UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21586
First Trust Enhanced Equity Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2012
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2012
FIRST TRUST
ENHANCED EQUITY
INCOME FUND
FIRST TRUST CHARTWELL INVESTMENT PARTNERS
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Institutional and Private Asset Management
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TABLE OF CONTENTS
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
ANNUAL REPORT
DECEMBER 31, 2012
Shareholder Letter........................................................... 1
At A Glance.................................................................. 2
Portfolio Commentary......................................................... 3
Portfolio of Investments..................................................... 5
Statement of Assets and Liabilities.......................................... 12
Statement of Operations...................................................... 13
Statements of Changes in Net Assets.......................................... 14
Financial Highlights......................................................... 15
Notes to Financial Statements................................................ 16
Report of Independent Registered Public Accounting Firm...................... 22
Additional Information....................................................... 23
Board of Trustees and Officers............................................... 25
Privacy Policy............................................................... 27
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Chartwell Investment Partners, L.P. ("Chartwell"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Enhanced Equity Income Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Chartwell are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
DECEMBER 31, 2012
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust Enhanced Equity Income Fund (the "Fund").
The report you hold contains detailed information about the Fund over the twelve
months ended December 31, 2012. It contains a market overview and a performance
analysis for the period. I encourage you to read this document and discuss it
with your financial advisor. A successful investor is also typically a
knowledgeable one, as we have found to be the case at First Trust.
First Trust remains committed to being a long-term investor and investment
manager and to bringing you quality financial solutions regardless of market ups
and downs. We have always believed that there are two ways to attain success in
reaching your financial goals: staying invested in quality products and having a
long-term investment horizon. We are committed to this approach in the products
we manage or supervise and offer to investors.
First Trust offers a variety of products that we believe could fit many
financial plans to help investors seeking long-term investment success. We
encourage you to talk to your advisor about the other investments First Trust
offers that might also fit your financial goals and to discuss those goals with
your advisor regularly so that he or she can help keep you on track.
First Trust will continue to make available up-to-date information about your
investment so you and your financial advisor are current on what you own. We
value our relationship with you, and thank you for the opportunity to assist you
in achieving your financial goals. I look forward to 2013 and to the next
edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees of First Trust Enhanced Equity Income Fund and
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST ENHANCED EQUITY INCOME FUND
"AT A GLANCE"
AS OF DECEMBER 31, 2012 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FFA
Common Share Price $11.84
Common Share Net Asset Value ("NAV") $13.27
Premium (Discount) to NAV (10.78)%
Net Assets Applicable to Common Shares $265,009,369
Current Quarterly Distribution per Common Share (1) $0.225
Current Annualized Distribution per Common Share $0.900
Current Distribution Rate on Closing Common Share Price (2) 7.60%
Current Distribution Rate on NAV (2) 6.78%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
12/11 10.83 12.51
11.05 12.70
11.21 12.85
11.43 13.07
1/12 11.55 13.08
11.75 13.37
11.79 13.34
11.89 13.54
2/12 12.12 13.57
12.07 13.61
12.09 13.62
12.24 13.87
3/12 11.96 13.59
12.08 13.67
11.99 13.56
11.79 13.30
11.87 13.42
4/12 12.09 13.61
11.97 13.38
11.86 13.21
11.25 12.69
5/12 11.54 12.91
11.22 12.55
11.46 12.99
11.64 13.15
6/12 11.59 12.87
11.77 13.12
11.81 13.09
11.73 13.11
11.77 13.20
7/12 11.87 13.33
11.96 13.44
12.03 13.59
12.17 13.66
8/12 12.05 13.60
12.02 13.55
12.19 13.80
12.39 14.01
12.23 13.78
9/12 12.21 13.58
12.29 13.76
12.26 13.49
12.30 13.53
10/12 12.00 13.34
12.12 13.34
11.70 13.07
11.32 12.90
11/12 11.91 13.35
11.91 13.43
11.82 13.39
11.77 13.37
11.86 13.31
11.60 13.05
12/12 11.84 13.27
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended Inception (8/26/2004)
12/31/2012 12/31/2012 to 12/31/2012
FUND PERFORMANCE (3)
NAV 14.18% 2.78% 4.77%
Market Value 17.68% 3.10% 2.78%
INDEX PERFORMANCE
S&P 500(R) Index 16.00% 1.66% 5.27%
BXM Index 5.20% 1.13% 4.06%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Apple, Inc. 4.4%
Pfizer, Inc. 3.3
JPMorgan Chase & Co. 3.1
General Electric Co. 2.8
Philip Morris International, Inc. 2.5
International Business Machines Corp. 2.5
Coca-Cola (The) Co. 2.4
QUALCOMM, Inc. 2.3
BlackRock, Inc. 2.3
Occidental Petroleum Corp. 2.1
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Total 27.7%
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% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
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Information Technology 19.7%
Financials 16.3
Energy 13.4
Consumer Discretionary 12.4
Industrials 10.9
Health Care 10.2
Consumer Staples 8.4
Materials 3.3
Telecommunication Services 3.1
Utilities 2.3
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Total 100.0%
======
(1) Most recent distribution paid or declared through 12/31/2012. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 12/31/2012. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
ANNUAL REPORT
DECEMBER 31, 2012
SUB-ADVISOR
Chartwell Investment Partners, L.P. ("Chartwell") is an employee-owned
investment advisory firm founded on April 1, 1997 by nine investment
professionals from Delaware Investment Advisers. The firm is 75% owned by the
partners and employees of Chartwell and 25% owned by a limited partnership
comprised of three passive investors in the Philadelphia area. There are no
affiliates at this time. The firm is a research-based equity and fixed-income
manager with a disciplined, team-oriented investment process.
Timothy J. Riddle, an executive with 33 years of investment industry experience,
is the Chief Executive Officer of Chartwell. Michael J. McCloskey, an executive
with 25 years of management experience, serves as President. G. Gregory Hagar is
Chartwell's Chief Financial Officer and Chief Compliance Officer. He has 24
years of related experience.
PORTFOLIO MANAGEMENT TEAM
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Schaffer is a founding partner of Chartwell and has 42 years of investment
industry experience. He serves as senior portfolio manager for Chartwell's
closed-end fund and hedged large-cap equity strategies. As the lead portfolio
manager for the Fund since 2007, he focuses on securities in the Energy,
Financials and Consumer Staples sectors. He was employed as a Senior Portfolio
Manager at Delaware Investment Advisers from 1990 to 1997, managing closed-end
equity income funds that utilized option strategies to generate portfolio gains.
Mr. Schaffer earned a Bachelor's degree in Economics from Villanova University
and an MBA from the University of Pennsylvania's Wharton School.
DOUGLAS W. KUGLER, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 15 years of investment industry experience. His areas of
focus include the Consumer Discretionary, Industrials, Materials and Technology
sectors of the market. He has been a portfolio manager for the Fund since 2007.
From 1993 to 2003, he held several positions at Morgan Stanley Investment
Management (Miller Anderson & Sherrerd) including Head of Mutual Fund
Administration and Vice President and Treasurer of the MAS Funds, Junior
Associate in the Equity Department, and his last position held prior to joining
Chartwell was Senior Associate and Analyst for the Large Cap Value team. Mr.
Kugler holds the Chartered Financial Analyst designation and is a member of the
CFA (Chartered Financial Analysts) Institute and the CFA Society of
Philadelphia. Mr. Kugler earned a Bachelor's degree in Accounting from the
University of Delaware.
PETER M. SCHOFIELD, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
Mr. Schofield is a Senior Portfolio Manager on Chartwell's large-cap equity
portfolio management team and has 28 years of investment industry experience.
His areas of focus include Consumer Staples, Health Care and Information
Technology. He has been a portfolio manager of the Fund since 2011. From 2005 to
2010, he was a Co-Chief Investment Officer at Knott Capital. From 1996 to 2005,
he was a Portfolio Manager at Sovereign Asset Management. Prior to Sovereign
Asset Management, he was a portfolio manager at Geewax, Terker & Company. Mr.
Schofield holds the Chartered Financial Analyst designation and is a member of
the CFA (Chartered Financial Analysts) Institute and the CFA Society of
Philadelphia. Mr. Schofield earned a Bachelor's degree in History from the
University of Pennsylvania.
COMMENTARY
FIRST TRUST ENHANCED EQUITY INCOME FUND
The investment objective of First Trust Enhanced Equity Income Fund (the "Fund")
is to provide a high level of current income and gains and, to a lesser extent,
capital appreciation. The Fund pursues its investment objective by investing in
a diversified portfolio of equity securities. Under normal market conditions,
the Fund pursues an integrated investment strategy in which the Fund invests
substantially all of its managed assets in a diversified portfolio of common
stocks of U.S. corporations and U.S. dollar-denominated equity securities of
foreign issuers. These securities are traded on U.S. securities exchanges. In
addition, on an ongoing and consistent basis, the Fund will write (sell) covered
call options on a portion of the Fund's managed assets. There can be no
assurance that the Fund's investment objective will be achieved.
MARKET RECAP
As measured on a total return basis, the Standard & Poor's 500 Index ("S&P 500")
rose 16.00% during the year ended December 31, 2012. This increase occurred
despite the numerous negative macro-economic fears that were discussed in the
financial and popular press. In fact, at no time during the year did the S&P 500
fall below where it ended 2012. The first quarter of 2012 saw the S&P 500 rise
by 12.59%, driven by better than expected economic activity. However, the rally
dissipated as the market fell almost 10% from the end of March through the
beginning of June on fears regarding the European
Page 3
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PORTFOLIO COMMENTARY - (CONTINUED)
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debt crisis and a global growth slowdown. From there, the index rallied almost
16% higher to its peak for the year in mid-September as the worst fears of the
March to June period were not realized and economic activity was slightly better
than expected. The last quarter of the year saw the index decline slightly due
to worries regarding the "fiscal cliff". The strong positive results for the
market for the year came from a combination of factors. Stocks were valued
inexpensively entering the year, central banks throughout the world continued to
add liquidity to their economies, the European Central Bank said it would do
whatever was necessary to support the Euro, economic data continued to exceed
meager expectations and corporate earnings continued to improve. These positives
offset any remaining questions the market had regarding the strength of China's
economy, the European debt crisis and the "fiscal cliff" the U.S. economy was to
face at the beginning of 2013.
PERFORMANCE ANALYSIS
The Net Asset Value ("NAV") total return1 of the Fund for the year ended
December 31, 2012 was 14.18%, and the market value total return1 of the Fund was
17.68%. Both these returns were inclusive of dividends paid during the period.
During this time period, the S&P 500 returned 16.00%. While measures of
volatility of the market have declined significantly over the last few years,
the Fund continued to take advantage of volatility in the market where it could
and sold call options on a significant percentage of the Fund's holdings. This
supplemented the portfolio's dividend stream and provided support to the Fund's
performance. We continue to believe the strategy of combining high
dividend-paying stocks and an option overwrite program is an excellent long-term
strategy. The Fund's portfolio will continue to be primarily focused on high
quality, large-capitalization, dividend-paying stocks which often tilts the
portfolio toward a value orientation. Based on analysis of the S&P 500 performed
by Bank of America Merrill Lynch, for the year, higher-yielding stocks
significantly underperformed lower-yielding stocks. Additionally, lower quality
stocks were better performers than higher quality stocks and smaller
capitalization stocks outperformed larger capitalization stocks. On the positive
side, the portfolio's tilt towards a value orientation aided performance versus
the S&P 500 during the period as Value returns outpaced those of Growth.
Positive contributions came from stock selection in the Materials, Insurance and
Consumer Services groups. Stocks such as PPG Industries (up 63.2%),
International Paper (up 39.1%), Travelers Companies (up 24.8%), Starwood Hotels
and Resorts Worldwide (up 22.4%), and JPMorgan Chase (up 36.2%) are examples of
the positive stock selection. In addition, an underweight in the Utilities
group, which significantly trailed the S&P 500, aided relative performance.
