As filed with the Securities and Exchange Commission on August 27, 2009.
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1933 Act File No. 333-124146
1940 Act File No. 811-21756
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement.
[ ] Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Section 240.14a-12
FIRST TRUST STRATEGIC HIGH INCOME FUND
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
FIRST TRUST STRATEGIC HIGH INCOME FUND
FIRST TRUST STRATEGIC HIGH INCOME FUND II
FIRST TRUST STRATEGIC HIGH INCOME FUND III
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
August 24, 2009
Dear Shareholders:
The accompanying materials relate to the Joint Special Meetings of
Shareholders (referred to as the "Meeting") of First Trust Strategic High Income
Fund, First Trust Strategic High Income Fund II and First Trust Strategic High
Income Fund III (each, a "Fund" and collectively, the "Funds"). The Meeting will
be held at the offices of First Trust Advisors L.P., 120 East Liberty Drive,
Suite 400, Wheaton, Illinois 60187, on Wednesday, October 14, 2009, at 4:00 p.m.
Central Time.
At the Meeting, you will be asked (1) to vote on a proposal to approve a
new investment sub-advisory agreement with a new sub-adviser for your Fund, (2)
to vote on a proposal to approve a change in your Fund's industry concentration
policy so that it will no longer concentrate in residential mortgage-backed
securities, and (3) to transact such other business as may properly come before
the Meeting and any adjournments and postponements thereof. The Board of
Trustees of each Fund is recommending that shareholders approve the proposals.
The proposals are described in the accompanying Notice of Joint Special Meetings
of Shareholders and Joint Proxy Statement.
Your participation at the Meeting is very important. If you cannot attend
the Meeting, you may participate by proxy. As a Shareholder, you cast one vote
for each share of a Fund that you own and a proportionate fractional vote for
any fraction of a share that you own. Please take a few moments to read the
enclosed materials and then cast your votes using one of the methods indicated
on the enclosed proxy card.
Voting takes only a few minutes. Each Shareholder's vote is important. Your
prompt response will be much appreciated.
After you have voted on the proposals, please be sure to sign your proxy
card and return it in the enclosed postage-paid envelope. Alternatively, you may
vote by telephone by following the instructions on the proxy card.
We appreciate your participation in this important Meeting.
Thank you.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board
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IF YOU NEED ANY ASSISTANCE, OR HAVE ANY QUESTIONS REGARDING THE PROPOSALS OR HOW
TO VOTE YOUR SHARES, CALL YOUR FUND'S PROXY SOLICITOR, THE ALTMAN GROUP, INC.,
AT (866) 530-8634 WEEKDAYS FROM 9:00 A.M. TO 10:00 P.M. EASTERN TIME.
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INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to you
and avoid the time and expense involved in validating your vote if you fail to
sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the registration
on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party signing
should conform exactly to the name shown in the registration.
3. All Other Accounts: The capacity of the individual signing the proxy should
be indicated unless it is reflected in the form of registration. For example:
REGISTRATION VALID SIGNATURE
CORPORATE ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78 Jane B. Doe
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr., UGMA John B. Smith
(2) John B. Smith John B. Smith, Jr., Executor
FIRST TRUST STRATEGIC HIGH INCOME FUND
FIRST TRUST STRATEGIC HIGH INCOME FUND II
FIRST TRUST STRATEGIC HIGH INCOME FUND III
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
NOTICE OF JOINT SPECIAL MEETINGS OF SHAREHOLDERS
To be held on October 14, 2009
August 24, 2009
To the Shareholders of the above Funds:
Notice is hereby given that the Joint Special Meetings of Shareholders
(referred to as the "Meeting") of First Trust Strategic High Income Fund, First
Trust Strategic High Income Fund II and First Trust Strategic High Income Fund
III (each, a "Fund" and collectively, the "Funds"), each a Massachusetts
business trust, will be held at the offices of First Trust Advisors L.P., 120
East Liberty Drive, Suite 400, Wheaton, Illinois 60187, on Wednesday, October
14, 2009, at 4:00 p.m. Central Time, for the following purposes:
1. For each Fund, to approve a new investment sub-advisory agreement
among such Fund, First Trust Advisors L.P., as investment adviser, and
Hyperion Brookfield Asset Management, Inc., as investment sub-adviser.
2. For each Fund, to approve a change in such Fund's industry
concentration policy from being concentrated in residential
mortgage-backed securities to being non-concentrated.
3. For each Fund, to transact such other business as may properly come
before the Meeting (including any adjournments or postponements).
The close of business on Monday, July 27, 2009 has been fixed as the record
date for the determination of Shareholders entitled to notice of and to vote at
the Meeting and any adjournments or postponements thereof.
By order of the Board of Trustees,
/s/ W. Scott Jardine
W. Scott Jardine
Secretary
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SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING ARE REQUESTED TO PROMPTLY
COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE ENCLOSED ENVELOPE WHICH
DOES NOT REQUIRE POSTAGE IF MAILED IN THE CONTINENTAL UNITED STATES.
INSTRUCTIONS FOR THE PROPER EXECUTION OF PROXIES ARE SET FORTH ON THE INSIDE
COVER. ALTERNATIVELY, SHAREHOLDERS MAY VOTE BY TELEPHONE BY FOLLOWING THE
INSTRUCTIONS ON THE PROXY CARD. IF YOU NEED ANY ASSISTANCE, OR HAVE ANY
QUESTIONS REGARDING THE PROPOSALS OR HOW TO VOTE YOUR SHARES, CALL YOUR FUND'S
PROXY SOLICITOR, THE ALTMAN GROUP, INC., AT (866) 530-8634 WEEKDAYS FROM 9:00
A.M. TO 10:00 P.M. EASTERN TIME.
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FIRST TRUST STRATEGIC HIGH INCOME FUND
FIRST TRUST STRATEGIC HIGH INCOME FUND II
FIRST TRUST STRATEGIC HIGH INCOME FUND III
JOINT SPECIAL MEETINGS OF SHAREHOLDERS
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
JOINT PROXY STATEMENT
August 24, 2009
This Joint Proxy Statement and the enclosed proxy card will first be mailed to
shareholders on or about August 31, 2009.
This Joint Proxy Statement is furnished in connection with the solicitation of
proxies by the Boards of Trustees (each, a "Board" and collectively, the
"Boards") of First Trust Strategic High Income Fund (the "High Income Fund"),
First Trust Strategic High Income Fund II (the "High Income Fund II") and First
Trust Strategic High Income Fund III (the "High Income Fund III" and, together
with the High Income Fund and the High Income Fund II, the "Funds"), each a
Massachusetts business trust, for use at the Joint Special Meetings of
Shareholders of the Funds to be held on Wednesday, October 14, 2009, at 4:00
p.m. Central Time, at the offices of First Trust Advisors L.P. ("First Trust
Advisors" or the "Adviser"), located at 120 East Liberty Drive, Suite 400,
Wheaton, Illinois 60187, and at any adjournments or postponements thereof
(referred to collectively as the "Meeting"). A Notice of Joint Special Meetings
of Shareholders and a proxy card accompany this Joint Proxy Statement. The
Boards of the Funds have determined that the use of this Joint Proxy Statement
is in the best interests of each Fund in light of the same matters being
considered and voted on by shareholders.
As discussed more fully below, shareholders of each Fund are being asked:
1. To vote to approve a new investment sub-advisory
agreement among the Fund, the Adviser and Hyperion
Brookfield Asset Management, Inc., as investment sub-adviser.
2. To vote to approve a change in the Fund's industry
concentration policy from being concentrated in residential
mortgage-backed securities to being non-concentrated.
3. To transact such other business as may properly come
before the Meeting (including any adjournments or
postponements).
Proxy solicitations will be made, beginning on or about August 31, 2009,
primarily by mail. However, proxy solicitations may also be made by telephone or
personal interviews conducted by (i) officers of the Funds; (ii) The Altman
Group, Inc. ("Altman"), a proxy solicitor; (iii) First Trust Advisors; (iv) PNC
Global Investment Servicing (U.S.) Inc. ("PNC"), the administrator, accounting
agent and transfer agent of each Fund and an indirect, majority-owned subsidiary
of The PNC Financial Services Group, Inc.; or (v) any affiliates of the
foregoing entities.
The costs of preparing, printing and mailing this Joint Proxy Statement and its
enclosures and all other costs in connection with the solicitation of proxies
(including amounts charged by Altman for its proxy solicitation services, which
amounts are expected to be approximately $55,000 for the High Income Fund,
$46,000 for the High Income Fund II and $56,000 for the High Income Fund III),
will be shared equally by the Adviser and the respective Funds. The Adviser and
the Funds also will reimburse brokerage firms and others for their expenses in
forwarding solicitation materials to the beneficial owners of Fund shares.
The close of business on July 27, 2009 has been fixed as the record date (the
"Record Date") for the determination of shareholders entitled to notice of and
to vote at the Meeting. Each Fund has one class of shares of beneficial interest
with a par value of $0.01 per share, known as common shares ("Shares").
Shareholders of record on the Record Date are entitled to one vote for each
Share the shareholder owns and a proportionate fractional vote for any fraction
of a Share the shareholder owns.
On the Record Date, each Fund had the following number of Shares outstanding:
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FUND AND TICKER SYMBOL SHARES OUTSTANDING
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First Trust Strategic High Income Fund (FHI) 9,150,594
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First Trust Strategic High Income Fund II (FHY) 9,533,776
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First Trust Strategic High Income Fund III (FHO) 9,156,182
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Shares of each Fund are listed on the New York Stock Exchange under the ticker
symbol shown above.
For shareholders voting by mail, if the enclosed proxy card is properly executed
and returned in time to be voted at the Meeting, the Fund Shares represented
thereby will be voted in accordance with the instructions marked thereon, or, if
no instructions are marked thereon, will be voted at the discretion of the
persons named on the proxy card. Accordingly, unless instructions to the
contrary are marked thereon, a properly executed and returned proxy will be
voted FOR the proposal to approve the new investment sub-advisory agreement, FOR
the proposal to approve the change in the industry concentration policy, and at
the discretion of the named proxies on any other matters that may properly come
before the Meeting, as deemed appropriate. Any shareholder who has given a proxy
has the right to revoke it at any time prior to its exercise either by attending
the Meeting and voting his or her or its Shares in person, or by timely
submitting a letter of revocation or a later-dated proxy to the applicable Fund
at the above address. A list of shareholders entitled to notice of and to be
present and to vote at the Meeting will be available at the offices of the
Funds, 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, for
inspection by any shareholder during regular business hours prior to the
Meeting. Shareholders will need to show valid identification and proof of Share
ownership to be admitted to the Meeting or to inspect the list of shareholders.
Under the By-Laws of each Fund, a quorum is constituted by the presence in
person or by proxy of the holders of thirty-three and one-third percent
(33-1/3%) of the voting power of the outstanding shares entitled to vote on a
matter. For the purposes of establishing whether a quorum is present, all Shares
present and entitled to vote, including abstentions and broker non-votes (i.e.,
Shares held by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners or the persons entitled to vote and (ii) the
broker or nominee does not have discretionary voting power), shall be counted.
2
Any meeting of shareholders may be postponed prior to the meeting with notice to
the shareholders entitled to vote at that meeting. Any meeting of shareholders
may, by action of the chairman of the meeting, be adjourned to permit further
solicitation of proxies without further notice with respect to one or more
matters to be considered at such meeting to a designated time and place, whether
or not a quorum is present with respect to such matter. In addition, upon motion
of the chairman of the meeting, the question of adjournment may be submitted to
a vote of the shareholders, and in that case, any adjournment must be approved
by the vote of holders of a majority of the Shares present and entitled to vote
with respect to the matter or matters adjourned, and without further notice.
