, based on current market conditions and assuming that the Acquired Fund’s holdings are the same as of September 21, 2023. Sales and purchases of less liquid securities could take longer. Based on the Acquired Fund’s holdings as of September 21, 2023, the Combined Fund expects to sell approximately 97% of the Acquired Fund’s portfolio following the closing of the Reorganization. If the Reorganization was completed on September 21, 2023, the expected cost to sell 97% of the Acquired Fund’s holdings following the closing of the Reorganization, which is estimated to equal 5.5% of the Combined Fund’s portfolio, would be approximately $523,000 (or 0.05% of the estimated NAV of the Combined Fund as of September 21, 2023) or $0.004 per share of the Combined Fund. To the extent there are any transaction costs (including brokerage commissions, transaction charges and related fees) associated with the sales and purchases made in connection with the Reorganization, these will be borne by the Acquired Fund with respect to the portfolio transitioning conducted before the Reorganization and borne by the Combined Fund with respect to the portfolio transitioning conducted after the Reorganization. The portfolio transitioning pre- and post-Reorganization may result in capital gains or losses, which may have federal income tax consequences for shareholders of the Acquired Fund and the Combined Fund.

 

Fees and Expenses

 

Below is a comparison of the fees and expenses of the Funds before and after the Reorganization based on the expenses for the fiscal period ended May 31, 2023, for the Acquired Fund and the fiscal period ended April 30, 2023, for the Acquiring Fund. The pro forma information for the Combined Fund is as of April 30, 2023. Pro forma combined fees and expenses are estimated in good faith and are hypothetical.

 

It is important to note that following the Reorganization, shareholders of the Acquired Fund would be subject to the actual fees and expenses of the Acquiring Fund, which may not be the same as the pro forma combined fees and expenses. Future fees and expenses may be greater or lesser than those indicated below.

 

    Acquired Fund   Acquiring Fund  

Pro Forma

Combined Fund

Common Shareholder Transaction Expenses            
Sales Load (as a percentage of the offering price)(1)   None   None   None
Offering expenses (as a percentage of offering price)(1)   None   None   None
Dividend reinvestment and optional cash purchase plan fees (per share for open-market purchases of common shares)            
Fee for Open Market Purchases of Common Shares   None   $0.02 (per share)(2)   $0.02 (per share)(2)
Fee for Optional Shares Purchases   None   $5.00 (max)(2)   $5.00 (max)(2)
Sales of Shares Held in a Dividend Reinvestment Account   None   $0.12 (per share) and $25.00 (max)(2)   $0.12 (per share) and $25.00 (max)(2)
             

Annual expenses 

(as a percentage of net assets attributable to Common Shares)

           
Advisory fee(3)   1.17%   1.02%   1.02%
Interest expense(4)   1.12%   0.11%   0.11%
Other expenses   0.42%   0.19%   0.18%
Total annual expenses   2.71%   1.32%   1.31%
Less: expense reimbursement  

N/A

  0.07%(5)   0.06%(5)
             
Total annual expenses after expense reimbursement

2.71%

  1.25%(5)   1.25%(5)

 13

 

(1)

No sales load will be charged in connection with the issuance of Acquiring Fund common shares as part of the Reorganization. Common shares are not available for purchase from the Funds but may be purchased on the NYSE through a broker-dealer subject to individually negotiated commission rates. Common shares purchased in the secondary market may be subject to brokerage commissions or other charges.

 

(2)

Shareholders who participate in the Acquiring Fund’s Dividend Reinvestment and Optional Cash Purchase Plan (the “Plan”) may be subject to fees on certain transactions. Fees for Computershare Trust Company N.A. (the “Plan Agent”) for the handling of the reinvestment of dividends will be paid by the Acquiring Fund; however, participating shareholders will pay a $0.02 per share fee incurred in connection with open-market purchases in connection with the reinvestment of dividends, capital gains distributions and voluntary cash payments made by the participant, which will be deducted from the value of the dividend. Shareholders will be subject to $0.12 per share fee and either a $10.00 fee (for batch orders) or $25.00 fee (for market orders) for sales of shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Plan Agent is required to pay.

 

(3)

The contractual advisory fee of the Acquired Fund is 1.00% of the Acquired Fund’s Managed Assets. For the purposes of this calculation, “Managed Assets” means the average daily gross asset value of the Acquired Fund (including assets attributable to the Acquired Fund's Preferred Shares (as such term is defined in the Acquired Fund's prospectus), if any, and the principal amount of borrowings, if any), minus the sum of the Acquired Fund's accrued and unpaid dividends on any outstanding Preferred Shares and accrued liabilities (other than the principal amount of any borrowings incurred, commercial paper or notes issued by the Acquired Fund). For purposes of determining Managed Assets, the liquidation preference of any outstanding Preferred Shares of the Acquired Fund is not treated as a liability.

 

The contractual advisory fee of the Acquiring Fund and the Combined Fund is 1.00% of the Fund’s average daily Managed Assets. “Managed Assets” is defined as total assets of the Fund, including any form of leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing through a credit facility or the usance of debt securities), (ii) the issuance of preferred stock or other similar preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the Fund’s investment objectives and policies, and/or (iv) any other means.

 

(4)

For the Acquired Fund, the percentage in the table is based on total borrowings of $8,600,000 for the Acquired Fund (the balance outstanding under the Acquired Fund’s credit facility as of May 31, 2023.

 

For the Acquiring Fund, the percentage in the table is based on total borrowings of $19,643,538 for the Acquiring Fund.

 14

 

  For the Combined Fund, the percentage in the table is based on estimated total average borrowings for the fiscal period ended April 30, 2023 of $20,273,000 for the Combined Fund (the same percentage of borrowing as the Acquiring Fund for the period ended April 30, 2023).
   
  There can be no assurances that the Acquired Fund will be able obtain such level of borrowing or to maintain its current level of borrowing, that the terms under which the Acquired Fund borrows will not change, or that the Acquired Fund’s use of leverage will be profitable.
   
(5) aIL, the investment adviser of the Acquiring Fund, has entered into a written contract (the “Amended and Restated Expense Limitation Agreement”) with the Acquiring Fund that is effective through June 30, 2024. In connection with the Reorganization, the Amended and Restated Expense Limitation Agreement shall be extended through one year from the date of the closing of the Reorganizations, or June 30, 2025, whichever is later. The Amended and Restated Expense Limitation Agreement limits the total ordinary operating expenses of the Acquiring Fund and following the consummation of the Reorganization, the Combined Fund (excluding any leverage costs, interest, taxes, brokerage commissions, and any non-routine expenses), from exceeding 1.14% of the average daily net assets of the Fund on an annualized basis. The Acquiring Fund or Combined Fund, as applicable, may repay any such reimbursement from aIL within three years of the reimbursement, provided that the following requirements are met: the reimbursements do not cause the Acquiring Fund or Combined Fund, as applicable, to exceed the lesser of the applicable expense limitation in the contract at the time the fees were limited or expenses are paid or the applicable expense limitation in effect at the time the expenses are being recouped by aIL.
   

Expense Example

 

The following example illustrates the expenses that a shareholder would pay on a $1,000 investment that is held for the time periods provided in the table. The example set forth below assumes shares of each Fund were owned as of the completion of the Reorganization and uses a 5% annual rate of return as mandated by SEC regulations.*

 

    1 Year   3 Years   5 Years   10 Years 
Acquired Fund   $27   $84   $143   $304 
Acquiring Fund    $13   $41   $72   $158 
Pro Forma Combined Fund    $13   $40   $71   $157 

 

* The example should not be considered a representation of future expenses or rate of return and actual Combined Fund expenses may be greater or less than those shown. The example assumes that (i) all dividends and other distributions are reinvested at NAV, (ii) the percentage amounts listed under “Total annual expenses” above remain the same in the years shown and (iii) the expense reimbursement agreement for the Combined Fund is only in effect until a year from the date of the closings of the Reorganizations or June 30, 2025, whichever is later, as described in note (5) above. 

 

Principal Risks

 

The principal risks of the Funds are similar, but include some substantial differences. Although the Funds are subject to similar risks in connection with their investment objectives, their risks materially differ in certain ways on account of each Fund’s distinct investment objectives and strategies. The Acquired Fund is subject to certain risks specific to its holdings in financial sector securities, and the Acquiring Fund is subject to specific risks to its holdings in foreign countries. Therefore, in the chart below and principal risks that follow, you will notice that the Acquired Fund is subject to certain risks stemming from its potential exposure to financial sector securities to which the Acquiring Fund is not subject, and that the Acquiring Fund is subject to certain risks stemming from its potential exposure to foreign securities to which the Acquired Fund is not subject. The Acquired Fund and the Acquiring Fund may share similar risks but describe them differently or under a different risk heading. A chart showing the risks applicable to each Fund based on section headings is included directly below. Because the chart categorizes risk heading titles only, it is possible that the descriptions of the risks could encompass broader concepts for one Fund compared to the other or include multiple associated risks under a single heading. Therefore, the description of the risks associated with each heading for each Fund is included below the chart to provide more descriptive information of each risk.

 15

 

Principal Risks   Acquiring Fund Acquired Fund
Business Development Company (“BDC”) Risk   X
Common Stock Risk X  
Convertible Securities Risk X  
Cyber Security Risk X  X
Defensive Positions X  
Deferred Tax Risks of MLPs X  
Depositary Receipts X  
Dividend Strategy Risks X  
Emerging Market Securities Risk X  
Financial Sector Concentration Risk   X
Foreign Securities Risk X  
Illiquid Securities Risk X X
Interest Rate Risk; Income and Interest Rate Risk X X
Inflation Risk X  
Investment and Market Risk X  
Investments in Undervalued Securities X  
Issuer Risk X  
Leverage Risk X X
Management Risk; Management Risk and Reliance on Key Personnel X X
Market Discount from Net Asset Value   X
Market Events Risk; Market Risk X X
Market Price of Shares X  
MLP Risk X  
MLP Tax Risk X  
Operational Risk   X
Portfolio Turnover Risk X  
Potential Conflicts of Interest Risk   X
Preferred Securities Risk X  
Qualified Dividend Tax Risk X  
REIT Risk; REIT, Mortgage-Related and Asset-Backed Securities Risk X X
Risk Characteristics of Options and Futures X  
Risks of Derivative Investments X  
Short Sale Risk X  
Small and Medium Cap Company Risk X  
Special Risks Associated with Foreign Currency Futures Contracts and Related Options X  
Special Risks Associated with Foreign Currency Options X  
Specialty Finance and Other Financial Companies Risks   X
Valuation Risk   X

 

Principal Risks of Investing in the Acquiring Fund

 

Investment and Market Risk. An investment in common shares is subject to investment risk, including the possible loss of the entire principal amount invested. An investment in common shares represents an indirect investment in the securities owned by the Fund, which are generally traded on a securities exchange or in the over-the-counter markets. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The value of your common shares at any point in time may be less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.

 

Issuer Risk. The value of an issuer's securities that are held in the Fund's portfolio may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer's goods and services. 

 16

 

Dividend Strategy Risks. The Fund's pursuit of its investment objectives depends upon the Adviser's ability to anticipate the dividend policies of the companies in which it chooses to invest. It is difficult to anticipate the level of dividends that companies will pay in any given timeframe. The Fund's strategies require the Adviser to identify and exploit opportunities such as the announcement of major corporate actions, such as restructuring initiatives or a special dividend, that may lead to high current dividend income. These situations are typically not recurring in nature or frequency, may be difficult to predict and may not result in an opportunity that allows the Adviser to fulfill the Fund's investment objective. In addition, the dividend policies of the Fund's target companies are heavily influenced by the current economic climate and the favorable federal tax treatment afforded to dividends. Challenging economic conditions, affecting either the market as a whole or a specific investment in the Fund's portfolio, may limit the opportunity to benefit from the current dividend policies of the companies in which the Fund invests or may cause such companies to reduce or eliminate their dividends. In addition, a change in the favorable provisions of the federal tax laws may limit your ability to benefit from dividend increases or special dividends, may effect a widespread reduction in announced dividends and may adversely impact the valuation of the shares of dividend-paying companies. The use of dividend capture strategies will expose the Fund to increased trading costs and potential for capital loss or gain, particularly in the event of significant short-term price movements of stocks subject to dividend capture trading.

 

Qualified Dividend Tax Risk. There can be no assurance as to what portion of the distributions paid to the Fund's shareholders will consist of tax-advantaged qualified dividend income or long-term capital gains or what the tax rates on various types of income will be in future years. The favorable U.S. federal tax treatment may be adversely affected, changed or repealed by future changes in tax laws at any time. In addition, it may be difficult to obtain information regarding whether distributions by non-U.S. entities in which the Fund invests should be regarded as qualified dividend income. Furthermore, to receive qualified dividend income treatment, the Fund must meet holding period and other requirements with respect to the dividend paying securities in its portfolio, and the shareholder must meet holding period and other requirements with respect to the common shares of the Fund.

 

Common Stock Risk. The Fund invests primarily in common stocks. Although common stocks have historically generated higher average returns than fixed income securities over the long term, common stocks also have experienced significantly more volatility in returns. Common stocks may be more susceptible to adverse changes in market value due to issuer specific events or general movements in the equities markets. A drop in the stock market may depress the price of common stocks held by the Fund. Common stock prices fluctuate for many reasons, including changes in investors' perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or the occurrence of political or economic events affecting issuers. For example, an adverse event, such as an unfavorable earnings report, may depress the value of common stock in which the Fund has invested; the price of common stock of an issuer may be particularly sensitive to general movements in the stock market; or a drop in the stock market may depress the price of most or all of the common stocks held by the Fund. Also, common stock of an issuer in the Fund's portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition. The common stocks in which the Fund invests are structurally subordinated to preferred securities, bonds and other debt instruments in a company's capital structure, in terms of priority to corporate income and assets, and therefore will be subject to greater risk than the preferred securities or debt instruments of such issuers. In addition, common stock prices may be sensitive to rising interest rates, as the costs of capital rise and borrowing costs increase.

 

Foreign Securities Risk. The Fund has substantial exposure to foreign securities. The Fund's investments in securities of foreign issuers are subject to risks not usually associated with owning securities of U.S. issuers. These risks can include fluctuations in foreign currencies, foreign currency exchange controls, social, political and economic instability, differences in securities regulation and trading, expropriation or nationalization of assets, and foreign taxation issues. In addition, changes in government administrations or economic or monetary policies in the United States or abroad could result in appreciation or depreciation of the Fund's securities. It may also be more difficult to obtain and enforce a judgment against a foreign issuer. Any foreign investments made by the Fund must be made in compliance with U.S. and foreign currency restrictions and tax laws restricting the amounts and types of foreign investments. The Fund has no other investment restrictions with respect to investing in foreign issuers. Dividends paid on foreign securities may not qualify for the reduced federal income tax rates applicable to qualified dividends under the Code. As a result, there can be no assurance as to what portion of the Fund's distributions attributable to foreign securities will be designated as qualified dividend income.

 

Emerging Market Securities Risk. The Fund may invest up to 35% of its total assets in securities of issuers located in "emerging markets." Although there is no universally accepted definition, an emerging or developing country is generally considered to be a country which is in the initial stages of industrialization. Investing in emerging markets can involve unique risks in addition to and greater than those generally associated with investing in developed markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed markets. The risks of investing in emerging markets include greater political and economic uncertainties than in developed markets, the risk of the imposition of economic sanctions against a country, the risk of nationalization of industries and expropriation of assets, social instability and war, currency transfer restrictions, risks that governments may substantially restrict foreign investing in their capital markets or in certain industries, impose punitive taxes, trade barriers and other protectionist or retaliatory measures. In the event of nationalization, default, debt restructuring, capital controls, expropriation or other confiscation, the Fund could lose its entire investment in foreign securities. Adverse conditions in a certain region can adversely affect securities of other countries whose economies appear to be unrelated. To the extent that the Fund invests a significant portion of its assets in a specific geographic region, the Fund will generally have more exposure to regional economic risks associated with foreign investments. Emerging market economies are often dependent upon a few commodities or natural resources that may be significantly adversely affected by volatile price movements against those commodities or natural resources. Emerging market countries may experience high levels of inflation and currency devaluation and have a more limited number of potential buyers for investments. A market swing in one or more emerging market countries or regions where the Fund has invested a significant amount of its assets may have a greater effect on the Fund's performance than it would in a more geographically diversified portfolio. 

 17

 

The securities markets and legal systems in emerging market countries may only be in a developmental stage and may provide few, or none, of the advantages and protections of markets or legal systems available in more developed countries. Legal remedies available to investors in some foreign countries are less extensive than those available to investors in the U.S. There could be difficulties in enforcing favorable legal judgments in foreign courts. Foreign markets may have different securities clearance and settlement procedures. In certain securities markets, settlements may not keep pace with the volume of securities transactions. If this occurs, settlement may be delayed and the Fund's assets may be uninvested and may not be earning returns. The Fund also may miss investment opportunities or not be able to sell an investment because of these delays. Some investments in emerging markets can be considered speculative, and the value of those investments can be more volatile than investments in more developed foreign markets.

 

Depositary Receipts. Depositary receipts include American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”) and Global Depositary Receipts (“GDRs”) or other securities convertible into securities of issuers based in foreign countries. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. Generally, ADRs, in registered form, are denominated in U.S. Dollars and are designed for use in the U.S. securities markets, GDRs, in bearer form, are issued and designed for use outside the United States and EDRs (also referred to as Continental Depositary Receipts (“CDRs”)), in bearer form, may be denominated in other currencies and are designed for use in European securities markets. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities. EDRs are European receipts evidencing a similar arrangement. GDRs are receipts typically issued by non-U.S. banks and trust companies that evidence ownership of either foreign or domestic securities. For purposes of a Fund's investment policies, ADRs, GDRs and EDRs are deemed to have the same classification as the underlying securities they represent. Thus, an ADR, GDR or EDR representing ownership of common stock will be treated as common stock.

 

The Fund may invest in depositary receipts through “sponsored” or “unsponsored” facilities. While ADRs issued under these two types of facilities are in some respects similar, there are distinctions between them relating to the rights and obligations of ADR holders and the practices of market participants.

 

A depositary may establish an unsponsored facility without participation by (or even necessarily the acquiescence of) the issuer of the deposited securities, although typically the depositary requests a letter of non-objection from such issuer prior to the establishment of the facility. Holders of unsponsored ADRs generally bear all the costs of such facilities. The depositary usually charges fees upon the deposit and withdrawal of the deposited securities, the conversion of dividends into U.S. Dollars, the disposition of non-cash distributions, and the performance of other services. The depositary of an unsponsored facility frequently is under no obligation to pass through voting rights to ADR holders in respect of the deposited securities. In addition, an unsponsored facility is generally not obligated to distribute communications received from the issuer of the deposited securities or to disclose material information about such issuer in the U.S. and thus there may not be a correlation between such information and the market value of the depositary receipts. Unsponsored ADRs tend to be less liquid than sponsored ADRs.

 

Sponsored ADR facilities are created in generally the same manner as unsponsored facilities, except that the issuer of the deposited securities enters into a deposit agreement with the depositary. The deposit agreement sets out the rights and responsibilities of the issuer, the depositary, and the ADR holders. With sponsored facilities, the issuer of the deposited securities generally will bear some of the costs relating to the facility (such as dividend payment fees of the depositary), although ADR holders continue to bear certain other costs (such as deposit and withdrawal fees). Under the terms of most sponsored arrangements, depositaries agree to distribute notices of shareholder meetings and voting instructions, and to provide shareholder communications and other information to the ADR holders at the request of the issuer of the deposited securities.

 

In addition, the issuers of depositary receipts may discontinue issuing new depositary receipts and withdraw existing depositary receipts at any time, which may result in costs and delays in the distribution of the underlying assets to the Fund and may negatively impact the Fund's performance.

 

Small and Medium Cap Company Risk. Compared to investment companies that focus only on large capitalization companies, the Fund's share price may be more volatile because it also invests in small and medium capitalization companies. Compared to large companies, small and medium capitalization companies are more likely to have (i) less information publicly available, (ii) more limited product lines or markets and less mature businesses, (iii) fewer capital resources, (iv) more limited management depth and (v) shorter operating histories. Further, compared to large cap stocks, the securities of small and medium capitalization companies are more likely to experience sharper swings in market values, be harder to sell at times and at prices that the Adviser believes appropriate, and offer greater potential for gains and losses. 

 18

 

Portfolio Turnover Risk. The techniques and strategies contemplated by the Fund might result in a high degree of portfolio turnover. The Fund cannot accurately predict its securities portfolio turnover rate, but anticipates that its annual portfolio turnover rate will likely exceed 100% under normal market conditions, although it could be materially higher under certain conditions. Higher portfolio turnover rates could result in corresponding increases in brokerage commissions and may generate short-term capital gains taxable as ordinary income.