Lagging stock selection in the Diversified Financials, Pharmaceuticals,
Biotechnology and Life Sciences and Energy sectors detracted from relative
returns. Not owning stocks such as Bank of America (up 109.8%), Visa Inc. (up
50.5%), eBay Inc. (up 68.1%) and Gilead Sciences Inc. (up 79.5%) while having
positions in Bristol-Myers Squibb (down 3.8%) and Apache Corp. Preferred Series
C (down 15.6%), detracted from relative returns. Additionally, returns in the
Master Limited Partnerships and Consumer Services sectors trailed the S&P 500.
MARKET AND FUND OUTLOOK
From its mid-September peak, the market sold off as it was faced with the
uncertainty of the U.S. presidential election and the impending "fiscal cliff".
However, during that time, U.S. and global economic data held steady and
domestic corporate profits did not disappoint expectations. As the election and
"fiscal cliff" uncertainties were resolved, the market regained most of what it
had lost and went on to reach a five-year high early in 2013. We believe this
pattern of the market grinding higher in a somewhat volatile manner, as
uncertainties are faced and then resolved, will likely continue in 2013 -
particularly in the first half of the year as the U.S. faces the political
showdown over the debt ceiling limit, possible threats of further downgrades of
the U.S. credit rating, and the impacts of slightly higher taxes brought about
as part of the "fiscal cliff" resolution.
As we have stated in the past, the stock market is a forward-looking indicator.
We believe that once the market begins to look past these issues, it will then
focus on more fundamental-based issues such as the U.S. and global economies and
the pace of domestic corporate profit growth. Measures of economic activity have
been showing slow and steady growth in the U.S. and solid growth in most of the
world with the exception of Europe. A dilemma the market is facing is whether
this growth will continue. Additionally, the question of whether Europe will
reverse its current economic slide remains. While corporate profits have
continued to climb and surprise on the upside, the rate of that growth has
slowed and profit margins have been hovering around all-time highs. If global
economic growth slows, revenue growth will slow and there could be added
pressure on the near record high profit margins.
Lastly, if the U.S. economy shows continued strength during the year, will the
Federal Reserve Board start to reverse its multi-year policy of monetary easing?
We are inclined to take the positive view on these matters and we believe that
corporate profits are not likely to decline in a significant way in the near
term. This would allow for continued reinvestment by businesses which will lead
to continued modest employment growth without significant inflation. However, we
believe it is likely that the resulting economic growth will continue to be
muted when compared to previous cycles. With the stock market up substantially
from its March 2009 lows and near five-year highs, along with the number of
unresolved issues that the market is wrestling with, we are prepared to react as
the markets change. We will continue to manage the Fund with the dual objectives
of earning dividend income and options gains while seeking capital appreciation
opportunities over the market cycle.
------------------------
1 Total return is based on the combination of reinvested dividends, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
Page 4
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2012
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS - 94.8%
AEROSPACE & DEFENSE - 2.8%
45,000 Boeing (The) Co.................................... $ 3,391,200
65,400 Honeywell International, Inc....................... 4,150,938
-------------
7,542,138
-------------
AIR FREIGHT & LOGISTICS - 1.6%
45,000 FedEx Corp......................................... 4,127,400
-------------
BEVERAGES - 3.3%
175,000 Coca-Cola (The) Co................................. 6,343,750
35,000 PepsiCo, Inc....................................... 2,395,050
-------------
8,738,800
-------------
CAPITAL MARKETS - 2.3%
30,000 BlackRock, Inc..................................... 6,201,300
-------------
CHEMICALS - 1.4%
80,000 E.I. Du Pont de Nemours & Co....................... 3,597,600
-------------
COMMERCIAL BANKS - 2.6%
55,000 PNC Financial Services Group, Inc.................. 3,207,050
110,000 Wells Fargo & Co................................... 3,759,800
-------------
6,966,850
-------------
COMMUNICATIONS EQUIPMENT - 3.7%
190,000 Cisco Systems, Inc................................. 3,733,500
100,000 QUALCOMM, Inc...................................... 6,202,000
-------------
9,935,500
-------------
COMPUTERS & PERIPHERALS - 5.8%
22,000 Apple, Inc......................................... 11,726,660
140,000 EMC Corp. (a) ..................................... 3,542,000
-------------
15,268,660
-------------
CONSUMER FINANCE - 1.3%
60,000 Capital One Financial Corp......................... 3,475,800
-------------
DIVERSIFIED FINANCIAL SERVICES - 3.1%
187,900 JPMorgan Chase & Co................................ 8,261,963
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 2.5%
130,000 AT&T, Inc.......................................... 4,382,300
50,000 Verizon Communications, Inc........................ 2,163,500
-------------
6,545,800
-------------
ELECTRIC UTILITIES - 1.2%
110,000 PPL Corp........................................... 3,149,300
-------------
ENERGY EQUIPMENT & SERVICES - 1.8%
70,000 Schlumberger Ltd................................... 4,850,300
-------------
FOOD PRODUCTS - 1.9%
110,000 Kraft Foods Group, Inc............................. 5,001,700
-------------
See Notes to Financial Statements Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2012
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS - (CONTINUED)
HEALTH CARE EQUIPMENT & SUPPLIES - 1.9%
87,900 Covidien PLC ...................................... $ 5,075,346
-------------
HEALTH CARE PROVIDERS & SERVICES - 1.4%
90,000 Cardinal Health, Inc............................... 3,706,200
-------------
HOTELS, RESTAURANTS & LEISURE - 5.2%
55,000 Carnival Corp...................................... 2,022,350
61,400 McDonald's Corp.................................... 5,416,094
60,000 Starwood Hotels & Resorts Worldwide, Inc........... 3,441,600
25,000 Wynn Resorts Ltd................................... 2,812,250
-------------
13,692,294
-------------
HOUSEHOLD DURABLES - 2.3%
110,000 Newell Rubbermaid, Inc............................. 2,449,700
200,000 PulteGroup, Inc. (a) .............................. 3,632,000
-------------
6,081,700
-------------
INDUSTRIAL CONGLOMERATES - 2.8%
350,000 General Electric Co................................ 7,346,500
-------------
INSURANCE - 3.9%
150,000 Lincoln National Corp.............................. 3,885,000
120,000 MetLife, Inc....................................... 3,952,800
35,000 Travelers (The) Cos., Inc.......................... 2,513,700
-------------
10,351,500
-------------
IT SERVICES - 3.6%
52,000 Automatic Data Processing, Inc..................... 2,964,520
34,000 International Business Machines Corp............... 6,512,700
-------------
9,477,220
-------------
LIFE SCIENCES TOOLS & SERVICES - 1.6%
105,000 Agilent Technologies, Inc.......................... 4,298,700
-------------
MACHINERY - 2.7%
37,000 Caterpillar, Inc................................... 3,314,460
45,000 Deere & Co......................................... 3,888,900
-------------
7,203,360
-------------
MEDIA - 2.6%
150,000 Regal Entertainment Group, Class A ................ 2,092,500
95,000 Walt Disney (The) Co............................... 4,730,050
-------------
6,822,550
-------------
METALS & MINING - 1.2%
90,000 Freeport-McMoRan Copper & Gold, Inc................ 3,078,000
-------------
MULTILINE RETAIL - 0.9%
40,000 Target Corp........................................ 2,366,800
-------------
OIL, GAS & CONSUMABLE FUELS - 8.0%
25,000 Apache Corp........................................ 1,962,500
40,000 Chevron Corp....................................... 4,325,600
Page 6 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2012
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS - (CONTINUED)
OIL, GAS & CONSUMABLE FUELS - (CONTINUED)
45,000 ConocoPhillips .................................... $ 2,609,550
90,000 Kinder Morgan, Inc................................. 3,179,700
120,000 Marathon Oil Corp.................................. 3,679,200
72,000 Occidental Petroleum Corp.......................... 5,515,920
-------------
21,272,470
-------------
PAPER & FOREST PRODUCTS - 0.8%
50,000 International Paper Co............................. 1,992,000
-------------
PHARMACEUTICALS - 6.9%
132,500 Bristol-Myers Squibb Co............................ 4,318,175
130,000 Merck & Co., Inc................................... 5,322,200
345,000 Pfizer, Inc........................................ 8,652,600
-------------
18,292,975
-------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 1.6%
100,000 Annaly Capital Management, Inc..................... 1,404,000
90,000 National Retail Properties, Inc.................... 2,808,000
-------------
4,212,000
-------------
ROAD & RAIL - 0.9%
50,000 Ryder System, Inc.................................. 2,496,500
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 1.4%
102,500 Intel Corp......................................... 2,114,575
47,000 Microchip Technology, Inc.......................... 1,531,730
-------------
3,646,305
-------------
SOFTWARE - 3.5%
157,500 Microsoft Corp..................................... 4,209,975
155,000 Oracle Corp........................................ 5,164,600
-------------
9,374,575
-------------
SPECIALTY RETAIL - 1.4%
80,000 Limited Brands, Inc................................ 3,764,800
-------------
TOBACCO - 3.2%
55,000 Altria Group, Inc.................................. 1,728,100
80,000 Philip Morris International, Inc................... 6,691,200
-------------
8,419,300
-------------
WATER UTILITIES - 1.1%
80,000 American Water Works Co., Inc...................... 2,970,400
-------------
WIRELESS TELECOMMUNICATION SERVICES - 0.6%
60,000 Vodafone Group PLC, ADR ........................... 1,511,400
-------------
TOTAL COMMON STOCKS ............................... 251,116,006
(Cost $229,411,184) -------------
See Notes to Financial Statements Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2012
SHARES/
UNITS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
MASTER LIMITED PARTNERSHIPS - 3.5%
OIL, GAS & CONSUMABLE FUELS - 3.5%
120,000 Energy Transfer Partners, L.P...................... $ 5,151,600
40,000 Enterprise Products Partners, L.P.................. 2,003,200
50,000 Magellan Midstream Partners, L.P................... 2,159,500
-------------
TOTAL MASTER LIMITED PARTNERSHIPS ................. 9,314,300
(Cost $4,408,342) -------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 1.4%
CAPITAL MARKETS - 1.4%
210,000 Ares Capital Corp. 3,675,000
-------------
TOTAL COMMON STOCKS - BUSINESS DEVELOPMENT
COMPANIES........................................ 3,675,000
(Cost $3,392,499) -------------
TOTAL INVESTMENTS - 99.7% ......................... 264,105,306
(Cost $237,212,025) (b) -------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.2%)
Agilent Technologies, Inc. Call
500 @ $43.00 due January 2013 ......................... (10,000)
-------------
Annaly Capital Management, Inc. Call
1,000 @ 16.00 due January 2013 ......................... (3,000)
-------------
AT&T, Inc. Call
200 @ 34.00 due January 2013 ......................... (5,000)
-------------
BlackRock, Inc. Call
150 @ 210.00 due January 2013 ........................ (37,500)
-------------
Boeing (The) Co. Call
200 @ 77.50 due January 2013 ......................... (10,200)
-------------
Bristol-Myers Squibb Co. Call
300 @ 34.00 due January 2013 ......................... (1,200)
-------------
Capital One Financial Corp. Call
200 @ 62.50 due January 2013 ......................... (4,800)
-------------
Carnival Corp. Call
250 @ 38.50 due January 2013 ......................... (5,000)
-------------
Cisco Systems, Inc. Call
500 @ 20.00 due January 2013 ......................... (12,500)
-------------
ConocoPhillips Call
450 @ 60.00 due January 2013 ......................... (9,450)
-------------
Covidien PLC Call
200 @ 60.00 due January 2013 ......................... (4,000)
-------------
Page 8 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2012
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (CONTINUED)
FedEx Corp. Call
150 @ $97.50 due January 2013 ......................... $ (3,600)
-------------
Freeport-McMoRan Copper & Gold, Inc. Call
300 @ 34.00 due January 2013 ......................... (16,200)
-------------
Honeywell International, Inc. Call
200 @ 65.00 due January 2013 ......................... (9,400)
-------------
Intel Corp. Call
250 @ 21.00 due January 2013 ......................... (1,750)
-------------
International Business Machines Corp. Call
100 @ 195.00 due January 2013 ........................ (3,700)
-------------
International Paper Co. Calls
200 @ 39.00 due January 2013 ......................... (26,400)
300 @ 41.00 due January 2013 ......................... (11,700)
-------------
(38,100)
-------------
Lincoln National Corp. Call
300 @ 27.00 due January 2013 ......................... (6,900)
-------------
McDonald's Corp. Call
200 @ 90.00 due January 2013 ......................... (10,000)
-------------
Merck & Co., Inc. Call
300 @ 45.00 due January 2013 ......................... (900)
-------------
Microsoft Corp. Call
500 @ 27.50 due January 2013 ......................... (2,000)
-------------
Newell Rubbermaid, Inc. Call
1,100 @ 22.00 due January 2013 ......................... (55,000)
-------------
Occidental Petroleum Corp. Call
100 @ 80.00 due January 2013 ......................... (3,600)
-------------
Oracle Corp. Call
500 @ 34.00 due January 2013 ......................... (16,500)
-------------
PNC Financial Services Group, Inc. Call
150 @ 60.00 due January 2013 ......................... (9,000)
-------------
PulteGroup, Inc. Calls
750 @ 18.00 due January 2013 ......................... (56,250)
950 @ 19.00 due January 2013 ......................... (29,450)
300 @ 20.00 due February 2013 ........................ (15,600)
-------------
(101,300)
-------------
Regal Entertainment Group, Class A Call -
1,500 @ 14.00 due January 2013 ......................... (30,000)
-------------
Ryder System, Inc. Call
100 @ 50.00 due January 2013 ......................... (11,250)
-------------
S&P 500 Index Call (c)
800 @ 1,495.00 due January 2013 ...................... (76,000)
-------------
See Notes to Financial Statements Page 9
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2012
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (CONTINUED)
Travelers (The) Cos., Inc. Call
350 @ $75.00 due January 2013 ......................... $ (5,250)
-------------
Wells Fargo & Co. Call
200 @ 36.00 due January 2013 ......................... (3,600)
-------------
Wynn Resorts Ltd. Call
250 @ 120.00 due January 2013 ........................ (13,750)
-------------
TOTAL CALL OPTIONS WRITTEN ........................ (520,450)
(Premiums received $858,201) -------------
NET OTHER ASSETS AND LIABILITIES - 0.5% ........... 1,424,513
-------------
NET ASSETS - 100.0%................................ $ 265,009,369
=============
-----------------------------
(a) Non-income producing security.