Unless a proxy is otherwise limited in this regard, any Shares present and
entitled to vote at a meeting, including broker non-votes, may, at the
discretion of the proxies named therein, be voted in favor of such an
adjournment or adjournments.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE
SHAREHOLDER MEETING TO BE HELD ON OCTOBER 14, 2009. This Joint Proxy Statement
is available on the Internet at:
http://www.ftportfolios.com/redirect.aspx?keyword=PROXYFHIFHOFHY.
The Funds' most recent annual and semi-annual reports are also available on the
Internet at:
(1) http://www.ftportfolios.com/Retail/cef/CEFfundnews.aspx?Ticker=FHI (for
the High Income Fund);
(2) http://www.ftportfolios.com/Retail/cef/CEFfundnews.aspx?Ticker=FHY (for
the High Income Fund II); and
(3) http://www.ftportfolios.com/Retail/cef/CEFfundnews.aspx?Ticker=FHO (for
the High Income Fund III). The Funds will furnish, without charge, copies of
their most recent annual and semi- annual reports to any shareholder upon
request. To request a copy, please write to the Adviser at 120 East Liberty
Drive, Suite 400, Wheaton, Illinois 60187, or call (800) 988-5891. The High
Income Fund mailed to shareholders a copy of its annual report for the last
fiscal year on December 30, 2008, the High Income Fund II mailed to shareholders
a copy of its annual report for the last fiscal year on December 30, 2008, and
the High Income Fund III mailed to shareholders a copy of its annual report for
the last fiscal year on April 1, 2009.
You may call (800) 988-5891 for information on how to obtain directions to be
able to attend the Meeting and vote in person.
In order that your Shares may be represented at the Meeting, please
vote your proxy as soon as possible either by mail or by telephone, as
indicated on the enclosed proxy card. If voting by mail, you are
requested to:
o indicate your instructions on the proxy card;
o date and sign the proxy card;
o mail the proxy card promptly in the enclosed
envelope which requires no postage if mailed
in the continental United States; and
o allow sufficient time for the proxy card to be
received by 4:00 p.m. Central Time, on Wednesday,
October 14, 2009. (However, proxies received after
this date may still be voted in the event
of an adjournment or postponement to a later date.)
The date of this Joint Proxy Statement is August 24, 2009.
3
PROPOSAL 1: APPROVAL OF A NEW INVESTMENT SUB-ADVISORY AGREEMENT FOR EACH FUND
BACKGROUND AND REASON FOR VOTE
Pursuant to separate investment sub-advisory agreements among Valhalla Capital
Partners, LLC ("Valhalla" or the "Prior Sub-Adviser"), the Adviser and the
respective Fund (each a "Prior Sub-Advisory Agreement"), Valhalla acted as
investment sub-adviser to each Fund until June 29, 2009. First Trust Portfolios
L.P., an affiliate of the Adviser, owns a minority interest in Valhalla. On May
1, 2009, Valhalla notified each Fund of its resignation as investment
sub-adviser in accordance with the terms of the respective Prior Sub-Advisory
Agreement, effective June 30, 2009. In anticipation of the effective date of
Valhalla's resignation, the Adviser considered various candidates to succeed
Valhalla and recommended to each Board that Hyperion Brookfield Asset
Management, Inc. ("HBAM"), an investment adviser registered with the Securities
and Exchange Commission (the "SEC") pursuant to the Investment Advisers Act of
1940, as amended (the "Advisers Act"), be appointed as the new sub-adviser to
the Funds. Accordingly, at a meeting of the Boards of the Funds held on June 29,
2009 (the "Board Meeting"), the Board of each Fund determined that the
appointment of HBAM was in the best interests of the respective Fund. In
addition, each Board authorized the termination of the respective Prior
Sub-Advisory Agreement, effective June 29, 2009 (the "Termination Date").
As permitted under the Investment Company Act of 1940, as amended (the "1940
Act"), at the Board Meeting, to ensure the continuation of investment
sub-advisory services to the Funds after the Termination Date, the Board of
Trustees of each Fund, including a majority of the Trustees who are not
"interested persons," as that term is defined in the 1940 Act, of the Fund (such
Trustees, the "Independent Trustees"), approved for the respective Fund an
interim sub-advisory agreement (each, an "Interim Sub-Advisory Agreement" and,
collectively, the "Interim Sub-Advisory Agreements") among the Adviser, the
respective Fund and HBAM. The Interim Sub-Advisory Agreements have been in
effect since June 29, 2009. In addition, at the Board Meeting, the Board of
Trustees of each Fund, including a majority of the Independent Trustees,
approved for the respective Fund, subject to shareholder approval, a new
sub-advisory agreement (each such agreement, a "New Sub-Advisory Agreement" and,
collectively, the "New Sub-Advisory Agreements") among the Adviser, the
respective Fund and HBAM.
Section 15(a) of the 1940 Act generally requires that investment advisory
agreements (including investment sub-advisory agreements) be approved by
shareholders; however, Rule 15a-4 promulgated under the 1940 Act ("Rule 15a-4")
provides a temporary exemption from the shareholder approval requirement if a
previous advisory contract was terminated due to certain events. Pursuant to
Rule 15a-4, the Interim Sub-Advisory Agreement for each Fund will be in effect
no longer than through November 26, 2009 (i.e., 150 days after the Termination
Date). If shareholders of a Fund do not approve the Fund's New Sub-Advisory
Agreement by that date, the respective Board will take such action as it deems
to be in the best interests of the Fund, which might include seeking approval of
a new investment sub-advisory agreement or taking any other steps deemed
appropriate by the Board. Each Interim Sub-Advisory Agreement will terminate
upon the approval by shareholders of the applicable New Sub-Advisory Agreement.
In addition, each Interim Sub-Advisory Agreement may be terminated by action of
the respective Board or by a vote of a majority of the outstanding voting
securities (as defined in the 1940 Act and rules and regulations promulgated
thereunder) of the respective Fund upon 60 days' written notice to HBAM.
4
CERTAIN INFORMATION REGARDING PRIOR SUB-ADVISORY AGREEMENTS
Set forth below, with respect to each Prior Sub-Advisory Agreement,
are: (1) the date of the Prior Sub-Advisory Agreement; (2) the date on which the
Prior Sub-Advisory Agreement was last submitted to a vote of the shareholders of
the applicable Fund and the purpose of such submission; and (3) the actions
taken by the applicable Fund's Board with respect to the Prior Sub-Advisory
Agreement since the beginning of the Fund's last fiscal year:
-------------------------- ------------------ -------------------------------- ----------------------------------------------
DATE OF PRIOR
SUB-ADVISORY DATE AND PURPOSE OF LAST BOARD ACTION SINCE BEGINNING OF
FUND AGREEMENT SUBMISSION TO SHAREHOLDERS LAST FISCAL YEAR
-------------------------- ------------------ -------------------------------- ----------------------------------------------
High Income Fund April 28, 2006 April 21, 2006 Approval of continuation (March 3, 2008;
(Previous sub-advisory March 1-2, 2009)
agreement automatically Termination (June 29, 2009)
terminated as the result of an
"assignment" as defined in the
1940 Act)
-------------------------- ------------------ -------------------------------- ----------------------------------------------
High Income Fund II March 28, 2006 March 21, 2006 Approval of continuation (March 3, 2008;
(Initial shareholder approval) March 1-2, 2009)
Termination (June 29, 2009)
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High Income Fund III March 27, 2007 March 21, 2007 Approval of continuation (March 1-2, 2009)
(Initial shareholder approval) Termination (June 29, 2009)
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HYPERION BROOKFIELD ASSET MANAGEMENT, INC.
General and Organizational Information
HBAM, an indirect wholly-owned subsidiary of Brookfield Asset Management Inc.
("BAM"),(1) is a Delaware corporation organized in 1989 and a registered
investment adviser under the Advisers Act. The business address of HBAM and its
officers and directors is Three World Financial Center, 200 Vesey Street, 10th
Floor, New York, New York 10281-1010. As of June 30, 2009, HBAM and its
affiliates had approximately $16.4 billion in assets under management. HBAM's
clients include pension plans, foundations and endowments, insurance companies,
financial institutions, mutual funds, closed-end funds and structured products.
HBAM also provides portfolio evaluation and consultation services. In its
investment process, HBAM focuses on relative value opportunities, particularly
in the mortgage-backed securities and asset-backed securities markets. BAM, an
Ontario, Canada corporation, is a global asset manager focused on property,
power and other infrastructure assets and has its principal place of business at
Brookfield Place, 181 Bay Street, Suite 300, P.O. Box 762, Toronto, Ontario M5J
2T3.
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(1) HBAM is an indirect wholly-owned subsidiary of BAM. HCM Holdings, Inc.
("HCM") is the sole shareholder of HBAM. HCM is a wholly-owned
subsidiary of Brookfield Investment Management Inc. ("BIM"). BIM is a
wholly-owned subsidiary of Brookfield US Corporation, which is a
wholly-owned subsidiary of Brascan US Holdings Inc. Brascan US Holdings
Inc. is a wholly-owned subsidiary of BAM. HBAM, HCM, BIM and Brookfield
US Corporation are each located at Three World Financial Center, 200
Vesey Street, 10th Floor, New York, New York 10281-1010. BAM and
Brascan US Holdings Inc. are each located at Brookfield Place, 181 Bay
Street, Suite 300, P.O. Box 762, Toronto, Ontario M5J 2T3.
5
John J. Feeney, Jr. is the chairman of the board, the sole director and
the president and chief executive officer of HBAM. Mr. Feeney's business address
is c/o HBAM, Three World Financial Center, 200 Vesey Street, 10th Floor, New
York, New York 10281-1010.
Portfolio Manager Information
The portfolio managers identified below are currently responsible for the
day-to-day management of each Fund's portfolio pursuant to the applicable
Interim Sub-Advisory Agreement. It is expected that they will continue to act as
the Funds' portfolio managers if shareholders approve the New Sub-Advisory
Agreements.
Dana E. Erikson, CFA, Managing Director. Mr. Erikson, Senior Portfolio Manager
and the co-Head of the HBAM High Yield Team, is responsible for HBAM's corporate
high yield and leveraged loan exposures and the establishment of portfolio
objectives and strategies. He is a member of HBAM's Investment Committee. Mr.
Erikson has over 21 years of investment experience. Prior to joining HBAM in
September 2006, he was with Evergreen Investments or one of its predecessor
firms since 1996. He was a senior portfolio manager and the Head of the High
Yield team. Prior to that, he was the Head of High Yield Research. Prior to
Evergreen, Mr. Erikson was an Associate Portfolio Manager for Prospect Street
Investment Management Company. Additionally, he was an Analyst with the Kellett
Group and a Research Assistant with Robert R. Nathan Associates. Mr. Erikson
received a BA in Economics from Brown University and an MBA, with honors, from
Northeastern University. He is a member of the Boston Security Analysts Society.
Anthony Breaks, CFA, Director. Mr. Breaks, Portfolio Manager, is responsible for
portfolio management of structured products and for executing structured product
financings for HBAM and its partners. Mr. Breaks is also head of HBAM's Short
Term Investments and Financing business. He joined HBAM in September 2005 from
BAM (formerly known as Brascan), where he worked since 2002. At Brascan he was
responsible for portfolio investments and credit analysis for a reinsurance
affiliate, execution and management of a synthetic collateralized debt
obligation ("CDO"), and development of insurance related investment products.
Prior to joining Brascan, Mr. Breaks was a Director at Liberty Hampshire since
2000 and was responsible for structuring, restructuring and executing several
CDOs, as well as ongoing monitoring and credit analysis for the CDO assets. Mr.
Breaks began his career at Merrill Lynch where he worked in trading and
structuring capacities in CDOs, adjustable rate mortgages and medium-term notes.
Mr. Breaks earned a BS in Electrical Engineering from the Massachusetts
Institute of Technology.