 

Defensive Positions. During periods of adverse market or economic conditions, the Fund may temporarily invest all or a substantial portion of its assets in cash or cash equivalents. The Fund would not be pursuing its investment objectives in these circumstances and could miss favorable market developments.

 

Market Price of Shares. The shares of closed-end management investment companies often trade at a discount from their NAV, and the Fund's common shares may likewise trade at a discount from NAV. The trading price of the Fund's common shares may be less than the public offering price. The returns earned by the Fund's shareholders who sell their common shares below NAV will be reduced. The Fund may utilize leverage, which magnifies the market risk.

 

Management Risk. The Fund is subject to management risk because it is an actively managed portfolio. The Fund's successful pursuit of its investment objectives depends upon the Adviser's ability to find and exploit market inefficiencies with respect to undervalued securities and identify companies experiencing a change in dividend policy, including the announcement of restructuring initiatives or special dividends. Such situations occur infrequently and sporadically and may be difficult to predict, and may not result in a favorable pricing opportunity that allows the Adviser to fulfill the Fund's investment objectives. The Adviser's security selections and other investment decisions might produce losses or cause the Fund to underperform when compared to other funds with similar investment goals. If one or more key individuals leave the employ of the Adviser, the Adviser may not be able to hire qualified replacements, or may require an extended time to do so. This could prevent the Fund from achieving its investment objectives.

 

Leverage Risk. Leverage creates three major types of risks for shareholders:

 

the likelihood of greater volatility of NAV and market price of common shares because changes in value of the Fund's portfolio (including changes in the value of any interest rate swap, if applicable) are borne entirely by the common shareholders;

 

the possibility either that share income will fall if the interest rate on any borrowings or the dividend rate on any preferred shares issued rises, or that share income and distributions will fluctuate because the interest rate on any borrowings or the dividend rate on any preferred shares issued varies; and

 

if the Fund leverages through issuing preferred shares or borrowings, the Fund may not be permitted to declare dividends or other distributions with respect to its common shares or purchase its capital stock, unless at the time thereof the Fund meets certain asset coverage requirements.

 

Leverage involves certain additional risks, including the risk that the cost of leverage may exceed the return earned by the Fund on the proceeds of such leverage. The use of leverage will increase the volatility of changes in the Fund's NAV, market price and distributions. In the event of a general market decline in the value of assets in which the Fund invests, the effect of that decline will be magnified in the Fund because of the additional assets purchased with the proceeds of the leverage.

 

In addition, funds borrowed pursuant a credit facility may 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. In the event of an event of default under a loan facility, lenders may have the right to cause a liquidation of the collateral (i.e., sell portfolio securities and other assets of the Fund) and, if any such default is not cured, the lenders may be able to control the liquidation as well. A leverage facility agreement may include covenants that impose on the Fund asset coverage requirements, Fund composition requirements and limits on certain investments, such as illiquid investments or derivatives, which are more stringent than those imposed on the Fund by the 1940 Act. However, because the Fund's use of leverage is expected to be relatively modest and flexible in approach, the Adviser currently does not believe that these restrictions would significantly impact its management of the Fund.

 

The Adviser in its best judgment nevertheless may determine to maintain the Fund's leveraged position if it deems such action to be appropriate in the circumstances. During periods in which the Fund is using leverage, the fees paid to the Adviser for investment advisory services will be higher than if the Fund did not use leverage because the fees paid will be calculated on the basis of the Fund's total assets, including proceeds from borrowings, which may create an incentive to leverage the Fund. 

 19

 

Short Sale Risk. When transacting a short sale, the Fund must borrow the security sold to make delivery to the buyer. The Fund is then obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be higher or lower than the price at which the security was sold by the Fund.

 

A short sale will be successful if the shorted security price decreases. However, if the underlying security goes up in price during the period during which the short position is outstanding, the Fund will realize a loss. The risk on a short sale is unlimited because the Fund must buy the shorted security at the higher price to complete the transaction. Therefore, short sales may be subject to greater risks than investments in long positions. With a long position the maximum sustainable loss is limited to the amount paid for the security plus the transaction costs, whereas there is no maximum attainable price of the security sold short.

 

The Fund also incurs increased transaction costs associated with selling securities short.

 

REIT Risk. If the Fund invests in REITs, such investment will subject the Fund to various risks. The first, real estate industry risk, is the risk that the REIT share prices will decline because of adverse developments affecting the real estate industry and real property values. In general, real estate values can be affected by a variety of factors, including supply and demand for properties, the economic health of the country or of different regions, and the strength of specific industries that rent properties. REITs often invest in highly leveraged properties. The second risk is the risk that returns from REITs, which typically are small or medium capitalization stocks, will trail returns from the overall stock market. The third, interest rate risk, is the risk that changes in interest rates may hurt real estate values or make REIT shares less attractive than other income producing investments.

 

Qualification as a REIT under the Code in any particular year is a complex analysis that depends on a number of factors. There can be no assurance that the entities in which the Fund invests with the expectation that they will be taxed as a REIT will qualify as a REIT. An entity that fails to qualify as a REIT, would be subject to a corporate level tax, would not be entitled to a deduction for dividends paid to its shareholders and would not pass through to its shareholders the character of income earned by the entity. If the Fund were to invest in an entity that failed to qualify as a REIT, such failure could drastically reduce the Fund's yield on that investment.

 

Dividends paid by REITs will not generally qualify for the reduced federal income tax rates applicable to qualified dividends under the Code.

 

The Fund does not expect to invest a significant portion of its assets in REITs, but does not have any investment restrictions with respect to such investments.

 

MLP Risk. An investment in MLP units involves some risks that differ from an investment in the common stock of a corporation. Holders of MLP units have limited control and voting rights on matters affecting the partnership. Although common unitholders are generally limited in their liability, similar to a corporation's shareholders, creditors typically have the right to seek the return of distributions made to such unitholders if the liability in question arose before the distribution was paid. This liability may stay attached to the common unitholder even after the units are sold. Investing in MLPs involves certain risks related to investing in the underlying assets of the MLPs and risks associated with pooled investment vehicles. MLPs holding credit-related investments are subject to interest rate risk and the risk of default on payment obligations by debt issuers. MLPs that concentrate in a particular industry or a particular geographic region are subject to risks associated with such industry or region. Investments held by MLPs may be relatively illiquid, limiting the MLPs' ability to vary their portfolios promptly in response to changes in economic or other conditions. MLPs may have limited financial resources, their securities may trade infrequently and in limited volume, and they may be subject to more abrupt or erratic price movements than securities of larger or more broadly based companies.

 

MLP Tax Risk. Certain diversification requirements imposed by the Code limits the Fund's ability to invest in MLP securities. In addition, the Fund's ability to meet its investment objectives may depend in part on the level of taxable income and distributions and dividends received from the MLP securities in which the Fund invests, a factor over which the Fund has no control. The benefit derived from the Fund's investment in MLPs is largely dependent on the MLPs being treated as partnerships for federal income tax purposes. If an MLP were classified as a corporation for federal income tax purposes, the amount of cash available for distribution would be reduced and distributions received by us would be taxed entirely as dividend income. Sale of MLPs may result in the Fund realizing significant amounts of taxable ordinary income even for MLP positions sold at an overall loss with such amounts of taxable ordinary income being very difficult for the Fund to estimate or accrue for, and the tax reporting being significantly delayed, subject to dramatic revisions, and depending on the MLP issuers so reporting. 

 20

 

Deferred Tax Risks of MLPs. As a limited partner in the MLPs in which the Fund invests, the Fund receives a pro rata share of income, gains, losses and deductions from those MLPs. Historically, a significant portion of income from such MLPs has been offset by tax deductions. The Fund's common shareholders will incur a current tax liability on the portion of an MLP's income and gains that is not offset by tax deductions and losses. The percentage of an MLP's income and gains that is offset by tax deductions and losses will fluctuate over time for various reasons.

 

Investments in Undervalued Securities. The Fund's investment strategy includes investing in securities, which, in the opinion of the Adviser, are undervalued. The identification of investment opportunities in undervalued securities is a difficult task and there is no assurance that such opportunities will be successfully recognized or acquired. While investments in undervalued securities offer opportunities for above-average capital appreciation, these investments involve a high degree of financial risk and can result in substantial losses.

 

Special Risks Associated with Foreign Currency Options. Buyers and sellers of foreign currency options are subject to the same risks that apply to options generally, as described below. In addition, there are certain additional risks associated with foreign currency options. The Fund's ability to establish and close out positions on such options is subject to the maintenance of a liquid secondary market. Although the Fund will not purchase or write such options unless and until, in the opinion of the Adviser, the market for them has developed sufficiently to ensure that the risks in connection with such options are not greater than the risks in connection with the underlying currency, there can be no assurance that a liquid secondary market will exist for a particular option at any specific time. In addition, options on foreign currencies are affected by most of the same factors that influence foreign exchange rates and investments generally.

 

The value of a foreign currency option depends upon the value of the underlying currency relative to the U.S. dollar. As a result, the price of the option position may vary with changes in the value of either or both currencies and may have no relationship to the investment merits of a foreign security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots.

 

There is no systematic reporting of last sale information for foreign currencies or any regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (i.e., less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the U.S. option markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets until they reopen.

 

Risk Characteristics of Options and Futures. Options and futures transactions can be highly volatile investments. Successful hedging strategies require the anticipation of future movements in securities prices, interest rates and other economic factors. When a fund uses futures contracts and options as hedging devices, the prices of the securities subject to the futures contracts and options may not correlate with the prices of the securities in a portfolio. This may cause the futures and options to react to market changes differently than the portfolio securities. Even if expectations about the market and economic factors are correct, a hedge could be unsuccessful if changes in the value of the portfolio securities do not correspond to changes in the value of the futures contracts. The ability to establish and close out futures contracts and options on futures contracts positions depends on the availability of a secondary market. If these positions cannot be closed out due to disruptions in the market or lack of liquidity, losses may be sustained on the futures contract or option.

 

Special Risks Associated with Foreign Currency Futures Contracts and Related Options. Buyers and sellers of foreign currency futures contracts are subject to the same risks that apply to the use of futures generally, as described above. In addition, there are risks associated with foreign currency futures contracts and their use as a hedging device similar to those associated with options on foreign currencies, as described above.

 

Options on foreign currency futures contracts may involve certain additional risks. The ability to establish and close out positions on such options is subject to the maintenance of a liquid secondary market. To reduce this risk, the Fund will not purchase or write options on foreign currency futures contracts unless and until, in the opinion of the Adviser, the market for such options has developed sufficiently that the risks in connection with such options are not greater than the risks in connection with transactions in the underlying foreign currency futures contracts. Compared to the purchase or sale of foreign currency futures contracts, the purchase of call or put options on futures contracts involves less potential risk to the Fund because the maximum amount at risk is the premium paid for the option (plus transaction costs). However, there may be circumstances when the purchase of a call or put option on a futures contract would result in a loss of up to the amount of the premium paid for the option, such as when there is no movement in the price of the underlying currency or futures contract. 

 21

 

Preferred Securities Risk. In addition to credit risk, investment in preferred securities carries risks including deferral risk, redemption risk, limited voting rights, risk of subordination and lack of liquidity. Fully taxable or hybrid preferred securities typically contain provisions that allow an issuer, at its discretion, to defer distributions for up to 20 consecutive quarters. Traditional preferreds also contain provisions that allow an issuer, under certain conditions to skip (in the case of "noncumulative preferreds") or defer (in the case of "cumulative preferreds"), dividend payments. If the Fund owns a preferred security that is deferring its distributions, the Fund may be required to report income for tax purposes while it is not receiving any distributions. Preferred securities typically contain provisions that allow for redemption in the event of tax or security law changes in addition to call features at the option of the issuer. In the event of a redemption, the Fund may not be able to reinvest the proceeds at comparable rates of return. Preferred securities typically do not provide any voting rights, except in cases when dividends are in arrears beyond a certain time period, which varies by issue. Preferred securities are subordinated to bonds and other debt instruments in a company's capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than those debt instruments. Preferred securities may be substantially less liquid than many other securities, such as U.S. government securities, corporate debt or common stocks. Dividends paid on preferred securities will generally not qualify for the reduced federal income tax rates applicable to qualified dividends under the Code.

 

Interest Rate Risk. Interest rate risk is the risk that preferred stocks paying fixed dividend rates and fixed-rate debt securities will decline in value because of changes in market interest rates. When interest rates rise, the market value of such securities generally will fall. The Fund's investment in preferred stocks and fixed-rate debt securities means that the NAV and price of the common shares may decline if market interest rates rise. Interest rates are currently low relative to historic levels. There can be no assurance that rates will remain at these levels. During periods of declining interest rates, an issuer of preferred stock or fixed-rate debt securities may exercise its option to redeem securities prior to maturity, forcing the Fund to reinvest in lower yielding securities. This is known as call risk. During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected payments. This may lock in a below market yield, increase the security's duration, and reduce the value of the security. This is known as extension risk.

 

The value of the Fund's common stock investments may also be influenced by changes in interest rates.

 

Convertible Securities Risk. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors may also have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security.

 

A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. If a convertible security held by the Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. Any of these actions could have an adverse effect on the Fund's ability to achieve its investment objectives.

 

Illiquid Securities Risk. Restricted securities and other illiquid investments of the Fund involve the risk that the securities will not be able to be sold at the time desired by the Adviser or at prices approximating the value at which the Fund is carrying the securities. Where registration is required to sell a security, the Fund may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to sell. Restricted securities for which no market exists and other illiquid investments are valued at fair value as determined in accordance with procedures approved and periodically reviewed by the Board of Trustees of the Fund.

 

Inflation Risk. Inflation risk is the risk that the purchasing power of assets or income from investment will be less in the future as inflation decreases the value of money. To the extent that inflation occurs, it will reduce the real value of dividends paid by the Fund and the Fund’s common shares. Most emerging market countries, in particular, have experienced substantial, and in some periods extremely high and volatile, rates of inflation. Inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on economies and securities markets globally. In an attempt to control inflation, wage and price controls have been imposed at times in certain countries. 

 22

 

Borrowing Risk. If the Fund borrows money, it would experience greater volatility of NAV and market price of the common shares. If the income from the securities purchased with such funds were not sufficient to cover the cost of any such borrowing, the return on the Fund would be less than if borrowing had not been used, and therefore the amount available for distribution to the Fund's shareholders as dividends and other distributions would be reduced and might not satisfy the level dividend rate distribution policy set by the Board of Trustees.

 

Risks of Derivative Investments. The Fund may invest in derivative instruments as described in the Fund's Prospectus and Statement of Additional Information. Investments in derivative instruments may be for both investment and hedging purposes. Losses from investments in derivative instruments can, among other things, result from a lack of correlation between changes in the value of derivative instruments and the portfolio assets (if any) being hedged, the potential illiquidity of the markets for derivative instruments, the failure of the counterparty to perform its contractual obligations, or the risks arising from margin and settlement payment requirements, related leverage factors or operational and legal issues associated with such transactions. The use of these investment techniques also involves the risk of loss if the Adviser is incorrect in its expectation of the timing or level of fluctuations in securities prices, interest rates or currency prices. Investments in derivative instruments may be harder to value, subject to greater volatility and more likely subject to changes in tax treatment than other investments. For these reasons, the Adviser's attempts to hedge portfolio risks through the use of derivative instruments may not be successful, and the Adviser may choose not to hedge certain portfolio risks. The use of derivatives for investment purposes is considered a speculative practice and presents even greater risk of loss.

 

In October 2020, the SEC adopted Rule 18f-4 under the 1940 Act governing a registered investment company's use of derivatives, short sales, reverse repurchase agreements, and certain other instruments.

 

Under Rule 18f-4, a fund's derivatives exposure is limited through a value-at-risk test and requires the adoption and implementation of a derivatives risk management program for certain derivatives users. However, subject to certain conditions, funds that do not invest heavily in derivatives may be deemed limited derivatives users and would not be subject to the full requirements of Rule 18f-4. Under the rule, when the Fund trades reverse repurchase agreements or similar financing transactions, including certain tender option bonds, it needs to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior securities representing indebtedness when calculating the Fund’s asset coverage ratio or treat all such transactions as derivatives transactions. In addition, under the rule, the Fund is permitted to invest in a security on a when-issued or forward-settling basis, or with a non-standard settlement cycle, and the transaction will be deemed not to involve a senior security (as defined under Section 18(g) of the 1940 Act), provided that, (i) the Fund intends to physically settle the transaction and (ii) the transaction will settle within 35 days of its trade date (the “Delayed-Settlement Securities Provision”). The Fund may otherwise engage in when-issued, forward-settling and non-standard settlement cycle securities transactions that do not meet the conditions of the Delayed-Settlement Securities Provision so long as the Fund treats any such transaction as a “derivatives transaction” for purposes of compliance with the rule. Furthermore, under the rule, the Fund is permitted to enter into an unfunded commitment agreement, and such unfunded commitment agreement will not be subject to the asset coverage requirements under the 1940 Act, if the Fund reasonably believes, at the time it enters into such agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all such agreements as they come due. These requirements may limit the ability of the Fund to use derivatives, and reverse repurchase agreements and similar financing transactions as part of its investment strategies. These requirements may increase the cost of the Fund’s investments and cost of doing business, which could adversely affect investors.

 

Anti-Takeover Provisions. The Fund's Declaration of Trust includes provisions that could have the effect of inhibiting the Fund's possible conversion to open-end status and limiting the ability of other entities or persons to acquire control of the Fund or the Board of Trustees. In certain circumstances, these provisions might also inhibit the ability of shareholders to sell their shares at a premium over prevailing market prices.

 

Market Events Risk. The market values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to changes in general market conditions, overall economic trends or events, governmental actions or intervention, actions taken by the US Federal Reserve or foreign central banks, market disruptions caused by trade disputes or other factors, political developments, investor sentiment and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the Fund's investments may be negatively affected. In addition, any spread of an infectious illness, public health threat or similar issue could reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines, and generally have a significant impact on the world economy, which in turn could adversely affect the Fund's investments. 

 

Cybersecurity Risk. Cybersecurity incidents may allow an unauthorized party to gain access to Fund assets, customer data (including private shareholder information), or proprietary information, or cause the Fund, the Adviser and/or its service providers (including, but not limited to, Fund accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data breaches, data corruption or lose operational functionality.

 23

 

Principal Risks of Investing in the Acquired Fund

 

Business Development Company (“BDC”) Risk. The Fund invests in closed-end funds that have elected to be treated as BDCs. Investments in 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, and investments in these companies present a greater risk of loss due to the companies’ youth and limited track record. BDCs are also generally more susceptible to competition and economic and market changes due to limited products and market shares. 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. Certain BDCs in which the Fund invests employ the use of leverage in their portfolios through borrowings or in the issuance of preferred stock. While leverage often serves to increase the yield of a BDC, the leverage also subjects the BDC to increased risks, including the likelihood of increased volatility and the possibility that the BDC’s common share income will fall if the dividend rate on any preferred shares or the interest rate on any borrowings rises. In addition, the market price for BDCs, together with other dividend paying stocks, may be negatively affected by a rise in interest rates. Alternatively, declining interest rates could adversely impact the earnings of BDCs in which the Fund invests, as new loan originations would likely be made at lower yields. 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.

 

Cyber Security Risk. The Fund is susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized access to the Fund’s digital information systems through “hacking” or malicious software coding, but may also result from outside attacks such as denial-of-service attacks through efforts to make network services unavailable to intended users. In addition, cyber security breaches of the Fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the Fund invests, can also subject the Fund to many of the same risks associated with direct cyber security breaches. The Fund has established risk management systems designed to reduce the risks associated with cyber security. However, there is no guarantee that such efforts will succeed, especially because the Fund does not directly control the cyber security systems of issuers or third party service providers. Substantial costs may be incurred by the Fund in order to resolve or prevent cyber incidents in the future.

 

Financial Sector Concentration Risk. Under normal market conditions, the Fund concentrates its investments (i.e., invests at least 25% of its total assets) in securities of companies within industries in the financial sector. A fund concentrated in a single industry or sector is likely to present more risks than a fund that is broadly diversified over several industries or groups of industries. Compared to the broad market, an individual sector may be more strongly affected by changes in the economic climate, broad market shifts, moves in a particular dominant stock, or regulatory changes. Specialty finance and other financial companies in general are subject to extensive government regulation, which may change frequently and may have significant adverse consequences for financial companies, including effects not intended by such regulation. 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. The impact of more stringent capital requirements, or recent or future regulation in various countries, on any individual financial company or on financial companies as a whole cannot be predicted. Certain risks may impact the value of investments in financial companies more severely than those of investments in other issuers, including the risks associated with companies that operate with substantial financial leverage. Financial companies may also be adversely affected by volatility in interest rates, loan losses and other customer defaults, decreases in the availability of money or asset valuations, credit rating downgrades and adverse conditions in other related markets. Financial companies are also a target for cyber attacks and may experience technology malfunctions and disruptions as a result. Leasing companies may be negatively impacted by changes in tax laws which affect the types of transactions in which such companies engage.