(b) Aggregate cost for federal income tax purposes is $237,694,174. As of
December 31, 2012, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$33,329,840 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$6,918,708.
(c) Call options on securities indices were written on a portion of the common
stock positions that were not used to cover call options written on
individual equity securities held in the Fund's portfolio.
ADR American Depositary Receipt
Page 10 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2012
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2012 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2012 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Common Stocks*..................................... $ 251,116,006 $ 251,116,006 $ -- $ --
Master Limited Partnerships*....................... 9,314,300 9,314,300 -- --
Common Stocks - Business Development
Companies*..................................... 3,675,000 3,675,000 -- --
------------- ------------- ------------- -------------
TOTAL INVESTMENTS.................................. $ 264,105,306 $ 264,105,306 $ -- $ --
============= ============= ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2012 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Call Options Written............................... $ (520,450) $ (520,450) $ -- $ --
============= ============= ============= =============
*See the Portfolio of Investments for industry breakdown.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at December 31, 2012.
See Notes to Financial Statements Page 11
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2012
ASSETS:
Investments, at value
(Cost $237,212,025)......................................................................... $264,105,306
Cash........................................................................................... 1,239,336
Prepaid expenses............................................................................... 7,933
Receivables:
Dividends................................................................................... 507,181
Investment securities sold.................................................................. 13,500
------------
Total Assets............................................................................ 265,873,256
------------
LIABILITIES:
Options written, at value (Premiums received $858,201)......................................... 520,450
Payables:
Investment advisory fees.................................................................... 226,615
Audit and tax fees.......................................................................... 43,200
Printing fees............................................................................... 25,611
Administrative fees......................................................................... 19,551
Legal fees.................................................................................. 12,445
Custodian fees.............................................................................. 6,269
Transfer agent fees......................................................................... 3,522
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 5,453
------------
Total Liabilities....................................................................... 863,887
------------
NET ASSETS..................................................................................... $265,009,369
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $304,966,275
Par value...................................................................................... 199,732
Accumulated net investment income (loss)....................................................... 572,277
Accumulated net realized gain (loss) on investments and written options transactions........... (67,959,947)
Net unrealized appreciation (depreciation) on investments and written options.................. 27,231,032
------------
NET ASSETS..................................................................................... $265,009,369
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 13.27
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 19,973,164
============
Page 12 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2012
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $18,616).......................................... $ 8,282,115
Interest....................................................................................... 482
------------
Total investment income..................................................................... 8,282,597
------------
EXPENSES:
Investment advisory fees....................................................................... 2,663,092
Administrative fees............................................................................ 229,732
Printing fees.................................................................................. 86,143
Legal fees..................................................................................... 55,812
Audit and tax fees............................................................................. 43,466
Transfer agent fees............................................................................ 36,117
Trustees' fees and expenses.................................................................... 28,875
Custodian fees................................................................................. 18,892
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 46,659
------------
Total expenses.............................................................................. 3,218,038
------------
NET INVESTMENT INCOME (LOSS)................................................................... 5,064,559
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 9,607,487
Written option transactions (a)............................................................. (182,250)
------------
Net realized gain (loss)....................................................................... 9.425.237
------------
Net increase from payment by the sub-advisor................................................... 77,318
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 18,125,927
Written options held (a).................................................................... 526,590
------------
Net change in unrealized appreciation (depreciation)........................................... 18,652,517
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 28,155,072
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 33,219,631
============
(a) Primary risk exposure is equity option contracts.
See Notes to Financial Statements Page 13
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2012 12/31/2011
------------ ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 5,064,559 $ 4,273,130
Net realized gain (loss)........................................................... 9,425,237 9,176,634
Net change in unrealized appreciation (depreciation)............................... 18,652,517 (9,322,778)
Net increase from payment by the sub-advisor....................................... 77,318 --
------------ ------------
Net increase (decrease) in net assets resulting from operations.................... 33,219,631 4,126,986
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (14,353,701) (13,596,236)
Net realized gain.................................................................. -- --
Return of capital.................................................................. (3,622,147) (4,379,612)
------------ ------------
Total distributions to shareholders................................................ (17,975,848) (17,975,848)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested............................................. -- --
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions.......... -- --
------------ ------------
Total increase (decrease) in net assets............................................ 15,243,783 (13,848,862)
NET ASSETS:
Beginning of period................................................................ 249,765,586 263,614,448
------------ ------------
End of period...................................................................... $265,009,369 $249,765,586
============ ============
Accumulated net investment income (loss) at end of period.......................... $ 572,277 $ 213,868
============ ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 19,973,164 19,973,164
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... -- --
------------ ------------
Common Shares at end of period..................................................... 19,973,164 19,973,164
============ ============
Page 14 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/2012 12/31/2011 12/31/2010 12/31/2009 12/31/2008
---------- ---------- ---------- ---------- ----------
Net asset value, beginning of period $ 12.51 $ 13.20 $ 12.32 $ 11.15 $ 18.38
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............. 0.26 0.22 0.24 0.20 0.42
Net realized and unrealized gain (loss)... 1.40 (0.01) 1.52 1.93 (6.05)
-------- -------- -------- -------- --------
Total from investment operations ......... 1.66 0.21 1.76 2.13 (5.63)
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .................... (0.72) (0.68) (0.59) (0.19) (0.43)
Net realized gain ........................ -- -- -- -- (0.10)
Return of capital ........................ (0.18) (0.22) (0.29) (0.77) (1.07)
-------- -------- -------- -------- --------
Total distributions to Common
Shareholders .......................... (0.90) (0.90) (0.88) (0.96) (1.60)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 13.27 $ 12.51 $ 13.20 $ 12.32 $ 11.15
======== ======== ======== ======== ========
Market value, end of period .............. $ 11.84 $ 10.83 $ 12.63 $ 11.70 $ 8.85
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET
VALUE (a) ............................. 14.18% (b) 2.42% 15.50% 22.24% (30.54)%
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (a) ... 17.68% (7.33)% 16.37% 46.26% (37.22)%
======== ======== ======== ======== ========
-----------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ..... $265,009 $249,766 $263,614 $246,048 $222,675
Ratio of total expenses to average net
assets ................................ 1.21% 1.22% 1.25% 1.34% 1.31%
Ratio of net investment income (loss) to
average net assets .................... 1.90% 1.65% 1.90% 1.80% 2.80%
Portfolio turnover rate .................. 66% 52% 41% 74% 121%
-----------------------
(a) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(b) The Fund received reimbursements from Chartwell Investment Partners, L.P.
(the "Sub-Advisor") in the amount of $77,318. The reimbursements from the
Sub-Advisor represent less than $0.01 per share and had no effect on the
Fund's total return.
See Notes to Financial Statements Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012
1. FUND DESCRIPTION
First Trust Enhanced Equity Income Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 20, 2004, and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FFA on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to provide a high level of current income and
gains and, to a lesser extent, capital appreciation. The Fund pursues its
investment objective by investing in a diversified portfolio of equity
securities. Under normal market conditions, the Fund pursues an integrated
investment strategy in which the Fund invests substantially all of its managed
assets in a diversified portfolio of common stocks of U.S. corporations and U.S.
dollar-denominated equity securities of non-U.S. issuers, in each case that are
traded on U.S. securities exchanges, and on an ongoing and consistent basis
writes (sells) covered call options on a portion of the Fund's managed assets.
Managed assets means the total asset value of the Fund minus the sum of the
Fund's liabilities, including the value of call options written (sold). There
can be no assurance that the Fund will achieve its investment objective. The
Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the New York Stock Exchange ("NYSE"),
normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If
the NYSE closes early on a valuation day, the NAV is determined as of that time.
The NAV per Common Share is calculated by dividing the value of all assets of
the Fund (including accrued interest and dividends), less all liabilities
(including accrued expenses, the value of call options written (sold) and
dividends declared but unpaid) by the total number of Common Shares outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the 1940 Act. The Fund's securities will be valued as follows:
Common stocks, master limited partnerships ("MLPs"), exchange-traded funds
and other equity securities listed on any national or foreign exchange
(excluding the NASDAQ(R) Stock Market LLC ("NASDAQ") and the London Stock
Exchange Alternative Investment Market ("AIM")) are valued at the last
sale price on the exchange on which they are principally traded or, for
NASDAQ and AIM securities, the official closing price. Securities traded
on more than one securities exchange are valued at the last sale price or
official closing price, as applicable, at the close of the securities
exchange representing the principal market for such securities.
Securities traded in the over-the-counter market are valued at their
closing bid prices.
Exchange-traded options and futures contracts are valued at the closing
price in the market where such contracts are principally traded. If no
closing price is available, exchange-traded options and futures contracts
are valued at the mean between the most recent bid and asked prices.
Over-the-counter options and futures contracts are valued at their closing
bid prices.