6
SIMILAR INVESTMENT COMPANIES ADVISED BY HBAM
HBAM currently acts as investment adviser to several other investment companies,
set forth in the table below, with investment objectives and policies that are
similar to, or that overlap with, those of the Funds:
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APPROXIMATE NET
ASSETS AS OF INVESTMENT ADVISORY
FUND JUNE 30, 2009 ANNUAL FEE RATE
---------------------------------------------------------------- ---------------------- -------------------------------------
Helios Advantage Income Fund, Inc. (HAV)(1) $ 42,972,000 0.65% of average daily net assets
---------------------------------------------------------------- ---------------------- -------------------------------------
Helios High Income Fund, Inc. (HIH)(1) $ 32,152,000 0.65% of average daily net assets
---------------------------------------------------------------- ---------------------- -------------------------------------
Helios Multi-Sector High Income Fund, Inc. (HMH)(1) $ 35,502,000 0.65% of average daily net assets
---------------------------------------------------------------- ---------------------- -------------------------------------
Helios Strategic Income Fund, Inc. (HSA)(1) $ 30,842,000 0.65% of average daily net assets
---------------------------------------------------------------- ---------------------- -------------------------------------
Helios Strategic Mortgage Income Fund, Inc. (HSM)(2) $ 56,651,000 0.65% of average weekly net assets
---------------------------------------------------------------- ---------------------- -------------------------------------
Helios Total Return Fund, Inc. (HTR)(2) $156,765,000 0.65% of average weekly net assets
---------------------------------------------------------------- ---------------------- -------------------------------------
Hyperion Brookfield Collateralized Securities Fund, Inc.*(3) $169,604,000 0.40% of average weekly net assets
---------------------------------------------------------------- ---------------------- -------------------------------------
Hyperion Brookfield Income Fund, Inc.*(4) $ 34,043,000 0.50% of average weekly net assets
---------------------------------------------------------------- ---------------------- -------------------------------------
----------------
* Not publicly traded.
(1) Annual operating expenses are capped at 1.30% of the fund's net assets.
These funds are subject to an additional annual fee payable to HBAM of
0.15% of the fund's average daily net assets for administrative services.
(2) These funds are subject to an additional annual fee payable to HBAM of
0.20% of average weekly net assets for administrative services.
(3) The fund's operating expenses are capped at 0.40% of the fund's net assets.
(4) The fund's operating expenses are capped at 0.50% of the fund's net assets.
COMPARISON OF CERTAIN TERMS OF THE NEW SUB-ADVISORY AGREEMENTS AND PRIOR
SUB-ADVISORY AGREEMENTS
Below is a brief comparison of certain terms of the Prior Sub-Advisory
Agreements to the corresponding terms of the New Sub-Advisory Agreements.
Although the terms of the New Sub-Advisory Agreements and the Prior Sub-Advisory
Agreements are similar in certain respects, there are some differences of which
you should be aware. For a more complete understanding of the New Sub-Advisory
Agreements, please refer to the form of the New Sub-Advisory Agreement, which
applies to each Fund, provided in Appendix A hereto. The summary of the terms
and provisions of the New Sub-Advisory Agreements below is qualified in all
respects by the terms and conditions of the form of New Sub-Advisory Agreement.
Investment Advisory Services. Both the Prior Sub-Advisory Agreement and the New
Sub-Advisory Agreement for each Fund provide that the sub-adviser will furnish
an investment program in respect of, make investment decisions for, and place
all orders for the purchase and sale of securities for the Fund's investment
portfolio, all on behalf of the Fund and subject to the supervision of the Board
and the Adviser. As was the case under each Prior Sub-Advisory Agreement, under
each New Sub-Advisory Agreement, the sub-adviser is required to monitor the
respective Fund's investments and to comply with the provisions of the
respective Fund's Declaration of Trust and By-Laws and the stated investment
objectives, policies and restrictions of the Fund; however, with respect to the
obligation to monitor a Fund's investments, the New Sub-Advisory Agreements
state that except for the sub-adviser's compliance responsibilities with respect
to its portfolio services, the Adviser will remain responsible for the oversight
7
of compliance with the Fund's policies and procedures and its Prospectus and
Statement of Additional Information. In addition, under each New Sub-Advisory
Agreement, the sub-adviser will assist in the valuation of portfolio securities
held by the Fund as requested by the Adviser or the Fund; the Prior Sub-Advisory
Agreements did not include a corresponding provision. Moreover, each New
Sub-Advisory Agreement provides that unless the applicable Board determines
otherwise, the sub-adviser will vote proxies solicited by or with respect to the
issuers of securities corresponding to assets of the Fund's investment portfolio
allocated by the Adviser to the sub-adviser; in contrast, the Prior Sub-Advisory
Agreement for the High Income Fund provided that the Adviser or its designee
would vote such proxies, and the Prior Sub-Advisory Agreements for the other
Funds did not include a specific related provision.
Brokerage. As was the case under the Prior Sub-Advisory Agreements, each New
Sub-Advisory Agreement authorizes the sub-adviser to select the brokers or
dealers that will execute the purchases and sales of portfolio investments for
the respective Fund and directs the sub-adviser to use its commercially
reasonable efforts to obtain best execution, which includes most favorable net
results and execution of the respective Fund's orders, taking into account all
appropriate factors, including price, dealer spread or commission, size and
difficulty of the transaction and research or other services provided.
Fees. Under each Prior Sub-Advisory Agreement, for services provided and
expenses assumed, the Adviser agreed to pay the sub-adviser a fee equal to the
annual rate of 0.40% of the Fund's "Managed Assets." Under each Interim
Sub-Advisory Agreement, the rate of compensation to be paid by the Adviser to
the sub-adviser is also equal to the annual rate of 0.40% of the Fund's "Managed
Assets." Under each New Sub-Advisory Agreement, the rate of compensation to be
paid by the Adviser to the sub-adviser has been increased to 0.45% of the Fund's
"Managed Assets." This increase in fees will be borne entirely by the Adviser
out of the investment advisory fee paid to the Adviser by the Fund. The
investment advisory fee rate paid to the Adviser by each Fund will not change.
Although there are some wording differences between the Prior Sub-Advisory
Agreements and the New Sub-Advisory Agreements, the term "Managed Assets"
generally means the average daily gross asset value of the Fund (including
assets attributable to the Fund's preferred shares, if any, and the principal
amount of borrowings, if any), minus the sum of the Fund's accrued and unpaid
dividends on any outstanding preferred shares and accrued liabilities (other
than the principal amount of any borrowings incurred, commercial paper or notes
issued by the Fund); the liquidation preference of any outstanding preferred
shares of the Fund is not treated as a liability for purposes of determining
"Managed Assets."
Set forth below for each Fund are, for the Fund's past fiscal year: (1) the
aggregate amount of the fees paid to the Prior Sub-Adviser under the Prior
Sub-Advisory Agreement (the "Prior Actual Amount"); (2) the amount that the
Prior Sub-Adviser would have received if the proposed fees under the
corresponding New Sub-Advisory Agreement had been in place during the same
period (the "Prior Hypothetical Amount"); and (3) the fee increase (expressed as
a percentage of the Prior Actual Amount, determined by dividing (a) the
difference between the Prior Hypothetical Amount and the Prior Actual Amount by
(b) the Prior Actual Amount):
---------------------- ----------------- ------------------ --------------------
PRIOR ACTUAL INCREASE AS A
AMOUNT PAID BY PRIOR HYPOTHETICAL PERCENTAGE OF PRIOR
FUND ADVISER AMOUNT ACTUAL AMOUNT
---------------------- ----------------- ------------------ --------------------
High Income Fund $557,598 $627,298 12.50%
---------------------- ----------------- ------------------ --------------------
High Income Fund II $633,470 $712,654 12.50%
---------------------- ----------------- ------------------ --------------------
High Income Fund III $274,249 $308,530 12.50%
---------------------- ----------------- ------------------ --------------------
8
In addition, under each Prior Sub-Advisory Agreement, the sub-adviser agreed to
pay the Adviser one-half of certain organizational costs and offering costs;
however, given that these costs have been fully paid, the corresponding New
Sub-Advisory Agreement does not contain a similar provision.
During their respective past fiscal years, the Funds did not make any payments
to HBAM or its affiliates. In addition, during their respective past fiscal
years, the Funds did not pay any brokerage commissions to any affiliates of
HBAM.
Under each Interim Sub-Advisory Agreement, for services provided and expenses
assumed, the Adviser is obligated to pay HBAM a fee equal to an annual rate of
0.40% of the Fund's "Managed Assets." As of August 1, 2009, the Adviser had paid
the following amounts to HBAM under the applicable Interim Sub-Advisory
Agreement:
----------------------------------- --------------------------------------------
AMOUNT PAID TO HBAM BY ADVISER UNDER
INTERIM SUB-ADVISORY AGREEMENT
FUND AS OF AUGUST 1, 2009
----------------------------------- --------------------------------------------
High Income Fund $9,583.47
----------------------------------- --------------------------------------------
High Income Fund II $15,675.40
----------------------------------- --------------------------------------------
High Income Fund III $11,911.76
----------------------------------- --------------------------------------------
Payment of Expenses. Under each Prior Sub-Advisory Agreement, the sub-adviser
agreed to pay all expenses incurred by it in connection with its activities
under such Agreement other than the "cost of securities and other assets
(including brokerage commissions, if any)" purchased for the applicable Fund.
The New Sub-Advisory Agreements state that the sub-adviser will pay all expenses
incurred by it in connection with its activities under the respective Agreement
other than the "cost of securities and other assets (including brokerage
commissions, transfer fees, registration costs, taxes and other similar costs
and transaction-related expenses and fees arising out of transactions for the
Fund, if any)" purchased for the Fund. Each New Sub-Advisory Agreement also
provides that the sub-adviser is not responsible for payment of any taxes due on
capital or income held or collected for the applicable Fund.
Limitation of Liability; Indemnification. As was the case under the Prior
Sub-Advisory Agreements, the New Sub-Advisory Agreements provide that the
sub-adviser will not be liable for, and the applicable Fund and the Adviser will
not take any action against the sub-adviser to hold the sub-adviser liable for,
any error of judgment or mistake of law or for any loss suffered by the Fund or
the Adviser in connection with the performance of the sub-adviser's duties under
the Agreement, except for a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the sub-adviser in the performance of its
duties under such Agreement, or by reason of its reckless disregard of its
obligations and duties under such Agreement.
In addition, a provision regarding indemnification of the sub-adviser that was
not included in the Prior Sub-Advisory Agreements has been included in each New
Sub-Advisory Agreement. It states generally that the Fund will indemnify and
hold harmless the sub-adviser, its affiliates and their directors, officers,
employees, agents and any person controlled by or controlling the sub-adviser
from and against, any and all losses, claims, damages, liabilities or litigation
(including reasonable attorney's fees and expenses) (collectively, "Losses")
incurred by the sub-adviser directly relating to the actions of any previous
sub-adviser of the Fund, including any claims by third parties (including, but
not limited to, any claims made or actions brought by any administrative or
regulatory authority) relating to, arising from or premised on any Losses
9
arising out of or relating to the Fund's investments in any securities that were
owned by the Fund on June 29, 2009; however, this indemnification arising from
or premised on any Losses arising out of or relating to the Fund's investments
in any securities that were owned by the Fund on June 29, 2009 will not apply in
the event that such Losses are finally judicially determined to have resulted
from the willful misfeasance, bad faith or gross negligence on the part of the
sub-adviser in the performance of its duties under the New Sub-Advisory
Agreement, or by reason of the sub-adviser's reckless disregard of its
obligations and duties under the New Sub-Advisory Agreement.