 

Illiquid Securities Risk. The Fund may invest in securities that are considered to be illiquid securities. Illiquid securities may be difficult to dispose of at a fair price at the times when the Fund believes it is desirable to do so. The market price of illiquid securities generally is more volatile than that of more liquid securities, which may adversely affect the price that the Fund pays for or recovers upon the sale of such securities. Illiquid securities are also more difficult to value, especially in challenging markets. 

 24

 

Income and Interest Rate 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 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 by the Fund can magnify the effect of any losses. If the income and gains from the securities and investments purchased with leverage proceeds do not cover the cost of leverage, the return to the common shares will be less than if leverage had not been used. Leverage involves risks and special considerations for common shareholders including: (i) the likelihood of greater volatility of net asset value and market price of the common shares than a comparable portfolio without leverage; (ii) the risk that fluctuations in interest rates on borrowings will reduce the return to the common shareholders or will result in fluctuations in the dividends paid on the common shares; (iii) in a declining market, the use of leverage is likely to cause a greater decline in the net asset value of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares; and (iv) when the Fund uses certain types of leverage, the investment advisory fee payable to the Advisor and by the Advisor to the Sub-Advisor will be higher than if the Fund did not use leverage. To the extent the Fund uses leverage and invests in BDCs that also use leverage, the risks associated with leverage will be magnified, potentially significantly.

 

Management Risk and Reliance on Key Personnel. The implementation of the Fund’s investment strategy depends upon the continued contributions of certain key employees of the Advisor and Sub-Advisor, some of whom have unique talents and experience and would be difficult to replace. The loss or interruption of the services of a key member of the portfolio management team could have a negative impact on the Fund.

 

Market Discount from Net Asset Value. Shares of closed-end investment companies such as the Fund frequently trade at a discount from their net asset value. The Fund cannot predict whether its common shares will trade at, below or above net asset value.

 

Market Risk. Securities held by the Fund, as well as shares of the Fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of the Fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on the Fund and its investments. For example, the coronavirus (COVID-19) global pandemic and the aggressive responses taken by many governments, including closing borders, restricting international and domestic travel, and the imposition of prolonged quarantines or similar restrictions, had negative impacts, and in many cases severe impacts, on markets worldwide. While the development of vaccines has slowed the spread of the virus and allowed for the resumption of reasonably normal business activity in the United States, many countries continue to impose lockdown measures in an attempt to slow the spread. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. Also, in February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe and the United States. These hostilities and sanctions resulting from these hostilities could have a significant impact on certain Fund investments as well as Fund performance. As the global pandemic and conflict in Ukraine have illustrated such events may affect certain geographic regions, countries, sectors and industries more significantly than others. Recent and potential future bank failures could result in disruption to the broader banking industry or markets generally and reduce confidence in financial institutions and the economy as a whole, which may also heighten market volatility and reduce liquidity. These events also may adversely affect the prices and liquidity of the Fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of the Fund’s shares and result in increased market volatility. During any such events, the Fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on the Fund’s shares may widen.

 

Operational Risk. The Fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund relies on third parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect the Fund’s ability to meet its investment objective. Although the Fund and the Advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks. 

 25

 

Potential Conflicts of Interest Risk. First Trust, Confluence and the portfolio managers have interests which may conflict with the interests of the Fund. In particular, First Trust and Confluence currently manage and may in the future manage and/or advise other investment funds or accounts with the same or substantially similar investment objective and strategies as the Fund. In addition, while the Fund is using leverage, the amount of the fees paid to First Trust (and by First Trust to Confluence) for investment advisory and management services are higher than if the Fund did not use leverage because the fees paid are calculated based on managed assets. Therefore, First Trust and Confluence have a financial incentive to leverage the Fund.

 

REIT, Mortgage-Related and Asset-Backed Securities Risk. 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 diversification due to investment in a limited number of properties or a particular market segment and are subject to the risks associated with obtaining financing for real property. 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. Additionally, certain REITs charge management fees, which may result in layering of management fees paid by the Fund.

 

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. Mortgage-related securities are susceptible to adverse economic, political or regulatory events that affect the value of real estate. Mortgage-related securities are also significantly affected by other factors such as borrower defaults, delinquencies, realized or liquidation losses and other shortfalls. 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 mortgages 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. In general, mortgage-related securities and asset-backed securities are subject to credit risk, extension risk, interest rate risk, liquidity risk and valuation risk.

 

Specialty Finance and Other Financial Companies Risks. The profitability of specialty finance and other financial companies in which the Fund may invest is largely dependent upon the availability and cost of capital, and may fluctuate significantly in response to changes in interest rates, as well as changes in general economic conditions. Any impediments to a specialty finance or other financial company’s access to capital markets, such as those caused by general economic conditions or a negative perception in the capital markets or the company’s financial condition or prospects, could adversely affect such company’s business. From time to time, severe competition may also affect the profitability of specialty finance and other financial companies. Specialty finance and other financial companies are subject to rapid business changes, significant competition, value fluctuations due to the concentration of loans in particular industries significantly affected by economic conditions (such as real estate or energy) and volatile performance based upon the availability and cost of capital and prevailing interest rates. In addition, credit and other losses resulting from the financial difficulties of borrowers or other third parties potentially may have an adverse effect on companies in these industries.

 

Valuation Risk. The valuation of the Fund’s investments may carry more risk than that of traditional common stock. Uncertainties in the conditions of the financial market, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing.

 

Investment Restrictions and Policies

 

The following is a comparison of the fundamental investment restrictions of the Acquired Fund and the Acquiring Fund. The Funds’ fundamental investment restrictions are substantially similar in some respects and differ in other respects. The Acquired Fund and Acquiring Fund are each diversified funds under the 1940 Act; however, only the Acquiring Fund has a fundamental investment restriction with respect to diversification. Additionally, the Acquired Fund may invest 25% or more of its total assets in securities of companies within industries in the financial sector. The Acquiring Fund does not make this representation.

 26

 

Acquired Fund Acquiring Fund Differences
  The Acquiring Fund may not, with respect to 75% of its total assets, invest more than 5% of its total assets in the securities of a single issuer or purchase more than 10% of the outstanding voting securities of a single issuer, except obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and except securities of other investment companies. The Acquired Fund does not have an equivalent fundamental restriction.
The Acquired Fund may not purchase any security if, as a result of the purchase, 25% or more of the Fund’s total assets (taken at current value) would be invested in the securities of borrowers and other issuers having their principal business activities in the same industry; provided, that this limitation shall not apply with respect to securities of companies within industries in the financial sector or obligations issued or guaranteed by the U.S. government or by its agencies or instrumentalities.

The Acquiring Fund may not, with respect to 75% of its total assets, invest 25% or more of its total assets in any single industry or group of industries (other than securities issued or guaranteed by the U.S. government or its agencies or instrumentalities).

 

The Acquired Fund may invest 25% or more of its total assets in securities of companies within industries in the financial sector.
The Acquired Fund may not borrow money except as permitted by the 1940 Act, the rules thereunder and interpretations thereof or pursuant to a Securities and Exchange Commission exemptive order. The Acquiring Fund may not borrow money, except as permitted by the 1940 Act. The Fund may borrow money for investment purposes, commonly referred to as leverage, and for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities. The 1940 Act currently requires that any indebtedness incurred by a closed-end investment company have an asset coverage of at least 300%. The Fund may not pledge, mortgage, hypothecate or otherwise encumber its assets, except to secure permitted borrowings and to implement collateral and similar arrangements incident to permitted investment practices. Substantially similar.
The Acquired Fund may not issue senior securities, as defined in the 1940 Act, other than: (i) Preferred Shares which immediately after issuance will have asset coverage of at least 200%; (ii) indebtedness which immediately after issuance will have asset coverage of at least 300%; (iii) the borrowings permitted by investment restriction 2 above; or (iv) pursuant to a Securities and Exchange Commission exemptive order. The Acquiring Fund may not issue senior securities, as defined in the 1940 Act, other than (a) preferred shares which immediately after issuance will have asset coverage of at least 200%, (b) indebtedness which immediately after issuance will have asset coverage of at least 300% or (c) the borrowings permitted by investment restriction (1) above. Substantially similar, except that the Acquired Fund also permits the issuance of senior securities if issued pursuant to a Securities and Exchange Commission exemptive order.

 27

 

Acquired Fund Acquiring Fund Differences
The Acquired Fund may not make loans of funds or other assets, other than by entering into repurchase agreements, lending portfolio securities and through the purchase of debt securities in accordance with its investment objectives, policies and limitations. The Acquiring Fund may not make loans to other persons, except by (a) the acquisition of loan interests, debt securities and other obligations in which the Fund is authorized to invest in accordance with its investment objectives and policies and (b) entering into repurchase agreements. Substantially similar.  
The Acquired Fund may not act as underwriter of another issuer’s securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of portfolio securities. The Acquiring Fund may not underwrite securities issued by other persons, except insofar as it may technically be deemed to be an underwriter under the Securities Act in selling or disposing of a portfolio investment. Substantially similar.
The Acquired Fund may not purchase or sell real estate, but this shall not prevent the Fund from investing in securities of companies that deal in real estate or are engaged in the real estate business, including real estate investment trusts, and securities secured by real estate or interests therein and the Fund may hold and sell real estate or mortgages on real estate acquired through default, liquidation, or other distributions of an interest in real estate as a result of the Fund’s ownership of such securities. The Acquiring Fund may not purchase or sell real estate, although it may purchase and sell securities which are secured by interests in real estate and securities of issuers which invest or deal in real estate. The Fund reserves the freedom of action to hold and to sell real estate acquired as a result of the ownership of securities. Substantially similar.
The Acquired Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts or derivative instruments or from investing in securities or other instruments backed by physical commodities). The Acquiring Fund may not Purchase or sell physical commodities or contracts for the purchase or sale of physical commodities. Physical commodities do not include futures contracts with respect to securities, securities indices, currencies, interest or other financial instruments. Substantially similar.
  The Acquiring Fund may not purchase securities on margin (but the Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities). The purchase of investment assets with the proceeds of a permitted borrowing or securities offering will not be deemed to be the purchase of securities on margin. The Acquired Fund does not have a similar restriction.  

 

Rights of Fund Shareholders

 

The Acquired Fund was organized as a Massachusetts business trust on March 20, 2007. The Acquiring Fund was organized as a Delaware statutory trust on October 27, 2006. 

 28

 

Summary of Certain Aspects of the Delaware Control Share Statute

 

The Acquiring Fund is subject to the control share acquisition statute (the “Control Share Statute”) contained in Subchapter III of the Delaware Statutory Trust Act (the “DSTA”), which became automatically applicable to listed closed-end funds, such as the Acquiring Fund. The Acquired Fund is not subject to this type of limitation as Massachusetts does not currently have a control share statute applicable to Massachusetts business trusts. Accordingly, the Control Share Statute will have no impact on the Special Meeting.

 

Following the consummation of the Reorganization, the Combined Fund will be subject to the Control Share Statute. The Control Share Statute provides for a series of voting power thresholds above which shares are considered “control beneficial interests” (referred to here as “control shares”). Once a threshold is reached, an acquirer has no voting rights under the DSTA or the governing documents of the Fund with respect to shares acquired in excess of that threshold (i.e., the “control shares”) unless approved by shareholders of the Fund or exempted by the Board. The Control Share Statute provides procedures for an acquirer to request a shareholder meeting for the purpose of considering whether voting rights shall be accorded to control shares.

 

Some uncertainty around the general application under the 1940 Act of state control share statutes exists as a result of recent federal and state court decisions that have found that certain control share by-laws adopted by Massachusetts business trusts violated the 1940 Act. 

 

The Acquired Fund is governed by its own Declaration of Trust and Amended and Restated By-laws. The Acquiring Fund is governed by its own Agreement and Declaration of Trust and By-Laws. Copies of these documents are available to shareholders without charge upon written request to the applicable Fund.

 

The below table summarizes a number of provisions of the respective governing documents of the Acquired Fund and the Acquiring Fund, which are in each case subject to any other applicable provision of the governing instruments of the relevant Fund and applicable law. The governing instruments have certain similar provisions, however there are differences that might impact how each Fund is governed. There are certain differences between the matters in which shareholders of the Funds have the right to vote, as highlighted below. Additionally, the Funds are subject to different criteria regarding shareholder quorum and termination of the respective Trust (as defined subsequently). The term “the Trust,” when used in the below table, refers to the applicable Fund.

 

  Acquired Fund Acquiring Fund
Voting Rights Shareholders shall not have the power to vote on any matter except: (i) for the election of Trustees under certain circumstances or the removal of Trustees; (ii) with respect to a sale of assets or reorganization or similar transaction only if required applicable law or as may be determined by the Trustees; (iii) with respect to the conversion of the Trust to an “open-end company”; and (iv) with respect to such additional matters relating to the Trust as may be required by law, the Declaration of Trust or as the Trustees may consider and determine necessary or desirable.

Shareholders shall have no power to vote on any matter except matters on which a vote of Shares is required by applicable law, the Declaration of Trust or resolution of the Trustees. Any matter required to be submitted for approval of any of the Shares and affecting one or more classes or series shall require approval by the required vote of Shares of the affected class or classes and series voting together as a single class and, if such matter affects one or more classes or series thereof differently from one or more other classes or series thereof or from one or more series of the same class, approval by the required vote of Shares of such other class or classes or series or series voting as a separate class shall be required in order to be approved with respect to such other class or classes or series or series; provided, however, that except to the extent required by the 1940 Act, there shall be no separate class votes on the election or removal of Trustees or the selection of auditors for the Trust. Shareholders of a particular class or series thereof shall not be entitled to vote on any matter that affects the rights or interests of only one or more other classes or series of such other class or classes or only one or more other series of the same class. There shall be no cumulative voting in the election or removal of Trustees.

 

Subject to any provision of applicable law, this Declaration or resolution of the Trustees specifying or requiring a greater or lesser vote requirement for the transaction of any matter of business at any meeting of Shareholders, (i) the affirmative vote of a plurality of the Shares entitled to vote for the election of any Trustee or Trustees shall be the act of such Shareholders with respect to the election of such Trustee or Trustees, (ii) the affirmative vote of a majority of the Shares present in person or represented by proxy and entitled to vote on any other matter shall be the act of the Shareholders with respect to such matter, and (iii) where a separate vote of one or more classes or series is required on any matter, the affirmative vote of a majority of the Shares of such class or classes or series or series present in person or represented by proxy and entitled to vote on such matter shall be the act of the Shareholders of such class or classes or series or series with respect to such matter.

 

 29

 

  Acquired Fund Acquiring Fund
Shareholder Quorum Thirty-three and a third percent (33-1/3%) of the outstanding shares entitled to vote present in person or by proxy shall constitute a quorum at any meeting of the shareholders. The holders of a majority of the outstanding Shares of the Trust on the record date present in person or by proxy shall constitute a quorum at any meeting of the Shareholders for purposes of conducting business on which a vote of all Shareholders of the Trust is being taken. The holders of a majority of the outstanding Shares of a class or classes on the record date present in person or by proxy shall constitute a quorum at any meeting of the Shareholders of such class or classes for purposes of conducting business on which a vote of Shareholders of such class or classes is being taken. The holders of a majority of the outstanding Shares of a series or series on the record date present in person or by proxy shall constitute a quorum at any meeting of the Shareholders of such series or series for purposes of conducting business on which a vote of Shareholders of such series or series is being taken.

Election of Trustees

 

A plurality of shares voted at a meeting at which a quorum is present shall elect a Trustee, except in the case of a contested election, where a majority of the outstanding shares entitled to vote is required. The affirmative vote of a plurality of the Shares entitled to vote for the election of any Trustee or Trustees shall be the act of such Shareholders with respect to the election of such Trustee or Trustees.

Removal of Trustees

 

Any of the Trustees may be removed (i) by action of at least two-thirds of the outstanding shares, or (ii) by the action of at least two-thirds of the remaining Trustees.

 

Any Trustee may be removed (provided the aggregate number of Trustees after such removal shall not be less than the minimum number required by Section 2.1 of the Declaration of Trust), for or without cause, at any time by a written instrument, signed or adopted by two-thirds of the remaining Trustees, or by vote of Shares having not less than two-thirds of the aggregate number of Shares entitled to vote in the election of such Trustee, specifying the date when such removal shall become effective.

 

Approval of a Consolidation or Reorganization In the event that such a transaction is required by applicable law to be approved by shareholders of the Trust or otherwise determined by the Trustees, such transaction shall require approval by the affirmative vote or consent of the holders of not less than two-thirds of the outstanding shares of the Trust entitled to vote, provided, however, that if such merger, consolidation, sale, lease or exchange has been previously approved by the affirmative vote of two-thirds of the Trustees, the vote of a majority of the outstanding voting securities, as defined in the 1940 Act, is required. The Trust may merge or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of the Trust Property or the property, including its goodwill, upon such terms and conditions and for such consideration when and as authorized by two-thirds of the Trustees and approved by the affirmative vote of the holders of not less than 75% of the affected Shares outstanding on the record date for the meeting of Shareholders to approve such transaction, and any such merger, consolidation, sale, lease or exchange shall be determined for all purposes to have been accomplished under and pursuant to the statutes of the State of Delaware.

 30

 

  Acquired Fund Acquiring Fund
Termination of the Trust The Trust may be terminated at any time by the Trustees by written notice to the shareholders of the Trust . The Trust may be dissolved, after two thirds of the Trustees have approved a resolution therefor, upon approval by Shares having at least 75% of the votes of all of the Shares outstanding on the record date for such meeting, voting as a single class, except to the extent required by the 1940 Act.

 

MANAGEMENT OF THE FUNDS

 

The Boards of the Funds

 

The Board of each Fund is responsible for the overall supervision of the operations of the Fund and performs the various duties imposed on the trustees of investment companies by the 1940 Act and under Delaware or Massachusetts law, as applicable.

 

The Advisers of the Funds

 

First Trust, located at 120 East Liberty Drive, Suite 400, Wheaton, IL 60187, serves as the investment adviser to the Acquired Fund pursuant to an investment management agreement between the Acquired Fund and First Trust (the “Investment Management Agreement”). In addition, First Trust is responsible for providing certain clerical, bookkeeping and other administrative services to the Acquired Fund and also provides fund reporting services to the Acquired Fund for a flat annual fee. First Trust is an investment adviser registered with the SEC under the Investment Advisers Act of 1940, as amended. First Trust is a limited partnership with one limited partner, Grace Partners of DuPage L.P. (“Grace Partners”), and one general partner, The Charger Corporation. Grace Partners is a limited partnership with one general partner, The Charger Corporation, and a number of limited partners. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, the Chief Executive Officer of First Trust and the sole Trustee of the Acquired Fund who is not an Independent Trustee. As of September 30, 2023, First Trust had collective assets under management or supervision of approximately $195 billion through unit investment trusts, exchange-traded funds, closed-end funds, mutual funds and separately managed accounts. Subject to the general supervision of the Acquired Fund’s Board, and in accordance with the investment objective, policies, and restrictions of the Acquired Fund, First Trust is responsible for the management and operation of the Acquired Fund and the investment of the Acquired Fund’s assets. First Trust provides such services to the Acquired Fund pursuant to the Investment Management Agreement. The Investment Management Agreement became effective for an initial two-year term and continues in effect from year to year provided such continuance is specifically approved at least annually in the manner required by the 1940 Act. A discussion regarding the basis for the Board’s renewal of the Investment Management Agreement is available in the Acquired Fund’s annual report to shareholders for the period ended November 30, 2022. The Acquired Fund pays to First Trust an investment management fee in consideration of the advisory and other services provided by First Trust to the Acquired Fund. Pursuant to the Investment Management Agreement, the Acquired Fund has agreed to pay First Trust a management fee payable on a monthly basis at the annual rate of 1.00% of the Acquired Fund’s Managed Assets. For purposes of this calculation, “Managed Assets” means the average daily gross asset value of the Acquired Fund (including assets attributable to the Acquired Fund's Preferred Shares (as such term is defined in the Acquired Fund's prospectus), if any, and the principal amount of borrowings, if any), minus the sum of the Acquired Fund's accrued and unpaid dividends on any outstanding Preferred Shares and accrued liabilities (other than the principal amount of any borrowings incurred, commercial paper or notes issued by the Acquired Fund). The Acquired Fund commenced investment operations on May 25, 2007. 