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
All market quotations used in valuing the Fund's securities are obtained from a
third party pricing service. If no quotation is received from a pricing service,
attempts will be made to obtain one or more broker quotes for the security. In
the event the pricing service does not provide a valuation, broker quotations
are not readily available, or the valuations received are deemed unreliable, the
Fund's Board of Trustees has designated First Trust Advisors L.P. ("First
Trust") to use a fair value method to value the Fund's securities. Additionally,
if events occur after the close of the principal markets for certain securities
that could materially affect the Fund's NAV, First Trust will use a fair value
method to value the Fund's securities. The use of fair value pricing is governed
by valuation procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the 1940 Act. As a general principle, the fair
value of a security is the amount which the Fund might reasonably expect to
receive for the security upon its current sale. In light of the judgment
involved in fair valuations, there can be no assurance that a fair value
assigned to a particular security will be the amount which the Fund might be
able to receive upon its current sale. Fair valuation of a security will be
based on the consideration of all available information, including, but not
limited to, the following:
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of December 31, 2012, is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective and may write (sell) options to hedge against changes in
the value of equities. Also, the Fund seeks to generate additional income, in
the form of premiums received, from writing (selling) the options. The Fund may
write (sell) covered call options ("options") on all or a portion of the equity
securities held in the Fund's portfolio and on securities indices as determined
to be appropriate by Chartwell Investment Partners, L.P. ("Chartwell" or the
"Sub-Advisor"), consistent with the Fund's investment objective. The number of
options the Fund can write (sell) is limited by the amount of equity securities
the Fund holds in its portfolio. Options on securities indices are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security and are similar to
options on single securities, except that the exercise of securities index
options requires cash settlement payments and does not involve the actual
purchase or sale of securities. The Fund will not write (sell) "naked" or
uncovered options. If certain equity securities held in the Fund's portfolio are
not covered by a related call option on the individual equity security,
securities index options may be written on all or a portion of such uncovered
securities. When the Fund writes (sells) an option, an amount equal to the
premium received by the Fund is included in "Options written, at value" on the
Fund's Statement of Assets and Liabilities. Options are marked-to-market daily
and their value will be affected by changes in the value and dividend rates of
the underlying equity securities, changes in interest rates, changes in the
actual or perceived volatility of the securities markets and the underlying
equity securities and the remaining time to the options' expiration. The value
of options may also be adversely affected if the market for the options becomes
less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss. If the price
of the underlying equity security is less than the option's strike price, the
option will likely expire without being exercised. The option premium received
by the Fund will, in this case, be treated as short-term capital gain on the
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012
expiration date of the option. The Fund may also elect to close out its position
in an option prior to its expiration by purchasing an option of the same series
as the option written (sold) by the Fund. Gain or loss on options is presented
separately as "Net realized gain (loss) on written option transactions" on the
Statement of Operations.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Sub-Advisor to predict pertinent market movements, which cannot be assured.
Thus, the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded daily on the accrual basis, including amortization of premiums and
accretion of discounts.
The Fund may hold publicly-traded real estate investment trusts ("REITs").
Distributions from such investments may include a return of capital component
from the REIT to the extent of the cost basis of such REIT investments. The
actual character of amounts received during the year is not known until after
the fiscal year end. The Fund records the character of distributions received
from REITs during the year based on estimates made. The Fund's characterization
may be subsequently revised based on information received from the REITs after
their tax reporting periods conclude.
For the year ended December 31, 2012, distributions of $538,213 received from
MLPs have been reclassified as return of capital. The cost basis of applicable
MLPs has been reduced accordingly.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income of the Fund are declared and paid quarterly
or as the Board of Trustees may determine from time to time. Distributions of
any net realized capital gains earned by the Fund are distributed at least
annually. Distributions will automatically be reinvested into additional Common
Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Distributions from income and realized capital gains are determined in
accordance with income tax regulations, which may differ from U.S. GAAP. Certain
capital accounts in the financial statements are periodically adjusted for
permanent differences in order to reflect their tax character. These permanent
differences are primarily due to the varying treatment of income and gain/loss
on portfolio securities held by the Fund and have no impact on net assets or NAV
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some point in the future. Permanent differences
incurred during the tax year ended December 31, 2012, primarily as a result of
distributions in excess of current year taxable income, have been reclassified
at year end to reflect an increase in accumulated net investment income (loss)
of $9,647,551, an increase in accumulated net realized gain (loss) on
investments and written option transactions of $70,346 and a decrease to paid-in
capital of $9,717,897. Net assets were not affected by this reclassification.
The tax character of distributions paid during the fiscal years ended December
31, 2012 and December 31, 2011 was as follows:
Distributions paid from: 2012 2011
Ordinary income................................. $ 14,353,701 $ 13,596,236
Long-term capital gain.......................... -- --
Return of capital............................... 3,622,147 4,379,612
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012
As of December 31, 2012, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income..................... $ --
Undistributed capital gains....................... --
--------------
Total undistributed earnings...................... --
Accumulated capital and other losses.............. (61,149,168)
Net unrealized appreciation (depreciation)....... 26,611,283
--------------
Total accumulated earnings (losses)............... (34,537,885)
Other............................................. (5,618,753)
Paid-in capital................................... 305,166,007
--------------
Net assets........................................ $ 265,009,369
==============
E. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward up
to eight years and treated as short-term losses. As a transition rule, the Act
requires that post-enactment net capital losses be used before pre-enactment net
capital losses. At December 31, 2012, the Fund had capital loss carryforwards
for federal income tax purposes of $61,149,168 expiring December 31, 2017.
During the taxable year ended December 31, 2012, the Fund utilized pre-enactment
capital loss carryforwards in the amount of $9,220,440.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2009, 2010,
2011 and 2012 remain open to federal and state audit. As of December 31, 2012,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
F. EXPENSES:
The Fund will pay all expenses directly related to its operations.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Chartwell manages the Fund's portfolio subject to First Trust's supervision.
Chartwell receives a monthly portfolio management fee calculated at an annual
rate of 0.50% of the Fund's Managed Assets that is paid monthly by First Trust
out of its investment advisory fee.
During the fiscal year ended December 31, 2012, the Fund received reimbursements
from the Sub-Advisor of $77,318 in connection with trade errors.
BNY Mellon Investment Servicing (US) Inc. serves as the Fund's Administrator,
Fund Accountant and Transfer Agent in accordance with certain fee arrangements.
The Bank of New York Mellon serves as the Fund's Custodian in accordance with
certain fee arrangements.
Page 19
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012
Effective January 23, 2012, James A. Bowen resigned from his position as the
President and Chief Executive Officer of the Fund. He will continue as a
Trustee, the Chairman of the Board of Trustees and a member of the Executive
Committee. The Board elected Mark R. Bradley to serve as the President and Chief
Executive Officer of the Fund and James M. Dykas to serve as the Treasurer,
Chief Financial Officer and Chief Accounting Officer of the Fund.
Effective January 1, 2012, each Trustee who is not an officer or employee of
First Trust, any sub-advisor or any of their affiliates ("Independent Trustees")
is paid a fixed annual retainer of $125,000 per year and an annual per fund fee
of $4,000 for each closed-end fund or other actively managed fund and $1,000 for
each index fund in the First Trust Fund Complex. The fixed annual retainer is
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Prior to January 1, 2012, each Independent Trustee received an annual
retainer of $10,000 per trust for the first 14 trusts of the First Trust Fund
Complex and an annual retainer of $7,500 per trust for each additional trust in
the First Trust Fund Complex. The annual retainer was allocated equally among
each of the trusts.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Prior to January 1, 2012, the annual amounts paid were $10,000, $5,000
and $2,500, respectively. Trustees are reimbursed for travel and out-of-pocket
expenses in connection with all meetings. The Lead Independent Trustee and each
Committee chairman will serve two-year terms until December 31, 2013 before
rotating to serve as chairman of another committee or as Lead Independent
Trustee. After December 31, 2013, the Lead Independent Trustee and Committee
chairmen will rotate every three years. The officers and "Interested" Trustee
receive no compensation from the funds for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended December 31, 2012, were $173,819,698 and
$186,071,261, respectively.
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-------------------------------------------------------------------------------------------
Options outstanding at December 31, 2011........... 9,150 $ 1,132,711
Options written.................................... 280,922 21,642,973
Options expired.................................... (126,150) (6,956,133)
Options exercised.................................. (9,829) (662,314)
Options closed .................................... (140,293) (14,299,036)
-------- --------------
Options outstanding at December 31, 2012........... 13,800 $ 858,201
======== ==============
5. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
6. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012
EQUITY SECURITIES RISK: The Fund invests in equity securities. An adverse event
affecting an issuer, such as an unfavorable earnings report, may depress the
value of a particular equity security held by the Fund. Also, the prices of
equity securities are sensitive to general movements in the stock market and a
drop in the stock market may depress the prices of equity securities to which
the Fund has exposure. Equity securities prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, or when political
or economic events affecting the issuers or their industries occur.
OPTION RISK: The Fund may write (sell) covered call options on all or a portion
of the equity securities held in the Fund's portfolio as determined to be
appropriate by the Fund's Sub-Advisor, consistent with the Fund's investment
objective. The ability to successfully implement the Fund's investment strategy
depends on the Sub-Advisor's ability to predict pertinent market movements,
which can not be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold an equity security that it might
otherwise sell. There can be no assurance that a liquid market for the options
will exist when the Fund seeks to close out an option position. Additionally, to
the extent that the Fund purchases options pursuant to a hedging strategy, the
Fund will be subject to additional risks.
INDUSTRY RISK: The Fund may not invest 25% or more of its total assets in
securities of issuers in any single industry. If the Fund is focused in an
industry, it may present more risks than if it were broadly diversified over
numerous industries of the economy. Individual industries may be subject to
unique risks which may include, among others, governmental regulation,
inflation, technological innovations that may render existing products and
equipment obsolete, competition from new entrants, high research and development
costs, and rising interest rates.
INCOME RISK: Net investment income paid by the Fund to its Common Shareholders
is derived from the premiums it receives from writing (selling) call options and
from the dividends and interest it receives from the equity securities and other
investments held in the Fund's portfolio and short-term gains thereon. Premiums
from writing (selling) call options and dividends and interest payments made by
the securities in the Fund's portfolio can vary widely over time. Dividends on
equity securities are not fixed but are declared at the discretion of an
issuer's board of directors. There is no guarantee that the issuers of the
equity securities in which the Fund invests will declare dividends in the future
or that if declared they will remain at current levels. The Fund cannot assure
as to what percentage of the distributions paid on the Common Shares, if any,
will consist of qualified dividend income or long-term capital gains, both of
which are taxed at lower rates for individuals than are ordinary income and
short-term capital gains.
NON-U.S. RISK: The Fund may invest a portion of its assets in the equity
securities of issuers domiciled in jurisdictions other than the U.S. Investments
in the securities and instruments of non-U.S. issuers involve certain
considerations and risks not ordinarily associated with investments in
securities and instruments of U.S. issuers. Non-U.S. companies are not generally
subject to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Non-U.S. securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may be
subject to withholding and other non-U.S. taxes, which may adversely affect the
net return on such investments. A related risk is that there may be difficulty
in obtaining or enforcing a court judgment abroad.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 21
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST ENHANCED EQUITY INCOME
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Enhanced Equity Income Fund (the "Fund"), including the portfolio of
investments, as of December 31, 2012, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2012 by correspondence with the Fund's
custodian. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
First Trust Enhanced Equity Income Fund as of December 31, 2012, and the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 19, 2013
Page 22
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 23
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com;
(3) on the SEC's website at http://www.sec.gov; and (4) for review and copying
at the SEC's Public Reference Room ("PRR") in Washington, DC. Information
regarding the operation of the PRR may be obtained by calling (800) SEC-0330.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the NYSE Listed Company Manual, the Fund's
President has certified to the NYSE that, as of May 8, 2012, he was not aware of
any violation by the Fund of NYSE corporate governance listing standards. In
addition, the Fund's reports to the SEC on Form N-CSR and N-Q contain
certifications by the Fund's principal executive officer and principal financial
officer to the Fund's public disclosure in such reports and that are required by
Rule 30a-2 under the 1940 Act.