Continuance. Each Prior Sub-Advisory Agreement provided that it would be in
effect for an initial term and could be continued thereafter for successive
one-year periods if such continuance was specifically approved at least annually
in the manner required by the 1940 Act and rules and regulations thereunder. If
the shareholders of a Fund approve the applicable New Sub-Advisory Agreement,
the New Sub-Advisory Agreement will expire no later than two years after the
date shareholders approve the New Sub-Advisory Agreement, unless continued.
Thereafter, the New Sub-Advisory Agreement may be continued for successive
one-year periods if such continuance is specifically approved at least annually
in the manner required by the 1940 Act and rules and regulations thereunder.
Termination. As was the case under the Prior Sub-Advisory Agreements, each New
Sub-Advisory Agreement provides for termination (1) automatically in the event
of its assignment (as defined in the 1940 Act and rules and regulations
thereunder), (2) at any time without the payment of any penalty by the Adviser
or the sub-adviser upon 60 days' written notice to the other parties, and (3) by
action of the Board or by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act and rules and regulations
thereunder) upon 60 days' written notice to the sub-adviser without the payment
of any penalty. In addition, each Prior Sub-Advisory Agreement was, and each New
Sub-Advisory Agreement is, terminable at any time without the payment of any
penalty by the Adviser, by the Board or by vote of a majority of the outstanding
voting securities of the Fund (as defined in the 1940 Act and rules and
regulations thereunder) in the event that it is established by a court of
competent jurisdiction that the sub-adviser or any officer or director of the
sub-adviser has taken any action that results in a breach of the material
covenants of the sub-adviser set forth in the Agreement.
Certain Other Additional Provisions Included in New Sub-Advisory Agreements. In
addition to various miscellaneous updates and revisions, the New Sub-Advisory
Agreements contain certain provisions that were not included in the Prior
Sub-Advisory Agreements, including:
o a provision regarding maintenance by the applicable Fund's
custodian (or by a central depository selected by the custodian)
of the assets subject to the New Sub-Advisory Agreement;
o certain representations and warranties made by the applicable Fund,
the Adviser and the sub-adviser; and
o a provision regarding compliance with Rule 38a-1 under the
1940 Act (which relates to investment companies' compliance
procedures and practices) and related certifications.
10
INTERIM SUB-ADVISORY AGREEMENTS
The Interim Sub-Advisory Agreements are very similar to the respective New
Sub-Advisory Agreements. The differences include: (1) different fee rates as
noted above; (2) different dates and differences in wording to cross-reference
applicable dates; (3) a reference to Rule 15a-4 (described above) included in
the Interim Sub-Advisory Agreements; and (4) different term and termination
provisions.
BOARD CONSIDERATIONS
The Board of Trustees of each Fund, including a majority of the Independent
Trustees, approved the respective Interim Sub-Advisory Agreement and New
Sub-Advisory Agreement (collectively, the "Agreements") among such Fund, the
Adviser and HBAM at the Board Meeting. The Board determined that the terms of
the Agreements are fair and reasonable and in the best interests of each Fund.
On May 1, 2009, Valhalla notified the Funds and the Adviser of its resignation
as sub-adviser to each Fund, effective June 30, 2009 (the "Resignation"). The
Adviser immediately notified the Board and thereafter conducted a review of
potential sub-advisers to replace Valhalla. The Board considered that pursuant
to the 1940 Act, any sub-advisory agreement with a replacement sub-adviser would
require shareholder approval prior to such sub-adviser assuming its duties. In
light of the short amount of time available to the Funds and the Adviser to find
a suitable replacement for Valhalla and to obtain shareholder approval of a new
sub-advisory agreement, the Adviser proposed and the Board approved the
termination of the Prior Sub-Advisory Agreements for each Fund at the Board
Meeting. The termination of the Prior Sub-Advisory Agreements allowed each Fund
to rely on Rule 15a-4 under the 1940 Act to enter into an interim sub-advisory
agreement with a successor sub-adviser without first obtaining shareholder
approval during the period while shareholder approval of a new sub-advisory
agreement was sought.
Between the time the Funds and the Adviser received notice of the Resignation
and the Board Meeting, the Adviser reviewed potential sub-advisers for
consideration as the successor sub-adviser and determined to recommend that HBAM
serve as the new sub-adviser for the Funds. Prior to the Board Meeting, HBAM
provided to the Board written responses to questions posed by independent legal
counsel on behalf of the Independent Trustees. At the Board Meeting,
representatives from HBAM, including the prospective portfolio managers for the
Funds, made a presentation to the Board and responded to questions. In their
presentation, the HBAM representatives reviewed the process they followed in
transitioning as investment adviser to another group of similar closed-end
funds, and discussed the changes they proposed for the Funds' investment
policies and to the Funds' portfolios. The Board then discussed the presentation
and the materials provided. The Independent Trustees then met separately with
their independent legal counsel to discuss the information provided by HBAM and
the Adviser. Based on their consideration of all the information received, the
Trustees appointed HBAM as the interim sub-adviser to each Fund, pursuant to the
Interim Sub-Advisory Agreements, effective June 29, 2009. Also at the Board
Meeting, the Board approved the New Sub-Advisory Agreements and determined to
recommend them to shareholders of each Fund for their approval.
To reach its determinations as to the Agreements, the Board considered its
duties under the 1940 Act, as well as under the general principles of state law
in reviewing and approving advisory contracts; the requirements of the 1940 Act
in such matters; the fiduciary duty of investment advisers with respect to
11
advisory agreements and compensation; the standards used by courts in
determining whether investment company boards have fulfilled their duties; and
the factors to be considered by the Board in voting on such agreements. In its
evaluation of the Agreements, the Board considered a report from HBAM responding
to a request for information from counsel to the Independent Trustees. The
report, among other things, outlined the services to be provided by HBAM,
including the relevant personnel responsible for these services and their
experience; the proposed sub-advisory fee for each Fund as compared to fees
charged to other clients of HBAM; the potential for economies of scale, if any;
financial data on HBAM; any fall-out benefits to HBAM; and information on HBAM's
compliance program. The Board applied its business judgment to determine whether
the proposed arrangements between the Funds, the Adviser and HBAM are reasonable
business arrangements from the Funds' perspective as well as from the
perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, quality and extent
of services to be provided by HBAM under the Agreements. The Board considered
HBAM's investment style and the backgrounds of the investment personnel who
would be responsible for the day-to-day management of each Fund. The Board
reviewed performance information provided by HBAM for a composite of high yield
accounts managed by HBAM. The Board also discussed with the prospective
portfolio managers the approach they planned to take in transitioning the Funds'
portfolios. In light of the information presented and the considerations made,
the Board concluded that the nature, quality and extent of services to be
provided to the Funds by HBAM under the Agreements are expected to be
satisfactory.
The Board considered the sub-advisory fees to be paid under the Agreements. The
Board noted that, as required by Rule 15a-4, the sub-advisory fee under each
Interim Sub-Advisory Agreement would be the same as the fee paid under the Prior
Sub-Advisory Agreements. However, the Board considered that the sub-advisory fee
proposed under each New Sub-Advisory Agreement (the "New Sub-Advisory Fee")
would be five basis points higher than the fee paid under the Prior Sub-Advisory
Agreements. The Board considered that the New Sub-Advisory Fee was negotiated at
arm's length between the Adviser and HBAM, an unaffiliated third party, and
noted that the fees to be paid to HBAM would be paid by the Adviser from its
advisory fee. The Board also considered the advisory fees charged by HBAM to
other exchange-traded closed-end funds managed by HBAM with similar investment
objectives as the Funds. The Board noted that the advisory fees charged by HBAM
to these comparable funds were higher than the New Sub-Advisory Fee. On the
basis of all the information provided, the Board concluded that the sub-advisory
fees to be paid under the Agreements were reasonable and appropriate in light of
the nature, quality and extent of services expected to be provided by HBAM under
the Agreements.
The Board considered the information provided by HBAM on the estimated
profitability of the New Sub-Advisory Agreements to HBAM, noting that the
estimated profitability did not seem unreasonable in light of the nature,
quality and extent of services expected to be provided by HBAM under the New
Sub-Advisory Agreements. The Board noted that the overall management fee
structure reflects an appropriate level of sharing of any economies of scale.
The Board noted that HBAM currently does not intend to utilize soft dollars in
connection with its management of the Funds' portfolios, and did not anticipate
any fall-out benefits from its relationship with the Funds. The Adviser stated
that there may be additional opportunities for the Adviser to work with HBAM
going forward.
12
Based on all of the information considered and the conclusions reached, the
Board, including a majority of the Independent Trustees, determined that the
terms of the Agreements are fair and reasonable and that the approval of the
Agreements is in the best interests of each Fund. No single factor was
determinative in the Board's analysis.
SHAREHOLDER APPROVAL AND REQUIRED VOTE
To become effective for a Fund, the applicable New Sub-Advisory Agreement must
be approved by a vote of a majority of the outstanding voting securities of the
Fund. The "vote of a majority of the outstanding voting securities" is defined
in the 1940 Act as the vote of the lesser of (i) 67% or more of the Shares of
the Fund present at the Meeting if the holders of more than 50% of the
outstanding Shares of the Fund are present in person or represented by proxy; or
(ii) more than 50% of the outstanding Shares of the Fund. For purposes of
determining the approval of each New Sub-Advisory Agreement, abstentions and
broker non-votes will have the effect of a vote against the proposal.
THE BOARD OF TRUSTEES OF EACH FUND RECOMMENDS THAT SHAREHOLDERS VOTE FOR
PROPOSAL 1. If you need any assistance, or have any questions regarding Proposal
1 or how to vote your Shares, call your Fund's proxy solicitor, The Altman
Group, Inc., at (866) 530-8634 weekdays from 9:00 a.m. to 10:00 p.m. Eastern
Time.
13
PROPOSAL 2: APPROVAL OF CHANGE IN INDUSTRY CONCENTRATION POLICY
Certain investment restrictions of the Funds are matters of fundamental policy
and may not be changed with respect to a Fund without the approval of that
Fund's shareholders. In addition, under the 1940 Act, all funds are required to
have a fundamental policy about concentration of their investments in a
particular industry or group of industries. The staff of the SEC has taken the
position that the investment of 25% or more of a fund's assets in securities of
one or more issuers conducting their principal activities in the same industry
or group of industries constitutes concentration. Regarding concentration, the
Funds' current investment policies and/or restrictions, as applicable (for each
Fund, its "Current Concentration Policy") provide as follows:
--------------------------------------------------------------
Current Concentration Policy
--------------------------------------------------------------
Under normal market conditions, the Fund will invest at least
25% of its total assets in residential mortgage-backed
securities.
The Fund may not purchase any security if, as a result of the
purchase, 25% or more of the Fund's total assets (taken at
current value) would be invested in the securities of
borrowers and other issuers having their principal business
activities in the same industry; provided, that this
limitation shall not apply with respect to residential
mortgage-backed securities or obligations issued or guaranteed
by the U.S. government or by its agencies or
instrumentalities.
--------------------------------------------------------------
In general, residential mortgage-backed securities ("RMBS") represent direct or
indirect participations in, or are secured by and payable from, pools of assets
which include all types of residential mortgage products. The types of
obligations underlying RMBS may generally include residential mortgage loans
secured by liens on single-family and multi-family residential properties. RMBS
may include single- and multi-class pass-through securities and collateralized
mortgage obligations. They may be issued by various entities including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities.
The Current Concentration Policy may not be changed without shareholder
approval. Based on a recommendation from the Adviser and HBAM that eliminating
the Current Concentration Policy may provide some additional flexibility and
facilitate additional diversification of portfolio holdings, the Board of each
Fund is recommending that shareholders approve the elimination of the Current
Concentration Policy and the adoption of a new concentration policy as follows
(the "Proposed Concentration Policy"):
--------------------------------------------------------------
Proposed Concentration Policy
--------------------------------------------------------------
The Fund may not purchase any security if, as a result of the
purchase, 25% or more of the Fund's total assets (taken at
current value) would be invested in the securities of
borrowers and other issuers having their principal business
activities in the same industry; provided, that this
limitation shall not apply with respect to obligations issued
or guaranteed by the U.S. government or by its agencies or
instrumentalities.