 31

 

CIM, located at 20 Allen Avenue, Suite 300, Saint Louis, MO 63119, serves as the Acquired Fund’s sub-adviser and manages the Acquired Fund’s portfolio subject to First Trust’s supervision.

 

abrdn Investments Limited (“aIL”), a Scottish company, serves as the adviser to the Acquiring Fund. aIL’s registered address is 10 Queen’s Terrace, Aberdeen, Aberdeenshire, United Kingdom, AB101XL. aIL is an indirect wholly-owned subsidiary of abrdn plc, which manages or administers approximately $632.2 billion in assets as of June 30, 2023. The Acquiring Fund pays aIL a monthly fee computed at the annual rate of 1.00% of the Acquiring Fund’s average daily Managed Assets. “Managed Assets” is defined as total assets of the Fund, including any form of investment leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other similar preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the Fund’s investment objectives and policies, and/or (iv) any other means. The Acquiring Fund commenced operations on January 26, 2007.

 

aIL has entered into a written contract (the “Amended and Restated Expense Limitation Agreement”) with the Acquiring Fund that is effective through June 30, 2024. In connection with the Reorganization, the Amended and Restated Expense Limitation Agreement shall be extended through one year from the date of the closing of the Reorganization, or June 30, 2025, whichever is later. The Amended and Restated Expense Limitation Agreement limits the total ordinary operating expenses of the Acquiring Fund and following the consummation of the Reorganization, the Combined Fund (excluding any leverage costs, interest, taxes, brokerage commissions, and any non-routine expenses), from exceeding 1.14% of the average daily net assets of the Fund on an annualized basis.

 

aIL may request and receive reimbursement from the Acquiring Fund or Combined Fund, as applicable, of the advisory fees waived and other expenses reimbursed pursuant to the Amended and Restated Expense Limitation Agreement as of a date not more than three years after the date when aIL limited the fees or reimbursed the expenses; provided that the following requirements are met: the reimbursements do not cause the Fund to exceed the lesser of the applicable expense limitation in the contract at the time the fees were limited or expenses are paid or the applicable expense limitation in effect at the time the expenses are being recouped by aIL, and the payment of such reimbursement is approved by the Fund Board on a quarterly basis. Except as provided for in the Amended and Restated Expense Limitation Agreement, reimbursement of amounts previously waived or assumed by aIL is not permitted.

 

Information regarding the basis of the Board of the Acquiring Fund’s approval of the investment advisory agreement with aIL is available in the Acquiring Fund’s annual shareholder report for the fiscal year ended October 31, 2022.

 

The Advisory Agreement with aIL was effective for an initial term of two years and may be continued thereafter from year to year provided such continuance is specifically approved at least annually in the manner required by the 1940 Act. The Advisory Agreement may be terminated at any time without payment of penalty by the Acquiring Fund or by aIL upon 60 days’ written notice. The Advisory Agreement will automatically terminate in the event of its assignment, as defined under the 1940 Act. Under the Advisory Agreement, aIL is permitted to provide investment advisory services to other clients.

 

aIL began managing the Acquiring Fund on May 7, 2018 pursuant to an Investment Advisory Agreement dated May 4, 2018. Prior to May 7, 2018, the Acquiring Fund was managed by another, unaffiliated investment adviser.

 

In rendering investment advisory services to the Acquiring Fund, aIL may use the resources of subsidiaries owned by abrdn plc. The abrdn plc affiliates have entered into a memorandum of understanding/personnel sharing procedures pursuant to which investment professionals from the abrdn plc affiliates may render portfolio management, research and/or trade services to US clients of aIL. 

 32

 

Portfolio Management of the Acquired Fund

 

The portfolio managers having primary responsibility for the day-to-day management of the Acquired Fund’s portfolio are Mark Keller, CFA, David Miyazaki, CFA, and Daniel Winter, CFA.

 

Listed below is the biography for the member of the portfolio management team.

 

Mark A. Keller, CFA – Chief Executive Officer and Chief Investment Officer

 

Mr. Keller has over 30 years of investment experience with a focus on value-oriented equity analysis and management. From 1994 to May 2008, he was the Chief Investment Officer of Gallatin Asset Management, Inc., and its predecessor organization, A.G. Edwards Asset Management, the investment management arm of A.G. Edwards, Inc. From 1999 to 2008, Mr. Keller was Chairman of A.G. Edwards’ Investment Strategy Committee, which set investment policy and established asset allocation models for the entire organization. Mr. Keller was a founding member of the A.G. Edwards Investment Strategy Committee, on which he served for over 20 years, the last ten of which as Chairman of the Committee. Mr. Keller began his career with A.G. Edwards in 1978, serving as an equity analyst for the firm’s Securities Research Department from 1979 to 1994. During his last five years in Securities Research, Mr. Keller was Equity Strategist and manager of the firm’s Focus List. Mr. Keller was a Senior Vice President of A.G. Edwards & Sons, Inc. and of Gallatin Asset Management, Inc., and was a member of the Board of Directors of both companies. Mr. Keller received a Bachelor of Arts from Wheaton College (Illinois) and is a CFA charterholder.

 

David B. Miyazaki, CFA – Senior Vice President and Portfolio Manager

 

Prior to joining Confluence in May 2008, Mr. Miyazaki served as a Portfolio Manager and Analyst with Gallatin Asset Management, Inc., the investment management arm of A.G. Edwards, Inc. Mr. Miyazaki was responsible for equity investments in value-oriented separately managed accounts. He also co-managed the A.G. Edwards’ ETF-based asset allocation program. In addition to portfolio management, Mr. Miyazaki served as a member of the A.G. Edwards’ Investment Strategy Committee. As a strategist, he was responsible for the firm’s quantitative asset allocation models, including its Cyclical Asset Allocation program. Prior to joining A.G. Edwards in 1999, Mr. Miyazaki was a Portfolio Manager at Koch Industries in Wichita, Kansas. His previous experience includes working as an Investment Analyst at Prudential Capital Group in Dallas, Texas, and as a Bond Trader at Barre & Company, also in Dallas. Mr. Miyazaki received a Bachelor of Business Administration from Texas Christian University and is a CFA charterholder.

 

Daniel T. Winter, CFA – Senior Vice President and Chief Investment Officer – Value Equity

 

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.

 

Portfolio Management of the Acquiring Fund

 

The Acquiring Fund is managed by abrdn’s Global Equity team, which is responsible for the Acquiring Fund’s public infrastructure investments. The Global Equity team works in a truly collaborative fashion; all team members have both portfolio management and research responsibilities. The team is responsible for the day-to-day management of the Acquiring Fund. As of the date of filing this Proxy Statement/Prospectus, the following individuals have primary responsibility for the day-to-day management of the Acquiring Fund’s portfolio:

 

Martin Connaghan – Investment Director, Global Equities – Currently, an Investment Director on the Global Equity Team at abrdn. Mr. Connaghan joined Murray Johnstone in 1998, which was subsequently acquired by abrdn in 2001. He has held a number of roles, including Trader and ESG Analyst on the Global Equity Team; he also spent two years as a Portfolio Analyst on the Fixed Income Team in London. He primarily focuses on global and global income mandates.

 

Josh Duitz – Deputy Head of the Global Equities Team – Josh Duitz is Deputy Head of Global Equities and Head of Infrastructure (public markets) at abrdn. He joined abrdn in 2018 from Alpine Woods Capital Investors LLC where he was a Portfolio Manager of its Global Dynamic Dividend and Global Infrastructure strategies. The management contracts of the funds he managed at Alpine Woods were acquired by abrdn in April 2018, which he continues to manage. Previously, Mr. Duitz worked for Bear Stearns where he was a Managing Director, Principal and traded international equities. Prior to that, he worked for Arthur Andersen where he was a senior auditor. 

 33

 

Ruairidh Finlayson – Investment Director at abrdn – Mr. Finlayson joined the company in 2018 from Polar Capital Partners where he worked as an Equity Analyst for the North America and Global Alpha funds. Previously, Mr. Finlayson worked as an Equity Analyst for Brewin Dolphin after qualifying as a Chartered Accountant with Ernst & Young.

 

Other Service Providers

 

The other service providers for the Funds are as follows. The other service providers for the Acquiring Fund will be the service providers to the Combined Fund.

 

  Service Providers to the Acquired Fund Service Providers to the Acquiring Fund
Administrator The Bank of New York Mellon abrdn Inc.
Sub-Administrator N/A State Street Bank and Trust Company
Custodian The Bank of New York Mellon State Street Bank and Trust Company

Transfer Agent, Dividend 

Paying Agent and 

Registrar 

Computershare, Inc. Computershare Trust Company, N.A.

Fund Accounting Services 

Provider

The Bank of New York Mellon State Street Bank and Trust Company
Independent Registered Public Accounting Firm Deloitte & Touche LLP KPMG LLP
Fund Counsel Chapman and Cutler LLP Dechert LLP

Counsel to the Independent

Trustees

Vedder Price P.C. Faegre Drinker Biddle & Reath LLP

 

Capitalization

 

The table below sets forth the capitalization of the Acquired Fund and the Acquiring Fund as of September 29, 2023, and the pro forma capitalization of the Combined Fund as if the Reorganization had occurred on that date. As shown below, it is anticipated that the NAV of Acquiring Fund shareholders’ shares would remain the same and Acquiring Fund assets would increase.

 

   Acquired Fund   Acquiring Fund   Adjustments  

Pro Forma

Combined Fund

 
Net Assets  $57,434,116   $927,237,048    --   $984,671,164 
Common Shares Outstanding(a)   14,367,591    105,430,999    (7,833,562)(b)   111,965,028 
Net Asset Value Per Share  $4.00   $8.79   $(4.00)b)  $8.79 

 

(a) Based on the number of outstanding common shares as of September 29, 2023.

(b) Reflects the exchange of Acquired Fund shares for Acquiring Fund shares as a result of the Reorganization.

 

AGREEMENT BETWEEN FIRST TRUST ADVISORS L.P. AND ABRDN INC.

 

First Trust and abrdn Inc. have entered into a separate agreement (the “Purchase Agreement”) pursuant to which abrdn Inc. will acquire certain assets related to First Trust’s business of providing investment management services with respect to the assets of the Acquired Fund and certain other registered investment companies (the “Business”) if the Reorganization is approved, and upon satisfaction or waiver of certain other conditions. More specifically, under the Purchase Agreement, First Trust has agreed to transfer to abrdn Inc., for a cash payment at the closing of the Asset Transfer (as defined below) and subject to certain exceptions, (i) all right, title and interest of First Trust in and to the books and records relating to the Business of the Acquired Fund and (ii) all goodwill of the Business as a going concern (the “Asset Transfer”). 

 34

 

Section 15(f) of the 1940 Act is a non-exclusive safe harbor provision that permits an investment adviser of a registered investment company (or any affiliated persons of the investment adviser) to receive any amount or benefit in connection with a sale of securities of, or a sale of any other interest in, the investment adviser that results in an “assignment” (as defined in the 1940 Act) of an investment advisory contract with such registered investment company, provided that two conditions are satisfied. First, during the three-year period after such transaction, at least 75% of the members of the investment company’s board of trustees may not be “interested persons” (as defined in the 1940 Act) of the investment adviser or its predecessor. Second, an “unfair burden,” as the term is defined in Section 15(f), must not be imposed on such registered investment company as a result of such transaction or any express or implied terms, conditions, or understandings relating to such transaction during the two-year period after the date on which any such transaction occurs. The term “unfair burden,” as defined in the 1940 Act, includes any arrangement during the two-year period after the sale whereby the investment adviser (or predecessor or successor adviser), or any “interested person” of the adviser (as defined in the 1940 Act), receives or is entitled to receive any compensation, directly or indirectly, from the investment company or its security holders (other than fees for bona fide investment advisory or other services), or from any person in connection with the purchase or sale of securities or other property to, from or on behalf of the investment company (other than ordinary fees for bona fide principal underwriting services).

 

First Trust intends to qualify for the “safe harbor” provided by Section 15(f), and consequently: (i) for a period of three years after the Closing Date, at least 75% of the trustees of the Combined Fund will not be “interested persons” (as defined in the 1940 Act) of abrdn Inc., aIL or First Trust, and (ii) for a period of two years after the Closing Date, no “unfair burden,” as defined in the 1940 Act, will be imposed on the Combined Fund as a result of the Reorganization or any express or implied terms, conditions, or understandings applicable thereto. 

 35

 

ADDITIONAL INFORMATION ABOUT THE COMMON SHARES OF THE FUNDS

 

Description of Common Shares to be Issued by the Acquiring Fund; Comparison to the Acquired Fund

 

General. Both Funds offer one class of shares: common shares. As a general matter, with respect to the Acquiring Fund and the Acquired Fund, the common shares have equal voting rights and equal rights with respect to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of their respective Fund and have no preemptive, conversion or exchange rights or rights to cumulative voting. Holders of whole common shares of each Fund are entitled to one vote per share on any matter on which the shares are entitled to vote, while each fractional share is entitled to a proportional fractional vote.

 

The Acquiring Fund’s Agreement and Declaration of Trust authorizes an unlimited number of transferable shares, no par value. If the Reorganization is consummated, the Acquiring Fund will issue common shares to the shareholders of common shares of the Acquired Fund based on the relative per share NAV of the Acquiring Fund and the NAV of the assets of the Acquired Fund, in each case as of the date of the Reorganization. The Acquiring Fund common shares, when issued, will be fully paid and non-assessable.

 

Preferred Shares and Other Securities. Currently, neither the Acquired Fund nor the Acquiring Fund have issued preferred shares.

 

Under the Acquired Fund’s Declaration of Trust, the Board of the Acquired Fund may authorize the issuance of preferred shares and debt instruments as provided therein.

 

The Acquiring Fund’s Declaration of Trust provides that the Board of the Fund may, subject to the fundamental policies of the Fund and the requirements of the 1940 Act, authorize and issue such other securities (or series thereof) of the Fund as they determine to be necessary, desirable or appropriate, having such terms, rights, preferences, privileges, limitations and restrictions as the Trustees see fit, including preferred shares of beneficial interest, debt securities or other senior securities.

 

Under the requirements of the 1940 Act, the Acquiring Fund must, immediately after the issuance of any preferred shares, have an “asset coverage” of at least 200%. Asset coverage means the ratio by which the value of the total assets of the Acquiring Fund, less all liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of senior securities representing indebtedness of the Acquiring Fund, if any, plus the aggregate liquidation preference of the preferred shares.

 

The 1940 Act requires, among other things, that (i) immediately after issuance of preferred shares and before any distribution is made with respect to the shares and before any purchase of shares is made, the aggregate involuntary liquidation preference of such preferred shares together with the aggregate involuntary liquidation preference or aggregate value of all other senior securities must not exceed an amount equal to 50% of the Acquiring Fund’s total assets after deducting the amount of such distribution or purchase price, as the case may be; and (ii) the holders of preferred shares, if any are issued, must be entitled as a class to elect two Trustees at all times and to elect a majority of the Trustees if distributions on such preferred shares are in arrears by two years or more. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred shares.

 

The rights of any existing or future lenders to receive payments of interest on and repayments of principal of any borrowings under any credit agreements in which the Acquiring Fund has entered or may enter are or will be senior to the rights of holders of preferred shares with respect to the payment of dividends and other distributions and upon liquidation. Under such borrowing programs, the Acquiring Fund would not be permitted to declare dividends and other distributions with respect to preferred phares or redeem preferred shares unless, at such time, the Acquiring Fund met certain asset coverage requirements and no event of default or other circumstance existed under the credit agreement that would limit or otherwise block payments on the preferred shares.

 

Immediately after the issuance of any preferred shares, the preferred shares will rank equally with all the Acquiring Fund’s other preferred shares that might be issued in the future as to payment of dividends and the distribution of Fund assets upon dissolution, liquidation or winding-up of the Acquiring Fund’s affairs. Any preferred shares that the Acquiring Fund may issue in the future will be, senior as to dividends and distributions to the Acquiring Fund’s common shares.

 

Distributions. The Funds have different dividend policies with respect to the payment of dividends on their shares. Distributions of investment company taxable income for the Acquiring Fund are declared and paid on a monthly basis, whereas distributions of investment company taxable income for the Acquired Fund are declared and paid on a quarterly basis. Capital gains distributions, if any, are paid at least annually by both Funds. 

 36

 

Outstanding Common Shares as of the Record Date

 

     Outstanding Shares 
Acquired Fund     14,367,111 
Acquiring Fund    105,430,999 

 

Purchase and Sale

 

Each Fund’s common shares are listed on the NYSE. The common shares of the Acquiring Fund are listed on the NYSE under the ticker symbol “AOD” and will continue to be so listed following the Reorganization. The common shares of the Acquired Fund are listed on the NYSE under the ticker symbol “FGB” and would be delisted from the NYSE following the Reorganization.

 

Purchase and sale procedures for the common shares of each of the Funds are similar. Investors typically purchase and sell common shares of the Funds through a registered broker-dealer on the NYSE, thereby incurring a brokerage commission set by the broker-dealer. Alternatively, investors may purchase or sell common shares of the Funds through privately negotiated transactions with existing shareholders.

 

Share Price Data

 

The Funds’ common shares have traded both at a premium and at a discount to the Funds’ NAV per common share. There can be no assurance that the Funds’ common shares will not trade at a discount in the future. Shares of closed-end investment companies frequently trade at a discount to NAV. It is not possible to state whether Combined Fund shares will trade at a discount or premium to NAV, or what the extent of any such discount or premium might be.

 

The following table sets forth for the fiscal quarters indicated the highest and lowest daily prices during the applicable quarter at the close of market on the NYSE per common share along with (i) the net asset value calculated on the day of the highest and lowest closing market prices at the close of the market on the NYSE and (ii) the highest and lowest premium or discount from NAV represented by such prices at the close of the market on the NYSE.

 

Acquired Fund

 

   Market Price ($)(1)   NAV ($)(2)   Premium/discount to NAV (%)(3) 
Quarter Ended  High   Low   High   Low   High   Low 
November 30, 2023   3.44    3.00    4.00    3.71    -14.00    -19.14 
August 31, 2023   3.48    2.97    4.07    3.55    -14.50    -16.34 
May 31, 2023   3.43    2.84    3.82    3.38    -10.21    -15.98 
Feb 28, 2023   3.44    3.02    3.90    3.52    -11.79    -14.20 
November 30, 2022   3.60    2.80    3.77    3.30    -4.51    -15.15 
August 31, 2022   3.77    3.06    4.17    3.54    -9.59    -13.56 
May 31, 2022   4.24    3.38    4.60    3.81    -7.83    -11.29 
February 28, 2022   4.18    3.83    4.51    4.27    -7.32    -10.30 
November 30, 2021   4.26    3.88    4.61    4.21    -7.59    -7.84 
August 31, 2021   4.36    3.99    4.34    4.21    0.46    -5.23 
May 31, 2021   4.26    3.69    4.28    3.90    -0.47    -5.38 

 

 37

 

(1) Based on high and low closing market price for the respective quarter. 

(2) Based on the net asset value calculated on the day of the high and low closing market prices, as applicable, as of the close of regular trading on the NYSE (normally 4:00 p.m. eastern time). 

(3) Calculated based on the information presented.

 

Acquiring Fund

 

    Market Price ($)(1)   NAV ($)(2)   Premium/discount to NAV (%)(3) 
Quarter Ended   High   Low   High   Low   High   Low 
October 31, 2023   8.33   7.02   9.63   8.47   -13.50   -17.12 
July 31, 2023    8.41    7.91    9.70    9.19    -13.30    -14.21 
April 30, 2023    8.54    7.69    9.72    8.99    -12.14    -14.46 
January 31, 2023    8.41    7.35    9.60    8.42    -11.57    -12.71 
October 31, 2022    8.67    7.00    9.81    8.09    -11.62    -13.79 
July 31, 2022    9.02    7.91    10.13    8.99    -10.96    -13.17 
April 30, 2022    10.09    8.84    11.01    9.84    -8.36    -11.51 
January 31, 2022    10.45    9.59    11.26    10.59    -7.19    -9.70 
October 31, 2021    10.49    9.69    11.28    10.53    -7.00    -7.98 
July 31, 2021    10.40    9.62    11.30    10.87    7.64    -11.50 
April 30, 3021    9.81    9.01    11.07    10.26    -11.38    -13.11 

 

(1) Based on high and low closing market price for the respective quarter. 

(2) Based on the net asset value calculated on the day of the high and low closing market prices, as applicable, as of the close of regular trading on the NYSE (normally 4:00 p.m. eastern time). 

(3) Calculated based on the information presented.