TAX INFORMATION
Of the ordinary income (including short-term capital gain, if applicable)
distributions made by the Fund during the year ended December 31, 2012, 5.70%
qualified for the corporate dividends received deduction available to corporate
shareholders. The Fund hereby designates as qualified dividend income 6.56% of
its ordinary income distributions (including short-term capital gain, if
applicable), for the year ended December 31, 2012.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of First Trust
Energy Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Active Dividend Income Fund, First Trust High Income
Long/Short Fund, First Trust Energy Infrastructure Fund and Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund was held on April
18, 2012 (the "Annual Meeting"). At the Annual Meeting, Richard E. Erickson and
Thomas R. Kadlec were elected by the Common Shareholders of the First Trust
Enhanced Equity Income Fund as Class II Trustees for a three-year term expiring
at the Fund's annual meeting of shareholders in 2015. The number of votes cast
in favor of Mr. Erickson was 18,342,607, the number of votes against was 541,429
and the number of abstentions was 1,089,128. The number of votes cast in favor
of Mr. Kadlec was 18,340,901, the number of votes against was 543,135 and the
number of abstentions was 1,089,128. James A. Bowen, Niel B. Nielson and Robert
F. Keith are the other current and continuing Trustees.
Page 24
BOARD OF TRUSTEES AND OFFICERS
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST OTHER
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX TRUSTEESHIPS OR
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
POSITION WITH THE FUND SERVICE (2) DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 98 None
c/o First Trust Advisors L.P. Co-Owner and Co-Director (January 1996
120 East Liberty Drive, o Since Fund to May 2007), Sports Med Center for
Suite 400 Inception Fitness; Limited Partner, Gundersen Real
Wheaton, IL 60187 Estate Limited Partnership; Member,
D.O.B.: 04/51 Sportsmed LLC
Thomas R. Kadlec, Trustee o Three-Year Term President (March 2010 to Present), Senior 98 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund (May 2007 to March 2010), Vice President Inc. and ADM
Suite 400 Inception and Chief Financial Officer (1990 to May Investor Services
Wheaton, IL 60187 2007), ADM Investor Services, Inc. (Futures International
D.O.B.: 11/57 Commission Merchant)
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 98 Director of
c/o First Trust Advisors L.P. Enterprises (Financial and Management Trust Company
120 East Liberty Drive, o Since June 2006 Consulting) of Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term President and Chief Executive Officer (June 98 Director of
c/o First Trust Advisors L.P. 2012 to Present), Dew Learning LLC Covenant
120 East Liberty Drive, o Since Fund (Educational Products and Services); President Transport Inc.
Suite 400 Inception (June 2002 to June 2012), Covenant College
Wheaton, IL 60187
D.O.B.: 03/54
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee and o Three-Year Term Chief Executive Officer (December 2010 98 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, 2010), First Trust Advisors L.P. and First
Suite 400 Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 o Since Fund Board of Directors, BondWave LLC
D.O.B.: 09/55 Inception (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
(2) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2014 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2015 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2013 annual meeting of shareholders.
Page 25
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BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o President and Chief L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Executive Officer Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Since January 2012 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
o Treasurer, Chief
Financial Officer and
Chief Accounting Officer
from Fund Inception
to January 2012
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief Accounting President (April 2007 to January 2011), Vice
Suite 400 Officer o Treasurer, Chief President (January 2005 to April 2007), First Trust
Wheaton, IL 60187 Financial Officer and Advisors L.P. and First Trust Portfolios L.P.
D.O.B.: 01/66 Chief Accounting Officer
Since January 2012
o Assistant Treasurer
from December 2005
to January 2012
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P. and BondWave LLC
Suite 400 o Since Fund Inception (Software Development Company/Investment
Wheaton, IL 60187 Advisor); Secretary of Stonebridge Advisors LLC
D.O.B.: 05/60 (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Senior Vice President (September 2005 to
120 E. Liberty Drive, Present), First Trust Advisors L.P. and First Trust
Suite 400 o Since December 2005 Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 02/70
Kristi A. Maher Assistant Secretary and o Indefinite Term Deputy General Counsel (May 2007 to Present),
120 E. Liberty Drive, Chief Compliance Officer First Trust Advisors L.P. and First Trust
Suite 400 o Assistant Secretary Portfolios L.P.
Wheaton, IL 60187 Since Fund Inception
D.O.B.: 12/66
o Chief Compliance Officer
Since January 2011
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 26
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PRIVACY POLICY
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FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2012 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 27
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, L.P.
1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by
the registrant or a third party.
(c) During the period covered by this report, the code of ethics that
applies to the registrant's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and
that relates to any element of the code of ethics description was
amended to name W. Scott Jardine as the Compliance Coordinator for
the implementation and administration of the aforementioned code.
The amended code of ethics is provided as an exhibit pursuant to
Item 12(a)(1).
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, that
relates to one or more of the items set forth in paragraph (b) of
this item's instructions.
(e) Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $39,000.00 for 2011 and
$38,000.00 for 2012.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years, for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0 for 2011 and $0 for 2012.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years of the registrant for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for 2011 and $0 for 2012.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $5,200
for 2011 and $0 for 2012. These fees were for tax preparation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years of the registrant for professional services rendered by
the principal accountant for tax compliance, tax advice, and tax planning to the
registrant's adviser were $0 for 2011 and $0 for 2012.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for 2011 and $0 for 2012.
All Other Fees (Investment Adviser) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal
accountant to the registrant's investment adviser, other than services reported
in paragraphs (a) through (c) of this Item were $0 for 2011 and $0 for 2012.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the registrant and the registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's engagement
to audit the registrant's financial statements for the most recent fiscal
year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
Registrant for 2011 were $5,200.00 and $6,200.00 for the Registrant and
the Registrant's investment adviser, respectively, and for 2012 were $0
and $4,120, for the Registrant and the Registrant's investment adviser,
respectively.
(h) The Registrant's audit committee of its Board of Trustees determined that
the provision of non-audit services that were rendered to the Registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the investment adviser that provides ongoing services
to the Registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining
the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of all
the independent trustees of the Registrant. The members of the audit committee
are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
CHARTWELL INVESTMENT PARTNERS
PROXY VOTING POLICIES AND PROCEDURES
As Further Amended February, 2012
PURPOSE. Chartwell Investment Partners ("Chartwell") has adopted these Proxy
Voting Policies and Procedures ("Policies") to seek to ensure that it exercises
voting authority on behalf of Chartwell clients in a manner consistent with the
best interests of each client and its agreement with the client.
SCOPE. These Policies apply where clients have delegated the authority and
responsibility to Chartwell to decide how to vote proxies. Chartwell does not
accept or retain authority to vote proxies in accordance with individual client
guidelines with the exception of those clients who wish their proxies voted in
accordance with Taft-Hartley Proxy Voting Guidelines and who have instructed
Chartwell to do so. In addition, Clients who wish to instruct Chartwell not to
vote in accordance with AFL-CIO Key Vote Survey recommendations, as described
below, retain that authority. Clients who wish to arrange to vote proxies in
accordance with their own guidelines may elect to do so at any time by notifying
Chartwell. Chartwell generally will follow these Policies if asked to make
recommendations about proxy voting to clients who request that advice but have
not delegated proxy voting responsibility to Chartwell.
GUIDING PRINCIPLES. Chartwell believes that voting proxies in the best interests
of each client means making a judgment as to what voting decision is most likely
to maximize total return to the client as an investor in the securities being
voted, and casting the vote accordingly. For this reason, Chartwell's evaluation
of the possible impact of a proxy vote on the economic interests of company
shareholders similarly situated to Chartwell's clients will be the primary
factor governing Chartwell's proxy voting decisions.
USE OF INDEPENDENT PROXY VOTING SERVICE. Chartwell has retained ISS, an
independent proxy voting service, to assist it in analyzing specific proxy votes
with respect to securities held by Chartwell clients and to handle the
mechanical aspects of casting votes. Historically, Chartwell has placed
substantial reliance on ISS' analyses and recommendations and generally gives
instructions to ISS to vote proxies in accordance with ISS' recommendations,
unless Chartwell reaches a different conclusion than ISS about how a particular
matter should be voted. ISS' proxy voting recommendations typically are made
available to Chartwell about a week before the proxy must be voted, and are
reviewed and monitored by members of the Proxy Voting Committee (and, in certain
cases, by Chartwell portfolio managers), with a view to determining whether it
is in the best interests of Chartwell's clients to vote proxies as recommended
by ISS, or whether client proxies should be voted on a particular proposal in
another manner. In addition, Chartwell generally votes in accordance with
AFL-CIO Key Votes Survey, a list of proposals and meetings based on
recommendations by the AFL-CIO Office of Investment. To the extent that any of
the proxy voting positions stated in these Policies are inconsistent with a Key
Vote Survey recommendation, Chartwell will generally vote in accordance with the
Key Vote Survey recommendation on all impacted securities unless any client has
chosen to instruct Chartwell to refrain from doing so. In that case, Chartwell
will vote the client's securities position in accordance with these Policies
(which may or may not cause the vote to be the same as the Key Vote Survey
recommendation).
ADMINISTRATION OF POLICIES. Chartwell has established a Proxy Voting Committee
to oversee and administer the voting of proxies on behalf of clients, comprised
of approximately five representatives of the firm's compliance and operations
departments. The Committee's responsibilities include reviewing and updating
these Policies as may be appropriate from time to time; identifying and
resolving any material conflicts of interest on the part of Chartwell or its
personnel that may affect particular proxy votes; evaluating and monitoring, on
an ongoing basis, the analyses, recommendations and other services provided by
ISS or another third party retained to assist Chartwell in carrying out its
proxy voting responsibilities; when deemed appropriate by the Committee,
consulting with Chartwell portfolio managers and investment professionals on
particular proposals or categories of proposals presented for vote; and
determining when and how client proxies should be voted other than in accordance
with the general rules and criteria set forth in Chartwell's Proxy Voting
Guidelines or with the recommendations of ISS or another independent proxy
voting service retained by Chartwell.
CONFLICTS OF INTEREST. It is Chartwell's policy not to exercise its authority to
decide how to vote a proxy if there is a material conflict of interest between
Chartwell's interests and the interests of the client that owns the shares to be
voted that could affect the vote on that matter. To seek to identify any such
material conflicts, a representative of the Proxy Voting Committee screens all
proxies and presents any potential conflicts identified to the Committee for
determination of whether the conflict exists and if so, whether it is material.
Conflicts of interest could result from a variety of circumstances, including,
but not limited to, significant personal relationships between executive
officers of an issuer and Chartwell personnel, a current or prospective
investment adviser-client relationship between an issuer or a pension plan
sponsored by an issuer and Chartwell, a significant ownership interest by
Chartwell or its personnel in the issuer and various other business, personal or
investment relationships. Generally, a current or prospective adviser-client
relationship will not be considered material for these purposes if the net
advisory revenues to Chartwell have not in the most recent fiscal year and are
not expected in the current fiscal year to exceed 1/2 of 1 percent of
Chartwell's annual advisory revenue.
Currently, the Proxy Voting Committee has determined that voting in accordance
with AFL-CIO Key Votes Survey recommendations is not a material conflict of
interest. In reaching this decision, the Committee recognized that Chartwell has
many union clients and many clients that are not union-oriented. By voting all
impacted securities positions in accordance with AFL-CIO recommendations, it
could be said that Chartwell is attempting to retain or attract existing and
prospective union clients. However, the overall number of proxy issues in the
AFL-CIO Key Votes Survey on which Chartwell has historically voted is
approximately 14 - 30 out of a total of approximately 500 company meetings and
thousands of proxy votes cast by Chartwell each year. Chartwell does not use its
AFL-CIO Key Votes Survey rankings for marketing purposes, so to the extent any
client or prospect becomes aware of how Chartwell votes in the Surveys, it does
so on its own. In addition, Union Clients have the ability to instruct Chartwell
to vote their proxies entirely in accordance with the Taft-Hartley policy.
Recognizing that deciding this is not a material conflict of interest is
fundamentally subjective, Chartwell nonetheless discloses its practices to
clients and invites clients to instruct Chartwell not to change any vote in
these Policies to be consistent with an AFL-CIO Key Votes Survey recommendation
(even though voting consistently with these Policies may result in voting the
same way).
In the event the Committee determines that there is a material conflict of
interest that may affect a particular proxy vote, Chartwell will NOT make the
decision how to vote the proxy in accordance with these Policies unless the
Policies specify how votes shall be cast on that particular type of matter,
i.e., "for" or "against" the proposal. Where the Policies provide that the
voting decision will be made on a "case-by-case" basis, Chartwell will either
request the client to make the voting decision, or the vote will be cast in
accordance with the recommendations of ISS or another independent proxy voting
service retained by Chartwell for that purpose. Chartwell also will not provide
advice to clients on proxy votes without first disclosing any material conflicts
to the client requesting such advice.