--------------------------------------------------------------
14
Shareholder approval of the Proposed Concentration Policy would eliminate the
requirement that a Fund under normal market conditions invest at least 25% of
its total assets in RMBS, and the Fund would, instead, be non-concentrated and
no longer permitted to invest 25% or more of its total assets in RMBS. If
shareholders of a Fund approve the Proposed Concentration Policy, the Fund will
seek, to the extent necessary depending on its then-current RMBS holdings, to
reduce its RMBS holdings within a reasonable timeframe.
It is anticipated that replacing the Funds' Current Concentration Policy with
the Proposed Concentration Policy will enable the Funds' sub-adviser to exploit
opportunities more broadly across the fixed income market. As its primary
investment objective, each Fund seeks a high level of current income, and, as
its secondary investment objective, each Fund seeks capital growth. Under normal
market conditions, each Fund may invest in a wide range of securities,
including, but not limited to, corporate bonds, asset-backed securities,
collateralized debt obligations, loans, convertible securities, municipal
obligations, foreign government obligations, mortgage-backed securities and
equity securities, as well as the securities of companies in bankruptcy
reorganization proceedings or otherwise in the process of debt restructuring.
Currently, the High Income Fund II and the High Income Fund III may each invest
and, as the result of a change in its investment strategy that has been approved
by its Board, beginning on or about September 1, 2009, the High Income Fund also
will be permitted to invest, up to 100% of its respective managed assets in
below-investment grade debt securities (commonly referred to as "high yield" or
"junk" bonds). (As of the date of this Joint Proxy Statement, the High Income
Fund pursues its investment objectives by investing at least 80% of its managed
assets in a diversified portfolio of high income producing securities that the
investment sub-adviser believes offer attractive yield and capital appreciation
potential.) High yield bonds are considered speculative with respect to the
issuer's capacity to pay interest and repay principal. Although HBAM anticipates
that, at times, the Funds may have little or no exposure to mortgage-backed
securities (including RMBS), it does expect to invest the Funds' portfolios in
the mortgage-backed securities market when it believes that opportunity and
value exist.
In accordance with each Fund's investment objectives and investment strategy,
HBAM currently intends to invest each Fund's portfolio primarily across the
fixed income market with a current emphasis on corporate high yield securities.
In this regard, HBAM envisions a transition process where, ultimately, a
substantial portion of the securities that each Fund currently holds will likely
be replaced. The time needed to accomplish this transition is impossible to
predict and depends largely on market conditions and market liquidity; however,
based on its experience, HBAM believes that a transition period of up to
approximately one year would not be unusual. In connection with the replacement
of each Fund's securities, shareholders should be aware that high portfolio
turnover may result in the realization of net short-term capital gains by a Fund
which, when distributed to shareholders, will be taxable as ordinary income. A
high portfolio turnover may increase a Fund's current and accumulated earnings
and profits, resulting in a greater portion of the Fund's distributions being
treated as a dividend to the Fund's shareholders. In addition, a higher
portfolio turnover rate results in correspondingly greater brokerage commissions
and other transactional expenses that are borne by a Fund.
By eliminating the requirement that a Fund invest at least 25% of its total
assets in RMBS and requiring instead that the Fund be non-concentrated, the
Proposed Concentration Policy may mitigate the risk of concentration generally
and, specifically, the risk of concentration in RMBS. With respect to
concentration generally, a fund that is concentrated in a single industry or
sector may be subject to greater risks of loss than a fund that is broadly
diversified over several industries or sectors. With respect to concentration in
RMBS specifically, since mid-2007, severe disruptions in the residential
mortgage market in the United States, including delinquencies and defaults, have
15
caused financial difficulties for certain loan originators and sub-prime lenders
and have affected related aspects of the capital markets.
For some shareholders, eliminating the Current Concentration Policy may take
away their ability to invest in their Fund as a means of diversifying into
residential real estate. In addition, the ability of a Fund (and its
shareholders) to benefit from any appreciation in the value of RMBS in the
future will be reduced or eliminated if the Fund stops concentrating in RMBS.
The Boards, the Adviser and HBAM do not view eliminating the Current
Concentration Policy as increasing risk. Nonetheless, shareholders of each Fund
are reminded that risk is inherent in all investing and should be aware that,
even if the Proposed Concentration Policy is approved, their investment in a
Fund will continue to be subject to the numerous and significant risks of
investing in a "high yield" fund that currently apply. Below is a brief summary
of some, but not all, of the risks that should be considered by investors in
each Fund. For additional information about the risks associated with investing
in a Fund, please see the Fund's regulatory filings.
The market values for high yield securities tend to be very volatile, and these
securities are generally less liquid than investment-grade debt securities. Some
(but not all) of the risks associated with high yield securities (also referred
to as "junk" bonds) include: (1) increased price sensitivity to changing
interest rates and to a deteriorating economic environment; (2) greater risk of
loss due to default or declining credit quality; (3) adverse issuer-specific
events are more likely to render the issuer unable to make interest and/or
principal payments; and (4) a negative perception of the high yield market may
depress the price and liquidity of high yield securities. Fixed income
securities generally, including high yield securities, are also subject to
certain risks which include, but are not limited to: (1) issuer risk (the risk
of a decline in value for reasons that directly relate to the issuer); (2)
interest rate risk (the risk of a decline in value because of changes in market
interest rates); (3) prepayment risk (the risk that an issuer exercises its
option to prepay principal earlier than scheduled during periods of declining
interest rates, forcing a Fund to reinvest in lower yielding securities); (4)
reinvestment risk (the risk of a decline in income if a Fund invests the
proceeds from matured, traded or called bonds at market interest rates that are
below the Fund portfolio's current earnings rate); and (5) credit risk (the risk
that a security in a Fund's portfolio will decline in price or the issuer will
fail to make interest payments when due because the issuer of the security
experiences a decline in its financial status).
Shareholders are also reminded of certain additional principal risks that will
continue to apply to their investment in a Fund. Some of these risks are
somewhat general in nature and include, but are not limited to: (1) investment
and market risk (including the possible loss of the entire principal amount
invested); (2) risks associated with current economic conditions (e.g., credit
crisis liquidity and volatility risk) and with adverse changes in economic or
market conditions generally; (3) market disruption risk; (4) value investing
risk (including the risk of misestimating certain fundamental factors with
respect to securities that the sub-adviser believes are undervalued or
inexpensive relative to other investments); (5) risks associated with the active
management of the Fund's portfolio (such as that particular investment
techniques and risk analyses may not produce the desired results); (6)
inflation/deflation risk; (7) illiquid/restricted securities risk; (8) valuation
risk; (9) credit rating agency risk (including risk due to any shortcomings or
inefficiencies in credit rating agencies' processes for determining credit
ratings); (10) the risk that Shares of the Fund may trade at a discount from
their net asset value; (11) leverage risk (including risk associated with a
borrowing or issuance of preferred shares by the Fund); (12) portfolio turnover
risk; and (13) risks associated with lending portfolio securities. Certain other
risks that will continue to apply to investments in the Funds are associated
16
with the types of securities in which the Funds may invest and transactions in
which they may participate and include, but are not limited to, risks relating
to (as applicable with respect to each Fund): (1) mortgage-backed securities;
(2) asset-backed securities; (3) convertible securities; (4) municipal
securities; (5) foreign securities; (6) foreign government securities; (7)
securities of issuers located in countries considered to be "emerging markets";
(8) securities denominated or quoted in foreign currencies; (9) distressed
securities; (10) equity securities; (11) preferred stocks; (12) credit linked
notes; (13) credit default swaps; (14) real estate investment trusts ("REITs");
and (15) derivatives.
Board Recommendation.
The Board of each Fund recommends that shareholders vote to approve the Proposed
Concentration Policy. If sufficient votes are not obtained to approve Proposal
2, the Board of the applicable Fund or Funds will consider what (if any) further
action to take.
SHAREHOLDER APPROVAL AND REQUIRED VOTE
The vote of a majority of the outstanding voting securities of a Fund will be
required for the approval of the change in the Fund's concentration policy. The
"vote of a majority of the outstanding voting securities" is defined in the 1940
Act as the vote of the lesser of (i) 67% or more of the Shares of the Fund
present at the Meeting if the holders of more than 50% of the outstanding Shares
of the Fund are present in person or represented by proxy; or (ii) more than 50%
of the outstanding Shares of the Fund. For purposes of determining the approval
of the change in concentration policy, abstentions and broker non-votes will
have the effect of a vote against the proposal.
THE BOARD OF TRUSTEES OF EACH FUND RECOMMENDS THAT SHAREHOLDERS VOTE FOR
PROPOSAL 2. If you need any assistance, or have any questions regarding Proposal
2 or how to vote your Shares, call your Fund's proxy solicitor, The Altman
Group, Inc., at (866) 530-8634 weekdays from 9:00 a.m. to 10:00 p.m. Eastern
Time.
17
ADDITIONAL INFORMATION
INFORMATION ABOUT THE ADVISER
First Trust Advisors L.P., 120 East Liberty Drive, Suite 400, Wheaton, Illinois
60187, serves as each Fund's investment adviser.
INFORMATION ABOUT THE ADMINISTRATOR, ACCOUNTING AGENT AND TRANSFER AGENT
PNC acts as the administrator, accounting agent and transfer agent to each Fund
and its principal U.S. office is located at 4400 Computer Drive, Westborough,
Massachusetts 01581. PNC is a leading provider of processing, technology and
business intelligence services to asset managers, broker/dealers and financial
advisors.
BENEFICIAL OWNERSHIP
As of June 30, 2009, the Independent Trustees of the Funds and James A. Bowen, a
Trustee and an "interested person" (as defined in the 1940 Act) of each Fund
(the "Interested Trustee"), beneficially owned the following numbers of Shares
of the Funds:
------------------------ ----------------- --------------------- -----------------------
TRUSTEE HIGH INCOME FUND HIGH INCOME FUND II HIGH INCOME FUND III
------------------------ ----------------- --------------------- -----------------------
Interested Trustee
------------------------ ----------------- --------------------- -----------------------
James A. Bowen 1,000 3,750 0
------------------------ ----------------- --------------------- -----------------------
Independent Trustees
------------------------ ----------------- --------------------- -----------------------
Richard E. Erickson 0 0 0
------------------------ ----------------- --------------------- -----------------------
Thomas R. Kadlec 0 0 0
------------------------ ----------------- --------------------- -----------------------
Robert F. Keith 0 0 0
------------------------ ----------------- --------------------- -----------------------
Niel B. Nielson 480 469 0
------------------------ ----------------- --------------------- -----------------------
As of June 30, 2009, each Trustee beneficially owned less than 1% of the Shares
outstanding of each Fund.
As of June 30, 2009, the Trustees and officers as a group beneficially owned the
following number of outstanding Shares of each Fund, which is less than 1% of
each Fund's Shares outstanding:
------------------------------ ----------------- -------------------- ----------------------
FUND HIGH INCOME FUND HIGH INCOME FUND II HIGH INCOME FUND III
------------------------------ ----------------- -------------------- ----------------------
Number of Shares
Beneficially Owned by 1,480 4,219 0
Trustees and Officers as a
Group
------------------------------ ----------------- ------------------------------------------
18
To the knowledge of the Board of Trustees, as of the Record Date, no single
shareholder or "group" (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act")) beneficially owned more than
5% of any class of any Fund's outstanding Shares, except as noted in the
following table. Information as to beneficial ownership of Shares is based on
securities position listing reports from The Depository Trust & Clearing
Corporation ("DTCC") as of the Record Date. No Fund has any knowledge of the
identity of the ultimate beneficiaries of the respective Shares listed below.