 

On December 6, 2023, the Acquired Fund’s NAV per share was $3.91 and the last reported sale price of a common share on the NYSE was $3.30, representing a discount to NAV of 15.60%. On November 30, 2023, the Acquiring Fund’s NAV per share was $9.19 and the last reported sale price of a common share on the NYSE was $7.82, representing a discount to NAV of 14.90%.

 

Performance Information

 

The performance table below illustrates the past performance of an investment in shares of the Acquired Fund and Acquiring Fund by setting forth the average total returns for the Acquired Fund for the fiscal year ended November 30, 2022, and for the Acquiring Fund for the fiscal year ended October 31, 2022. A Fund’s past performance does not necessarily indicate how its shares will perform in the future and the deduction of taxes that a shareholder would pay on fund distributions or the sale of fund shares is not reflected in the below.

 

     Average Annual Total Return on NAV     Average Annual Total Return on Market Value   
     Ten Years    Five Years    One Year    Since Inception     Ten Years    Five Years    One Year    Since Inception    Inception Date
Acquired Fund    2.55%   -0.50%   -5.60%   -0.04%   1.59%   -1.70%   -4.39%   -0.77%  May 25, 2007
Acquiring Fund    7.89%   5.19%   -15.15%   1.81%   7.36%   4.35%   -19.25%   0.62%  January 26, 2007

 38

 

For the Acquired Fund, 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.

 

For the Acquiring Fund, Average Annual Total Return on NAV is the combination of changes in common share NAV, reinvested dividend income at NAV and reinvested capital gains distributions at NAV, if any. The last dividend declared in the period is assumed to be reinvested at the ending NAV. The actual reinvestment price for the last dividend declared in the period may often be based on a Fund’s market price (and not its NAV), and therefore may be different from the price used in the calculation. Average Annual Total Return on Market Value is the combination of changes in the market price per share and the effect of reinvested dividend income and reinvested capital gains distributions, if any, at the average price paid per share at the time of reinvestment. The last dividend declared in the period is assumed to be reinvested at the ending market price. The actual reinvestment for the last dividend declared in the period may take place over several days, and in some instances it may not be based on the market price, so the actual reinvestment price may be different from the price used in the calculation.

 

NET ASSET VALUE OF COMMON SHARES OF THE ACQUIRING FUND

 

Common shares of the Acquiring Fund are listed on the NYSE. The NAV of the common shares of the Acquiring Fund is computed based upon the value of the Fund’s total assets. NAV is generally determined daily by the Acquiring Fund’s custodian as of the close of the regular trading session on each day that the NYSE is open for business. The NAV of the common shares of the Acquiring Fund is determined by calculating the total value of the Fund’s assets (the value of the securities, plus cash or other assets, including interest accrued but not yet received), deducting its total liabilities (including accrued expenses or dividends), and dividing the result by the number of common shares outstanding of the Fund. The Acquiring Fund reserves the right to calculate the NAV more frequently if deemed desirable.

 

The Acquiring Fund values its securities at current market value or fair value, consistent with regulatory requirements. Equity securities that are traded on an exchange are valued at the last quoted sale price on the principal exchange on which the security is traded at the “Valuation Time”, subject to application, when appropriate, of the valuation factors described in the paragraph below. Under normal circumstances, the Valuation Time is as of the close of regular trading on the NYSE (usually 4:00pm ET). In the absence of a sale price, the security is valued at the mean of the bid/ask quoted at the close on the principal exchange on which the security is traded. Securities traded on NASDAQ are valued at the NASDAQ official closing price. Open end mutual funds are valued at the respective NAV as reported by such company. The prospectuses for the registered open-end management investment companies in which the Fund invests explain the circumstances under which those companies will use fair value pricing and the effects of using fair value pricing. Closed-end funds and ETFs are valued at the market price of the security at the Valuation Time.

 

Foreign equity securities that are traded on foreign exchanges that close prior to the Valuation Time are valued by applying valuation factors to the last sale price or the mean price as noted above. Valuation factors are provided by an independent pricing service provider. These valuation factors are used when pricing the Fund’s portfolio holdings to estimate market movements between the time foreign markets close and the time the Fund values such foreign securities. These valuation factors are based on inputs such as depositary receipts, indices, futures, sector indices/ETFs, exchange rates, and local exchange opening and closing prices of each security. When prices with the application of valuation factors are utilized, the value assigned to the foreign securities may not be the same as quoted or published prices of the securities on their primary markets. Valuation factors are not utilized if the independent pricing service provider is unable to provide a valuation factor or if the valuation factor falls below a predetermined confidence threshold.

 

Derivative instruments are generally valued according to the following procedures. Forward currency exchange contracts are generally valued based on the current spot exchange rates and the forward exchange rate points (ex. 1-month, 3-month) that are obtained from an approved pricing agent. Based on the actual settlement dates of the forward contracts held, an interpolated value of the forward points is combined with the spot exchange rate to derive the valuation. Futures contracts are generally valued at the most recent settlement price as of NAV determination. Swap agreements are generally valued by an approved pricing agent based on the terms of the swap agreement (including future cash flows). When market quotations or exchange rates are not readily available, or if the Adviser concludes that such market quotations do not accurately reflect fair value, the fair value of a Fund’s assets are determined in good faith in accordance with the Valuation Procedures. 

 39

 

Pursuant to Rule 2a-5 under the 1940 Act, the Acquiring Fund Board designated aIL as the valuation designee ("Valuation Designee") for the Acquiring Fund to perform the fair value determinations relating to Acquiring Fund investments for which market quotations are not readily available. In the event that a security’s market quotations are not readily available or are deemed unreliable (for reasons other than because the foreign exchange on which it trades closed before the Valuation Time), the security is valued at fair value as determined by the Valuation Designee, taking into account the relevant factors and surrounding circumstances using valuation policies and procedures approved by the Acquiring Fund’s Board of Trustees.

 

If events materially affecting the price of foreign portfolio securities occur between the time when their price was last determined on such foreign securities exchange or market and the time when the Acquiring Fund’s NAV was last calculated (for example, movements in certain US securities indices which demonstrate strong correlation to movements in certain foreign securities markets), such securities may be valued at their fair value as determined in good faith in accordance with procedures established by the Board. For purposes of calculating NAV, all assets and liabilities initially expressed in foreign currencies will be converted into US dollars at the mean of the bid price and ask price of such currencies against the US dollar, as quoted by a major bank.

 

When an Acquiring Fund common shareholder sells common shares, he or she will typically receive the market price for such common shares, which may be less than the NAV of such common shares.

 

DIVIDEND REINVESTMENT AND OPTIONAL CASH PURCHASE PLAN

 

The dividend reinvestment plan (the “Plan”) of the Acquiring Fund, described below, will be the dividend reinvestment plan of the Combined Fund.

 

The Acquiring Fund intends to distribute to shareholders substantially all of its net investment income and to distribute any net realized capital gains at least annually. Net investment income for this purpose is income other than net realized long-term and short-term capital gains net of expenses. Pursuant to the Dividend Reinvestment and Optional Cash Purchase Plan (the “Plan”), shareholders whose shares of common stock are registered in their own names will be deemed to have elected to have all distributions automatically reinvested by Computershare Trust Company N.A. (the “Plan Agent” or “Computershare”) in the Acquiring Fund shares pursuant to the Plan, unless such shareholders elect to receive distributions in cash. Shareholders who elect to receive distributions in cash will receive such distributions paid by check in US dollars mailed directly to the shareholder by the Plan Agent, as dividend paying agent. In the case of shareholders such as banks, brokers or nominees that hold shares for others who are beneficial owners, the Plan Agent will administer the Plan on the basis of the number of shares certified from time to time by the shareholders as representing the total amount registered in such shareholders’ names and held for the account of beneficial owners that have not elected to receive distributions in cash. Investors that own shares registered in the name of a bank, broker or other nominee should consult with such nominee as to participation in the Plan through such nominee and may be required to have their shares registered in their own names in order to participate in the Plan. Please note that the Acquiring Fund does not issue certificates so all shares will be registered in book entry form. The Plan Agent serves as agent for the shareholders in administering the Plan. If the Trustees of the Acquiring Fund declare an income dividend or a capital gains distribution payable either in the Acquiring Fund’s common stock or in cash, nonparticipants in the Plan will receive cash and participants in the Plan will receive common stock, to be issued by the Acquiring Fund or purchased by the Plan Agent in the open market, as provided below. If the market price per share (plus expected per share fees) on the valuation date equals or exceeds NAV per share on that date, the Acquiring Fund will issue new shares to participants at NAV; provided, however, that if the NAV is less than 95% of the market price on the valuation date, then such shares will be issued at 95% of the market price. The valuation date will be the payable date for such distribution or dividend or, if that date is not a trading day on the NYSE, the immediately preceding trading date. If NAV exceeds the market price of Acquiring Fund shares at such time, or if the Acquiring Fund should declare an income dividend or capital gains distribution payable only in cash, the Plan Agent will, as agent for the participants, buy Acquiring Fund shares in the open market, on the NYSE or elsewhere, for the participants’ accounts on, or shortly after, the payment date. If, before the Plan Agent has completed its purchases, the market price exceeds the NAV of an Acquiring Fund share, the average per share purchase price paid by the Plan Agent may exceed the NAV of the Acquiring Fund’s shares, resulting in the acquisition of fewer shares than if the distribution had been paid in shares issued by the Acquiring Fund on the dividend payment date. Because of the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent will cease making open-market purchases and will receive the uninvested portion of the dividend amount in newly issued shares at the close of business on the last purchase date.

 

Participants have the option of making additional cash payments of a minimum of $50 per investment (by check, one-time online bank debit or recurring automatic monthly ACH debit) to the Plan Agent for investment in the Acquiring Fund’s common stock, with an annual maximum contribution of $250,000. The Plan Agent will wait up to three business days after receipt of a check or electronic funds transfer to ensure it receives good funds. Following confirmation of receipt of good funds, the Plan Agent will use all such funds received from participants to purchase Acquiring Fund shares in the open market on the 25th day of each month or the next trading day if the 25th is not a trading day. 

 40

 

If the participant sets up recurring automatic monthly ACH debits, funds will be withdrawn from his or her US bank account on the 20th of each month or the next business day if the 20th is not a banking business day and invested on the next investment date. The Plan Agent maintains all shareholder accounts in the Plan and furnishes written confirmations of all transactions in an account, including information needed by shareholders for personal and tax records. Shares in the account of each Plan participant will be held by the Plan Agent in the name of the participant, and each shareholder’s proxy will include those shares purchased pursuant to the Plan. There will be no brokerage charges with respect to common shares issued directly by the Acquiring Fund. However, each participant will pay a per share fee of $0.02 incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of dividends, capital gains distributions and voluntary cash payments made by the participant. Per share fees include any applicable brokerage commissions the Plan Agent is required to pay.

 

Participants also have the option of selling their shares through the Plan. The Plan supports two types of sales orders. Batch order sales are submitted on each market day and will be grouped with other sale requests to be sold. The price will be the average sale price obtained by Computershare’s broker, net of fees, for each batch order and will be sold generally within 2 business days of the request during regular open market hours. Please note that all written sales requests are always processed by Batch Order. ($10 and $0.12 per share). Market Order sales will sell at the next available trade. The shares are sold real time when they hit the market, however an available trade must be presented to complete this transaction. Market Order sales may only be requested by phone at 1-800-647-0584 or using Investor Center through www.computershare.com/buyaberdeen. ($25 and $0.12 per share).

 

The receipt of dividends and distributions under the Plan will not relieve participants of any income tax that may be payable on such dividends or distributions. The Acquiring Fund or the Plan Agent may terminate the Plan as applied to any voluntary cash payments made and any dividend or distribution paid subsequent to notice of the termination sent to members of the Plan at least 30 days prior to the record date for such dividend or distribution. The Plan also may be amended by the Acquiring Fund or the Plan Agent, but (except when necessary or appropriate to comply with applicable law or the rules or policies of the SEC or any other regulatory authority) only by mailing a written notice at least 30 days’ prior to the effective date to the participants in the Plan. All correspondence concerning the Plan should be directed to the Plan Agent by phone at 1-800-647-0584, using Investor Center through www.computershare.com/buyaberdeen or in writing to Computershare Trust Company N.A., P.O. Box 43006, Providence, RI 02940-3078.

 

ANTI-TAKEOVER AND CERTAIN PROVISIONS OF THE ACQUIRING FUND’S AGREEMENT AND DECLARATION OF TRUST AND BY-LAWS

 

The Agreement and Declaration of Trust and By-Laws of the Acquiring Fund contain provisions, which are described below in this section, that could have the effect of limiting (i) the ability of other entities or persons to acquire control of the Acquiring Fund; (ii) the Acquiring Fund’s freedom to engage in certain transactions or (iii) the ability of the Acquiring Fund’s trustees or shareholders to amend the Agreement and Declaration of Trust and By-Laws or effectuate changes in the Acquiring Fund’s management. These provisions of the Agreement and Declaration of Trust and By-Laws of the Acquiring Fund may be regarded as “anti-takeover” provisions.

 

The Board of the Acquiring Fund is divided into three (3) classes, with the terms of one (1) class expiring at each annual meeting of shareholders or special meeting in lieu thereof. At each annual meeting, one class of trustees is elected to a three-year term. This provision could delay for up to two (2) years the replacement of a majority of the Board of the Acquiring Fund. A Trustee may be removed from office without cause only by a written instrument signed or adopted by two-thirds of the remaining Trustees or by a vote of the holders of at least two-thirds of the class of shares of the Acquiring Fund that are entitled to elect a Trustee and that are entitled to vote on the matter.

 

In addition, the Declaration of Trust requires the favorable vote of the holders of at least 80% of the outstanding shares of each class of the Acquiring Fund, voting as a class, then entitled to vote to approve, adopt or authorize certain transactions with 5%-or-greater holders of the Acquiring Fund’s outstanding shares and their affiliates or associates, unless two-thirds of the Board of Trustees have approved by resolution a memorandum of understanding with such holders, in which case normal voting requirements would be in effect. For purposes of these provisions, a 5%-or-greater holder of outstanding shares (a “Principal Shareholder”) refers to any person who, whether directly or indirectly and whether alone or together with its affiliates and associates, beneficially owns 5% or more of the outstanding shares of beneficial interest of the Acquiring Fund. The transactions subject to these special approval requirements are: (i) the merger or consolidation of the Acquiring Fund or any subsidiary of the Acquiring Fund with or into any Principal Shareholder; (ii) the issuance of any securities of the Acquiring Fund to any Principal Shareholder for cash (other than pursuant to any automatic dividend reinvestment plan or pursuant to any offering in which such Principal Shareholder acquires securities that represent no greater a percentage of any class or series of securities being offered than the percentage of any class of shares beneficially owned by such Principal Shareholder immediately prior to such offering or, in the case of securities, offered in respect of another class or series, the percentage of such other class or series beneficially owned by such Principal Shareholder immediately prior to such offering); (iii) the sale, lease or exchange of all or any substantial part of the assets of the Acquiring Fund to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period); (iv) the sale, lease or exchange to the Acquiring Fund or any subsidiary thereof, in exchange for securities of the Acquiring Fund, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period); or (v) the purchase by the Acquiring Fund, or any entity controlled by the Acquiring Fund, of any common shares from any Principal Shareholder or any person to whom any Principal Shareholder transferred common shares. 

 41

 

The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. These provisions also provide, however, the advantage of potentially requiring persons seeking control of the Acquiring Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund’s investment objectives and policies. The provisions of the Agreement and Declaration of Trust and By-Laws described above could have the effect of discouraging a third party from seeking to obtain control of the Acquiring Fund in a tender offer or similar transaction.

 

The Board of the Acquiring Fund has determined that provisions with respect to the Board of the Acquiring Fund and the shareholder voting requirements are in the best interests of the shareholders generally. Reference should be made to the Agreement and Declaration of Trust on file with the SEC for the full text of these provisions.

 

The Agreement and Declaration of Trust provides that the Acquiring Fund will fully indemnify (except in the case of certain disabling conduct) each of its trustees, officers and employees, and any investment adviser or sub-adviser in connection with their service with the Acquiring Fund. The Agreement and Declaration of Trust also provides for advancement of expenses (including counsel fees) to such indemnified persons subject to certain conditions set forth in the Agreement and Declaration of Trust.

 

APPRAISAL RIGHTS

 

Shareholders of the Acquired Fund and the Acquiring Fund do not have appraisal rights in connection with the proposed transactions. 

 42

 

FINANCIAL HIGHLIGHTS

 

The Acquired Fund  

The information for the six months ended May 31, 2023, is unaudited. The information for the other periods shown has been audited by Deloitte & Touche LLP, the Acquired Fund’s independent registered public accounting firm, unless identified as unaudited. Financial statements for the fiscal year ended November 30, 2022, and the Report of the Independent Registered Public Accounting Firm thereon appear in the Acquired Fund’s Annual Report for the fiscal year ended November 30, 2022, which is available at https://www.ftportfolios.com and upon request.

 

    Six Months                           
    Ended                           
    5/31/2023    Year Ended November 30, 
    (Unaudited)    2022    2021    2020    2019    2018 
Net asset value, beginning of period   $3.73   $4.33   $3.44   $5.92   $5.78   $6.42 
                               
Income from investment operations:                              
Net investment income (loss)    0.18    0.26    0.26    0.33    0.58    0.66 
Net realized and unrealized gain (loss)    (0.23)   (0.53)   0.96    (2.37)   0.22    (0.60)
Total from investment operations    (0.05)   (0.27)   1.22    (2.04)   0.80    0.06 
                               
Distributions paid to shareholders from:                              
Net investment income    (0.17)   (0.28)   (0.30)   (0.44)   (0.40)   (0.63)
Return of capital        (0.05)   (0.03)        (0.26)   (0.07)
Total distributions paid to Common Shareholders    (0.17)   (0.33)   (0.33)   (0.44)   (0.66)   (0.70)
                               
Net asset value, end of period   $3.51   $3.73   $4.33   $3.44   $5.92   $5.78 
                               
Market value, end of period   $2.95   $3.49   $4.00   $3.28   $5.90   $6.07 
                               
Total return based on net asset value(a)    (0.96)%   (5.60)%   36.49%   (34.67)%   14.58%   1.09%
Total return based on market value(a)    (11.04)%   (4.39)%   32.23%   (37.49)%   8.74%   6.83%
Ratios to average net assets/supplemental data:                              
Net assets, end of period (in 000’s)   $50,420   $53,604   $62,197   $49,437   $85,054   $82,960 
Ratio of total expenses to average net assets    2.71%(b)   2.02%   1.78%   2.35%   2.56%   2.38%
Ratio of total expenses to average net assets excluding interest expense    1.59%(b)   1.53%   1.49%   1.78%   1.60%   1.58%
Ratio of net investment income (loss) to average net assets    9.84%(b)   6.44%   6.35%   8.87%   9.95%   10.79%
Portfolio turnover rate    7%   5%   8%   20%   7%   12%
                               
Indebtedness:                              
Total loan outstanding (in 000’s)   $8,600   $8,600   $8,600   $6,500   $25,000   $25,000 
Asset coverage per $1,000 of indebtedness(c)   $6,863   $7,233   $8,232   $8,606   $4,402   $4,318 

 

(a)Total return is based on the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan, and changes in net asset value per share for net asset value returns and changes in Common Share Price for market value returns. Total returns do not reflect sales load and are not annualized for periods of less than one year. Past performance is not indicative of future results.

(b)Annualized.
(c)Calculated by subtracting the Fund’s total liabilities (not including the loan outstanding) from the Fund’s total assets, and dividing by the outstanding loan balance in 000’s.

 43

 

   Year Ended November 30, 
   2017   2016   2015   2014   2013 
Net asset value, beginning of period  $6.82   $6.54   $7.72   $8.61   $7.85 
Income from investment operations:                         
Net investment income (loss)   0.54    0.66    0.64    0.65    0.62 
Net realized and unrealized gain (loss)   (0.24)   0.32    (1.12)(a)   (0.85)   0.81 
Total from investment operations   0.30    0.98    (0.48)   (0.20)   1.43 
Distributions paid to shareholders from:                         
Net investment income   (0.60)   (0.66)   (0.67)   (0.66)   (0.67)
Return of capital   (0.10)   (0.04)   (0.03)   (0.03)    
Total distributions paid to Common Shareholders   (0.70)   (0.70)   (0.70)   (0.69)   (0.67)
Premiums from shares sold in at the market offering           0.00(b)        
Net asset value, end of period  $6.42   $6.82   $6.54(a)  $7.72   $8.61 
Market value, end of period  $6.38   $7.00   $6.17   $8.58   $8.19 
Total return based on net asset value (c)   4.23%   16.39%   (6.25)%(a)   (2.44)%   18.91%
Total return based on market value (c)   0.91%   26.63%   (20.42)%   14.00%   10.03%
Ratios to average net assets/supplemental data:                         
Net assets, end of period (in 000’s)  $92,165   $97,753   $93,659   $110,395   $123,081 
Ratio of total expenses to average net assets   2.02%   1.87%   1.85%   1.71%   1.73%
Ratio of total expenses to average net assets excluding interest expense   1.52%   1.54%   1.63%   1.52%   1.50%
Ratio of net investment income (loss) to average net assets   7.66%   10.42%   9.14%   8.00%   7.51%
Portfolio turnover rate   5%   13%   10%   14%   13%
Indebtedness:                         
Total loan outstanding (in 000’s)  $25,000   $25,000   $25,000   $25,000   $25,000 
Asset coverage per $1,000 of indebtedness (d)  $4,687   $4,910   $4,746   $5,416   $5,923 

 

(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 subtracting the Fund’s total liabilities (not including the loan outstanding) from the Fund’s total assets, and dividing by the outstanding loan balance in 000’s.