WHEN CHARTWELL DOES NOT VOTE PROXIES. Chartwell may not vote proxies respecting
client securities in certain circumstances, including, but not limited to,
situations where (a) the securities are no longer held in a client's account;
(b) the proxy and other relevant materials are not received in sufficient time
to allow analysis or an informed vote by the voting deadline; (c) Chartwell
concludes that the cost of voting the proxy will exceed the expected potential
benefit to the client; or (d) the securities have been loaned out pursuant to a
client's securities lending program and are unavailable to vote.
PROXY VOTING GUIDELINES
Generally, Chartwell votes all proxies in accordance with the ISS guidelines.
These guidelines may be changed or supplemented from time to time. Votes on
matters not covered by these guidelines will be determined in accordance with
the principles set forth above. Client guidelines may be inconsistent with these
guidelines and may cause Chartwell to vote differently for different clients on
the same matter.
The policies contained herein are a sampling of select, key proxy voting
guidelines and are not exhaustive.
ROUTINE/MISCELLANEOUS:
AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors, unless any of the following apply:
o An auditor has a financial interest in or association with the
company and is therefore not independent;
o There is reason to believe that the independent auditor has rendered
an opinion which is neither accurate nor indicative of the company's
financial position;
o Poor accounting practices are identified that rise to a serious
level of concern, such as: fraud; misapplication of GAAP; and
material weaknesses identified in Section 404 disclosures; or
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
o Non-audit ("other") fees > audit fees + audit-related fees + tax
compliance/preparation fees
BOARD OF DIRECTORS:
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS Votes on director nominees
should be determined CASE-BY-CASE. Four fundamental principles apply when
determining votes on director nominees:
1. Board Accountability
2. Board Responsiveness
3. Director Independence
4. Director Competence
1. BOARD ACCOUNTABILITY
Vote AGAINST(1) or WITHHOLD from the entire board of directors (except new
nominees(2) who should be considered CASE-BY-CASE for the following: Problematic
Takeover Defenses:
CLASSIFIED BOARD STRUCTURE
1.1 The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for
election - any or all appropriate nominees (except new) may be held
accountable;
1.2 The board lacks accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is
measured by one- and three-year total shareholder returns in the
bottom half of a company's four-digit GICS industry group (Russell
3000 companies only). Take into consideration the company's
five-year total shareholder return and five-year operational
metrics. Problematic provisions include but are not limited to:
o A classified board structure;
o A supermajority vote requirement;
o Either a plurality vote standard in uncontested director
elections or a majority vote standard for director elections
with no plurality carve-out for contested elections;
o The inability for shareholders to call special meetings;
o The inability for shareholders to act by written consent;
o A dual-class capital structure; and/or o A
non-shareholder-approved poison pill.
POISON PILLS:
1.3 The company's poison pill has a "dead-hand" or "modified dead-hand"
feature. Vote WITHHOLD/AGAINST every year until this feature is
removed;
1.4 The board adopts a poison pill with a term of more than 12 months
("long-term pill"), or renews any existing pill, including any
"short-term pill" (12 months or less), without shareholder approval.
A commitment or policy that puts a newly-adopted pill to a binding
shareholder vote may potentially offset an adverse vote
recommendation. Review such companies with classified boards every
year, and such companies with annually-elected boards at least once
every three years, and vote AGAINST or WITHHOLD votes from all
nominees if the company still maintains a non-shareholder-approved
poison pill. This policy applies to all companies adopting or
renewing pills after the announcement of this policy (November 19,
2009); or
1.5 The board makes a material adverse change to an existing poison pill
without shareholder approval.
------------------------
1 In general, companies with a plurality vote standard use "Withhold" as the
contrary vote option in director elections; companies with a majority vote
standard use "Against". However, it will vary by company and the proxy
must be checked to determine the valid opposition vote for the particular
company.
2 A "new nominee" is any current nominee who has not already been elected by
shareholders and who joined the board after the problematic action in
question transpired. If ISS cannot determine whether the nominee joined
the board before or after the problematic action transpired, the nominee
will be considered a "new nominee" if he or she joined the board within
the 12 months prior to the upcoming shareholder meeting.
Vote CASE-BY-CASE on all nominees if:
1.6 The board adopts a poison pill with a term of 12 months or less
("short-term pill") without Shareholder approval, taking into
account the following factors:
o The date of the pill's adoption relative to the date of the
next meeting of shareholders-i.e., whether the company had
time to put the pill on ballot for shareholder ratification
given the circumstances;
o The issuer's rationale;
o The issuer's governance structure and practices; and
o The issuer's track record of accountability to shareholders.
Problematic Audit-Related Practices
Generally, vote AGAINST or WITHHOLD from the members of the Audit Committee if:
1.7 The non-audit fees paid to the auditor are excessive (see discussion
under "Auditor Ratification");
1.8 The company receives an adverse opinion on the company's financial
statements from its auditor; or
1.9 There is persuasive evidence that the audit committee entered into
an inappropriate indemnification agreement with its auditor that
limits the ability of the company, or its shareholders, to pursue
legitimate legal recourse against the audit firm.
Vote CASE-BY-CASE on members of the Audit Committee and potentially the full
board if:
1.10 Poor accounting practice are identified that rise to a level of
serious concern, such as: fraud; misapplication of GAAP; and
material weaknesses identified in Section 404 disclosures. Examine
the severity, breadth, chronological sequence and duration, as well
as the company's efforts at remediation or corrective actions, in
determining whether WITHHOLD/AGAINST votes are warranted.
Problematic Compensation Practices/Pay for Performance Misalignment
In the absence of an Advisory Vote on Executive Compensation ballot item, or, in
egregious situations, vote WITHHOLD/AGAINST from the members of the Compensation
Committee and potentially the full board if:
1.11 There is a significant misalignment between CEO pay and company
performance (Pay for Performance);
1.12 The company maintains significant problematic pay practices;
1.13 The board exhibits a significant level of poor communication and
responsiveness to shareholders;
1.14 The company fails to submit one-time transfers of stock options to a
shareholder vote; or
1.15 The company fails to fulfill the terms of a burn rate commitment
made to shareholders.
Vote CASE-BY-CASE on Compensation Committee members (or, in exceptional cases,
the full board) and the Management Say-on-Pay proposal if:
1.16 The company's previous say-on-pay proposal received the support of
less than 70 percent of votes cast, taking into account;
o The company's response, including:
o Disclosure of engagement efforts with major
institutional investors regarding the issues that
contributed to the low level of support;
o Specific actions taken to address the issues that
contributed to the low level of support;
o Other recent compensation actions taken by the company.
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which
would warrant the highest degree of responsiveness.
Governance Failures
Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors
individually, committee members, or the entire board, due to:
1.17 Material failures of governance, stewardship, risk oversight or
fiduciary responsibilities at the company;
1.18 Failure to replace management as appropriate; or
1.19 Egregious actions related to a director's service on other boards
that raise substantial doubt about his or her ability to effectively
oversee management and serve the best interests of shareholders at
any company.
2. BOARD RESPONSIVENESS
Vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who
should be considered on a CASE-BY-CASE basis), if:
2.1 The board failed to act on a shareholder proposal that received
approval of a majority of the shares outstanding the previous year;
2.2 The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years;
2.3 The board failed to act on takeover offers where the majority of
shares are tendered;
2.4 At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company
has failed to address the issue(s) that caused the high withhold/
against vote; or
2.5 The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received the majority of
votes cast at the most recent shareholder meeting at which
shareholders voted on the say-on-pay frequency.
Vote CASE-BY-CASE on the entire board if:
2.6 The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received a plurality,
but not a majority, of the votes cast at the most recent shareholder
meeting at which shareholders voted on the say-on-pay frequency,
taking into account:
o The board's rationale for selecting a frequency that is
different from the frequency that received a plurality;
o The company's ownership structure and vote results;
o ISS' analysis of whether there are compensation concerns or a
history of problematic compensation practices; and
o The previous year's support level on the company's say-on-pay
proposal.
3. DIRECTOR INDEPENDENCE
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the Categorization of Directors below) when:
3.1 The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
3.2 The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
3.3 The company lacks a formal nominating committee, even if the board
attests that the independent directors fulfill the functions of such
a committee; or
3.4 The full board is less than majority independent.
4. DIRECTOR COMPETENCE
Vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who
should be considered CASE-BY-CASE), if:
4.1 The company's proxy indicated that not all directors attended 75
percent of the aggregate board and committee meetings, but fails to
provide the required disclosure of the names of the director(s)
involved.
Generally vote AGAINST or WITHHOLD from individual directors who:
4.2 Attend less than 75 percent of the board and committee meetings
(with the exception of new nominees). Acceptable reasons for
director(s) absences are generally limited to the following:
o Medical issues/illness;
o Family emergencies; and
o Missing only one meeting.
These reasons for directors' absences will only be considered by ISS if
disclosed in the proxy or another SEC filing. If the disclosure is
insufficient to determine whether a director attended at least 75 percent
of board and committee meetings in aggregate, vote AGAINST/WITHHOLD from
the director.
OVERBOARDED DIRECTORS:
Vote AGAINST or WITHHOLD from individual directors who:
4.3 Sit on more than six public company boards; or
4.4 Are CEOs of public companies who sit on the boards of more than two
public companies besides their own--withhold only at their outside
boards.
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote CASE BY CASE on the election of directors in contested elections,
considering the following factors:
o Long-term financial performance of the target company relative to
its industry;
o Management's track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved
(both slates);
o Stock ownership positions.
PROXY ACCESS
ISS supports proxy access as an important shareholder right, one that is
complementary to other best-practice corporate governance features. However, in
the absence of a uniform standard, proposals to enact proxy access may vary
widely; as such, ISS is not setting forth specific parameters at this time and
will take a case-by-case approach in evaluating these proposals.
Vote CASE-BY-CASE on proposals to enact proxy access, taking into account, among
other factors:
o Company-specific factors; and
o Proposal-specific factors, including:
o The ownership thresholds proposed in the resolution (i.e.,
percentage and duration);
o The maximum proportion of directors that shareholders may
nominate each year; and
o The method of determining which nominations should appear on
the ballot if multiple shareholders submit nominations.
SHAREHOLDER RIGHTS & DEFENSES:
EXCLUSIVE VENUE
Vote CASE-BY-CASE on exclusive venue proposals, taking into account:
o Whether the company has been materially harmed by shareholder
litigation outside its jurisdiction of incorporation, based on
disclosure in the company's proxy statement; and
o Whether the company has the following good governance features:
o An annually elected board;
o A majority vote standard in uncontested director elections;
and
o The absence of a poison pill, unless the pill was approved by
shareholders.
POISON PILLS - MANAGEMENT PROPOSALS TO RATIFY POISON PILL
Vote CASE BY CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limit the
ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the
board refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or
seek a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses, and any problematic governance concerns.
POISON PILLS - MANAGEMENT PROPOSALS TO RATIFY A PILL TO PRESERVE NET OPERATING
LOSSES (NOLS)
Vote AGAINST proposals to adopt a poison pill for the stated purpose of
protecting a company's net operating losses ("NOLs") if the term of the pill
would exceed the shorter of three years and the exhaustion of the NOL.
Vote CASE-BY-CASE on management proposals for poison pill ratification,
considering the following factors, if the term of the pill would be the shorter
of three years (or less) and the exhaustion of the NOL:
o The ownership threshold to transfer (NOL pills generally have a
trigger slightly below 5%);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision, or commitment
to cause expiration of the pill upon exhaustion or expiration of
NOLs);
o The company's existing governance structure including: board
independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic governance
concerns; and
o Any other factors that may be applicable.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Generally vote AGAINST management and shareholder proposals to restrict or
prohibit shareholders' ability to act by written consent. Generally vote FOR
management and shareholder proposals that provide shareholders with the ability
to act by written consent, taking into account the following factors:
o Shareholders' current right to act by written consent;
o The consent threshold;
o The inclusion of exclusionary or prohibitive language;
o Investor ownership structure; and
o Shareholder support of, and management's response to, previous
shareholder proposals.