-------------------------------------------- ----------------------------------------- -------------------------------
SHARES BENEFICIALLY % OUTSTANDING SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BENEFICIALLY OWNED
-------------------------------------------- ----------------------------------------- -------------------------------
HIGH INCOME FUND
-------------------------------------------- ----------------------------------------- -------------------------------
Charles Schwab & Co., Inc. 462,989 Shares 5.06%
211 Main Street
San Francisco, CA 94105
-------------------------------------------- ----------------------------------------- -------------------------------
First Clearing, LLC
One North Jefferson Street 1,145,780 Shares 12.52%
St. Louis, MO 63103
-------------------------------------------- ----------------------------------------- -------------------------------
National Financial Services LLC
200 Liberty Street 1,246,520 Shares 13.62%
New York City, NY 10281
-------------------------------------------- ----------------------------------------- -------------------------------
Pershing LLC
1 Pershing Plaza 667,447 Shares 7.29%
Jersey City, NJ 07399
-------------------------------------------- ----------------------------------------- -------------------------------
RBC Capital Markets Corporation
510 Marquette Avenue South 1,140,288 Shares 12.46%
Minneapolis, MN 55402
-------------------------------------------- ----------------------------------------- -------------------------------
HIGH INCOME FUND II
-------------------------------------------- ----------------------------------------- -------------------------------
First Clearing, LLC 1,702,309 Shares 17.86%
One North Jefferson Street
St. Louis, MO 63103
-------------------------------------------- ----------------------------------------- -------------------------------
National Financial Services LLC
200 Liberty Street 860,616 Shares 9.03%
New York City, NY 10281
-------------------------------------------- ----------------------------------------- -------------------------------
Oppenheimer & Co. Inc.
125 Broad Street, 15th Floor 622,589 Shares 6.53%
New York, NY 10004
-------------------------------------------- ----------------------------------------- -------------------------------
Pershing LLC
1 Pershing Plaza 674,493 Shares 7.07%
Jersey City, NJ 07399
-------------------------------------------- ----------------------------------------- -------------------------------
RBC Capital Markets Corporation
510 Marquette Avenue South 683,769 Shares 7.17%
Minneapolis, MN 55402
-------------------------------------------- ----------------------------------------- -------------------------------
19
-------------------------------------------- ----------------------------------------- -------------------------------
SHARES BENEFICIALLY % OUTSTANDING SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BENEFICIALLY OWNED
-------------------------------------------- ----------------------------------------- -------------------------------
HIGH INCOME FUND III
-------------------------------------------- ----------------------------------------- -------------------------------
First Clearing, LLC 1,450,087 Shares 15.84%
One North Jefferson Street
St. Louis, MO 63103
-------------------------------------------- ----------------------------------------- -------------------------------
National Financial Services LLC
200 Liberty Street 684,855 Shares 7.48%
New York City, NY 10281
-------------------------------------------- ----------------------------------------- -------------------------------
Oppenheimer & Co. Inc.
125 Broad Street, 15th Floor 702,123 Shares 7.67%
New York, NY 10004
-------------------------------------------- ----------------------------------------- -------------------------------
Pershing LLC
1 Pershing Plaza 744,324 Shares 8.13%
Jersey City, NJ 07399
-------------------------------------------- ----------------------------------------- -------------------------------
RBC Capital Markets Corporation
510 Marquette Avenue South 1,434,041 Shares 15.66%
Minneapolis, MN 55402
-------------------------------------------- ----------------------------------------- -------------------------------
SHAREHOLDER PROPOSALS
To be considered for presentation at the Annual Meetings of Shareholders of the
High Income Fund and the High Income Fund II to be held in 2010, a shareholder
proposal submitted pursuant to Rule 14a-8 of the 1934 Act must be received at
the office of the applicable Fund not later than November 20, 2009. To be
considered for presentation at the Annual Meeting of Shareholders of the High
Income Fund III to be held in 2010, a shareholder proposal submitted pursuant to
Rule 14a-8 of the 1934 Act must be received at the office of such Fund not later
than January 4, 2010. Shareholder proposals submitted pursuant to Rule 14a-8 of
the 1934 Act should be sent to the applicable Fund at 120 East Liberty Drive,
Suite 400, Wheaton, Illinois 60187.
Under each Fund's By-Laws, any proposals by shareholders may only be brought
before an annual meeting of the Fund if timely written notice (the "Shareholder
Notice") is provided to the Secretary of the Fund. In accordance with the
advance notice provisions included in each Fund's By-Laws, unless a greater or
lesser period is required under applicable law, to be timely, the Shareholder
Notice must be delivered to or mailed to and received at the principal executive
offices of the Fund not less than forty-five (45) days nor more than sixty (60)
days prior to the first anniversary date of the date of the proxy statement
released to shareholders for the preceding year's annual meeting. However, if
and only if the annual meeting is not scheduled to be held within a period that
commences thirty (30) days before the first anniversary date of the annual
meeting for the preceding year and ends thirty (30) days after such anniversary
date (an annual meeting date outside such period being referred to herein as an
"Other Annual Meeting Date"), such Shareholder Notice must be given as described
above by the later of the close of business on (i) the date forty-five (45) days
prior to such Other Annual Meeting Date or (ii) the tenth (10th) business day
following the date such Other Annual Meeting Date is first publicly announced or
disclosed. Shareholder Notices should be sent to a Fund at 120 East Liberty
Drive, Suite 400, Wheaton, Illinois 60187, Attention: W. Scott Jardine,
Secretary.
Timely submission of a proposal does not mean that such proposal will be
included in a proxy statement.
20
SHAREHOLDER COMMUNICATIONS
Shareholders of a Fund who want to communicate with the Board of Trustees or any
individual Trustee should write the Fund to the attention of the Fund Secretary,
W. Scott Jardine. The letter should indicate that you are a Fund shareholder. If
the communication is intended for a specific Trustee and so indicates, it will
be sent only to that Trustee. If a communication does not indicate a specific
Trustee, it will be sent to the chairman of the Nominating and Governance
Committee of the applicable Board and the outside counsel to the Independent
Trustees for further distribution as deemed appropriate by such persons.
FISCAL YEAR
The fiscal year end for the High Income Fund and the High Income Fund II is
October 31. The fiscal year end for the High Income Fund III is January 31.
DELIVERY OF CERTAIN DOCUMENTS
Annual reports will be sent to shareholders of record of each Fund. Each Fund
will furnish, without charge, a copy of its annual report and/or semi-annual
report as available upon request. Such written or oral requests should be
directed to the applicable Fund at 120 East Liberty Drive, Suite 400, Wheaton,
Illinois 60187 or by calling (800) 988-5891.
Please note that only one annual or semi-annual report, proxy statement or
Notice of Availability of Proxy Materials, as applicable, may be delivered to
two or more shareholders of a Fund who share an address, unless the Fund has
received instructions to the contrary. To request a separate copy of an annual
or semi-annual report, proxy statement or Notice of Availability of Proxy
Materials, as applicable, or for instructions as to how to request a separate
copy of such documents or as to how to request a single copy if multiple copies
of such documents are received, shareholders should contact the applicable Fund
at the address and phone number set forth above. Pursuant to a request, a
separate copy will be delivered promptly.
21
OTHER MATTERS TO COME BEFORE THE MEETING
No business other than the matters described above is expected to come before
the Meeting, but should any other matter requiring a vote of shareholders arise,
including any question as to an adjournment or postponement of the Meeting, the
persons named on the enclosed proxy card will vote thereon according to their
best judgment in the interests of the applicable Fund.
August 24, 2009
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE MEETING ARE THEREFORE URGED TO COMPLETE, SIGN, DATE AND
RETURN THE PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE
OR ALTERNATIVELY, TO VOTE BY TELEPHONE BY FOLLOWING THE INSTRUCTIONS ON THE
PROXY CARD.
--------------------------------------------------------------------------------
IF YOU NEED ANY ASSISTANCE, OR HAVE ANY QUESTIONS REGARDING THE PROPOSALS OR HOW
TO VOTE YOUR SHARES, CALL YOUR FUND'S PROXY SOLICITOR, THE ALTMAN GROUP, INC.,
AT (866) 530-8634 WEEKDAYS FROM 9:00 A.M. TO 10:00 P.M. EASTERN TIME.
--------------------------------------------------------------------------------
22
APPENDIX A
FORM OF NEW INVESTMENT SUB-ADVISORY AGREEMENT
AGREEMENT made as of this ___ day of ________, 2009 by and among First Trust
Strategic High Income Fund [II] [III], a Massachusetts business trust (the
"Fund"), First Trust Advisors L.P., an Illinois limited partnership (the
"Manager") and a registered investment adviser with the Securities and Exchange
Commission ("SEC"), and Hyperion Brookfield Asset Management, Inc., a Delaware
corporation and a registered investment adviser with the SEC (the
"Sub-Adviser").
WHEREAS, the Fund is a closed-end management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund has retained the Manager to serve as the investment manager
for the Fund pursuant to an Investment Management Agreement between the Manager
and the Fund (as such agreement may be modified from time to time, the
"Management Agreement");
WHEREAS, the Management Agreement provides that the Manager may, subject to the
initial and periodic approvals required under Section 15 of the 1940 Act,
appoint a sub-adviser at its own cost and expense for the purpose of furnishing
certain services required under the Management Agreement;
WHEREAS, the Fund and the Manager desire to retain the Sub-Adviser to furnish
investment advisory services for the Fund's investment portfolio, upon the terms
and conditions hereafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
1. Appointment. The Fund and the Manager hereby appoint the Sub-Adviser to
provide certain sub-investment advisory services to the Fund for the period and
on the terms set forth in this Agreement. The Sub-Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided. The Sub-Adviser shall, for all purposes herein
provided, be deemed an independent contractor and, unless otherwise expressly
provided or authorized, shall have no authority to act for nor represent the
Fund or the Manager in any way, nor otherwise be deemed an agent of the Fund or
the Manager.
2. Services to Be Performed. Subject always to the supervision of the Fund's
Board of Trustees and the Manager, the Sub-Adviser will act as sub-adviser for,
and manage on a discretionary basis the investment and reinvestment of the
assets of the Fund, furnish an investment program in respect of, make investment
decisions for, and place all orders for the purchase and sale of securities for
the Fund's investment portfolio, all on behalf of the Fund and as described in
the Fund's initial registration statement on Form N-2 (File No. 333-________) as
declared effective by the SEC, and as the same may thereafter be amended from
time to time. In the performance of its duties, the Sub-Adviser will in all
material respects (a) satisfy any applicable fiduciary duties it may have to the
Fund, (b) monitor the Fund's investments (provided that except for the
compliance responsibilities of the Sub-Adviser with respect to the portfolio
services described in the first sentence of this Section 2, the Manager shall
remain responsible for the oversight of compliance with the Fund's policies and
procedures and its Prospectus and Statement of Additional Information), (c)
comply with the provisions of the Fund's Declaration of Trust and By-laws, as
amended from time to time and communicated by the Fund or the Manager to the
Sub-Adviser in writing, and the stated investment objectives, policies and
restrictions of the Fund as such objectives, policies and restrictions may
subsequently be changed by the Fund's Board of Trustees and communicated by the
Fund or the Manager to the Sub-Adviser in writing, and (d) assist in the
valuation of portfolio securities held by the Fund as requested by the Manager
or the Fund; provided that prices derived from third parties are the
responsibility of such third parties and do not reflect the professional opinion
of the Sub-Adviser, and information provided by the Sub-Adviser that may be used
to determine "fair value" prices are solely the reflection of the Sub-Adviser's
professional opinion and the Fund and the Manager are free to accept or reject
this information; the Sub-Adviser is not solely responsible for the pricing of
the Fund's securities. The Fund or the Manager has provided the Sub-Adviser with
current copies of the Fund's Declaration of Trust, By-laws, prospectus,
statement of additional information and any amendments thereto, and any
objectives, policies or limitations not appearing therein as they may be
relevant to the Sub-Adviser's performance under this Agreement.