 44

 

The Acquiring Fund

 

The information for the six months ended April 30, 2023 and for the fiscal years ended October 31, 2017 through October 31, 2013, is unaudited. The information for the other periods shown has been audited by KPMG LLP, the Acquiring Fund’s independent registered public accounting firm, unless identified as unaudited. Financial statements for the fiscal year ended October 31, 2022, and the Report of the Independent Registered Public Accounting Firm thereon appear in the Acquiring Fund’s Annual Report for the fiscal year ended October 31, 2022, which is available at www.abrdnaod.com and upon request.

 

   For the Six-
Months
Ended
April 30,
   For the Fiscal Years Ended October 31, 
   2023                     
   (unaudited)   2022   2021   2020   2019   2018 
PER SHARE OPERATING PERFORMANCE(a):                        
Net asset value per common share beginning of period  $8.61   $10.98   $8.76   $9.56   $9.33   $9.95 
Net investment income   0.29    0.63    0.66    0.63    0.64    0.64 
Net realized and unrealized gains/(losses) on investments, forward foreign currency exchange contracts and foreign currency transactions   1.00    (2.31)   2.25    (0.74)   0.27    (0.58)
Total from investment operations applicable to common shareholders   1.29    (1.68)   2.91    (0.11)   0.91    0.06 
Distributions to common shareholders from:                              
Net investment income   (0.35)   (0.69)   (0.69)   (0.67)   (0.65)   (0.67)
Return of capital               (0.02)   (0.04)   (0.02)
Total distributions   (0.35)   (0.69)   (0.69)   (0.69)   (0.69)   (0.69)
Capital Share Transactions: Anti-Dilutive effect of share repurchase program                   0.01    0.01 
                               
Net asset value per common share, end of period  $9.55   $8.61   $10.98   $8.76   $9.56   $9.33 
Market price, end of period  $8.26   $7.50   $10.05   $7.31   $8.44   $7.94 
                               
Total Investment Return Based on(b):                              
Market price   14.82%   (19.25)%   47.64%   (5.47)%   15.55%   (4.96)%
Net asset value   15.63%   (15.15)%   34.60%(c)   0.00%(c)   11.39%   1.24%
                               
Ratio to Average Net Assets Applicable to Common                              
Shareholders/Supplementary Data:                              
Net assets applicable to common shareholders, end of period (000 omitted)  $1,006,391   $908,039   $1,157,523   $924,011   $1,007,850   $994,556 
                               
Average net assets applicable to common shareholders (000 omitted)  $979,873   $1,049,849   $1,129,413   $964,667   $981,093   $1,082,514 
Net operating expenses, net of fee waivers   1.25%(d)   1.16%   1.16%   1.15%   1.22%   1.18%
Net operating expenses, excluding fee waivers   1.32%(d)   1.21%   1.20%   1.18%   1.24%   1.19%
Net operating expenses, net of fee waivers   1.14%(d)   1.14%   1.14%   1.14%   1.18%   1.14%
and excluding interest expense                              
Net Investment income   6.37%(d)   6.36%   6.14%   6.93%   6.94%   6.32%
Portfolio turnover   36%(e)   83%   72%   115%   135%   77%
Line of credit payable outstanding (000 omitted)  $45,679   $12,250   $4,092   $   $   $15,401 

 

(a)Based on average shares outstanding.

(b)Total investment return is calculated assuming a purchase of common stock on the first day and a sale on the last day of each reporting period. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions.

(c)The total return shown above includes the impact of financial statement rounding of the NAV per share and/or financial statement adjustments.

(d)Annualized.

(e)Not annualized.

(f)Asset coverage ratio is calculated by dividing net assets plus the amount of any borrowings, for investment purposes by the amount of the Line of Credit.

 45

 

 

   Years Ended October 31, 
   2017   2016   2015†   2014†   2013†(a) 
   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
PER COMMON SHARE OPERATING PERFORMANCE:                         
Net asset value per share, beginning of year  $8.69   $9.56   $9.92   $9.82(a)   $9.22 
Income from investment operations:                         
Net investment income   0.68    0.65    0.69    0.64    0.68 
Net realized and unrealized gain (loss)   1.27    (0.83)   (0.38)   0.13    0.74 
Total from investment operations   1.95    (0.18)   0.31    0.77    1.42 
LESS DISTRIBUTIONS:                         
Net investment income   (0.68)   (0.66)   (0.68)   (0.67)   (0.82)
Tax return of capital   (0.01)   (0.03)   (0.00)(b)         
Total distributions   (0.69)   (0.69)   (0.68)   (0.67)   (0.82)
Anti-Dilutive effect of share repurchase program           0.01         
Net asset value per share, end of year  $9.95   $8.69   $9.56   $9.92   $9.82 
Per share market value, end of year  $9.02   $7.37   $8.01   $8.67   $8.34 
Total return based on:                         
Net Asset Value(c)   24.22%   (0.40)%   4.39%   9.26%   17.60%
Market Value(c)   32.78%   0.81%   0.07%   12.44%   9.11%
RATIOS/SUPPLEMENTAL DATA:                         
Net Assets at end of year (000)  $1,070,253   $934,580   $1,028,225   $1,077,053   $1,067,171 
Ratio of total expenses to average net assets(d)   1.19%   1.15%   1.16%   1.14%   1.19%
Ratio of net investment income to average net assets   7.03%   7.31%   6.74%   6.47%   7.24%
Portfolio turnover   94%   98%   127%   99%   192%
Borrowing at End of year                         
Aggregate Amount Outstanding (000)  $33,239    N/A    N/A   $8,301   $5,897 
Asset Coverage Per $1,000 (000)  $31,199    N/A    N/A   $130,757   $181,979 

 

Beginning with the year ended October 31, 2015, the Fund was audited by Ernst & Young LLP. The previous years were audited by another independent registered public accounting firm.
(a) On January 21, 2014, the Fund implemented a 1 for 2 reverse stock split. Net asset value and per share information through January 20, 2014 have been updated to reflect the effect of the split. Shareholders received 1 share for every 2 shares owned and net asset value per share increased correspondingly.
(b) The amount is less than $0.005 per share.
(c) Total investment return is calculated assuming a purchase of a common share at the opening on the first day and a sale at closing on the last day of each period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment returns do not reflect brokerage commissions paid directly by the Fund’s common shareholders. Past performance is not a guarantee of future results.
(d) Ratio of total expenses to average net assets excluding interest expense was 1.15%, 1.15%, 1.15%, 1.13% and 1.18% for the years ended October 31, 2017, 2016, 2015, 2014 and 2013, respectively.

 46

 

INFORMATION ABOUT THE REORGANIZATION

 

Pursuant to the Reorganization Agreement (a form of which is attached as Appendix A to this Proxy Statement/Prospectus), the Acquired Fund will transfer all of its assets to the Acquiring Fund and the Acquiring Fund will assume all of the Acquired Fund’s liabilities and obligations in exchange solely for newly issued common shares of the Acquiring Fund, which will be distributed by the Acquired Fund to its shareholders in the form of a liquidating distribution. Acquiring Fund common shares issued to the Acquired Fund shareholders will have an aggregate NAV equal to the aggregate NAV of the Acquired Fund’s outstanding common shares immediately prior to the Reorganization. Each shareholder of the Acquired Fund will receive the number of Acquiring Fund common shares corresponding to his or her proportionate interest in the common shares of the Acquired Fund (with cash in lieu of fractional shares of the Acquiring Fund, which may be taxable). The Reorganization, together with related acts necessary to consummate the same, shall occur at the principal office of the Acquiring Fund or via electronic exchange of documents in the first quarter of 2024 and after satisfaction or waiver of the conditions precedent to the Closing, immediately after the close of regular trading on the NYSE, or at such other place and/or on such other date as to which the parties may agree. As soon as practicable after the Closing Date for the Reorganization, the Acquired Fund will dissolve pursuant to Massachusetts law.

 

The distribution of Acquiring Fund common shares to the Acquired Fund’s shareholders will be accomplished by opening new accounts on the books of the Acquiring Fund in the names of the shareholders of the Acquired Fund and transferring to those shareholder accounts Acquiring Fund common shares. Each newly-opened account on the books of the Acquiring Fund for the former shareholders of the Acquired Fund will represent the respective pro rata number of Acquiring Fund common shares due to such shareholder.

 

TERMS OF THE REORGANIZATION AGREEMENT

 

The following is a summary of the significant terms of the Reorganization Agreement. The form of Reorganization Agreement is attached as Appendix A to the Proxy Statement/Prospectus.

 

Valuation of Common Shares

 

The NAV per Acquiring Fund share shall be computed as of the time at which the Acquired Fund and the Acquiring Fund calculate their NAVs as set forth in their respective prospectuses (normally the close of regular trading on the NYSE) on the Closing Date (the “Effective Time”), after the declaration and payment of any dividends and/or other distributions on that date. At the closing of the Reorganization, the Reorganization Agreement sets forth that the Acquired Fund assets will be valued in accordance with the Acquired Fund’s valuation procedures as approved by the Board of the Acquired Fund. Upon the consummation of the Reorganization, the assets transferred to the Acquiring Fund will be valued pursuant to the Acquiring Fund’s valuation procedures as approved by the Board of Trustees of the Acquiring Fund. Please see “Synopsis” above for further information regarding the Funds’ valuation procedures.

 

Calculation of Number of Acquiring Fund Shares

 

As of the Effective Time, the Acquired Fund shares outstanding immediately prior to the Effective Time shall be exchanged for Acquiring Fund shares in an amount equal to the ratio of the NAV per share of the Acquired Fund to the NAV per share of the Acquiring Fund. Cash may be issued in lieu of fractional shares of the Acquiring Fund. In the event Acquired Fund shareholders would be entitled to receive fractional Acquiring Fund shares, the Acquiring Fund’s transfer agent will aggregate such fractional shares and sell the resulting whole shares on the exchange on which such shares are listed for the account of all such Acquired Fund shareholders, and each such Acquired Fund shareholder will be entitled to a pro rata share of the proceeds from such sale. With respect to the aggregation and sale of fractional Acquiring Fund shares, the Acquiring Fund’s transfer agent will act directly on behalf of the Acquired Fund shareholders entitled to receive fractional shares and will accumulate such fractional shares, sell the shares and distribute the cash proceeds net of brokerage commissions, if any, directly to Acquired Fund shareholders entitled to receive the fractional shares (without interest and subject to withholding taxes).

 

Conditions

 

Under the terms of the Reorganization Agreement, the Reorganization is conditioned upon, among other things, approval of the Proposal by the shareholders of the Acquired Fund and each Fund’s receipt of certain routine certificates and legal opinions. 

 47

 

Termination

 

The Reorganization Agreement may be terminated (i) by mutual agreement of the parties at any time prior to the Effective Time, if circumstances should develop that, in the opinion of such Board of the Acquiring Fund and the Board of the Acquired Fund, make proceeding with the Reorganization Agreement inadvisable; (ii) if one party breaches any representation, warranty or agreement contained in the Reorganization to be performed at or before the Closing Date, which breach would give rise to the failure of a condition precedent to the obligation of a party as set forth in the Reorganization Agreement and it is not cured within 30 days after being provided notice by the non-breaching party; or (iii) if the Agreement referred to in “AGREEMENT BETWEEN FIRST TRUST ADVISORS L.P. AND ABRDN INC.” above is validly terminated.

 

Expenses of the Reorganization

 

aIL and its affiliates and First Trust and its affiliates will bear certain expenses, including portfolio transaction costs and certain taxes, incurred in connection with the Reorganization, except as otherwise disclosed in the proxy statements to Acquired Fund shareholders, whether or not the Reorganization is consummated. The expenses of the Reorganization expected to be borne by abrdn and First Trust are estimated to be approximately $446,000. To the extent there are any transaction costs (including brokerage commissions, transaction charges and related fees) associated with the sales and purchases made in connection with the Reorganization, these will be borne by the Acquired Fund with respect to the portfolio transitioning and de-levering conducted before the Reorganization and borne by the Combined Fund with respect to the portfolio transitioning conducted after the Reorganization.

 48

 

MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION

 

Treatment as a Tax Free Reorganization

 

The Reorganization is intended to qualify as a tax-free reorganization for federal income tax purposes under section 368(a) of the Code. As a condition to the closing of the Reorganization, the Acquired Fund and the Acquiring Fund each will receive an opinion from Dechert LLP, dated as of the Closing Date, regarding the characterization of the Reorganization as a “reorganization” within the meaning of section 368(a) of the Code. The opinion of Dechert LLP will be based on US federal income tax law in effect on the Closing Date. In rendering its opinion, Dechert LLP will also rely upon certain representations of the management of the Acquired Fund and the Acquiring Fund and assume, among other things, that the Reorganization will be consummated in accordance with the Reorganization Agreement and other operative documents and as described herein.

 

As a reorganization, the US federal income tax consequences of the Reorganization can be summarized as follows:

 

The transfer of the Acquired Fund assets in exchange solely for Acquiring Fund shares and the assumption by the Acquiring Fund of all liabilities of the Acquired Fund followed by the distribution by the Acquired Fund of Acquiring Fund shares to the Acquired Fund shareholders in exchange for their Acquired Fund shares in liquidation of the Acquired Fund pursuant to and in accordance with the terms of the Reorganization Agreement will constitute a “reorganization” within the meaning of section 368(a)(1) of the Code;

 

No gain or loss will be recognized by the Acquiring Fund upon the receipt of the Acquired Fund assets solely in exchange for the Acquiring Fund shares and the assumption by the Acquiring Fund of all liabilities of the Acquired Fund;

 

No gain or loss will be recognized by the Acquired Fund upon the transfer of the Acquired Fund assets to the Acquiring Fund in exchange solely for Acquiring Fund shares and the assumption by the Acquiring Fund of all liabilities or upon the distribution of the Acquiring Fund shares to the Acquired Fund shareholders in exchange for their Acquired Fund shares, except that the Acquired Fund may be required to recognize gain or loss with respect to contracts described in section 1256(b) of the Code or stock in a passive foreign investment company, as defined in section 1297(a) of the Code;

 

No gain or loss will be recognized by the Acquired Fund shareholders upon the exchange of the Acquired Fund shares for Acquiring Fund shares (except with respect to cash received in lieu of fractional shares of the Acquiring Fund);

 

The aggregate tax basis for the Acquiring Fund shares received by each Acquired Fund shareholder pursuant to the Reorganization will be the same as the aggregate tax basis of the Acquired Fund shares held by each such Acquired Fund shareholder immediately prior to the Reorganization (reduced by any amount of tax basis allocable to fractional shares of the Acquiring Fund for which cash is received);

 

The holding period of the Acquiring Fund shares to be received by each Acquired Fund shareholder will include the period during which the Acquired Fund shares surrendered in exchange therefor were held (provided such Acquired Fund shares were held as capital assets on the date of the Reorganization);

 

Except for assets which may be marked to market for federal income tax purposes as a consequence of a termination of Acquired Fund’s taxable year, the tax basis of the Acquired Fund assets acquired by the Acquiring Fund will be the same as the tax basis of such assets to the Acquired Fund in exchange therefor; and

 

The holding period of the Acquired Fund assets in the hands of the Acquiring Fund will include the period during which those assets were held by the Acquired Fund (except where the investment activities of the Acquiring Fund have the effect of reducing or eliminating such periods with respect to an Acquired Fund asset).

 

The Funds have not sought a tax ruling from the IRS. Opinions of counsel are not binding upon the IRS or the courts. If the Reorganization is consummated but does not qualify as a tax free reorganization under the Code, and thus is taxable, the Acquired Fund would recognize gain or loss on the transfer of its assets to the Acquiring Fund and each shareholder of the Acquired Fund would recognize a taxable gain or loss equal to the difference between its tax basis in the Acquired Fund shares and the fair market value of the shares of the Acquiring Fund it received.

 49

 

Capital Loss Carryforwards

 

As of the fiscal year ended November 30, 2022, the Acquired Fund had $49,410,705 of non-expiring capital loss carryforwards. As of the fiscal year ended October 31, 2022, the Acquiring Fund had $161,117,918 of non-expiring capital loss carryforwards. The Acquiring Fund’s ability to carry forward and use the Acquired Fund or its own pre-Reorganization capital losses may be limited following the Reorganization under the loss limitation rules of sections 382, 383 and 384 of the Code. Either Fund’s “pre-acquisition losses” (including capital loss carryforwards, net current-year capital losses, and unrealized losses that exceed certain thresholds) cannot be used to offset unrealized gains in another Fund that are “built in” (unrealized) at the time of the Reorganization and that exceed certain thresholds (“non-de minimis built-in gains”) for five calendar years. Further, a portion of a Fund’s pre-acquisition losses may become subject to an annual limitation on the amount that may be used to offset future gain. Any remaining pre-acquisition losses will offset capital gains realized after the Reorganization and this will reduce subsequent capital gain distributions to a broader group of shareholders than would have been the case absent such Reorganization. Therefore, in certain circumstances, shareholders of a Fund may be subject to tax sooner, or incur more taxes as a result of the transactions that would take place as part of the Reorganization, than they would have had the Reorganization not occurred.

 

The impact of the rules described above will depend on the relative sizes of, and the losses and gains (both realized and unrealized) in, each of the Acquired Fund and the Acquiring Fund at the time of the Reorganization and thus cannot be calculated precisely at this time.

 

Cash in lieu of Fractional Shares of the Acquiring Fund

 

If an Acquired Fund shareholder receives cash in lieu of a fractional share of the Acquiring Fund, the Acquired Fund shareholder will be treated as having received the fractional share of Acquiring Fund pursuant to the Reorganization and then as having sold that fractional share of Acquiring Fund for cash. As a result, each such Acquired Fund shareholder generally will recognize gain or loss equal to the difference between the amount of cash received and the tax basis in his, her or its fractional share of Acquiring Fund. This gain or loss generally will be a capital gain or loss and will be long-term capital gain or loss if, as of the date of Reorganization, the holding period for the shares (including the holding period of Acquired Fund shares surrendered therefor) is greater than one year. The deductibility of capital losses is subject to limitations.

 

Distribution of Income and Gains

 

The Acquired Fund’s tax year is expected to end as a result of the Reorganization. The Acquired Fund generally will be required to declare to its shareholders of record one or more distributions of all of its previously undistributed investment company taxable income and net realized capital gain (if any), including capital gain realized on any securities disposed of in connection with the Reorganization, in order to maintain its treatment as a registered investment company during its tax year ending with the date of the Reorganization and to eliminate any US federal income tax on its taxable income in respect of such tax year.

 

The pre-Reorganization portfolio transitioning is anticipated to result in net capital gains of $824,192, or $0.057 per share based on Acquired Fund holdings as of September 21, 2023. However, it is anticipated that the Acquired Fund’s capital loss carryforwards would offset projected realized gains. The actual tax consequences as a result of portfolio repositioning are dependent on the portfolio composition of the Acquired Fund at the time and market conditions. 

 

Moreover, if the Acquiring Fund has investment company taxable income or net realized capital gain, but has not distributed such income or gain prior to the Reorganization and you acquire shares of the Acquiring Fund in the Reorganization, a portion of your subsequent distributions from the Combined Fund may, in effect, be a taxable return of part of your investment. Similarly, if you acquire Acquiring Fund shares in the Reorganization when the Acquiring Fund holds appreciated securities, you may receive a taxable return of part of your investment if and when the Combined Fund sells the appreciated securities and distributes the realized gain.

 

Tracking Your Basis and Holding Period; State and Local Taxes

 

After the Reorganization of the Acquired Fund, you will continue to be responsible for tracking the adjusted tax basis and holding period for your shares of the Combined Fund for federal income tax purposes. You should consult your tax adviser regarding the effect, if any, of the Reorganization in light of your individual circumstances. You should also consult your tax adviser about the state and local tax consequences, if any, of the Reorganization because the discussion above only relates to the federal income tax consequences.