Vote CASE-BY-CASE on shareholder proposals if, in addition to the considerations
above, the company has the following governance and antitakeover provisions:
o An unfettered(3) right for shareholders to call special meetings at
a 10 percent threshold;
o A majority vote standard in uncontested director elections;
o No non-shareholder-approved pill; and
o An annually elected board.
CAPITAL/RESTRUCTURING
COMMON STOCK AUTHORIZATION
Vote FOR proposals to increase the number of authorized common shares where the
primary purpose of the increase is to issue shares in connection with a
transaction on the same ballot that warrants support.
Vote AGAINST proposals at companies with more than one class of common stock to
increase the number of authorized shares of the class of common stock that has
superior voting rights.
Vote AGAINST proposals to increase the number of authorized common shares if a
vote for a reverse stock split on the same ballot is warranted despite the fact
that the authorized shares would not be reduced proportionally.
Vote CASE-BY-CASE on all other proposals to increase the number of shares of
common stock authorized for issuance. Take into account company-specific factors
which include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized shares during the last three
years;
o The Current Request:
o Disclosure in the proxy statement of the specific reasons for
the proposed increase;
o Disclosure in the proxy statement of specific and severe risks
to shareholders of not approving the request; and
--------------------------
3 "Unfettered" means no restrictions on agenda items, no restrictions on the
number of shareholders who can group together to reach the 10 percent
threshold, and only reasonable limits on when a meeting can be called: no
greater than 30 days after the last annual meeting and no greater than 90
prior to the next annual meeting.
o The dilutive impact of the request as determined by an
allowable increase calculated by ISS (typically 100 percent of
existing authorized shares) that reflects the company's need
for shares and total shareholder returns.
PREFERRED STOCK AUTHORIZATION
Vote FOR proposals to increase the number of authorized preferred shares where
the primary purpose of the increase is to issue shares in connection with a
transaction on the same ballot that warrants support.
Vote AGAINST proposals at companies with more than one class or series of
preferred stock to increase the number of authorized shares of the class or
series of preferred stock that has superior voting rights.
Vote CASE-BY-CASE on all other proposals to increase the number of shares of
preferred stock authorized for issuance. Take into account company-specific
factors that include, at a minimum, the following:
o Past Board Performance
o The company's use of authorized preferred shares during the
last three years;
o The Current Request:
o Disclosure in the proxy statement of specific reasons for the
proposed increase;
o Disclosure in the proxy statement of specific and severe risks
to shareholders of not approving the request;
o In cases where the company has existing authorized preferred
stock, the dilutive impact of the request as determined by an
allowable increase calculated by ISS (typically 100 percent of
existing authorized shares) that reflects the company's need
for shares and total shareholder returns; and
o Whether the shares requested are blank check preferred shares
that can be used for antitakeover purposes.
DUAL CLASS STRUCTURE
Generally vote AGAINST proposals to create a new class of common stock unless:
o The company discloses a compelling rationale for the dual-class
capital structure, such as:
o The company's auditor has concluded that there is substantial
doubt about the company's ability to continue as a going
concern; or
o The new class of shares will be transitory;
o The new class is intended for financing purposes with minimal or no
dilution to current shareholders in both the short term and long
term; and
o The new class is not designed to preserve or increase the voting
power of an insider or significant shareholder.
MERGERS AND ACQUISITIONS
Vote CASE-BY-CASE on mergers and acquisitions. Review and evaluate the merits
and drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors including:
o Valuation - Is the value to be received by the largest shareholders
(or paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
o Market reaction - How has the market responded to the proposed deal?
A negative market reaction should cause closer scrutiny of a deal.
o Strategic rationale - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable.
Management should also have a favorable track record of successful
integration of historical acquisitions.
o Negotiations and process - Were the terms of the transaction
negotiated at arm's-length? Was the process fair and equitable? A
fair process helps to ensure the best price for shareholders.
Significant negotiation "wins" can also signify the deal makers'
competency. The comprehensiveness of the sales process (e.g., full
auction, partial auction, no auction) can also affect shareholder
value.
o Conflicts of interest - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors
and officers of the company may be more likely to vote to approve a
merger than if they did not hold these interests. Consider whether
these interests may have influenced these directors and officers to
support or recommend the merger. The CIC figure presented in the
"ISS Transaction Summary" section of this report is an aggregate
figure that can in certain cases be a misleading indicator of the
true value transfer from shareholders to insiders. Where such figure
appears to be excessive, analyze the underlying assumptions to
determine whether a potential conflict exists.
o Governance - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is
to change for the worse, the burden is on the company to prove that
other issues (such as valuation) outweigh any deterioration in
governance.
COMPENSATION
EXECUTIVE PAY EVALUATION
Underlying all evaluations are five global principles that most investors expect
corporations to adhere to in designing and administering executive and director
compensation programs:
1. Maintain appropriate pay-for-performance alignment, with emphasis on
long-term shareholder value: This principle encompasses overall
executive pay practices, which must be designed to attract, retain
and appropriately motivate the key employees who drive shareholder
value creation over the long term. It will take into consideration,
among other factors, the link between pay and performance, the mix
between fixed and variable pay, performance goals, and equity-based
plan costs;
2. Avoid arrangements that risk "pay for failure": This principle
addresses the appropriateness of long or indefinite contracts,
excessive severance packages and guaranteed compensation;
3. Maintain an independent and effective compensation committee: This
principle promotes oversight of executive pay programs by directors
with appropriate skills, knowledge, experience and a sound process
for compensation decision-making (e.g., including access to
independent expertise and advice when needed);
4. Provide shareholders with clear, comprehensive compensation
disclosures: This principle underscores the importance of
informative and timely disclosures that enable shareholders to
evaluate executive pay practices fully and fairly;
5. Avoid inappropriate pay to non-executive directors: This principle
recognizes the interests of shareholders in ensuring that
compensation to outside directors does not compromise their
independence and ability to make appropriate judgments in overseeing
managers' pay and performance. At the market level, it may
incorporate a variety of generally accepted best practices.
ADVISORY VOTES ON EXECUTIVE COMPENSATION - MANAGEMENT PROPOSALS (SAY-ON-PAY)
Vote CASE-BY-CASE on ballot items related to executive pay and practices, as
well as certain aspects of outside director compensation.
Vote AGAINST Advisory Votes on Executive Compensation (Management Say-on-Pay -
MSOP) if:
o There is a significant misalignment between CEO pay and company
performance (pay for performance);
o The company maintains significant problematic pay practices;
o The board exhibits a significant level of poor communication and
responsiveness to shareholders.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee and
potentially the full board if:
o There is no MSOP on the ballot, and an AGAINST vote on an MSOP is
warranted due to pay for performance misalignment, problematic pay
practices or the lack of adequate responsiveness on compensation
issues raised previously, or a combination thereof;
o The board fails to respond adequately to a previous MSOP proposal
that received less than 70 percent support of votes cast;
o The company has recently practiced or approved problematic pay
practices, including option repricing or option backdating; or
o The situation is egregious.
Vote AGAINST an equity plan on the ballot if:
o A pay for performance misalignment is found, and a significant
portion of the CEO's misaligned pay is attributed to
non-performance-based equity awards, taking into consideration:
o Magnitude of pay misalignment;
o Contribution of non-performance-based equity grants to overall
pay; and
o The proportion of equity awards granted in the last three
fiscal years concentrated at the named executive officer (NEO)
level.
PRIMARY EVALUATION FACTORS FOR EXECUTIVE PAY
PAY FOR PERFORMANCE EVALUATION
ISS annually conducts a pay-for-performance analysis to identify strong or
satisfactory alignment between pay and performance over a sustained period. With
respect to companies in the Russell 3000 index, this analysis considers the
following:
1. Peer Group(4) Alignment:
o The degree of alignment between the company's TSR rank and the
CEO's total pay rank within a peer group, as measured over
one-year and three-year periods (weighted 40/60);
o The multiple of the CEO's total pay relative to the peer group
median.
------------------------
4 The peer group is generally comprised of 14-24 companies that are selected
using market cap, revenue (or assets for financial firms), and GICs
industry group, via a process designed to select peers that are closest to
the subject company, and where the subject company is close to median in
revenue/asset size. The relative alignment evaluation will consider the
company's rank for both pay and TSR within the peer group (for one- and
three-year periods) and the CEO's pay relative to the median pay level in
the peer group.
2. Absolute Alignment: The absolute alignment between the trend in CEO
pay and company TSR over the prior five fiscal years - i.e., the
difference between the trend in annual pay changes and the trend in
annualized TSR during the period.
If the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of non-Russell 3000 index
companies, misaligned pay and performance are otherwise suggested, analyze the
following qualitative factors to determine how various pay elements may work to
encourage or to undermine long-term value creation and alignment with
shareholder interests:
o The ratio of performance- to time-based equity awards;
o The ratio of performance-based compensation to overall compensation;
o The completeness of disclosure and rigor of performance goals;
o The company's peer group benchmarking practices;
o Actual results of financial/operational metrics, such as growth in
revenue, profit, cash flow, etc., both absolute and relative to
peers;
o Special circumstances related to, for example, a new CEO in the
prior fiscal year or anomalous equity grant practices (e.g.,
biennial awards); and
o Any other factors deemed relevant.
PROBLEMATIC PAY PRACTICES
The focus is on executive compensation practices that contravene the global pay
principles, including:
o Problematic practices related to non-performance-based compensation
elements;
o Incentives that may motivate excessive risk-taking; and
o Options backdating.
PROBLEMATIC PAY PRACTICES RELATED TO NON-PERFORMANCE-BASED COMPENSATION ELEMENTS
Pay elements that are not directly based on performance are generally evaluated
CASE-BY-CASE considering the context of a company's overall pay program and
demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation
FAQ document for detail on specific pay practices that have been identified as
potentially problematic and may lead to negative recommendations if they are
deemed to be inappropriate or unjustified relative to executive pay best
practices. The list below highlights the problematic practices that carry
significant weight in this overall consideration and may result in adverse vote
recommendations:
o Repricing or replacing of underwater stock options/SARS without
prior shareholder approval (including cash buyouts and voluntary
surrender of underwater options);
o Excessive perquisites or tax gross-ups, including any gross-up
related to a secular trust or restricted stock vesting;
o New or extended agreements that provide for:
o CIC payments exceeding 3 times base salary and
average/target/most recent bonus;
o CIC severance payments without involuntary job loss or
substantial diminution of duties ("single" or "modified
single" triggers);
o CIC payments with excise tax gross-ups (including "modified"
gross-ups).
INCENTIVES THAT MAY MOTIVATE EXCESSIVE RISK-TAKING
o Multi-year guaranteed bonuses;
o A single performance metric used for short- and long-term plans;
o Lucrative severance packages;
o High pay opportunities relative to industry peers;
o Disproportionate supplemental pensions; or
o Mega annual equity grants that provide unlimited upside with no
downside risk.
Factors that potentially mitigate the impact of risky incentives include
rigorous claw-back provisions and robust stock ownership/holding guidelines.
OPTIONS BACKDATING
The following factors should be examined CASE-BY-CASE to allow for distinctions
to be made between "sloppy" plan administration versus deliberate action or
fraud:
o Reason and motive for the options backdating issue, such as
inadvertent vs. deliberate grant changes;
o Duration of options backdating;
o Size of restatement due to options backdating;
o Corrective actions taken by the board or compensation committee,
such as canceling or re-pricing backdated options, the recouping of
option gains on backdated grants; and
o Adoption of a grant policy that prohibits backdating and creates a
fixed grant schedule or window period for equity grants in the
future.
BOARD COMMUNICATIONS AND RESPONSIVENESS
Consider the following factors CASE-BY-CASE when evaluating ballot items related
to executive pay.
o Failure to respond to majority-supported shareholder proposals on
executive pay topics; or
o Failure to adequately respond to the company's previous say-on-pay
proposal that received the support of less than 70 percent of votes
cast, taking into account:
o The company's response, including:
o Disclosure of engagement efforts with major
institutional investors regarding the issues that
contributed to the low level of support;
o Specific actions taken to address the issues that
contributed to the low level of support;
o Other recent compensation actions taken by the company.