The Sub-Adviser is authorized to select the brokers or dealers that will execute
the purchases and sales of portfolio investments for the Fund, and is directed
to use its commercially reasonable efforts to obtain best execution, which
includes most favorable net results and execution of the Fund's orders, taking
into account all appropriate factors, including price, dealer spread or
commission, size and difficulty of the transaction and research or other
services provided. Subject to approval by the Fund's Board of Trustees and
compliance with the policies and procedures adopted by the Board of Trustees for
the Fund and to the extent permitted by and in conformance with applicable law
(including Rule 17e-1 of the 1940 Act), the Sub-Adviser may select brokers or
dealers affiliated with the Sub-Adviser. It is understood that the Sub-Adviser
will not be deemed to have acted unlawfully, or to have breached a fiduciary
duty to the Fund, or be in breach of any obligation owing to the Fund under this
Agreement, or otherwise, solely by reason of its having caused the Fund to pay a
member of a securities exchange, a broker or a dealer a commission for effecting
a securities transaction for the Fund in excess of the amount of commission
another member of an exchange, broker or dealer would have charged if the
Sub-Adviser determined in good faith that the commission paid was reasonable in
relation to the brokerage or research services provided by such member, broker
or dealer, viewed in terms of that particular transaction or the Sub-Adviser's
overall responsibilities with respect to its accounts, including the Fund, as to
which it exercises investment discretion.
In addition, the Sub-Adviser may, to the extent permitted by applicable law,
aggregate purchase and sale orders of securities placed with respect to the
assets of the Fund with similar orders being made simultaneously for other
accounts managed by the Sub-Adviser or its affiliates, if in the Sub-Adviser's
reasonable judgment such aggregation shall result in an overall economic benefit
to the Fund, taking into consideration the selling or purchase price, brokerage
commissions and other expenses. In the event that a purchase or sale of an asset
of the Fund occurs as part of any aggregate sale or purchase orders, the
objective of the Sub-Adviser and any of its affiliates involved in such
transaction shall be to allocate the securities so purchased or sold, as well as
expenses incurred in the transaction, among the Fund and other accounts in a
fair and equitable manner. Nevertheless, the Fund and the Manager acknowledge
that under some circumstances, such allocation may adversely affect the Fund
with respect to the price or size of the securities positions obtainable or
salable, and neither the Fund nor the Manager shall object to any such fair and
equitable allocation. Whenever the Fund and one or more other investment
advisory clients of the Sub-Adviser have available funds for investment,
investments suitable and appropriate for each will be allocated in a manner
A-2
believed by the Sub-Adviser to be equitable to each, although such allocation
may result in a delay in one or more client accounts being fully invested that
would not occur if such an allocation were not made. Moreover, it is possible
that due to differing investment objectives or for other reasons, the
Sub-Adviser and its affiliates may purchase securities of an issuer for one
client and at approximately the same time recommend selling or sell the same or
similar types of securities for another client.
Unless the Fund's Board of Trustees determines otherwise, the Sub-Adviser will
vote all proxies solicited by or with respect to the issuers of securities which
assets of the Fund's investment portfolio allocated by the Manager to the
Sub-Adviser are invested, consistent with the Sub-Adviser's written Proxy
Policies and Procedures. The Sub-Adviser will maintain appropriate records in
accordance with applicable law detailing its voting of proxies on behalf of the
Fund and upon request will provide a report setting forth the proposals voted on
and how the Fund's shares were voted, including the name of the corresponding
issuers.
The Sub-Adviser will not arrange purchases or sales of securities between the
Fund and other accounts advised by the Sub-Adviser or its affiliates unless (a)
such purchases or sales are in accordance with applicable law (including Rule
17a-7 of the 1940 Act) and the Fund's policies and procedures, (b) the
Sub-Adviser reasonably believes the purchase or sale is in the best interests of
the Fund, and (c) the Fund's Board of Trustees has approved these types of
transactions.
The Fund may adopt policies and procedures that modify or restrict the
Sub-Adviser's authority regarding the execution of the Fund's portfolio
transactions provided herein. However, no such policy or procedure shall be
binding on the Sub-Adviser unless it is communicated to the Sub-Adviser in
writing.
The Sub-Adviser will communicate to the officers and Trustees of the Fund such
information relating to transactions for the Fund as they may reasonably
request. In no instance will the Fund's portfolio securities be knowingly
purchased from or sold to the Manager, the Sub-Adviser or any affiliated person
of any of the Fund, the Manager, or the Sub-Adviser, except as may be permitted
under the 1940 Act.
The Sub-Adviser further agrees that it:
(a) will use the same degree of skill and care in providing
such services as it uses in providing services to other accounts for
which it has investment responsibilities under the Investment Advisers
Act of 1940;
(b) will (i) conform in all material respects to all
applicable rules and regulations of the SEC, (ii) comply in all
material respects with all policies and procedures adopted by the Board
of Trustees for the Fund and communicated to the Sub-Adviser in writing
and (iii) conduct its activities under this Agreement in all material
respects in accordance with any applicable law and regulations of any
governmental authority pertaining to its investment advisory
activities;
(c) will report to the Manager and to the Board of Trustees
of the Fund on a quarterly basis and will make appropriate persons
available for the purpose of reviewing with representatives of the
Manager and the Board of Trustees on a regular basis at such times as
the Manager or the Board of Trustees may reasonably request in writing
regarding the management of the Fund, including, without limitation,
A-3
review of the general investment strategies of the Fund, the
performance of the Fund's investment portfolio in relation to relevant
standard industry indices and general conditions affecting the
marketplace and will provide various other reports from time to time as
reasonably requested by the Manager or the Board of Trustees of the
Fund; and
(d) will prepare and maintain such books and records with
respect to the Fund's securities and other transactions for the Fund's
investment portfolio as required for registered investment advisers
under applicable law or as otherwise reasonably agreed to by the
parties and will prepare and furnish the Manager and the Fund's Board
of Trustees such periodic and special reports as the Board or the
Manager may reasonably request. The Sub-Adviser further agrees that all
records that it maintains for the Fund are the property of the Fund and
the Sub-Adviser will surrender promptly to the Fund any such records
upon the request of the Manager or the Fund (provided, however, that
the Sub-Adviser shall be permitted to retain copies thereof); and shall
be permitted to retain originals (with copies to the Fund) to the
extent required under Rule 204-2 of the Investment Advisers Act of 1940
or other applicable law.
3. Expenses. During the term of this Agreement, the Sub-Adviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities and other assets (including brokerage
commissions, transfer fees, registration costs, taxes and other similar costs
and transaction-related expenses and fees arising out of transactions for the
Fund, if any) purchased for the Fund. Moreover, the Sub-Adviser shall not be
responsible for payment of any taxes due on capital or income held or collected
for the Fund.
4. Additional Sub-Advisers. Subject to obtaining the initial and periodic
approvals required under Section 15 of the 1940 Act and the approval of the
Manager, the Sub-Adviser may retain one or more additional sub-advisers at the
Sub-Adviser's own cost and expense for the purpose of furnishing one or more of
the services described in Section 2 hereof with respect to the Fund. Retention
of a sub-adviser hereunder shall in no way reduce the responsibilities or
obligations of the Sub-Adviser under this Agreement and the Sub-Adviser shall be
responsible to the Fund for all acts or omissions of any sub-adviser in
connection with the performance of the Sub-Adviser's duties hereunder.
5. Compensation. For the services provided and the expenses assumed pursuant to
this Agreement, the Manager will pay the Sub-Adviser, and the Sub-Adviser agrees
to accept as full compensation therefor, a portfolio management fee (the
"Management Fee") equal to the annual rate of 0.45% of the Fund's Managed Assets
(as defined below). For purposes of calculating the Management Fee, Managed
Assets means the average daily gross asset value of the Fund (including assets
attributable to the Fund's Preferred Shares (as such term is defined in the
Fund's prospectus), if any, and the principal amount of borrowings, if any),
minus the sum of the Fund's accrued and unpaid dividends on any outstanding
Preferred Shares and accrued liabilities (other than the principal amount of any
borrowings incurred, commercial paper or notes issued by the Fund). For purposes
of determining Managed Assets, the liquidation preference of any outstanding
Preferred Shares of the Fund is not treated as a liability. The Management Fee
shall be payable in arrears on or about the first day of each month during the
term of this Agreement.
For the month and year in which this Agreement becomes effective or terminates,
there shall be an appropriate proration on the basis of the number of days that
the Agreement is in effect during the month and year, respectively.
A-4
6. Custodian. The assets subject to this Agreement shall be held by the
Custodian of the Fund ("Custodian") or by a central depository selected by the
Custodian. In no event shall the Sub-Adviser have the power or authority to take
custody or possession of any assets of the Fund. The Sub-Adviser is authorized
to give instructions to the current or any successor Custodian with respect to
all investment decisions regarding such assets. The Sub-Adviser will promptly
notify the Custodian of all securities transactions for the Fund and will
cooperate with the Custodian in supplying all reasonable information required by
the Custodian. All transactions will be consummated by payment or delivery to
the Custodian of all cash or securities due to or from the Fund. In the event
that any cash or securities are delivered to the Sub-Adviser, the Sub-Adviser
will promptly deliver the same over to the Custodian. The Sub-Adviser will
instruct all brokers executing orders on behalf of the Fund to forward to the
Custodian copies of all brokerage confirmations promptly after execution of each
transaction. The Fund will not change the Custodian without giving the
Sub-Adviser reasonable prior notice of its intention to do so together with the
name of, and other relevant information with respect to, the new Custodian.
7. Services to Others. The Fund and the Manager acknowledge that the Sub-Adviser
now acts, or may in the future act, as an investment adviser to other managed
accounts and as investment adviser or sub-investment adviser to one or more
other investment companies as set forth in the Sub-Adviser's Form ADV, Part II.
In addition, the Fund and the Manager acknowledge that the persons employed by
the Sub-Adviser to assist in the Sub-Adviser's duties under this Agreement will
not devote their full time to such efforts. It is also agreed that the
Sub-Adviser may use any supplemental research obtained for the benefit of the
Fund in providing investment advice to its other investment advisory accounts
and for managing its own accounts.
8. Representations and Warranties.
(i) Each of the Fund, the Manager and the Sub-Adviser represent and warrant with
respect to itself as follows:
(a) This Agreement has been duly authorized, executed
and delivered by such party and constitutes its
valid and binding obligation, enforceable in
accordance with its terms;
(b) No governmental authorizations, approvals or
consents are required in connection with the
execution, delivery or performance of this
Agreement by such party;
(c) To the best of such party's knowledge, there is
neither pending nor threatened in writing any
action, suit, proceeding or investigation before
or by any court or governmental, regulatory,
self-regulatory, arbitration or exchange body
related to the Fund to which the Manager, the
Sub-Adviser and/or the Fund is a party or to which
any of its assets are subject, other than what has
been previously disclosed to the other parties to
this Agreement at the time of the execution and
delivery of this Agreement; and
(d) The foregoing representations and warranties
(other than the representation and warranty in
clause (b) above) shall be continuing, and if any
of them shall cease to be true and accurate in any
material respect, such party shall immediately
give notice of such to the other parties to this
Agreement.
A-5
(ii) Each of the Manager and the Sub-Adviser represents and warrants to each
other that such party is registered with the SEC under the U.S. Investment
Advisers Act of 1940, as amended, as an "investment adviser".