 

Portfolio Transitioning

 

Portfolio transitioning after the Reorganization may result in capital gains or losses, which may have federal income tax consequences. For example, if the Reorganization was completed on September 21, 2023, it is estimated that approximately $6,866,343, or $0.061 per share, in capital losses would have resulted from portfolio transitioning in the Combined Fund following the Reorganization.

 50

 

VOTING INFORMATION AND REQUIREMENTS

 

Record Date

 

Shareholders of record of the Acquired Fund as of the close of business on October 23, 2023, the record date (previously defined as the “Record Date”), are entitled to notice of and to vote at the Special Meeting. Shareholders on the Record Date will be entitled to one vote for each share held, and each fractional share held shall be entitled to a proportionate fractional vote.

 

Proxies

 

Shareholders of record as of the Record Date may vote by attending the Special Meeting or, prior to the Special Meeting, may vote their shares by returning the enclosed proxy card or by casting their vote via telephone or the Internet using the instructions provided on the enclosed proxy card. The giving of such a proxy will not affect your right to vote should you decide to attend the Special Meeting. If your shares are held in “street name” by a broker or bank, you will receive information regarding how to instruct your bank or broker to cast your votes. For more information on attending the Special Meeting, see “ Additional Information about Attending the Special Meeting” below.

 

You may revoke your proxy at any time before the Special Meeting by (i) written notice delivered to the Secretary of the Acquired Fund prior to the exercise of the proxy; (ii) execution of a subsequent proxy; or (iii) attending and voting at the Special Meeting.

 

If you hold shares through a broker, bank or other nominee, you must follow the instructions you receive from your nominee in order to revoke your voting instructions.

 

If you hold your shares directly (not through a broker-dealer, bank or other financial institution) and if you return a properly executed proxy card that does not specify how you wish to vote on the Proposal, your shares will be voted “FOR” the Proposal.

 

Quorum

 

A quorum of shareholders must be present for any business to be conducted at the Special Meeting. Thirty-three and one-third percent (33-1/3%) of the shares outstanding of the Acquired Fund entitled to vote present in person or represented by proxy at the Acquired Fund’s Special Meeting shall constitute a quorum for that meeting.

 

Broker Non-Votes and Abstentions

 

Broker non-votes occur when a beneficial owner of shares held in “street name” does not give instructions to the broker holding the shares as to how to vote on matters deemed “non-routine.” Generally, if shares are held in street name, the beneficial owner of the shares is entitled to give voting instructions to the broker holding the shares. If the beneficial owner does not provide voting instructions, the broker can still vote the shares with respect to matters that are considered to be “routine,” but cannot vote the shares with respect to “non-routine” matters. The Proposal is considered ”non-routine,” so brokers will not have discretionary voting power with respect to the Proposal, and the Acquired Fund does not expect to receive any broker non-votes.

 

Abstentions, if any, will be included for purposes of determining whether a quorum for the Acquired Fund is present at the Special Meeting and will be treated as shares present at the Special Meeting, but will not be treated as votes cast.

 

Adjournments

 

Any meeting of shareholders may, by action of the chair of the meeting, be adjourned from time to time with respect to one or more matters to a date that may be more than one hundred and twenty (120) days after the date set for the original meeting, whether or not a quorum is present with respect to such matter or matters; upon motion of the chair of the meeting, the question of adjournment may be submitted to a vote of the shareholders, and in that case, any adjournment with respect to one or more matters must be approved by the vote of holders of a majority of the shares present and entitled to vote with respect to the matter or matters adjourned, and without further notice. Unless a proxy is otherwise limited in this regard, any shares present and entitled to vote at a meeting, including those that are represented by broker non-votes, may, at the discretion of the proxies named therein, be voted in favor of such an adjournment or adjournments. Any adjourned meeting may be held as adjourned without further notice if the new date, time and place of the meeting was announced at the meeting that was adjourned. Unless otherwise specifically limited by their terms, proxies shall entitle the holder thereof to vote at any postponements or adjournments of a meeting, and no proxy shall be valid after eleven months from its date unless a longer period is expressly provided in the appointment. 

 51

 

 

Additional Information about Attending the Special Meeting

 

As stated earlier in this Proxy Statement/Prospectus, the Special Meeting is scheduled to be held on February 20, 2024, at 1:00 p.m. Central Time at the offices of First Trust, located at 120 East Liberty Drive, Suite 400, Wheaton, IL 60187. Please note that shareholders who intend to attend the Special Meeting will need to provide valid identification and, if they hold shares through a bank, broker or other nominee, satisfactory proof of ownership of shares, such as a voting instruction form (or a copy thereof) or a letter from their bank, broker or other nominee or broker’s statement indicating ownership as of the Record Date to be admitted to the Special Meeting. You may call toll-free (866) 796-7172 for information on how to obtain directions to be able to attend the Special Meeting and vote in person.

 

List of Acquired Fund Shareholders

 

A list of shareholders of record of the Acquired Fund entitled to notice of the Special Meeting will be available at First Trust’s offices, located at 120 East Liberty Drive, Suite 400, Wheaton, IL 60187, for inspection by any shareholder during regular business hours beginning on the second business day after notice is given of the Special Meeting, subject to restrictions that may be imposed on a requesting shareholder on the copying, use or distribution of the information contained in the list. Shareholders will need to provide advance written notice to the Acquired Fund to inspect the list of shareholders and will also need to show valid identification and proof of share ownership to inspect such list.

 

Householding

 

Please note that only one copy of shareholder documents, including annual or semi-annual reports and proxy materials may be delivered to two or more shareholders of the Acquired Fund who share an address, unless the Acquired Fund has received instructions to the contrary. This practice is commonly called “householding” and it is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct the Acquired Fund otherwise. To request a separate copy of any shareholder document, or for instructions as to how to request a separate copy of these documents or as to how to request a single copy if multiple copies of these documents are received, shareholders should contact the Acquired Fund at the address and phone number set forth above.

 

Shareholder Communications

 

Shareholders of the Acquired Fund who want to communicate with the Board of the Acquired Fund or any individual Trustee should write the Acquired Fund to the attention of the Acquired Fund Secretary, W. Scott Jardine, at 120 East Liberty Drive, Suite 400, Wheaton, IL 60187. The letter should indicate that you are a shareholder of the Acquired Fund. If the communication is intended for a specific Trustee and so indicates, it will be sent only to that Trustee. If a communication does not indicate a specific Trustee, it will be sent to the Chair of the Nominating and Governance Committee of the Board of the Acquired Fund and the independent legal counsel to the Independent Trustees for further distribution as deemed appropriate by such persons.

 

Vote Required for the Proposal

 

The Proposal will require the affirmative vote of a majority of the outstanding voting shares (as defined under the 1940 Act) of the Acquired Fund. The 1940 Act defines a majority of the outstanding voting shares as the lesser of either (i) at least 67% of the voting securities present at the Special Meeting, if at least 50% of such securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting shares.

 52

 

SHAREHOLDER INFORMATION

 

As of November 30, 2023, to each Fund’s knowledge, no single shareholder or “group” (as that term is used in Section 13(d) of the Exchange Act) beneficially owned more than 5% of either Fund’s outstanding common shares, except as described in the following tables. A control person is one who owns, either directly or indirectly, more than 25% of the voting securities of a Fund or acknowledges the existence of control. A party that controls a Fund may be able to significantly affect the outcome of any item presented to shareholders for approval. Information as to beneficial ownership of common shares, including percentage of common shares beneficially owned, is based on, among other things, reports filed with the SEC by such holders.

 

The Acquired Fund

 

Shareholder Name and Address  Class of Shares /
Beneficial or Record
Owner
  Share Holdings   Percentage Owned   Estimated Pro Forma
Percentage of Ownership of
Combined Fund
 
Charles Schwab & Co., Inc.
2423 E Lincoln Drive
Phoenix, Arizona 85016
  Common Shares/Record Owner   2,939,294    20.46%  1.19%
LPL Financial LLC *
1055 LPL Way
Fort Mill, South Carolina 29715
  Common Shares/Record and Beneficial Owner   Record: 858,718
Beneficial: 889,332
*   Record: 5.97
Beneficial: 6.20
%
%*
  Record: 0.35
Beneficial: 0.36
%
%
National Financial Services LLC
499 Washington Boulevard
Jersey City, New Jersey 07310
  Common Shares/Record Owner   1,713,684    11.93%  0.70%
Wells Fargo Clearing Services, LLC
2801 Market Street H0006-09B
St. Louis, Missouri 63103
  Common Shares/Record Owner   1,670,901    11.63%  0.68%
Morgan Stanley Smith Barney LLC
1300 Thames St 6th Floor
Baltimore, Maryland 21231
  Common Shares/Record Owner   1,482,711    10.32%  0.60%
Pershing LLC
One Pershing Plaza
Jersey City, New Jersey 07399
  Common Shares/Record Owner   805,631    5.61%  0.33%

 

* For the beneficial share holdings, based solely upon information presented in a Schedule 13G filed February 3, 2023 by LPL Financial LLC.

 

The Acquiring Fund

 

Shareholder Name and Address  Class of Shares /
Beneficial or Record
Owner
  Share Holdings   Percentage Owned   Estimated Pro Forma
Percentage of Ownership of
Combined Fund
 
Allspring Global Investment Holdings, et al.*
525 Market St, 10th Fl
San Francisco, CA 94105
  Common Shares/Beneficial Owner   7,347,241*   6.97%*  6.56%
Parametric Portfolio Associates, LLC**
800 Fifth Avenue, Suite 2800
Seattle, WA 98104
  Common Shares/Beneficial Owner   8,108,906**   7.7%**  7.24%

 

* Based solely on information presented in a Schedule 13G/A filed December 31, 2022, jointly by Allspring Global Investments Holdings, LLC, Allspring Global Investments, LLC and Allspring Funds Management, LLC.

 

** Based solely on information presented in a Schedule 13G/A filed December 30, 2022 by Parametric Portfolio Associates, LLC.

 

Security Ownership of Management

 

As of November 30, 2023, the officers and Trustees of the Acquired Fund, in the aggregate, owned less than 1% of the outstanding shares of the Acquired Fund. As of November 30, 2023, the officers and Trustees of the Acquiring Fund, in the aggregate, owned less than 1% of the outstanding shares of the Acquiring Fund.

 

SHAREHOLDER PROPOSALS

 

In order to nominate persons to the Board of the Acquired Fund or to present any other permitted proposal for action by shareholders at an annual meeting of shareholders of the Acquired Fund, a shareholder must comply with any requirements under applicable law (including without limitation the proxy rules under the Exchange Act) and the requirements of the Acquired Fund’s Amended and Restated By-Laws (the “By-Laws”). The By-Laws provide, among other requirements, that a proposing shareholder be entitled to vote on the proposal and that timely written notice which includes the information required by the By-Laws must be provided to the Secretary of the Acquired Fund. In order to be considered timely, unless a greater or lesser period is required under applicable law, the shareholder notice must be delivered to or mailed and received at the Acquired Fund’s principal executive offices, Attn: W. Scott Jardine, Secretary, not less than one hundred and five (105) days nor more than one hundred and twenty (120) days prior to the first anniversary date of the date the Acquired Fund’s proxy statement was released to shareholders for the preceding year’s annual meeting. However, if and only if an annual meeting is not scheduled to be held within a period that commences thirty (30) days before the first anniversary date of the annual meeting for the preceding year and ends thirty (30) days after such anniversary date (an annual meeting date outside such period being referred to herein as an “Other Annual Meeting Date”), such shareholder notice must be given as described above not more than one hundred and twenty (120) days prior to such Other Annual Meeting Date and not less than the close of business on the later of (i) the date one hundred and five (105) days prior to such Other Annual Meeting Date or (ii) the tenth (10th) business day following the date such Other Annual Meeting Date is first publicly announced or disclosed. Timely submission of a proposal does not mean that such proposal will be included in the Acquired Fund’s proxy statement. The Acquired Fund’s proxy materials for its 2023 annual meeting were mailed to shareholders on or about March 14, 2023, and such annual meeting was held on April 17, 2023. Shareholders should consult the Acquired Fund’s By-Laws for more information about the requirements for shareholder proposals. Copies of the By-Laws can be found in the Current Report on Form 8-K filed by the Acquired Fund with the SEC on June 23, 2023, which is available at www.sec.gov, and may also be obtained by writing to the Secretary of the Acquired Fund at such Fund’s principal executive offices. 

 53

 

To be considered for presentation at the Acquired Fund’s 2024 annual meeting, if any, a shareholder proposal submitted pursuant to Rule 14a-8 of the Exchange Act, must have been received at the offices of the Acquired Fund at 120 East Liberty Drive, Suite 400, Wheaton, IL 60187, no later than November 15, 2023. However, if the Reorganization is approved and will be consummated, the Acquired Fund will be dissolved and will no longer hold annual meetings of shareholders.

 

In addition, the By-Laws of the Acquired Fund provide that, unless required by applicable law, no matter shall be considered at or brought before any annual or special meeting unless such matter has been deemed a proper matter for shareholder action by at least sixty-six and two-thirds percent (66-2/3%) of the Trustees. Timely submission of a proposal does not mean that such proposal will be brought before a meeting.

 

SOLICITATION OF PROXIES

 

Solicitation of proxies is being made primarily by the mailing of the Notice and this Proxy Statement/Prospectus with its enclosures on or about December 26, 2023. Proxy solicitations may also be made by telephone or personal interviews conducted by officers and service providers of the Acquired Funds, including any agents or affiliates of such service providers. In addition, as noted above, a proxy solicitation firm, EQ Fund Solutions, LLC, has been engaged to assist in the solicitation of proxies. Shareholders of the Acquired Fund whose shares are held by nominees such as brokers can vote their proxies by contacting their respective nominee.

 

OTHER BUSINESS

 

The Board knows of no other business to be presented for action at the Special Meeting. If any matters do come before the Special Meeting on which action can properly be taken in accordance with the Acquired Fund’s By-Laws, it is intended that the proxies shall vote in accordance with the judgment of the person or persons exercising the authority conferred by the proxy at the Special Meeting. The submission of a proposal does not guarantee its inclusion in the proxy statement or presentation at the Special Meeting unless certain securities law requirements are met.

 

If you need any assistance or have any questions regarding the Proposal or how to vote your shares, please call the Acquired Fund’s Proxy Solicitor, EQ Fund Solutions, LLC, at (866) 796-7172 weekdays from 9:00 a.m. to 10:00 p.m. Eastern Time.

 54

 

APPENDIX A

 

FORM OF AGREEMENT AND PLAN OF REORGANIZATION

THIS AGREEMENT AND PLAN OF REORGANIZATION (the “Agreement”) is made as of [March 15, 2024], by and between abrdn Total Dynamic Dividend Fund, a Delaware statutory trust (the “Acquiring Fund”), and First Trust Specialty Finance and Financial Opportunities Fund, a Massachusetts business trust (the “Acquired Fund” and, together with the Acquiring Fund, the “Funds”). First Trust Advisors L.P., an Illinois limited partnership and the investment adviser to the Acquired Fund (the “Seller”), joins this Agreement solely for purposes of paragraphs 8.2, 11.1, 11.2 and 11.3, and abrdn Inc., a Delaware corporation registered under the Investment Advisers Act of 1940 (the “Purchaser”), joins this Agreement solely for purposes of paragraphs 5.12, 5.13, 8.2, 11.1, 11.2 and 11.3.

The reorganization will consist of the transfer of all of the Assets (as defined in paragraph 1.2) of the Acquired Fund to the Acquiring Fund in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund, no par value per share (the “Acquiring Fund Shares”), the assumption by the Acquiring Fund of Liabilities (as defined in paragraph 1.3) of the Acquired Fund, and the distribution of the Acquiring Fund Shares to the shareholders of the Acquired Fund as part of the complete liquidation of the Acquired Fund, all upon the terms and conditions hereinafter set forth in this Agreement (the “Reorganization”).

WHEREAS, the Acquiring Fund and the Acquired Fund are each registered closed-end management investment companies, and the Acquired Fund owns securities which are assets of the character in which the Acquiring Fund is permitted to invest; and

WHEREAS, both the Acquired Fund and the Acquiring Fund are authorized to issue their shares of beneficial interest; and

WHEREAS, the Board of Trustees of the Acquiring Fund and the Board of Trustees of the Acquired Fund have authorized and approved the Reorganization; and

WHEREAS, each of the Seller and the Purchaser have entered into a purchase agreement (the “Purchase Agreement”) pursuant to which Purchaser agreed to acquire, and Seller agreed to sell, certain assets relating to the Seller’s business with respect to the Acquired Fund; and

WHEREAS, it is intended that, for United States federal income tax purposes, (i) the transactions contemplated by this Agreement shall qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and (ii) that the Agreement shall constitute a “plan of reorganization” for purposes of the Code.

NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, intending to be legally bound hereby, the parties hereto covenant and agree as follows:

  

1.THE REORGANIZATION AND FUND TRANSACTIONS

1.1.            The Reorganization. Subject to the requisite approvals and other terms and conditions herein set forth and on the basis of the representations and warranties contained herein, at the Effective Time (as defined in paragraph 2.4), the Acquired Fund shall assign, deliver and otherwise transfer the Assets (as defined in paragraph 1.2) of the Acquired Fund to the Acquiring Fund, and the Acquiring Fund shall assume the Liabilities (as defined in paragraph 1.3) of the Acquired Fund. In consideration of the foregoing, at the Effective Time, the Acquiring Fund shall issue Acquiring Fund Shares to the Acquired Fund. The number of Acquiring Fund Shares to be delivered shall be determined as set forth in paragraph 2.3.

1.2.            Assets of the Acquired Fund. The assets of the Acquired Fund to be acquired by the Acquiring Fund shall consist of all assets and property that can legally be transferred whether accrued or contingent, known or unknown, including, without limitation, all cash, cash equivalents, securities, receivables (including securities, interests and dividends receivable), commodities and futures interests, rights to register shares under applicable securities laws, any deferred or prepaid expenses shown as an asset on the books of the Acquired Fund at the Effective Time (as defined in paragraph 2.4), books and records of the Acquired Fund, and any other property owned by the Acquired Fund at the Effective Time (collectively, the “Assets”). For the avoidance of doubt, Assets shall not include any assets or property that cannot be transferred to the Acquiring Fund pursuant to applicable law or regulation.

 A-1 

 

1.3.            Liabilities of the Acquired Fund. The Acquired Fund will use commercially reasonable efforts to discharge all of its known liabilities and obligations prior to the Effective Time consistent with its obligation to continue its operations and to pursue its investment objective and strategies in accordance with the terms as presented in the Proxy Statement/Prospectus (as defined in paragraph 5.6) in connection with the Reorganization. The Acquiring Fund will assume all liabilities of the Acquired Fund whether accrued or contingent, known or unknown (collectively, the “Liabilities”). At and after the Effective Time, the Liabilities of the Acquired Fund shall become and be the liabilities of the Acquiring Fund and may be enforced against the Acquiring Fund to the extent as if the same had been incurred by the Acquiring Fund.

1.4.            Distribution of Acquiring Fund Shares. At the Effective Time (or as soon thereafter as is reasonably practicable), the Acquired Fund will distribute the Acquiring Fund Shares received from the Acquiring Fund pursuant to paragraph 1.1 (cash may be distributed in lieu of fractional Acquiring Fund Shares, as set forth in paragraph 2.3), pro rata to the record holders of the shares of the Acquired Fund determined as of the Effective Time (the “Acquired Fund Shareholders”) in complete liquidation of the Acquired Fund. Such distribution and liquidation will be accomplished by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund Shareholders. The aggregate net asset value of the Acquiring Fund Shares to be so credited to Acquired Fund Shareholders shall be equal to the aggregate net asset value of the then outstanding shares of beneficial interest of the Acquired Fund (the “Acquired Fund Shares”) owned by Acquired Fund Shareholders at the Effective Time other than with respect to any fractional Acquiring Fund Shares for which cash may be distributed in lieu thereof, pursuant to paragraph 2.3. All issued and outstanding shares of the Acquired Fund will be canceled on the books of the Acquired Fund. The Acquiring Fund shall not issue share certificates representing the Acquiring Fund Shares in connection with such transfer, except for any global certificate or certificates required by a securities depository in connection with the establishment of book-entry ownership of the Acquiring Fund Shares.

1.5.            Recorded Ownership of Acquiring Fund Shares. Ownership by Acquired Fund Shareholders of Acquiring Fund Shares will be shown on the books of the Acquiring Fund’s transfer agent.

1.6.            Filing Responsibilities of Acquired Fund. Any reporting responsibility of the Acquired Fund, including, but not limited to, the responsibility for filing regulatory reports, tax returns, or other documents with the Securities and Exchange Commission (the “Commission”), the exchange on which the Acquired Fund’s shares are listed, any state securities commission, any state corporate registry, and any Federal, state or local tax authorities or any other relevant regulatory authority, is and shall remain the responsibility of the Acquired Fund.