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which
would warrant the highest degree of responsiveness.
FREQUENCY OF ADVISORY VOTE ON EXECUTIVE COMPENSATION (MANAGEMENT "SAY ON PAY")
Vote FOR annual advisory votes on compensation, which provide the most
consistent and clear communication channel for shareholder concerns about
companies' executive pay programs.
VOTING ON GOLDEN PARACHUTES IN AN ACQUISITION, MERGER, CONSOLIDATION OR PROPOSED
SALE
Vote CASE-BY-CASE on proposals to approve the company's golden parachute
compensation, consistent with ISS' policies on problematic pay practices related
to severance packages. Features that may lead to a vote AGAINST include:
o Recently adopted or materially amended agreements that include
excise tax gross-up provisions (since prior annual meeting);
o Recently adopted or materially amended agreements that include
modified single triggers (since prior annual meeting);
o Single trigger payments that will happen immediately upon a change
in control, including cash payment and such items as the
acceleration of performance-based equity despite the failure to
achieve performance measures;
o Single trigger vesting of equity based on a definition of change in
control that requires only shareholder approval of the transaction
(rather than consummation);
o Potentially excessive severance payments;
o Recent amendments or other changes that may make packages so
attractive as to influence merger agreements that may not be in the
best interests of shareholders;
o In the case of a substantial gross-up from
pre-existing/grandfathered contract: the element that triggered the
gross-up (i.e., option mega-grants at low point in stock price,
unusual or outsized payments in cash or equity made or negotiated
prior to the merger); or
o The company's assertion that a proposed transaction is conditioned
on shareholder approval of the golden parachute advisory vote. ISS
would view this as problematic from a corporate governance
perspective.
In cases where the golden parachute vote is incorporated into a company's
separate advisory vote on compensation ("management "say on pay"), ISS will
evaluate the "say on pay" proposal in accordance with these guidelines, which
may give higher weight to that component of the overall evaluation.
EQUITY-BASED AND OTHER INCENTIVE PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits the repricing;
o A pay-for-performance misalignment is found;
o The company's three-year burn rate exceeds the burn rate cap of its
industry group;
o The plan has a liberal change-of-control definition; or
o The plan is a vehicle for poor pay practices.
SOCIAL/ENVIRONMENTAL ISSUES
OVERALL APPROACH
When evaluating social and environmental shareholder proposals, ISS considers
the following factors:
o Whether adoption of the proposal is likely to enhance or protect
shareholder value;
o Whether the information requested concerns business issues that
relate to a meaningful percentage of the company's business as
measured by sales, assets and earnings;
o The degree to which the company's stated position on the issues
raised in the proposal could affect its reputation or sales, or
leave it vulnerable to a boycott or selective purchasing;
o Whether the issues presented are more appropriately/effectively
dealt with through governmental or company-specific action;
o Whether the company has already responded in some appropriate manner
to the request embodied in the proposal;
o Whether the company's analysis and voting recommendation to
shareholders are persuasive;
o What other companies have done in response to the issue addressed in
the proposal;
o Whether the proposal itself is well framed and the cost of preparing
the report is reasonable;
o Whether implementation of the proposal's request would achieve the
proposal's objectives;
o Whether the subject of the proposal is best left to the discretion
of the board;
o Whether the requested information is available to shareholders
either from the company or from a publicly available source; and
o Whether providing this information would reveal proprietary or
confidential information that would place the company at a
competitive disadvantage.
POLITICAL SPENDING & LOBBYING ACTIVITIES
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
o There are no recent, significant controversies, fines or litigation
regarding the company's political contributions or trade association
spending; and
o The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees
(PACs) are strictly voluntary and prohibits coercion.
Vote AGAINST proposals to publish in newspapers and other media the company's
political contributions. Such publications could present significant cost to the
company without providing commensurate value to shareholders.
Generally vote FOR proposals requesting greater disclosure of a company's
political contributions and trade association spending policies and activities.
However, the following will be considered:
o The company's current disclosure of policies and oversight
mechanisms related to its direct political contributions and
payments to trade associations or other groups that may be used for
political purposes, including information on the types of
organizations supported and the business rationale for supporting
these organizations; and
o Recent significant controversies, fines or litigation related to the
company's political contributions or political activities.
Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state and local level;
barring political contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals asking for list of company executives, directors,
consultants, legal counsels, lobbyists or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
activities, including direct lobbying as well as grassroots lobbying activities,
considering:
o The company's current disclosure of relevant policies and oversight
mechanisms;
o Recent significant controversies, fines or litigation related to the
company's public policy activities; and
o The impact that the policy issues may have on the company's business
operations.
HYDRAULIC FRACTURING
Generally vote FOR proposals requesting greater disclosure of a company's
(natural gas) hydraulic fracturing operations, including measures the company
has taken to manage and mitigate the potential community and environmental
impacts of those operations, considering:
o The company's current level of disclosure of relevant policies and
oversight mechanisms;
o The company's current level of such disclosure relative to its
industry peers;
o Potential relevant local, state or national regulatory developments;
and
o Controversies, fines or litigation related to the company's
hydraulic fracturing operations.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF DECEMBER 31, 2012
Chartwell Investment Partners, L.P. ("Chartwell" or the "Sub-Adviser"), founded
in 1997, is an employee-owned investment firm focusing on institutional,
sub-advisory and private client relationships. The firm is a research-based
equity and fixed-income manager with a disciplined, team-oriented investment
process. The Portfolio Management Team consists of the following:
PORTFOLIO MANAGEMENT TEAM
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Schaffer is a founding partner of Chartwell and has 38 years of investment
industry experience. He serves as senior portfolio manager for Chartwell's
closed-end fund and hedged large-cap equity strategies. As the lead portfolio
manager for the Fund since 2007, he focuses on securities in the Energy,
Financials and Consumer Staples sectors. He was employed as a Senior Portfolio
Manager at Delaware Investment Advisers from 1990 to 1997, managing closed-end
equity income funds that utilized option strategies to generate portfolio gains.
Mr. Schaffer earned a Bachelor's degree in Economics from Villanova University
and an MBA from the University of Pennsylvania's Wharton School.
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 15 years of investment industry experience. His areas of
focus include the Consumer Discretionary, Industrials, Materials and Technology
sectors of the market. He has been a portfolio manager for the Fund since 2007.
From 1993 to 2003, he held several positions at Morgan Stanley Investment
Management (Miller Anderson & Sherrerd) the last of which was Senior Associate
and Analyst for the Large Cap Value team. Mr. Kugler is a member of the CFA
(Chartered Financial Analysts) Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. Mr. Kugler earned a
Bachelor's degree in Accounting from the University of Delaware.
PETER M. SCHOFIELD, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
Mr. Schofield is a Senior Portfolio Manager on Chartwell's large-cap equity
portfolio management team and has 27 years of investment industry experience.
His areas of focus include Consumer Staples, Health Care and Information
Technology. From 2005 to 2010, he was a Co-Chief Investment Officer at Knott
Capital. From 1996 to 2005, he was a Portfolio Manager at Sovereign Asset
Management. Prior to Sovereign Asset Management, he was a portfolio manager at
Geewax, Terker & Company. Mr. Schofield holds the Chartered Financial Analyst
designation and is a member of the CFA (Chartered Financial Analysts) Institute
and the CFA Society of Philadelphia. Mr. Schofield earned a Bachelor's degree in
History from the University of Pennsylvania.
The investment team for the First Trust Enhanced Equity Income Fund consists of
three portfolio managers with an average of 29 years of investment experience.
All team members conduct fundamental research and meet with company management.
Purchase and sale decisions are made by the portfolio managers. The day-to-day
work and the management of the Fund is divided evenly among the portfolio
managers.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
INFORMATION PROVIDED AS OF DECEMBER 31, 2012
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
# of Accounts Total Assets
-------------- -------------
Managed for for which
------------ ----------
Total # of which Advisory Advisory Fee
----------- --------------- -------------
Name of Portfolio Manager or Accounts Total Fee is Based on is Based on
----------------------------- --------- ------ ---------------- ------------
Team Member Type of Accounts* Managed Assets Performance Performance
----------- ----------------- ------- ------ ----------- -----------
1. Bernard P. Schaffer Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 1 $412,000 0 $0
Vehicles:
Other Accounts: 16 $288.5 Mil 0 $0
2. Douglas W. Kugler Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 1 $412,000 0 $0
Vehicles:
Other Accounts: 16 $288.5 Mil 0 $0
3. Peter M. Schofield Registered Investment 1 $20.9 0 $0
Companies:
Other Pooled Investment 1 $412,000 0 $0
Vehicles:
Other Accounts: 16 $288.5 Mil 0 $0
POTENTIAL CONFLICTS OF INTERESTS
The portfolio managers manage other accounts for Chartwell including
institutional portfolios of similar investment styles. None of these portfolio
managers manage any hedge funds nor any accounts with performance-based fees.
When registered funds and investment accounts are managed side-by-side, firm
personnel must strictly follow the policies and procedures outlined in our Trade
Allocation Policy to ensure that accounts are treated in a fair and equitable
manner, and that no client or account is favored over another. When registered
funds and investment accounts are trading under the same investment product, and
thus trading the same securities, shares are allocated on a pro-rata basis based
on market value, and all portfolios obtain the same average price.
On a monthly basis, a member of Chartwell's Compliance Group, oversees the
performance calculation process handled in Operations, and completes a
spreadsheet of monthly portfolio returns by client. This person provides this
spreadsheet to the CEO, CCO and various investment personnel for their review.
Any performance dispersion noted by anyone on the distribution list is
investigated by a member of Chartwell's Compliance Group by reviewing the
underlying transactional detail, holdings & security weightings by portfolio.
This monthly process ensures that all portfolios that are managed under the same
investment product are treated fairly, and traded in accordance with firm
policy.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF DECEMBER 31, 2012
The compensation paid to a Chartwell portfolio manager and analyst consists of
base salary, annual bonus, ownership distribution, and an annual profit-sharing
contribution to the firm's retirement plan.
A portfolio manager's and analyst's base salary is determined by Chartwell's
Compensation Committee and is reviewed at least annually. A portfolio manager's
and analyst's experience, historical performance, and role in firm or product
team management are the primary considerations in determining the base salary.
Industry benchmarking is utilized by the Compensation Committee on an annual
basis.
Annual bonuses are determined by the Compensation Committee based on a number of
factors. The primary factor is a performance-based compensation schedule that is
applied to all accounts managed by a portfolio manager within a particular
investment product, and is not specific to any one account. The bonus is
calibrated based on the gross composite performance of such accounts versus the
appropriate benchmark and peer group rankings. Portfolio construction, sector
and security weighting, and performance are reviewed by the Compliance Committee
and Compensation Committee to prevent a manager from taking undue risks.
Additional factors used to determine the annual bonus include the portfolio
manager's contribution as an analyst, product team management, and contribution
to the strategic planning and development of the investment group as well as the
firm.
Ownership distributions are paid to a portfolio manager and analyst based on the
portfolio manager's and analyst's level and type of ownership interest(s). There
are currently three types of equity: (1) straight limited partnership interests,
(2) Class B share interests, and (3) phantom stock interests. In all cases, the
annual ownership distributions are paid to employees based on their respective
percentage equity interest(s) multiplied by total net cash distributions paid
during the year.
Chartwell also provides a profit sharing and 401(k) plan for all employees. The
annual profit sharing contribution and/or matching contribution from Chartwell
is discretionary and based solely on the profitability of the firm.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF DECEMBER 31, 2011:
Name of Portfolio Manager or Dollar Range of Fund Shares
---------------------------- ---------------------------
Team Member Beneficially Owned
----------- ------------------
Bernard P. Schaffer $100,000-500,000
Kevin A. Melich $0
Peter M. Schofield $0
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the
1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Enhanced Equity Income Fund
--------------------------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date February 19, 2013
---------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date February 19, 2013
---------------------------
By (Signature and Title)* /s/ James M. Dykas
------------------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date February 19, 2013
---------------------------
* Print the name and title of each signing officer under his or her signature.