9. Limitation of Liability; Indemnification. The Sub-Adviser shall not be liable
for, and the Fund and the Manager will not take any action against the
Sub-Adviser to hold the Sub-Adviser liable for, any error of judgment or mistake
of law or for any loss suffered by the Fund or the Manager (including, without
limitation, by reason of the purchase, sale or retention of any security) in
connection with the performance of the Sub-Adviser's duties under this
Agreement, except for a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Sub-Adviser in the performance of its duties
under this Agreement, or by reason of its reckless disregard of its obligations
and duties under this Agreement.
The Fund will indemnify and hold harmless the Sub-Adviser, its affiliates and
their directors, officers, employees, agents and any person controlled by or
controlling the Sub-Adviser from and against, any and all losses, claims,
damages, liabilities or litigation (including reasonable attorney's fees and
expenses) (collectively, "Losses") incurred by the Sub-Adviser directly relating
to the actions of any previous sub-adviser of the Fund, including any claims by
third parties (including, but not limited to, any claims made or actions brought
by any administrative or regulatory authority) relating to, arising from or
premised on any Losses arising out of or relating to the Fund's investments in
any securities that were owned by the Fund on June 29, 2009 (provided that such
indemnification arising from or premised on any Losses arising out of or
relating to the Fund's investments in any securities that were owned by the Fund
on June 29, 2009 shall not apply in the event that such Losses are finally
judicially determined to have resulted from the willful misfeasance, bad faith
or gross negligence on the part of the Sub-Adviser in the performance of its
duties under this Agreement, or by reason of the Sub-Adviser's reckless
disregard of its obligations and duties under this Agreement). The Sub-Adviser
shall give the Fund prompt notice of any claim asserted or threatened against
the Sub-Adviser with respect to which the Sub-Adviser intends to seek
indemnification from the Fund as herein provided. The Fund shall be entitled to
participate at its own expense in the defense of such action. In addition, if
the Fund notifies the Sub-Adviser in writing within a reasonable time after the
Fund receives such notice, the Fund may assume the defense of such action with
counsel chosen by the Fund which counsel is reasonably acceptable to the
Sub-Adviser. Nothing in this Agreement shall in any way constitute a waiver or
limitation of any rights which the Fund may have under federal securities laws.
10. Term; Termination. This Agreement shall become effective on [______________]
(the "Effective Date") provided that it has been approved in the manner required
by the 1940 Act, and shall remain in full force until [_________] unless sooner
terminated as hereinafter provided. This Agreement shall continue in force from
year to year thereafter, but only as long as such continuance is specifically
approved for the Fund at least annually in the manner required by the 1940 Act
and the rules and regulations thereunder; provided, however, that if the
continuation of this Agreement is not approved for the Fund, the Sub-Adviser may
continue to serve in such capacity for the Fund in the manner and to the extent
permitted by the 1940 Act and the rules and regulations thereunder.
This Agreement shall automatically terminate in the event of its assignment and
may be terminated at any time without the payment of any penalty by the Manager
or the Sub-Adviser upon sixty (60) days' written notice to the other parties.
This Agreement may also be terminated by the Fund by action of the Board of
Trustees of the Fund or by a vote of a majority of the outstanding voting
A-6
securities of the Fund upon sixty (60) days' written notice to the Sub-Adviser
by the Fund without payment of any penalty.
This Agreement may be terminated at any time without the payment of any penalty
by the Manager, the Board of Trustees of the Fund or by vote of a majority of
the outstanding voting securities of the Fund in the event that it shall have
been established by a court of competent jurisdiction that the Sub-Adviser or
any officer or director of the Sub-Adviser has taken any action that results in
a breach of the material covenants of the Sub-Adviser set forth herein.
The terms "assignment" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and the rules and
regulations promulgated thereunder.
Termination of this Agreement shall not affect the right of the Sub-Adviser to
receive payments on any unpaid balance of the compensation described in Section
5 earned prior to such termination and for any additional period during which
the Sub-Adviser serves as such for the Fund, subject to applicable law.
11. Compliance Certification. From time to time the Sub-Adviser shall provide
such certifications with respect to Rule 38a-1 under the 1940 Act as are
reasonably requested by the Fund or Manager. In addition, the Sub-Adviser will,
from time to time, provide a written assessment of its compliance program in
conformity with current industry standards that is reasonably acceptable to the
Fund to enable the Fund to fulfill its obligations under Rule 38a-1 under the
1940 Act.
12. Notice. Any notice under this Agreement shall be sufficient in all respects
if given in writing and delivered by commercial courier providing proof of
delivery and addressed as follows or addressed to such other person or address
as such party may designate in writing for receipt of such notice.
If to the Manager or the Fund: If to the Sub-Adviser:
First Trust Strategic High Income Fund [II] [III] Hyperion Brookfield Asset
First Trust Advisors L.P. Management, Inc.
120 E. Liberty Drive, Suite 400 Three World Financial Center
Wheaton, Illinois 60187 200 Vesey Street, 10th Floor
Attention: Secretary New York, New York 10281-1010
Attention: General Counsel
13. Limitations on Liability. All parties hereto are expressly put on notice of
the Fund's Declaration of Trust and all amendments thereto, a copy of which is
on file with the Secretary of the Commonwealth of Massachusetts, and the
limitation of shareholder and Trustee liability contained therein, a copy of
which has been provided to the Sub-Adviser prior to the date hereof. This
Agreement is executed on behalf of the Fund by the Fund's officers in their
capacity as officers and not individually and is not binding upon any of the
Trustees, officers or shareholders of the Fund individually but the obligations
imposed upon the Fund by this Agreement are binding only upon the assets and
property of the Fund, and persons dealing with the Fund must look solely to the
assets of the Fund for the enforcement of any claims.
A-7
14. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. This Agreement will be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
15. Applicable Law. This Agreement shall be construed in accordance with
applicable federal law and (except as to Section 13 hereof, which shall be
construed in accordance with the laws of the Commonwealth of Massachusetts) the
laws of the State of Illinois, without regard to its conflict of laws
principles.
16. Amendment, Etc. This Agreement may only be amended, or its provisions
modified or waived, in a writing signed by the party against which such
amendment, modification or waiver is sought to be enforced.
17. Authority. Each party represents to the others that it is duly authorized
and fully empowered to execute, deliver and perform its obligations under this
Agreement. The Fund represents that engagement of the Sub-Adviser has been duly
authorized by the Fund and is in accordance with the Fund's Declaration of Trust
and other governing documents of the Fund.
18. Severability. Each provision of this Agreement is intended to be severable
from the others so that if any provision or term hereof is illegal or invalid
for any reason whatsoever, such illegality or invalidity shall not affect the
validity of the remaining provisions and terms hereof; provided, however, that
the provisions governing payment of the Management Fee described in Section 5
are not severable.
19. Entire Agreement. This Agreement constitutes the sole and entire agreement
of the parties hereto with respect to the subject matter expressly set forth
herein.
A-8
IN WITNESS WHEREOF, the Fund, the Manager and the Sub-Adviser each have caused
this Agreement to be executed as of the day and year first above written.
FIRST TRUST ADVISORS L.P. HYPERION BROOKFIELD ASSET
MANAGEMENT, INC.
By____________________________________ By____________________________________
Title:___________________________ Title:____________________________
FIRST TRUST STRATEGIC HIGH INCOME
FUND [II] [III]
By____________________________________
Title:___________________________
A-9
FORM OF PROXY CARD
FIRST TRUST STRATEGIC HIGH INCOME FUND
Proxy Ballot for Special Meeting of Shareholders - October 14, 2009
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned holder of Common Shares of the First Trust Strategic High Income
Fund (the "Fund"), a Massachusetts business trust, hereby appoints W. Scott
Jardine, Mark R. Bradley, Kristi A. Maher, James M. Dykas and Erin E. Chapman as
attorneys and proxies for the undersigned, with full powers of substitution and
revocation, to represent the undersigned and to vote on behalf of the
undersigned all shares of the Fund that the undersigned is entitled to vote at
the Special Meeting of Shareholders of the Fund (the "Meeting") to be held at
the offices of First Trust Advisors L.P., 120 East Liberty Drive, Suite 400,
Wheaton, Illinois 60187, at 4:00 p.m. Central time on the date indicated above,
and any adjournments or postponements thereof. The undersigned hereby
acknowledges receipt of the Notice of Joint Special Meetings of Shareholders and
Joint Proxy Statement dated August 24, 2009, and hereby instructs said attorneys
and proxies to vote said shares as indicated hereon. In their discretion, the
proxies are authorized to vote upon such other business as may properly come
before the Meeting. A majority of the proxies present and acting at the Meeting
in person or by substitute (or, if only one shall be so present, then that one)
shall have and may exercise all of the power and authority of said proxies
hereunder. The undersigned hereby revokes any proxy previously given.
--------------------------- THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE
VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED
Registration dynamically SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
printed here WILL BE VOTED FOR THE PROPOSALS SET FORTH.
PLEASE VOTE, DATE AND SIGN ON REVERSE SIDE AND
--------------------------- RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE FOLD HERE AND RETURN ENTIRE BALLOT - DO NOT DETACH
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND
Proxy Ballot for Special Meeting of Shareholders - October 14, 2009
Vote by Phone or by Mail! Please be sure to sign and date this
proxy. Please sign exactly as your
CALL: To vote your proxy by phone, name appears on this proxy. When
call our toll-free proxy shares are held by joint tenants
hotline at 1-866-530-8634. either may sign. When signing as
Representatives are attorney, executor, administrator,
available to record your trustee, guardian or corporate
vote Monday through Friday officer, please give full title as
9:00 a.m. to 10:00 p.m. such.
Eastern Time.
Please mark your vote on the reverse
MAIL: To vote your proxy by mail, of this Proxy Ballot.
mark the appropriate voting
boxes on the reverse side of ------------------------------------
this Proxy Ballot, sign and Shareholder sign here
date the ballot and return
it in the enclosed ------------------------------------
postage-paid envelope or Joint owner sign here
mail to: The Altman Group,
P.O. Box 238, Lyndhurst, NJ ------------------------------------
07071. Date:
IT IS IMPORTANT THAT PROXIES BE VOTED PROMPTLY.
EVERY SHAREHOLDER'S VOTE IS IMPORTANT.
FIRST TRUST STRATEGIC HIGH INCOME FUND
CONTROL NUMBER
----------------------
123456789123
----------------------
WE NEED YOUR PROXY VOTE AS SOON AS POSSIBLE. YOUR PROMPT ATTENTION TO
THIS MATTER WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
THE PROXY BALLOT MUST BE SIGNED AND DATED ON THE REVERSE SIDE FOR YOUR
INSTRUCTIONS TO BE COUNTED AND WILL BE VOTED IN THE MANNER INDICATED. IF NO
INSTRUCTION HAS BEEN INDICATED BELOW, A VOTE WILL BE CAST "FOR" EACH PROPOSAL.
PLEASE COMPLETE AND RETURN THIS PROXY BALLOT PROMPTLY.
PLEASE MARK YOUR VOTES AS INDICATED IN THIS EXAMPLE [ ]
FOR AGAINST ABSTAIN
Proposal 1 -- The Board of Trustees
recommends a vote FOR the Proposal
to approve a new Investment
Sub-Advisory Agreement with Hyperion
Brookfield Asset Management, Inc. for
your Fund.
1. Approval of New Investment [ ] [ ] [ ]
Sub-Advisory Agreement
Proposal 2 -- The Board of Trustees
recommends a vote FOR the Proposal
to approve a change in your Fund's
industry concentration policy so
that it will no longer concentrate
in residential mortgage-backed
securities.
2. Approval of change in
concentration policy [ ] [ ] [ ]
--------------------------------------------------------------------------------
Non-Voting items
Meeting Attendance - Mark the box to the right if you plan to attend the Special Meeting |_|
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Change of Address - Please print new address below. Comments - Please print your comments below.
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(BARCODE HERE) (TAGID HERE) (CUSIP HERE)