1.7.            Transfer Taxes. Any transfer taxes payable upon issuance of the Acquiring Fund Shares in a name other than the registered holder of the Acquired Fund Shares on the books of the Acquired Fund as of that time shall, as a condition of such issuance and transfer, be paid by the person to whom such Acquiring Fund Shares are to be issued and transferred.

1.8            Termination. Promptly after the distribution of Acquiring Fund Shares pursuant to paragraph 1.4, the Acquired Fund shall take, in accordance with Massachusetts law and the Investment Company Act of 1940, as amended (the “1940 Act”), all steps as may be necessary or appropriate to effect a complete deregistration, liquidation, dissolution and termination of the Acquired Fund.

2.VALUATION

2.1.            Net Asset Value per Acquired Fund Share. The net asset value per Acquired Fund Share shall be computed as of the Effective Time, after the declaration and payment of any dividends and/or other distributions on that date, using the valuation procedures of the Acquired Fund adopted by the Acquired Fund’s Board of Trustees.

 A-2 

 

2.2.            Net Asset Value per Acquiring Fund Share. The net asset value per Acquiring Fund Share shall be computed as of the Effective Time, after the declaration and payment of any dividends and/or other distributions on that date, using the valuation procedures of the Acquiring Fund adopted by the Acquiring Fund’s Board of Trustees.

2.3.            Calculation of Number of Acquiring Fund Shares. As of the Effective Time, each Acquired Fund Share outstanding immediately prior to the Effective Time shall be exchanged for Acquiring Fund Shares in an amount equal to the ratio of the net asset value per share of the Acquired Fund determined in accordance with paragraph 2.1 to the net asset value per share of the Acquiring Fund determined in accordance with paragraph 2.2. No fractional Acquiring Fund Shares will be distributed unless such shares are to be held in a Dividend Reinvestment Plan account. In the event Acquired Fund Shareholders would be entitled to receive fractional Acquiring Fund Shares, the Acquiring Fund’s transfer agent will aggregate such fractional shares and sell the resulting whole shares on the exchange on which such shares are listed for the account of all such Acquired Fund Shareholders, and each such Acquired Fund Shareholder will be entitled to a pro rata share of the proceeds from such sale. With respect to the aggregation and sale of fractional Acquiring Fund Shares, the Acquiring Fund’s transfer agent will act directly on behalf of the Acquired Fund Shareholders entitled to receive fractional shares and will accumulate such fractional shares, sell the shares and distribute the cash proceeds net of brokerage commissions, if any, directly to Acquired Fund Shareholders entitled to receive the fractional shares (without interest and subject to withholding taxes).

2.4.            Effective Time. The Effective Time shall be the time at which the Funds calculate their net asset values as set forth in their respective valuation procedures (normally the close of regular trading on the New York Stock Exchange) on the Closing Date (as defined in paragraph 3.1) (the “Effective Time”).

3.CLOSING

3.1.            Closing. The Reorganization, together with related acts necessary to consummate the same (“Closing”), shall occur at the principal office of the Acquiring Fund or via the electronic exchange of documents on the Closing Date (as defined in the Purchase Agreement) applicable to the Acquired Fund, or such other date or place as an officer of the Acquiring Fund and an officer of the Acquired Fund may agree in writing and after satisfaction or waiver (to the extent permitted by applicable law) of the conditions precedent to the Closing set forth in Section 6 of this Agreement (other than those conditions that by their terms are to be satisfied by actions taken at the Closing, but subject to the satisfaction or, to the extent permitted, waiver of those conditions at the Closing), immediately after the close of regular trading on the New York Stock Exchange (the “Closing Date”). All acts taking place at the Closing shall be deemed to take place simultaneously as of the Effective Time.

3.2.            Transfer and Delivery of Assets. The Acquired Fund shall direct The Bank of New York Mellon (“BNY”), as custodian for the Acquired Fund, to deliver, at the Closing, a certificate of an authorized officer stating that the Assets were delivered in proper form to the Acquiring Fund at the Effective Time. The Acquired Fund’s portfolio securities represented by a certificate or other written instrument, if any, shall be presented by BNY, on behalf of the Acquired Fund, to State Street Bank and Trust Company (“State Street”), as custodian for the Acquiring Fund. Such presentation shall be made for examination as soon as reasonably practicable following the Effective Time and shall be transferred and delivered by the Acquired Fund as soon as reasonably practicable following the Effective Time for the account of the Acquiring Fund duly endorsed in proper form for transfer in such condition as to constitute good delivery thereof. BNY, on behalf of the Acquired Fund, shall deliver to State Street, as custodian of the Acquiring Fund, as of the Effective Time by book entry, in accordance with the customary practices of BNY and of each securities depository, as defined in Rule 17f-4 under the 1940 Act, in which the Assets are deposited, the Assets deposited with such depositories. The cash to be transferred by the Acquired Fund shall be delivered by wire transfer of Federal funds at the Effective Time or by such other manner as State Street, as custodian of the Acquiring Fund, deems appropriate.

 A-3 

 

3.3.            Share Records. The Acquired Fund shall direct Computershare Inc., in its capacity as transfer agent for the Acquired Fund (the “Transfer Agent”), to deliver at the Closing a certificate of an authorized officer stating that its records contain the names and addresses of the Acquired Fund Shareholders and the number and percentage ownership of outstanding Acquired Fund Shares owned by each such Acquired Fund Shareholder immediately prior to the Closing. The Acquiring Fund shall issue and deliver to the Secretary of the Acquired Fund a confirmation evidencing that the Transfer Agent has been instructed to credit an appropriate number of Acquiring Fund Shares to the Acquired Fund as of the Effective Time, or provide other evidence satisfactory to the Acquired Fund as of the Effective Time that such Acquiring Fund Shares will be credited to the Acquired Fund’s accounts on the books of the Acquiring Fund.

3.4.            Postponement of Effective Time. In the event that at the Effective Time, the primary trading market for portfolio securities of the Acquiring Fund or the Acquired Fund (the “Market”) shall be closed to trading or trading thereupon shall be restricted, or trading or the reporting of trading on such Market or elsewhere shall be disrupted so that, in the mutual judgment of the Boards of Trustees or officers of the Acquired Fund and the Acquiring Fund, accurate appraisal of the value of the net assets of the Acquired Fund or the Acquiring Fund, respectively, is impracticable, the Effective Time shall be postponed until the first business day, or other mutually agreed business day, after the day when trading shall have been fully resumed and reporting shall have been restored.

3.5.            Failure To Deliver Assets. If the Acquired Fund is unable to make delivery pursuant to paragraph 3.2 to the custodian for the Acquiring Fund of any of the Assets of the Acquired Fund for the reason that any of such Assets have not yet been delivered to it by the Acquired Fund’s broker, dealer or other counterparty, then, in lieu of such delivery, the Acquired Fund shall deliver, with respect to said Assets, executed copies of an agreement of assignment and due bills executed on behalf of said broker, dealer or other counterparty, together with such other documents as may be required by the Acquiring Fund or its custodian, including brokers’ confirmation slips, and shall use its reasonable best efforts to deliver any such Assets to the custodian as soon as reasonably practicable. In addition, with respect to any Asset that requires additional documentation by an Asset’s issuer or other third party in order to effect a transfer of such Asset, the Acquired Fund will identify each such asset to the Acquiring Fund on a mutually agreed upon date prior to the Closing Date and will engage with the Acquiring Fund to complete such documentation as necessary to transfer such Assets to the Acquiring Fund’s custodian as soon as reasonably practicable.

4.REPRESENTATIONS AND WARRANTIES

4.1.            Representations and Warranties of the Acquired Fund. Except as has been fully disclosed to the Acquiring Fund as of the date hereof in a written instrument executed by an officer of the Acquired Fund, the Acquired Fund represents and warrants to the Acquiring Fund as follows:

(a)            The Acquired Fund is a business trust duly organized, validly existing, and in good standing under the laws of the Commonwealth of Massachusetts with power under its Declaration of Trust and Amended and Restated By-Laws, each as amended from time-to-time, to own all of its properties and assets and to carry on its business as it is presently conducted.

(b)            The Acquired Fund is registered with the Commission as a closed-end management investment company under the 1940 Act, and the Acquired Fund Shares have been registered under the Securities Act of 1933, as amended (the “1933 Act”).

(c)            At the Effective Time, the Acquired Fund will have good and marketable title to the Assets and full right, power, and authority to sell, assign, transfer and deliver such Assets hereunder free of any liens or other encumbrances except as otherwise disclosed to the Acquiring Fund, and upon delivery and payment for such Assets, the Acquiring Fund will acquire all rights of the Acquired Fund thereto, subject to no restrictions on the full transfer thereof other than such restrictions as might arise under the 1933 Act or as otherwise disclosed to the Acquiring Fund.

 A-4 

 

(d)            No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Acquired Fund of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the Securities Exchange Act of 1934, as amended (the “1934 Act”), and the 1940 Act, and such as may be required under state securities laws.

(e)            The shareholder reports, marketing and other related materials of the Acquired Fund and each prospectus and statement of additional information of the Acquired Fund used for a period of six (6) years prior to the date of this Agreement conform or conformed at the time of their use in all material respects to the applicable requirements of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations of the Commission thereunder and do not or did not at the time of their use include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not materially misleading.

(f)            The Acquired Fund is not engaged currently, and the execution, delivery and performance of this Agreement will not result, in: (i) a violation of federal securities laws (including the 1940 Act) or of Massachusetts law in any material respect or a material violation of its Declaration of Trust and Amended and Restated By-Laws, each as amended from time-to-time, or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquired Fund is a party or by which it is bound, or (ii) the acceleration of any obligation, or the imposition of any penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquired Fund is a party or by which it is bound.

(g)            All material contracts or other commitments of the Acquired Fund (other than this Agreement and investment contracts, including options, futures, forward contracts and other similar instruments) will terminate without liability or obligation to the Acquired Fund on or prior to the Effective Time.

(h)            Except as otherwise disclosed to and accepted by the Acquiring Fund in writing, no litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to the Acquired Fund’s knowledge, threatened against the Acquired Fund or any of the Acquired Fund’s properties or assets that, if adversely determined, is reasonably likely to materially and adversely affect the Acquired Fund’s financial condition or the conduct of its business. The Acquired Fund knows of no facts which are reasonably likely to form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects the Acquired Fund’s business or its ability to consummate the transactions herein contemplated.

(i)            The financial statements and financial highlights of the Acquired Fund at [November 30, 2023], have been audited by Deloitte & Touche LLP, independent registered public accounting firm, and are in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and such statements present fairly, in all material respects, the financial position of the Acquired Fund as of such date in accordance with GAAP, and there are no known contingent liabilities of the Acquired Fund required to be reflected on the statement of assets and liabilities (including the notes thereto) in accordance with GAAP as of such date not disclosed therein.

(j)            Since [November 30, 2023], there has not been any material adverse change in the Acquired Fund’s financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by the Acquired Fund of indebtedness, except as otherwise disclosed to the Acquiring Fund. For the purposes of this subparagraph (j), a decline in net asset value per share of Acquired Fund Shares due to declines in market values of securities held by the Acquired Fund, the discharge of the Acquired Fund’s liabilities, or the redemption of the Acquired Fund’s shares by shareholders of the Acquired Fund shall not constitute a material adverse change.

(k)            At the Effective Time, all material Federal and other tax returns, dividend reporting forms, and other tax-related reports of the Acquired Fund required by law to have been filed by such date (including any extensions, if any) shall have been filed and are or will be correct in all material respects, and all Federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof, and no such return is currently under audit, and no assessment has been asserted, in writing, with respect to such returns.

 A-5 

 

(l)            The Acquired Fund has not taken any action and does not know of any fact or circumstance that could reasonably be expected to prevent the Reorganization from qualifying as a reorganization within the meaning of Section 368(a) of the Code.

(m)            The Acquired Fund has elected to be treated as a “regulated investment company” under Subchapter M of the Code. For each taxable year since its commencement of operations (including the taxable year ending on the Closing Date), the Acquired Fund has met the requirements of Subchapter M of the Code for qualification and treatment as a regulated investment company within the meaning of Section 851 et seq. of the Code and has been eligible to and has computed its federal income tax under Section 852 of the Code in respect of each taxable year since its commencement of operations (including the taxable year ending on the Closing Date) and expects to continue to meet such requirements at all times through the Closing Date. The Acquired Fund has not at any time since its inception been liable for, nor is now liable for, any material income or excise tax pursuant to Sections 852 or 4982 of the Code. There is no other material tax liability (including any foreign, state or local tax liability) of the Acquired Fund except as set forth and accrued on the Acquired Fund’s books. The Acquired Fund has no earnings or profits accumulated with respect to any taxable year in which the provisions of Subchapter M of the Code did not apply. The Acquired Fund will not be subject to corporate-level taxation on the sale of any assets currently held by it as a result of the application of Section 337(d) of the Code and the regulations thereunder.

(n)            The Acquired Fund is in compliance in all material respects with applicable regulations of the Internal Revenue Service pertaining to the reporting of dividends and other distributions on and redemptions of its shares of beneficial interest. To the knowledge of its officers, the Acquired Fund has complied with the requirements for collection and maintenance of Forms W-9 and/or Forms W-8 and has withheld in respect of dividends and other distributions and paid to the proper taxing authorities all taxes required to be withheld and is not liable for any penalties which could be imposed thereunder. The Acquired Fund is not under audit by any federal, state or local taxing authority, and there are no actual or proposed tax deficiencies with respect to the Acquired Fund that have been presented to the Acquired Fund in writing.

(o)            All of the issued and outstanding shares of the Acquired Fund will, at the time of Closing, be held by the persons and in the amounts set forth in the records of the Transfer Agent, on behalf of the Acquired Fund, as provided in paragraph 3.3. The Acquired Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of the shares of the Acquired Fund, nor is there outstanding any security convertible into any of the Acquired Fund’s shares.

(p)            The execution, delivery and performance of this Agreement have been duly authorized by all necessary action, if any, on the part of the Trustees of the Acquired Fund, and, subject to the approval of the shareholders of the Acquired Fund, this Agreement will constitute a valid and binding obligation of the Acquired Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles.

(q)            The Proxy Statement/Prospectus (as defined in paragraph 5.6), insofar as it relates to information provided by the Acquired Fund for the use therein, will, as of the effective time of the Acquiring Fund’s registration statement on Form N-14 (the “Registration Statement”) in which it is included and any time prior to the Effective Time: (i) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not materially misleading and (ii) comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations of the Commission thereunder; provided, however, that the representations and warranties of this subparagraph (q) shall not apply to statements in or omissions from the Proxy Statement/Prospectus made in reliance upon and in conformity with information that was furnished by the Acquiring Fund for use therein.

 A-6 

 

4.2.            Representations and Warranties of the Acquiring Fund. Except as has been fully disclosed to the Acquired Fund as of the date hereof in a written instrument executed by an officer of the Acquiring Fund, Acquiring Fund represents and warrants to the Acquired Fund as follows:

(a)            The Acquiring Fund is a statutory trust duly organized, validly existing, and in good standing under the laws of the State of Delaware with power under its Agreement and Declaration of Trust and Amended and Restated By-Laws, each as amended from time-to-time, to own all of its properties and assets and to carry on its business as it is presently conducted.

(b)            The Acquiring Fund is registered with the Commission as a closed-end management investment company under the 1940 Act, and the Acquiring Fund Shares have been registered under the 1933 Act.

(c)            The Acquiring Fund has not taken any action and does not know of any fact or circumstance that could reasonably be expected to prevent the Reorganization from qualifying as a reorganization within the meaning of Section 368(a) of the Code.

(d)            At the Effective Time, all material Federal and other tax returns, dividend reporting forms, and other tax-related reports of the Acquiring Fund required by law to have been filed by such date (including any extensions, if any) shall have been filed and are or will be correct in all material respects, and all Federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof, and no such return is currently under audit, and no assessment has been asserted, in writing, with respect to such returns.

(e)            The Acquiring Fund has elected to be treated as a “regulated investment company” under Subchapter M of the Code. For each taxable year since its commencement of operations (including the period through the Closing Date), the Acquiring Fund has met the requirements of Subchapter M of the Code for qualification and treatment as a regulated investment company within the meaning of Section 851 et seq. of the Code and has been eligible to and has computed its federal income tax under Section 852 of the Code and expects to continue to meet such requirements at all times through the Closing Date. The Acquiring Fund has not at any time since its inception been liable for, nor is now liable for, any material income or excise tax pursuant to Sections 852 or 4982 of the Code. There is no other material tax liability (including any foreign, state or local tax liability) of the Acquiring Fund except as set forth and accrued on the Acquiring Fund’s books. The Acquiring Fund has no earnings or profits accumulated with respect to any taxable year in which the provisions of Subchapter M of the Code did not apply. The Acquiring Fund will not be subject to corporate-level taxation on the sale of any assets currently held by it as a result of the application of Section 337(d) of the Code and the regulations thereunder.

(f)            The Acquiring Fund is in compliance in all material respects with applicable regulations of the Internal Revenue Service pertaining to the reporting of dividends and other distributions on and redemptions of its common shares of beneficial interest. To the actual knowledge of its officers, the Acquiring Fund has complied with the requirements for collection and maintenance of Forms W-9 and/or Forms W-8 and has withheld in respect of dividends and other distributions and paid to the proper taxing authorities all taxes required to be withheld and is not liable for any penalties which could be imposed thereunder. The Acquiring Fund is not under audit by any federal, state or local taxing authority, and there are no actual or proposed tax deficiencies with respect to the Acquiring Fund that have been presented to the Acquiring Fund in writing.

(g)            No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Acquiring Fund of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities laws.

 A-7 

 

(h)            The shareholder reports, marketing and other related materials of the Acquiring Fund and each prospectus and statement of additional information of the Acquiring Fund used at all times prior to the date of this Agreement conform or conformed at the time of their use in all material respects to the applicable requirements of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations of the Commission thereunder and do not or did not at the time of their use include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not materially misleading.

(i)             The Acquiring Fund is not engaged currently, and the execution, delivery and performance of this Agreement will not result, in: (i) a violation of federal securities laws (including the 1940 Act) or of Delaware law in any material respect or a material violation of its Agreement and Declaration of Trust and Amended and Restated By-Laws, each as amended from time-to-time, or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquiring Fund is a party or by which it is bound, or (ii) the acceleration of any obligation, or the imposition of any penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquiring Fund is a party or by which it is bound.

(j)             Except as otherwise disclosed to and accepted by the Acquired Fund in writing, no litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to the Acquiring Fund’s knowledge, threatened against the Acquiring Fund or any of the Acquiring Fund’s properties or assets that, if adversely determined, is reasonably likely to materially and adversely affect the Acquiring Fund’s financial condition or the conduct of its business. The Acquiring Fund knows of no facts which are reasonably likely to form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects the Acquiring Fund’s business or its ability to consummate the transactions herein contemplated.

(k)            The Statement of Assets and Liabilities, Statement of Operations, Statements of Changes in Net Assets, and Schedule of Investments of the Acquiring Fund at [October 31, 2023], have been audited by KPMG LLP, independent registered public accounting firm, and are in accordance with GAAP consistently applied, and such statements present fairly, in all material respects, the financial condition of the Acquiring Fund as of such date in accordance with GAAP, and there are no known contingent liabilities of the Acquiring Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date not disclosed therein.

(l)             Since [October 31, 2023], there has not been any material adverse change in the Acquiring Fund’s financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by the Acquiring Fund of indebtedness, except as otherwise disclosed to the Acquired Fund. For the purposes of this subparagraph (l), a decline in net asset value per share of Acquiring Fund shares due to declines in market values of securities held by the Acquiring Fund, the discharge of the Acquiring Fund’s liabilities, or the redemption of the Acquiring Fund’s shares by shareholders of the Acquiring Fund shall not constitute a material adverse change.

(m)           The execution, delivery and performance of this Agreement have been duly authorized by all necessary action, if any, on the part of the Trustees of the Acquiring Fund, and this Agreement will constitute a valid and binding obligation of the Acquiring Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles.

(n)            The Acquiring Fund Shares to be issued and delivered to the Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant to the terms of this Agreement, will at the Effective Time have been duly authorized and, when so issued and delivered, will be duly and validly issued Acquiring Fund Shares, will be fully paid and non-assessable by the Acquiring Fund and will have been issued in every jurisdiction in compliance in all material respects with applicable registration requirements and applicable securities laws. The Acquiring Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of the shares of the Acquiring Fund, nor is there outstanding any security convertible into any of the Acquiring Fund’s shares.